Top Economists On Which CRE Sectors Will Benefit Most From Tax Reform This Year

The overhaul of the tax code President Donald Trump signed into law Dec. 22 represents a win for commercial real estate as a whole, economists say, but some sectors will benefit more — and sooner — than others as a result. 

Retail 

The retail sector will likely be the biggest beneficiary, Colliers Chief U.S. Economist Andrew Nelson said, because of the lowering of the corporate tax rate. The tax reform law reduces the corporate tax rate to 21% from 35%, but because of deductions, not all types of businesses had effectively paid that same higher rate.

"Retailers traditionally pay a high corporate tax rate because they don't have the same kind of deductions as other sectors," Nelson said. "When you lower the corporate rate overall, retailers tend to benefit a lot." 

Changes to the individual tax code could also benefit retail through an increase in consumer spending, JLL Chief Economist Ryan Severino said. 

"As of February, households should theoretically be seeing bigger paychecks, so low- to- medium-income people should be spending more money," Severino said. "I think you'll see that sooner than later." 

Nelson is not as optimistic about a boost in consumer spending from the changes to the individual tax code. He said the law focused more on cutting taxes for businesses, and he doubts the individual cuts will have much of an impact.

"For the average household it will be a pretty modest increase in take-home pay," Nelson said. "Not only is the overall tax cut on individuals modest, they are also skewed toward the upper end of the income distribution ... Upper income households tend to spend less of their income and save more of their tax cuts than do lower income households, so you have more of a stimulus when you cut taxes on lower income households." 

Hospitality 

The increase in consumer spending Severino expects would also benefit the hospitality sector, he said, though it might take a few more months for that to materialize. 

"The impact on hotels might be seen by the middle of the year as school ends and vacation season rolls around," Severino said. "Some households will use the increased income to take vacations they weren't planning or spend more lavishly." 

In addition to the potential for more demand, Savills Studley Chief Economist Heidi Learner identified a specific provision in the law that will help hotel owners. In a section of the tax code allowing companies to immediately deduct the cost of certain types of property, a clause was added expanding it to include "depreciable tangible personal property used predominately to furnish lodging." 

"To me that specifically speaks to the hotel sector," Learner said. "It could also speak to furnished apartments or student housing." 

The provision begins phasing out the deductions at $2.5M, so Learner said it would be especially beneficial to owners of smaller hotels, allowing them to reduce costs by deducting capital expenses paid on furniture. 

Multifamily

The multifamily sector could see a boost in demand from provisions in the law that discourage homeownership, pushing people toward renting. The law lowered the cap on the mortgage interest deduction from $1M to $750K, which could reduce the number of homeowners who can take advantage of the deduction from 44% to less than 15%, according to Zillow. 

"There's a negative for single-family homeownership," CBRE Chief Economist Jeffrey Havsy said. "It's less advantageous, so people have less benefit to buy a home, so they should have a greater incentive to rent. That is good for apartment investors." 

The law could also force homeowners to pay more property taxes because of its $10K limit on state and local tax deductions. This could have a greater effect in states like California, New York and New Jersey where housing prices and property taxes are higher. 

"Multifamily should benefit because the benefits of homeownership will decline, especially in some of the strongest apartment markets, which are high-priced, blue state markets," Nelson said. 

Severino agreed these changes could have an impact on multifamily, but said it will not be as immediate as the benefits he expects in retail and hospitality.

"We're waiting to see the impact on housing markets and prices due to the mortgage deduction and state and local tax limitation, that might take a little longer," Severino said. "Depending on how people feel about their living situations, it might be longer for that to show up in some of the data." 

Office

The effects on the office sector will be less significant than other types of commercial real estate, the economists said. The broad economic growth they expect tax reform to spur will benefit companies that occupy office space, but it remains unclear how much of that profit will go toward expanding their real estate footprints. 

"Many corporations are expected to distribute much of their tax savings to shareholders through dividends and buybacks instead of investing in new facilities," Nelson said. "I think the impact on office will be more neutral. It's not going to be bad but it won't gain an extra amount like retail." 

Even if companies are able to hire more people and expand their footprints, Severino said the labor market shortage could stand in the way of achieving that growth. 

"If there's any positive impact to office I think it will be marginal," Severino said. "The bigger concern for the office market is that we're running out of people to hire. Even if we get some marginal boost to hiring from tax benefits, I think it's almost certain hiring [in 2018] will be lower than last year ... Office space is hitting some headwinds with the fact that we're almost nine years into an expansion and running out of competent people to hire." 

Nelson, Severino, Learner and Havsy will share a stage to discuss tax reform and other issues affecting commercial real estate at Bisnow's Economic And Political Forecast event Jan. 31 at The Willard InterContinental in Washington, D.C.