'Fiscal Cliff' May Have Hidden Benefits for Certain U.S. Commercial Real Estate Sectors

'Fiscal Cliff' May Have Hidden Benefits for Certain U.S. Commercial Real Estate Sectors

Commercial News » North America Commercial News Edition | By Hortense Leon | November 15, 2012 8:10 AM ET

Fiscal-Cliff.jpg While everyone in the business community seems to be wringing their collective hands these days over the possibility of the US economy going over the so-called fiscal cliff, some sectors of the commercial real estate market are almost looking forward to it. 
Richard Bassuk, chairman and CEO at the Greystone Bassuk Group in New York, whose company focuses on financing for multifamily housing, notes that interest rates are at a once-in-a-lifetime low level and could go even lower if there is a deadlock (on the fiscal cliff)."Today, you can get 35-year financing at under 2.5% and we are besieged by people interested in this," he says.
"Even people in the real estate business don't realize that FHA/HUD has this enormous program," for the acquisition and refinancing of multi-family rentals under section 223 (f), says Bassuk. "At least for the next 12 to 18 months, based on what (Federal Reserve Chairman Ben) Bernanke has said, we will have very low interest rates," which is good for refinancing and the construction of multifamily properties, he says.
Even if the multi-family business experiences a downturn because of a shortage of new renters, the result of a deep recession, says Bassuk, apartment building owners "can refinance and get the least costly mortgage."
Still, "if we fall off the cliff," says Asieh Mansour, Ph.D., head of research for the Americas at CBRE, the negative impact on GDP growth will be significant. There won't be much job creation or business spending and there will be a lower demand for commercial real estate space, she says. Also, there will be much higher taxes of various sorts: Income taxes and capital gains taxes will go up and dividend income will be taxed as ordinary income, says Mansour. If capital gains taxes go up, investors' returns will go down, says Mansour, which will be a disincentive to buy commercial real estate. 
At the beginning of 2012, commercial real estate investors were starting to move toward value-added commercial real estate properties, but with the possibility of the "fiscal cliff" looming, investors have changed course, says Mansour.  "Over the next two to three quarters, they will stick to core assets with credit tenants and long- term leases, and will focus on key markets like New York, San Francisco and Chicago," she says. "In the near term, risk will be off the table."
But Mansour is not completely pessimistic. She says that increased taxes on capital gains will have a "one-time," short-term, negative effect. "Probably, by the second half of 2013, once we are sure about what the regulations are, (investors and owners) will adjust," and begin to invest more freely in commercial real estate again, she says.
On another positive note, Mansour says that, regardless of any changes in the tax code, Obamacare may help the commercial real estate industry, because "we may see new (real estate) development in the healthcare sector."
In addition, REITs may benefit from a different tax environment, according to Daniel Clifton, head of policy research at the investment-research firm Strategas. He told the Wall Street Journal, in a November 9th article, that because REIT dividends are already taxed as ordinary income, REITs will look better compared to other dividend-paying stocks, if scheduled dividend-tax increases take effect.

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