During the last two years, the syndicated 1031 exchange market, primarily existing of Delaware Statutory Trust (DST) programs with a few Tenant-in-Common (TIC) programs, has experienced a surge in transactions, raising record amounts of equity. Though real estate analysts anticipated this surge, the actual transaction amounts exceeded expectations.
Syndicated 1031 exchange programs were expected to raise an estimated $800 million in 2015. The actual amounts raised by these programs in 2015 exceeded $1 billion. Midway through 2016, estimates for the year’s equity raise reached $1.4 billion. The actual amount was $1.46 billion, according to Mountain Dell Consulting, LLC, an independent consulting firm and affiliate of Orchard Securities, LLC, a registered member of the Financial Industry Regulatory Authority, syndicated.
Based on the numbers, this trend should continue through 2018.
Here’s how we know this: Between 2002 and 2007, syndicated 1031 exchange programs raised over $12.4 billion of equity. The majority of these investment programs used Commercial Mortgage-Backed Securities (CMBS) to finance the acquisition of their assets. With a 10-year term on these mortgages, billions of dollars in CMBS loans have matured over the last several years and billions more will mature over the next couple years. Reports estimate approximately $300 billion in CMBS loans will have matured between 2015-2018.
The recent surge in the market is the result of these maturing loans forcing the syndicated programs from the early 2000s to come full-cycle and the investors from these programs to exchange their equity into new syndicated programs to continue their capital gain tax deferral cycles.
As has been the case for programs with loans that have matured in the last two years, programs with loans that will mature in 2017 and 2018 will also be forced to sell their properties because of CMBS lending guideline changes that now prohibit TIC ownership on collateralized property and DST governance, commonly referred to as the Seven Deadly Sins of DSTs, that restricts DSTs from refinancing.
It can be expected that when these properties sell, investors involved will respond as others have – by returning to syndicated programs to find suitable replacement properties to complete 1031 exchanges. As this happens over the next two years, syndicated 1031 exchange programs will again experience record amounts of equity raised.
Foreseeing the large amounts of equity that would re-enter the market, program sponsors have been pressed to make enough investment-grade real estate available to accommodate the needs of exchange investors. In response, some sponsors have increased the portfolio size of their DSTs. Instead of syndicating separate DST offerings for single real estate assets, sponsors are saving time and money while increasing offering maximums by combining multiple real estate assets into single DSTs.
At 1031 Crowdfunding, investors are experiencing additional benefits from these types of DSTs. Not only have multiple asset DSTs become a vehicle to increase DST availability faster and at a lower cost, they have also increased investment diversity. Without having to seek out multiple properties and divide equity to diversify a real estate portfolio, investors are acquiring diversified portfolios with a single purchase of beneficial interest in a multiple asset DST.
DSTs popularity continues to grow as investors seek an easier way to navigate the 1031 exchange process and compete in a competitive market, and now DSTs are providing a simpler way to diversify.