2021 Outlook for Portland & Oregon 1031 Exchanges Austin Bowlin, CPA – Partner at Real Estate Transition Solutions
In the wake of the Coronavirus pandemic, 2020 will be remembered as one of the most challenging, chaotic, and bizarre years in recent memory – easily rivaling the economic turmoil and social unrest of 2008. In a matter of weeks, 2020 will be behind us [insert sigh of relief], naturally prompting questions about the outlook for 2021. As a real estate investment advisory firm specializing in 1031 Exchanges & Delaware Statutory Trusts, our company has experienced an unusually high level of exchanges from rental property owners in 2020. As you may expect, this exchange activity is concentrated in highly appreciated and highly regulated rental markets like Portland, Seattle, and San Francisco as landlords look to 1031 Exchanges as a way out. So let’s analyze the key factors driving this trend and the expected impact on the Portland and Oregon rental housing market in the coming year. Let’s start with the positives. According to the Federal Reserve Chairman Jerome Powell’s September Policy Statement, the Fed plans to keep interest rates near zero for several years to come, at least until 2023, to stimulate and provide liquidity to the economy. What does this mean for investment property owners? Lower Fed rates lead to lower lending rates which have a positive correlation with capitalization rates used to establish property values. Simply put, property values should stay relatively high provided rents hold steady. The next positive is the reduced supply of new multifamily construction projected to come online over the coming few years. The reason for this reduction is not purely Covid19 related; it is also due to increased permitting costs and timelines, increased construction costs, and economic uncertainty. Declines in new supply, with stable or increasing demand, shift the supply/demand equation in a direction that is favorable for existing properties – provided regional employers continue to hire and employees continue to migrate to Oregon. Lastly, we are hopeful that the worst of Covid19 could be behind us, especially if an effective vaccine is developed. Specifically, we are optimistic that restaurants, offices, schools, and venues will resume somewhat regular operations in 2021 so that children can attend traditional school and adults can work. Undoubtedly, the impacts of the pandemic will continue to be felt for years to come, but every safe step we can make toward resuming normal operations will help both our economy and society. Unfortunately, by no means are all winds blowing in favorable directions for 2021. There is still plenty of uncertainty next year which is largely due to the following factors. First, both city and state landlord-tenant regulations and eviction bans place disproportionate financial responsibility and liability on landlords. Questions loom as to when the eviction bans will be lifted, given the subjective duration of the bans in many cities. If landlords do not have a legal and efficient method to remove non-paying or problematic tenants, then owning Oregon rental property will present a considerable risk. Nearly 9 months into Covid19, the road to recovery is much longer than originally predicted. Many behaviors may change for good, such as the general acceptance of working remotely, especially among our region’s largest technology employers. Will renters decide to move to lower-cost markets with a higher quality of life and more open amenities because of remote work flexibility? This is a major question for a region that has been scarred by social unrest, protests, a high cost of living, and Covid19 shutdowns. Lastly, there are several both proposed and approved taxes that will undoubtedly impact Oregon investment property owners. First, the newly implemented Oregon Corporate Activity Tax, a 0.57% tax applied to gross receipts in excess of $1 million for all businesses with income derived in Oregon with limited deductions allowed. Second, the supportive housing services tax of 1% on taxable income above $125,000 for individuals and $200,000 for couples who are married filing jointly as well as businesses with gross receipts over $5 million within the Portland Metro approved in May 2020 and effective January 2021. Third, the universal preschool tax proposals that range from 1.5% - 3.9% for Multnomah County residents and those deriving income in the county which will be voted on in November. Finally, a proposed 0.75% on all payroll paid by businesses with 25 or more employees operating within the Portland Metro to also be voted on in November. These taxes significantly increase the tax burden on individuals and cost of doing business in the
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RENTAL ALLIANCE UPDATE November 2020
www.rhaoregon.org
