The 4th Quarter Rush to Sell

With the Bush era tax cuts on capital gains poised to expire at the end of the year, the investment sales market went on a tear in the 4^th quarter. According to CoStar, total deals were up 46% from the same time a year ago based on transaction data through Dec. 31, according to Brian Kerschner, real estate economist for Property and Portfolio Research (PPR), CoStar’s analytics and forecasting company.

Not surprisingly, it was small-cap deals — assets most likely to be sold by owners hoping to mitigate the tax consequences of a sale – that really spiked, increasing in volume by 77% in the fourth quarter. Large-cap deals typically have less exposure to capital gains because they tend to involve REITs and pension funds which are tax advantaged investors.

The maximum rate for long-term capital gains had been 15% for individuals earning up to $85,650 a year or families earning up to $142,700. If we had gone over the cliff, the rate would have jumped to 20%.

Deals that closed in the waning days of 2012 included the following:

• Amazon.com had the blockbuster of the year:  It paid $1.16 billion for its Seattle headquarters, encompassing 11 buildings totaling 1.8 million square feet.
• Cupertino, CA-based Mission West Properties, Inc. sold all of its real estate assets for about $1.3 billion in two separate transactions
• Dexus Property Group sold the majority of its U.S. industrial portfolio for $561 million as part of its strategy to exit the U.S. market by April, reallocating proceeds from offshore property sales to core Australian properties, CEO Darren Steinberg said. The sale of 26 of Dexus’  27 American properties was achieved at a significant premium to their book value.

Incidentally, the same logic applied to the residential market. New York, for example, saw an extraordinary 2,598 home sales in the last three months of 2012 — the highest for a Manhattan fourth quarter in at least 25 years.

Under the terms of the fiscal-cliff deal reached Tuesday, capital-gains taxes increased only for annual incomes over $400,000 for individuals and $450,000 for households. They will pay a new capital gains tax rate of 23.8%.