Tax Reform – impacts and projections for the Bay Area

We recently released an article on the tax reform and how it affects those in high SALT (state and local tax) states like California and New York. I’ve posted a summary of that article here and a link below to the entire report. Hope you enjoy the article.

The recently enacted tax reform legislation (the Tax Cuts and Jobs Act or “TCJA”) was an attempt both to lower taxes and to broaden the tax base in a number of ways to compensate for tax cuts.  There is a tendency to focus on the change in the tax liability from a single provision in isolation rather than to look at the tax reform law as a whole, due in part of the complexity of the varied and countervailing provisions within the law. Nonetheless, it is absolutely necessary when examining tax reform to focus on the net effects. The best examples of this are the limitations of state and local tax (SALT) and mortgage interest deductions (MID) and their impact on taxpayers and communities, particularly in higher tax, higher income areas. This report details the implications in California, New York and other markets.

A few take away points from the article were:

• Tax reform reduces taxes even in those states and markets with the highest state and local taxes such as San Francisco Bay Area and New York City Metro.
• The new tax law will help drive investment in knowledge center markets such as the Bay Area, Seattle, Boston, and Raleigh-Durham supporting office rent growth and having positive spillovers into other product types.
• The Bay Area economy and office market stand to benefit from increased investment following repatriation of tech companies’ cash hoards.
• Tax reform provides tailwinds to the tech and financial services sectors which will have a positive effect on the economy and commercial real estate market.
• The tax law reduces home ownership incentives and that will likely translate into slower single-family home price growth in high-tax, high cost markets.
• Investment opportunities; knowledge center markets (primarily office but other property types as well), Multifamily, and Class A Multifamily.

Additional observations that I picked up from the article were while we as Californians will see a reduction in taxes next year, the biggest benefit will be to those who live in lower tax states. As a point of comparison, the average reduction in taxes is 2.1% for all US taxpayers but in California, we will only see a 1.6% decrease. For you high income earners, you may not see a reduction at all, in fact, your taxes may increase by .6% to 1.7%. While a 1-2% decrease in taxes is nice, it isn’t likely going to impact the economy in a big way.

Businesses on the other hand will see more of a benefit than the individual tax payer. The tax reform could spur new business formation, greater investment by existing enterprises and attract more capital spending to the United States from abroad. All of these affects should support demand for Commercial Real Estate (CRE).

The Bay Area is highly dependent on the technology sector. In the US, 4.8% of workers are in the technology sector but in the Bay Area, that number is 11.9% and in Silicon Valley, that number is about 30%. We should watch for the impacts of the tax reform to have a bigger impact on the Bay Area due to the number of tech companies in the region. While the tax reform will set the stage for business growth, we expect the driver to be coming from the global markets investing in these tech companies.

A challenge that may come from the tax reform in the Bay Area will be in the area of housing. The tax reform reduces home ownership incentives and we have ongoing issues with affordability and traffic congestion. The impact of this could play out with Occupiers and their decisions to expand in the Bay Area or elsewhere.  It is possible that they may be tempted to expand in a number or growing secondary tech markets where tax incentives are available.

If you are an owner of Class A Multifamily projects then you may see all of these housing challenges as good news.  These challenges may be what is needed to give these multifamily landlords another justification to raise rents.

This post is just a summary of the nine page report.  To access the full report, please click here.