Another Day at the Office, But With Tax Reform

A total of five months has passed since the Tax Cuts and Jobs Act, commonly known as the TCJA, entered our lives. While the real estate world is still awaiting guidance about some aspects of the TCJA, the impact on the office market is becoming more apparent.

The TCJA itself was designed to increase the Federal Deficit by $2 trillion, likely affecting both inflation and interest rates. Rising interest rates can be a detriment to real estate owners who are reliant upon debt to purchase assets or are looking to refinance debt on existing property. On the flip side, rising interest rates are also a sign of a strong economy, which investors hope will continue to drive asking rents in the office sector.

In New York, for example, financial services firms still represent a substantial portion of office leasing demand. During the 2017 presidential campaign, both candidates discussed the repeal of the so-called “carried interest loophole,” a tax vehicle used by private equity firms to take advantage of capital gains rates (maximum 20%) that are substantially lower than ordinary income rates (now maxed at 37%). While it was feared that the TCJA would eliminate this so-called “loophole,” the new tax law merely requires a longer three-year holding period for asset managers to meaningfully benefit from the capital gains rates. Keeping the carried interest rules in significantly the same form as before the tax reform should have minimal adverse impact on financial services firms and allow them to continue to flourish, thereby boosting New York office rent demands.