Commercial Winter News & Updates
CSS provides real estate title and valuation solutions throughout the eastern half of the US and Colorado, and is expanding its CSS Commercial Title operations once again.
In early 2022, CSS expanded its commercial operations and “boots on the ground” efforts to the Southern part of Michigan. In addition to servicing the entire state of Michigan with its commercial expertise, CSS is now expanding to the Pittsburgh market. While CSS has served Pittsburgh and Pennsylvania overall for many years with residential settlement solutions, it is now serving commercial real estate professionals in the Pittsburgh market. CSS works to save commercial customers time and money through its unique combination of technology and processes. This expansion will provide commercial customers with title and closing solutions that combine the personal touch and responsiveness of a smaller local provider with the geographic scale and technological superiority of a larger national provider.
This issue will focus on predictions for the commercial real estate market in 2023 from multiple commercial expert sources. Only time will tell whose predictions are the most accurate, although you will see overlap in some of the predictions, particularly where it comes to the best commercial real estate investments.
A overall picture of 2023 commercial market predictions:
- According to the National Association of Realtors’ (NAR)’s Chief Economist Lawrence Yun at the 2022 NAR NXT, The Realtor® Experience, while commercial real estate prices may see a slight decrease nationwide, strong job growth will continue to drive demand in many markets moving forward.
- NAR said it is anticipating the commercial real-estate market to experience a “slight decline in prices” in 2023.
- A nationwide decline in commercial appraisal values, according to Yun.
- Multifamily properties will continue to be stable into 2023, as it has been over the past 40 to 50 years.
- A continued rise in office vacancies in many cities, due to employees’ preference for remote work.
- Matt Vance, senior director and Americas head of multifamily research and senior economist for Coldwell Banker Real Estate (CBRE), estimates that employees will spend 25-35% less time in the office than they did pre-pandemic. “We believe this will translate to a 15% reduction in office space demand per employee.”
Capitalization (Cap) Rates:
As you know, the capitalization rate (also known as cap rate) is used in the world of commercial real estate to indicate the rate of return that is expected to be generated on a real estate investment property. Here are some predictions relative to 2023 Cap rates:
- Cap rates cannot match up with higher borrowing costs, but “strong job growth is supporting prices in many markets,” according to Lawrence Yun of NAR.
- According to recent ULI survey, the availability of real estate capital for lenders looks likely to be shakier next year but it is still anticipated to match 2022 levels in many cases or even rise to 4.3% in 2023 and remain at 4.3% in 2024.
- If elevated inflation lingers, aggressive monetary policy will likely push cap rates higher in 2023, according to CBRE Econometric Advisors.
- Overall consensus: transactions volumes will fall, cap rates will rise, even for multifamily and industrial, and new construction will slow.
Leasing and Sub-Leasing:
According to Elizabeth Ptacek, senior director of market analytics at commercial real estate information and analytics company CoStar:
- As companies go to hybrid work and satellite offices are not used or used less, there is real estate to be sold. But, people are not selling it now.
- Companies that own their own campuses will likely wait out the current market, even knowing prices may further deteriorate.
- Well-leased medical offices and laboratories with high credit score tenants and secure income streams are still attracting plenty of attention from investors, but that is about it. Few lease holders can find buyers or tenants for unused office space.
- The subleasing square footage will never return to the pre-pandemic level.
- The amount of commercial real estate available for sub-lease is roughly equal to eight Amazon HQ2 towers.
Commercial Property Executive (CPE) Outlook 2023:
A recent CPE webinar entitled, Insights From CRE Thought Leaders, was given with commercial industry experts Hessam Nadji, Camille Renshaw, Chuck Schreiber, Jonathan Martin and John Gates relating their thoughts on the 2022 commercial real estate market and economy and predictions about 2023. Below are some of their projections for 2023:
- Global supply chain will get better, not worse;
- Multi-family has best outlook/prospects, as well as the life, health care and medical sciences space;
- 10-year treasury will top out at 4.5%-5%;
- As debt matures, investors will recapitalize deals;
- Investors with lower cash/liquidity are going to be threatened/challenged;
- Moderate job losses;
- Price corrections on assets;
- More sale-leaseback transactions;
- CRE transactions will increase and there will be more opportunity the 2nd half of 2023; with one expert stating that “Q4 will be huge” in 2023.
Final Positive Note: The consensus among 47 economists from 36 real estate organizations about the U.S. economy and commercial real estate is mostly upbeat about the next three years, according to the latest ULI Real Estate Economic Forecast.
1031 tax-deferred exchange updates:
Federal Disaster Extensions
There were several federal extensions of the 45-day and 180-day deadlines related to Hurricane Ian:
For the entire State of Florida:
- The Disaster Date is September 23, 2022. The General postponement date is February 15, 2023.
- Affected Taxpayers are defined as those individuals who live, and businesses whose principal place of business is located in the covered disaster area.
- Affected taxpayers are entitled to relief regardless of where the relinquished property or replacement property is located.
- Affected Taxpayers may choose either the General Postponement relief under Section 6 or the Alternative relief under Section 17 of Rev. Proc. 2018-58.
For the entire states of North Carolina and South Carolina:
- The tax relief postpones various tax filing and payment deadlines that occurred starting on September 25, 2022 in South Carolina and September 28 in North Carolina.
- As a result, affected individuals and businesses will have until February 15, 2023, to file returns and pay any taxes that were originally due during this period.
You can read more on the extensions below:
- Florida: IRS Notice FL-2022-19, September 29, 2022
- North Carolina: IRS Notice NC-2022-10, October 5, 2022
- South Carolina: IRS Notice SC-2022-06, October 5, 2022
Pennsylvania passes state capital gains law change.
Thanks to House Bill 1342 being signed into law on July 8, 2022, property owners in the state of Pennsylvania can now take full advantage of favorable tax treatment under Section 1031 of the Internal Revenue Code. The new law contains a provision that brings the state’s tax treatment of 1031 exchanges in line with the Federal Internal Revenue Code. Before this law was passed, a capital gain that was created by a 1031 exchange triggered state income taxes at the time of the sale. If a property owner used any portion of his/her proceeds to pay state income taxes he/she would also lose the ability to complete a full deferral of the gain, triggering additional taxes at the federal level.
This new law reconciles this issue, allowing Pennsylvania property owners the ability to take full advantage of a 1031 exchange. The law applies to both individuals and partnerships and goes into effect for all exchanges that occur after December 31, 2022.
SVP, Corporate Counsel