As we find ourselves halfway through 2024, the commercial real estate (CRE) market presents a mixed outlook. Various sectors are experiencing different phases of their cycles, with some showing resilience despite broader economic challenges.
High interest rates and inflationary pressures strain property owners, leading to rising vacancies and price adjustments in many traditional sectors. However, not all areas of CRE are equally affected; certain property types are better positioned to weather these conditions and even thrive.
One way investors participate in commercial real estate is through using 1031 exchanges and Delaware Statutory Trusts (DSTs). A 1031 exchange allows investment property owners to defer capital gains taxes by reinvesting proceeds from the sale into a like-kind property.
Delaware Statutory Trusts (DSTs) are deemed “like-kind” property under 1031 exchange guidelines and offer investors a unique opportunity to access many different commercial property types. By pooling resources into high-quality, income-producing properties, DSTs provide diversification, professional management, and potential tax advantages, making them an attractive option for accredited investors.
Office buildings have been hit particularly hard. The shift towards remote and hybrid work has led to persistently high vacancy rates, reaching 19.2% in late 2023, and is expected to rise further. Office space owners also face refinancing challenges due to higher interest rates, making it difficult to service debt and maintain occupancy rates. The uncertain future of office demand adds to the sector's woes, pushing owners to consider converting office spaces to alternative uses such as residential or data centers.
While some traditional sectors struggle, several CRE segments are poised for solid performance due to persistent demand drivers. Those include:
1. Student Housing: Demand remains strong as higher education institutions attract students. Despite economic fluctuations, the sector has shown stability, consistent demand often driven by limited supply at many institutions.
2. Self-Storage: This sector benefits from lifestyle changes, including downsizing and increased urbanization. The need for storage space remains consistently high, and self-storage facilities have maintained fairly stable rents amidst robust demand.
3. Medical Office Buildings: Healthcare needs are continually rising, driven by an aging population and advances in medical technology. These properties offer stable, long-term leases and are less sensitive to economic cycles.
4. Senior Living Facilities: With the aging baby boomer population, the demand for senior housing facilities is expected to be sustained. These properties cater to a growing demographic with specific housing and care needs.
Investing in DSTs allows for ownership of high-performing commercial properties across these emerging sectors. DSTs offer several advantages:
The diverse CRE sectors mentioned offer promising opportunities for accredited investors to optimize their portfolios. By leveraging DSTs, investors can access high-quality properties with strong performance potential, benefiting from diversification and professional management.
We encourage you to consider DSTs for your 1031 exchange and explore how Bangerter Financial can help you achieve your investment goals.
For more information on how DSTs can enhance your investment strategy, contact us at 916.965.1879 today.