2021 Outlook for Seattle & Washington State 1031 Exchange

In the wake of the Coronavirus pandemic, 2020 will be remembered as one of the most challenging, chaotic, and bizarre years in recent memory – easily rivaling the economic turmoil and social unrest of 2008. In a matter of weeks, 2020 will be behind us [insert sigh of relief], naturally prompting questions about the outlook for 2021.

As a real estate investment advisory firm specializing in 1031 Exchanges & Delaware Statutory Trusts, our company has experienced an unusually high level of exchanges from rental property owners in 2020. As you may expect, this exchange activity is concentrated in highly appreciated and highly regulated rental markets like Seattle, Portland, and San Francisco as landlords look to 1031 Exchanges as a way out. So, let’s analyze the key factors driving this trend and the expected impact on the Seattle and Washington rental housing market in the coming year.

Let’s start with the positives. According to the Federal Reserve Chairman Jerome Powell’s September Policy Statement, the Fed plans to keep interest rates near zero for several years to come, at least until 2023, to stimulate and provide liquidity to the economy. What does this mean for investment property owners? Lower Fed rates lead to lower lending rates which have a positive correlation with capitalization rates used to establish property values. Simply put, property values should stay relatively high provided rents hold steady.

The next positive is the reduced supply of new multifamily construction projected to come online over the coming few years. The reason for this reduction is not purely Covid19 related; it is also due to increased permitting costs and timelines, impact fees such as MHA (Mandatory Housing Affordability) in Seattle, increased construction costs, and economic uncertainty. Declines in new supply, with stable or increasing demand, shift the supply/demand equation in a direction that is favorable for existing properties – provided regional employers continue to hire and employees continue to migrate to Washington.

Lastly, we are hopeful that the worst of Covid19 could be behind us, especially if an effective vaccine is developed. Specifically, we are optimistic that restaurants, offices, schools, and venues will resume somewhat regular operations in 2021 so that children can attend traditional school and adults can work. Undoubtedly, the impacts of the pandemic will continue to be felt for years to come, but every safe step we can make toward resuming normal operations will help both our economy and society.

Unfortunately, by no means are all winds blowing in favorable directions for 2021. There is still plenty of uncertainty next year which is largely due to the following factors. First, both city and state landlord-tenant regulations and eviction bans place disproportionate financial responsibility and liability on landlords. Questions loom as to when the eviction bans will be lifted, given the subjective duration of the bans in many cities. If landlords do not have a legal and efficient method to remove non-paying or problematic tenants, then owning Washington State rental property will present a considerable risk.

Nearly 9 months into Covid19, the road to recovery is much longer than originally predicted. Many behaviors may change for good, such as the general acceptance of working remotely, especially among our region’s largest technology employers. Will renters decide to move to lower-cost markets with a higher quality of life and more open amenities because of remote work flexibility? This is a major question for a region that has been scarred by social unrest, protests, a high cost of living, and Covid19 shutdowns.

Lastly, there are several both proposed and approved taxes that will undoubtedly impact Washington investment property owners. First is the proposed Washington State capital gains tax of 9% for all gains realized by individuals or married couples with $25,000 or $50,000 or more of income, respectively, unless a tax-deferred 1031 Exchange is performed. The second impactful tax is the July 2020 passage of Seattle’s payroll tax on large employers scheduled to take effect in 2021. This tax significantly increases large employers’ cost of operating in Seattle and may be a catalyst in redirecting growth elsewhere, whether via remote work or expansion of offices outside Seattle. The potential for increased property taxes and Federal taxes in 2020 should also be closely monitored – all of which will impact investment property owners’ bottom line.

All in all, while we are relieved to soon have 2020 behind us, there is still plenty of uncertainty ahead. In addition to the above factors, your objectives and priorities are likely changing as time goes by. Perhaps increased stable income potential is a higher priority than appreciation? Perhaps 2021 is the year to consider estate planning strategies for your investment real estate? Perhaps you have had enough of the time, energy, and effort it takes to actively manage your real estate? As you reflect on 2020 and look forward to this coming year and beyond, we encourage you to reach out to us to discuss how best to align your rental properties with your financial and lifestyle objectives. We can educate you on your available options in order to effectively stage yourself for both the coming year and the next chapter of life.