The capital stack is flooded with investors seeking to place money into can’t-miss projects with strong returns on investments. As real estate prices continue to soar, 1031 investors aren’t being shy about making their interest known and driving record deal activity.
Inland Private Capital Corp president Keith Lampi says a significant amount of his firm's capital flow comes through 1031 placements. Inland raised a record $478M in equity last year; 80% of which came from 1031 investors. Inland is on pace to raise $600M in 2016.
Keith says this is the culmination of four years of planning. Inland looked at the state of the market in 2012 and determined the industry was at the beginning of a growth cycle. The firm put a plan in place to expand its platform beyond retail and encouraged diversification across several investment types. That variety would, in turn, attract investors.
A major factor driving 1031 investment is a desire by Baby Boomers to remove themselves from a hands-on approach to real estate. When seeking deals, the tax ramifications of actively owning and managing properties can be onerous and Boomer investors prefer investing in real estate funds like Inland, whose product is pre-packaged specifically for a passive role in real estate.
Inland set its sights on specialty asset classes to feed 1031 investor appetites. One example: student housing, which Keith says is a recession-resistant real estate sector. Its low volatility allows it to perform strongly in a growing market. Student populations keep occupancies high and rent spreads expanding. Keith says university structure matters with regards to student housing.
Another sector where Inland struck gold is in self-storage, which is still a mostly mom-and-pop field. Keith says an institutional foothold is only now entering the self-storage marketplace. Inland’s research showed strong operating fundamentals and tremendous potential to drive rents spreads by grouping self-storage assets together, and implementing operational and cost efficiencies enjoyed by other sectors. Keith says Inland has been able to purchase self-storage real estate at or near replacement costs.
Keith, like other real estate pros, keeps tabs on attacks on 1031 exchanges from Congress and says Inland works with groups like the National Association of Realtors to educate Congress on the benefits of 1031 for investors and the global economy. Restricting 1031 in a negative manner would remove a lot of taxable revenue from the table, thanks to deal flow and transaction volume, Keith tells us. For real estate owners, removing 1031 would lead to a freeze in volume if they couldn’t use the proceeds of a sale to reinvest in another acquisition. Those owners would hold on to their properties instead.
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