Tax Plan Will Encourage More Multifamily Activity

January 16, 2018 | By Kelsi Maree Borland

The new tax plan and the still historically low interest rates will likely fuel more multifamily activity in Los Angeles this year.

All signs indicated that multifamily activity will remain strong in 2018. Despite being so late in the cycle, Mark Ventre, SVP at Stepp Commercial, says that the new tax plan and low—although slowly rising—interest rates will fuel market activity throughout the year. We sat down with Ventre to talk about the Los Angeles multifamily market and what we can expect this year. How will the new tax plan impact the multifamily market in Los Angeles? 

Mark Ventre: The tax plan will have a positive impact on the multifamily industry for various reasons.  Owners of pass-through entities such as LLCs and LLPs, private equity funds, and S Corporations will be able to claim a 20% deduction on their income.  Additionally, the depreciation schedule has been shortened from 27.5 years to 25 years.  Indirectly but not at all less consequential, is how it will affect the single-family market, especially in high property value locations like Los Angeles. There is a new $10,000 limit on state and local property tax deductions, and the interest expense deduction has been reduced to the first $750,000 of mortgage debt (and an elimination entirely on the interest deduction on home equity loans).  And, because the standard deduction has doubled, there is less of an incentive to itemize, which is one of the main benefits of home ownership.  All these reasons could cause would-be homeowners to continue renting. Are you concerned about rising interest rates, and how do you think that they will impact the multifamily market activity in Los Angeles? 

Ventre: At this point, no. We are still at historic lows.  We are about to enter into what could be a prolonged growth environment that the new tax plan jumpstarted.  With that will come wage growth and a more normalized inflationary environment that will result in steadily rising interest rates. Deal volume fell in 2017. Do you expect that trend to continue through 2018? 

Ventre: I believe there will be a modest selloff this year by owners looking to cash out or exchange into other markets or asset classes such as NNN properties. Rising interest rates, rent control restrictions, looming seismic retrofit burdens (in the City of LA), a highly competitive rental market, and the new tax bill are all driving factors. What will be the theme of the L.A. multifamily market in 2018? 

Ventre: More inventory, more repositioning opportunities, more aggressive tenant buyout scenarios, and rejoicing from the failure to repeal the Costa-Hawkins Act, which prescribes statewide limitations on the application of local rent control. What is your advice to L.A. multifamily investors this year?

Ventre: Interest rates, while beginning to rise, are still historically low and rental rates are still increasing. The economy is shifting into high gear.  We could be in the opening inning of a double-header—play ball!