Investors have a rare window to make high returns on 1031 exchanges, experts say.

The 1031 exchange sector is recovering from COVID-19 as small investors seek to grow their portfolios via the tax tool, experts say. In June, IPX 1031, a platform that facilitates 1031 deals, saw an 18 percent decline in number of orders from last June, when orders had hit a recent record high, said, executive vice president and western regional manager Jennifer Keen.

Orders rose 30 percent year over year in January but plunged 30 percent in April and 50 percent in May, she said on a Marcus & Millichap webinar called Maximizing 1031 Exchanges. “2019 was an incredible year for IPX,” she said. “That gives me a lot of confidence — that we’re only down 18 percent.”

1031 exchange investors are motivated by a rare window of opportunity to make high returns, said Marcus & Millichap senior vice president and research services national director John Chang. That window exists because the cost of capital has decreased while capitalization rates have remained stable. “The 10-year Treasury has fallen significantly. It’s around 70 basis points right now, which is the lowest we’ve seen ever. Interest rates are dramatically lower than in the past, and that signals that the yield premium on the asset versus the cost of capital has opened back up and created another investment window.”

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Many small investors are trading multifamily properties for triple-net-lease retail properties, said Marcus & Millichap senior vice president and retail division national director Scott Holmes. “When people go into net lease investments through a 1031 exchange, 47 percent of the time, they’re coming out of apartments; 12 percent are coming out of multitenant retail.”

The federal government also is offering the 1031 exchange sector relief by extending certain deadlines that govern when a property has to trade in order to qualify for the tax deferral. The deadline was pushed from April 1 to July 15 and could push further, Keen said. “During this pandemic, many times you couldn’t see a property and lending became a challenge, and that slowed things down. We’re still not quite up to speed.”

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