The 1031 exchanges and tenant-in-common deals have had a rough time of it lately. Until last year, there was a booming volume of real estate investment sales, which provided the necessary folder for a healthy 1031 exchange and TIC market. In particular, as apartments went condo, the sellers needed a tax-advantageous exit strategy.
Those days are gone. But 1031s remain an important part of the real estate market, and companies such as American Realty Capital Exchange L.L.C. (ARCX), an arm of American Realty Capital Advisors, remain active participants in the market, especially those exchanges that facilitate subsequent TIC investments. Recently ARCX inked a deal to merge with the 1031 exchange and wealth management businesses industry veteran of Brad Watt, who became the company’s president and managing director. Watt has over 20 years of experience in structuring, marketing and managing various real estate investment programs, totaling over $2 billion in asset value.
Recently CPN Net Lease Newsletter spoke with Watt about the 1031 and TIC markets. Despite the current economic perturbations, he anticipates good long-range prospects for the business.
CPN: What’s the state of the 1031 market, given all that’s happened in the last year and a half?
Watt: There’s been a cyclical slowdown in investment sales, and that’s translated to a slowdown in the 1031 and TIC markets, but structurally speaking, positive trends remain. We’re anticipating a $10 trillion multi-generational wealth transfer in the next 10 years, the largest wealth transfer in history. Much of that wealth is tied to real estate, and a lot of people inheriting it are baby boomers who won’t want to manage that real estate. This seismic wealth transfer will create the opportunity to provide replacement properties that are much more passive, and much more conservative, in the way they are structured.
CPN: This long-term trend will also lift the TIC market out of its doldrums?
Watt: Definitely. There will be a larger and larger pool of investors who will want to exchange into higher-quality properties, such as Wal-Mart, Walgreen’s or a Fedex facility, for example. These are investment-grade properties that most smaller investors will want, but can’t have on a single basis. By pooling in a TIC structure, they can participate. That’s not so different as it is now; it’s just that there are going to be a lot more investors looking for such structures in the not-too-distant future.
CPN: Will the TIC structure work through its current difficulties?
Watt: It will, though hardly all TICs have underperformed in recent year. Still, there have been underperforming and nonperforming TIC programs because they weren’t structured on sound fundamentals. The emphasis going forward will be sound underwriting and fundamentals. Right now, with all the fear and panic, is the time to step forward with a “flight-to-quality” TIC structure, employing an investment strategy that allows for stability, income and even growth. The challenge for any real estate sponsor is to align those investment objectives with the fundaments of the real estate assets.
CPN: What’s it like to be a buyer of high-quality properties in this climate?
Watt: There are more sellers now than buyers, and we’re able to make some terrific buys because there’s a liquidity crisis, and so we’re actually in a good position. Investors with cash are king. We’re seeing values we haven’t seen in five years, at significant discounts to replacement cost in many of the assets we’re buying. There’s a new normal in the market now, and we’re squeezing out all the excess built into the market in the last five years or so.