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A new analysis by Marcus & Millichap demonstrates how like-kind exchanges are fundamental to the health and financing of the commercial real estate industry, particularly during market corrections and liquidity shortages. (Marcus & Millichap – The Importance of Like-Kind Exchanges During Periods of Reduced Commercial Real Estate Market Liquidity, 2023).
Key Findings
- Commercial real estate transaction volume is down, but like-kind exchanges are up. Despite a general decline in commercial real estate transactions, the number of 1031 exchanges initiated has increased nearly 15% from 17,467 in the first half of 2019 to 20,070 in the first half of 2023.
- The analysis attributes the general decline in commercial real estate transactions in the first half of 2023 to the rise in interest rates, stricter lender underwriting, a diminished economic outlook, and a broad spectrum of geopolitical challenges.
- “The 15% rise in the number of exchanges initiated, when commercial real estate transaction count fell by 22.1%, underscores the importance of like-kind exchanges in periods of reduced commercial real estate market activity.” (Marcus & Millichap)
- The liquidity generated through LKEs serves as a deterrent against commercial property defaults, consequently reducing risks in the banking and financial systems that could otherwise pose a threat to the broader economy.
- While the Biden administration has proposed limiting like-kind exchanges in its last two budget submissions, academic and other economic research has repeatedly demonstrated the positive economic contribution of LKEs and their importance to the economy. (EY report—“Economic Contribution of the Like-Kind Exchange Rules to the US Economy in 2021: An Update”)
- The Marcus & Millichap analysis draws on data collected by the largest like-kind exchange qualified intermediaries in the country and aggregated by the Federation of Exchange Accommodators, a member of The Real Estate Roundtable’s President’s Council.
The Roundtable’s Tax Policy Advisory Committee (TPAC) will continue working to raise awareness of the role that like-kind exchanges play in supporting the health of the US economy and the stability of real estate markets.
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