By Michael G. McGuinness
Twice each year, a sentiment survey is sent to several thousand developers, investors and operators in the office, industrial, retail and multifamily sectors. Conducted by NAIOP, the commercial real estate development association, the September 2018 survey included 287 companies that roughly correlated to 31 percent office, 37 percent industrial, 17 percent retail and 15 percent multifamily. The most recent key findings yielded a 0.66 Sentiment Index, which is the highest posted since the full survey commenced in March 2016. The results of the individual questions in the survey are consistent with responses posted over the five previous surveys but, in the aggregate, there is more support for the notion that the fundamentals underpinning commercial real estate will be stronger in 12 months than they are today. This consistent, positive index level over the past 36 months is a sign that the greater commercial real estate market has been operating at a steady pace and it is expected to support continued expansion for at least 12 more months.
The most positive changes in the survey that contributed to this optimistic outlook were the favorable expectations regarding the availability of capital (both debt and equity), as well as the belief that effective rents will rise over the next 12 months. At the same time, however, respondents were still greatly concerned about the costs of construction materials and labor, as indicated by the lowest score recorded for each category since the survey started. Labor costs continue to be the most negative component of the overall Sentiment Index.
I believe that some of this optimism is also due to the Tax Cuts and Jobs Act of 2017. Aside from several business-friendly changes (including a reduced corporate tax rate of 21 percent, a doubling of the estate tax exemption and a lower tax rate for many pass-through businesses), the law created the federal Opportunity Zone (OZ) program. Simply put, the OZ program is a new type of economic development tool designed to spur development, infrastructure improvements and job creation in economically distressed communities by providing generous federal tax benefits to investors. It is anticipated that many individuals and fund managers who are currently on the sidelines will be motivated to invest trillions of dollars in unrealized capital gains in these OZs. Depending on the length of time that the capital is invested in the OZ funds, the federal tax benefits would include a tax deferral, tax reduction and/or a tax exemption. Found in every county, parts of 75 communities are eligible for OZs, including Hackensack, Clifton, Dover, Hamilton Township and Salem City.
Given this ready availability of capital, along with the generous federal tax benefits for investors that target their assets in the OZs, towns in New Jersey need to get their acts together upfront before they can attract investors.
This also holds true for the non-OZ communities that can benefit from the Public-Private Partnership (P3) law that Gov. Murphy signed on Aug.14, 2018, which takes effect in February 2019. Under the new law, school districts, municipalities, counties and state entities may enter into a public-private partnership agreement with a private organization, which would assume the financial and administrative responsibility for the development, construction, reconstruction, repair, alteration, improvement, extension, operation and maintenance of a government-related project that is financed in whole, or in part, by the private entity. The government entity would still own the project. Prior to this law, private capital could only have been used to build higher education facilities, but that expired in 2012. Starting next year, private investors can put their capital to work on a wide range of projects, including those related to ports, rail, roads, recreation, higher education and more. Using private-sector ingenuity, the goal is to deliver projects in an accelerated, less expensive and timelier way. The benefits accrue by allocating the risks to those parties best able to manage and mitigate them, which helps to guarantee performance.
As state Sen. Steve Oroho said, “Capital is the lifeblood of the economy; it’s like water and takes the path of least resistance. It needs to be successful and get a steady rate of return with more flexibility in financing.” Municipalities and government agencies that are forward-thinking and willing to do their homework have much to gain. They can modernize and maximize the value of their infrastructure; improve the safety, accessibility and utilization of public facilities; preserve heritage properties; make their buildings and facilities more environmentally and financially sustainable and provide their taxpayers with more efficient, healthier and prosperous communities.
(Portions of this article were obtained from the NAIOP CRE Sentiment Index for fall 2018)
Michael McGuinness is CEO of NAIOP New Jersey and has led the commercial real estate development association since 1997. NAIOP represents developers, owners, asset managers and investors of commercial, industrial and mixed-use properties, with 830 members in New Jersey and over 19,000 members throughout North America.
