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There was a special focus on how port-related issues are driving real estate development at last week’s Bisnow National Industrial and Logistics Summit Northeast held in New York. Bisnow’s Miriam Hall did a great report on the experts’ view of commercial real estate market trends. Beyond the supply and demand of the current market, there were a few longer-term trends and issues that recurred throughout the day.
It’s all about the trucks
Trucking is the key mode of transport for moving goods in and out of ports, and it is increasingly the link in the supply chain driving the nature of industrial real estate development. Depending on who you ask, there’s either a shortage or truckers or a terribly inefficient allocation of existing resources. Either way, it’s creating a growing burden on logistics: the average age of truck drivers is now is 57, costs are up as much as 35%, and the American Trucking Association ATA estimates there is a shortage of nearly 69,000 truckers.
Another hot topic of discussion throughout the day was the state of the trucking industry and the effect of mandated Electronic Logging Devices (ELDs). ELDs bring the traditional DOT-required driver logs into the 21st century by automatically tracking hours of service. While the system could lead to greater safety, there are significant costs for initial investment, especially for smaller owner/operators. The new system also means that a few minutes delay here and there cannot be fudged as many acknowledge has been done in the past, making efficiency even more important.
Going forward, experts see the maritime industry coalescing around a limited number of “gateway” ports capable of providing the infrastructure and service needed to compete for container traffic. With an expanded Panama Canal and larger ships, channel depth and air draft are two of the most obvious attributes that will define gateway ports.
Equally important is what you do with cargo once it’s offloaded. Larger ships and fewer steamship lines create the risk that gateway ports will become choke points unless they can achieve the velocity needed to move goods quickly through the port. Many ports have established truck appointment systems, and ELD requirements are only putting greater pressure on scheduling. Facilities need to be configured to handle this volume, and having a sufficient number of Customs agents on hand when cargo is moving through is vital.
Low supply and high demand means that warehousing properties situated near ports are commanding a premium right now. Long-term, experts expect distribution points to move closer to markets as land become more scare at ports.
That need in part prompted the Port of Virginia to create inland intermodal facilities to which containers are transported by rail and barge for distribution. Not only does this solve the landside storage problem, it avoids the need for added truck traffic at the port. The future will likely bring strategic alliances between private developers and public ports (especially landlord ports) to solve these warehousing and transportation issues.
The changing nature of logistics activity is driving changes in the physical configurations and attributes of warehousing as well:
- E-commerce fulfillment centers require more parking (and more land) than traditional distribution facilities.
- The configuration of dropyards will need to be more efficient to minimize ingating and outgating times.
- Next-day delivery will drive more multistory warehouse/industrial uses in urban areas. These are expensive build, and older building stock may not have required clearances and engineering.
- Expect to see vacant big box start to fill last-mile needs.
As with many industries, technology is affecting logistics in the present and not-too-distant-future:
- Electric trucks: Can save 25 cents/mile, helping to offset ELD compliance costs and dampen effect of low supply.
- Load-Matching Apps: Sometimes called Uber for trucks, linking truckers with loads to improve utilization of trucking resources. Two of the most prominent are Convoy and Transfix.
- Blockchain: Encrypted transactions of products more attractive.
- Drone delivery: FAA clearance could one day be a factor in site selection.
Anthony V. Mannino
Chief Operating Officer, Wolf Commercial Real Estate (WCRE)
Sr. Consultant, Triad Strategies
Board Member, PhilaPort
Greater Philadelphia Area Commercial Real Estate
Let’s look at how the recent tax reform bill impacts commercial real estate. The Tax Cuts and Jobs Bill was signed into law on 22 December 2017. The tax reform bill is one of the most substantive changes to the tax laws passed in over 30 years. With the current administration’s background in commercial real estate and understanding of the challenges in the industry, it’s no surprise that certain provisions would be included that might help propel real estate development and commercial real estate transactions. Here’s a quick summary of a few of the critical pieces that affect the commercial real estate business. This isn’t a full compendium or review of the bill and it’s not tax advice but it will help guide you in developing some strategies to take advantage of these laws with your CPA in 2018.
Tax Reform Bill Lowers Taxes on Pass Through Corporations
Pass-through businesses—partnerships, S-corporations, and limited liability companies—are corporate entities that allow business income to “pass-through” to the owner, thereby paying a personal income rate, as opposed to a business rate. For most this is a tax cut from 40% down to 25%. So, let’s say you have a rental income entity organized as an LLC, this new regulation could be significant tax savings to you. Also, be sure to ask your accountant about the “Corker Kickback” which further amplifies this benefit through a 20% deduction subject to income thresholds.
Tax Reform Bill Offers Tax Deductions for Property Developers:
New provisions allow developers to deduct interest expenses for a variety of real estate activities, including construction, management, and property development. This should help developers free up some necessary cash to keep projects moving.
Tax Reform Bill’s Impact on 1031 Exchanges
Like-kind exchanges enable owners of property to sell at a large capital gain but defer any tax as long as they use the proceeds to buy some other property. In essence, owners of commercial real estate can keep flipping the properties until they die without ever paying any capital gains tax. (And if the estate tax is abolished, the gains might go untaxed forever.)
Tax Reform Bill’s Impact on Carried-Interest
There was lots of talk that the “carried interest” loophole would be closed for hedge fund managers. Carried interest essentially allows for taxation at lower capital gains rates rather than ordinary income rates for assets held at least one year. The new reform changes the hold period to three years but this won’t affect most hedge funds as the average hold on assets is three years.
In the real estate context, the change doesn’t make much difference to investors who have a long-term hold strategy. However, for real estate investors who operate on a fix-and-flip strategy this could affect you directly.
There are more aspects in this tax reform bill that are favorable to real estate investors and you should be consulting your CPA as soon as possible to start planning for 2018 if you haven’t already. While every action has an equal and opposite reaction, most experts agree that these new regulations should spur additional investment in the commercial real estate sector from development through purchase of real estate for rental income purposes.
For more information, contact:
Marc Snyderman, Esquire
923 Haddonfield Road, Suite 300
Cherry Hill, NJ 08002
Antonella Colella, Esquire
150 Monument Road, Suite 207
Bala Cynwyd, PA 19004