PORTLAND, OR—The end of the year is around the corner, ushering in new EB-5 regulations and the potential for further clarification on opportunity zone legislation. In this exclusive, Adam Hooper, co-founder and CEO of RealCrowd, discusses his outlook on the commercial real estate market, his expectations for the remainder of the year and 2020, and how upcoming legislation changes might impact the industry.
GlobeSt.com: As we enter third quarter, what is your overall outlook on the market and what can investors expect as we move into the end of the year and into 2020?
Hooper: The outlook on the commercial real estate market is bright through the end of the year and well into 2020. Despite an uncharacteristically long recovery, we are experiencing a strong economy, low unemployment, low interest rates and wage growth, all of which are directly boosting our industry. Throughout the recovery, we have seen controlled levels of development in most markets and heightened interest in real estate from many groups of investors, and this interest is expected to increase. In fact, our recent survey of high-net-worth investors indicated that they plan to make even more real estate investments in the next year than they have in years past.
There are some headwinds in our industry, such as increasing construction costs due to a persistent labor shortage and tariff threats, and prices leveling off as of mid-year. However, most experts are not anticipating a recession until at least the latter part of 2020, and then only a mild one, so this bodes well for commercial real estate.
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GlobeSt.com: What can you tell us about the new EB-5 regulations that were released and how this may impact investment in CRE?
Hooper: The US Citizenship and Immigration Services agency has been working for more than two years on updating EB-5 regulations to combat fraud and abuse in the program. The updated regulations were just released and are set to go into effect in November.
EB-5 allows people from other countries to apply for conditional lawful permanent US residence as long as they invest in US commercial real estate or with certain restrictions preserve 10 permanent full-time jobs for qualified US workers. The federal program has served for more than 30 years to help fund development projects in targeted employment areas in need of an economic boost and in other areas, while providing an opportunity for foreign investors to become residents here.
Under the new regulations, the minimum investment amount for an EB-5 visa will increase from $1 million to $1.8 million to account for inflation, the first increase since 1990, and the minimum investment amount in a targeted employment area will increase from $500,000 to $900,000, with adjustments for inflation every five years.
There is some concern among developers that the increased minimum investment amount and shift in federal control of targeted employment area designation may delay or derail some projects. On the other hand, the goal of these tighter restrictions is to return EB-5 to its original focus, which is to provide much-needed development to areas of the country that are in need, and that’s always good for commercial real estate.
GlobeSt.com: What is the latest in opportunity zones? Do you expect more regulations to be released this year?
Hooper: The first deadline for deferring tax on capital gains just passed at the end of June. That deadline applied to gains realized by December 31, 2018, and it required those gains to be reinvested in qualified opportunity funds to be eligible for the opportunity zone program.
The next deadline applies to investors interested in deferring capital gains until the end of 2026 and taking advantage of the full 15% step-up in basis for the initial deferred gain. Those investors have until December 31 to reinvest capital gains into a qualified opportunity fund without tax penalties.
We are hoping to receive further guidance from the treasury on a new round of regulations by year end, though the timeline for any updated guidance may slip into early 2020. There have also been talks of possibly extending a few of the original deadlines to help investors realize the full 15% step-up in basis through 2020, but official guidance will need to come from regulators before anybody gets too excited.
GlobeSt.com: What else is of interest regarding investment considerations?
Hooper: Investors have a lot of factors to consider when placing their real estate capital over the next several months. Both the EB-5 and opportunity zone regulations are designed to present opportunities for investors to benefit from real estate investment if they follow certain guidelines. The legislation is complex, so it’s wise for them to consult with a trusted investment advisor and accountant before making a move, but given the low interest rate environment and demand for certain types of development, investor sentiment remains high and the outlook for investing in commercial real estate continues to increase.
Join the GlobeSt.com ADAPT: Opportunity Zones Conference on September 16-17 in Baltimore, MD. The new national conference series is aimed at identifying opportunity zones across all property types and geographic regions. This first-of-its-kind event will educate, connect and celebrate the investors, developers and owners with the people behind the planning and decision-making, such as architects, consultants, academics and, most importantly, municipal officials.
Click here to register and view the agenda.