U.S. commercial real estate is a likely winner in a tax plan that’s poised to lower rates for property owners, spur new investment and increase demand for rental housing, according to a new report.
Real estate investors would fare especially well in the House version of the tax-overhaul effort, now working its way through Congress along with its Senate counterpart; the two sides are said to have reached a tentative compromise. According to the report, by Cushman & Wakefield Inc., 61 percent of investment in U.S. commercial real estate is made by “pass-through” entities, those that don’t pay corporate tax but instead pass income through to their owners’ individual tax returns. The House bill slashes the top tax rate on such income to 25 percent from a current top rate of 39.6 percent.
The Senate bill takes a different approach, tying a new deduction for pass-through income to the amount of wages the business pays, said Revathi Greenwood, head of Americas research for Cushman & Wakefield. That provision would mean larger savings for ownership structures with more employees, such as real estate investment trusts.
The treatment of pass-through income in the House bill “would be a huge win for the commercial real estate sector,” Greenwood said. “If the Senate version goes through, there’s marginal advantage to being a REIT instead of a partnership. There might be some conversions.”
Representatives of the two chambers are meeting this week to reconcile their versions of the legislation, setting the stage for President Donald Trump, who made his fortune in commercial real estate, to sign a bill into law as early as next week.
In the weeks since the House of Representatives unveiled its tax plan, on Nov. 2, housing experts have warned of its potential effects on the U.S. housing market. Proposed changes to the treatment of mortgage interest and state and local taxes could reduce incentives for buying a new home. Potential effects on commercial real estate have gotten less attention, perhaps because the industry doesn’t have much to complain about.
Opportunity for Malls
Still, not every sector will benefit equally. The tax plan should favor residential landlords, the report said, with the tax benefits of homeownership curbed. It is also likely to benefit retail landlords by lowering taxes on companies that rent space and leaving consumers with more discretionary income to spend.
“Mall operators are looking at restructuring anyway,” remaking their properties to give shoppers experiences they can’t get online, Greenwood said. “We think some of the money saved in taxes will be reinvested back into the business.”
Office landlords are likely to see more-modest gains. While corporate tenants are key beneficiaries of the tax plan, they’re likelier to return tax savings to shareholders than to increase spending, Greenwood said. The tax overhaul could benefit the office sector by discouraging companies from moving their headquarters abroad to save on taxes, she said.