December 12, 2024
Clark Nuber recently hosted a comprehensive real estate and hospitality event that brought together industry experts to discuss the latest industry trends and challenges. We are thankful to Emily Eckroth from Parker Smith & Feek, Kris Hollingshead from Washington Trust Bank, and Jesse Stanley from KBKG for sharing their insights. The event covered a wide range of topics, from insurance premiums and risk management to financing and market trends.
Here’s a detailed summary of the key points discussed:
Federal Tax Updates
2017 Tax Cuts and Jobs Act (TCJA) Provisions: Over 30 provisions are set to expire on December 31, 2025, including the 20% qualified business income deduction, business interest limitation, and reduction of the estate tax lifetime exclusion.
Corporate Transparency Act: Businesses created before January 1, 2024, must file a Beneficial Ownership Information Report with FinCEN by January 1, 2025. On December 3, 2024, a federal judge in Texas temporarily suspended the enforcement of the BOI filing nationwide. Legal advice recommends to continue with the filings in case a higher court reverses the ruling.
Pending Tax Law Changes in 2025: Republicans aim to move quickly on tax legislation using the budget reconciliation process. A few key items that will be considered during negotiations will be the extension of Tax Cuts and Jobs Act (TCJA) provisions for all taxpayers, the return of 100% bonus depreciation, and 100% deduction of research and development costs.
Tax Incentives
The Inflation Reduction Act has brought significant changes to tax credits relevant to the real estate industry. The 45L tax credit now offers incentives for energy-efficient homes, providing substantial savings for developers who meet the criteria. Additionally, the 179D tax deduction has been enhanced, allowing for greater deductions on energy-efficient commercial building property, which can lead to considerable tax benefits for property owners and developers.
Insurance Premiums and Risk Management
One of the primary topics was the significant increase in insurance premiums. On average, premiums have risen by 5.6%, with commercial property premiums seeing an 8.9% increase. Properties located in catastrophic zones have experienced even steeper hikes, ranging from 10% to 40%. This surge is attributed to the growing frequency and severity of natural disasters.
To address these challenges, the insurance industry is leveraging advanced risk assessment mapping powered by artificial intelligence (AI). This technology enhances the accuracy of risk evaluations, helping insurers and property owners better prepare for potential disasters. Companies were advised to adopt several risk management strategies:
- Disaster Preparedness: Implementing comprehensive disaster preparedness plans.
- Smart Technology: Investing in smart building technologies that can detect water leaks, as water damage remains the leading cause of insurance claims.
- Infrastructure Improvements: Consider investing in upgrades, including retrofitting existing buildings and investing in green solutions.
- Tailored Solutions: Consulting with insurance agents or brokers to develop customized insurance solutions, including taking advantage of available savings programs.
- Proactive Communication: Maintaining strong relationships with insurance providers, emphasizing the importance of proactive communication and transparency to avoid surprises.
Cybersecurity Concerns
The event also highlighted a notable increase in cybersecurity claims, particularly within the hospitality sector. Due to the reliance on point-of-sale (POS) systems, hospitality businesses are more vulnerable to cyberattacks. Experts recommended that these businesses obtain cybersecurity insurance to mitigate potential risks.
Financing and Market Trends
The discussion on financing revealed that the prime rate has decreased by 75 basis points compared to a year ago. The 10-year treasury rate, which serves as a benchmark for underwriting rates and influences loan proceeds, has also seen fluctuations. This rate is crucial for determining the cost of long-term financing and impacts the availability of capital for real estate investments.
Multi-Family Sector
The multi-family sector is currently experiencing an increase in delivery of new projects from the spike coming out of COVID in 2021/2022. However, rising interest rates and decreasing tenant rent applications are creating a competitive environment for attracting tenants. New build applications plummeted after interest rate increases. Experts predict that the market will stabilize by 2027/2028 as supply levels off. During this period, developers may need to offer concessions to attract tenants, such as reduced rent or additional amenities.
Office Sector
The office sector continues to face stress, with no significant recovery in sight. Despite this, there are trends of employers bringing employees back to the office, and 55% of companies in Bellevue, Washington, have already done so.
Emerging Trends
Several emerging trends were discussed:
- Multi-Family Market: The sector is experiencing a “hangover” from the rapid starts of new projects in 2021 and 2022. With the significant number of projects approaching completion, we may see a rise in loan extensions as construction inspections are delayed.
- Eviction Limitations: There are ongoing limitations on evictions, which can make it harder for property owners to turn over rooms. Borrowers are often reluctant to provide similar investments under these conditions. This is specifically challenging for affordable housing providers.
Conclusion
The Clark Nuber real estate and hospitality event provided valuable insights into the current state of the market, highlighting both challenges and opportunities. From rising insurance premiums and cybersecurity threats to financing hurdles and market trends, the event underscored the importance of proactive risk management and strategic planning. By staying informed and adopting innovative solutions, companies can navigate the complexities of the real estate and hospitality landscape and position themselves for future success.
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