Welcome back everybody. Stephen Morris here with AdviseRE, and we are approaching the year end. I thought I’d spend a little bit of time here to share some predictions, ideas, and other thoughts about what’s going to happen in 2025 as it relates to real estate, as well as some changes in the tax laws. Without further ado, let’s jump right into it.
Let’s start with housing and the rental market. As we know right now, rents are sky high, home prices are also sky high, and it doesn’t seem like there’s going to be any indication that this will change in the near future. With interest rates continuing to be where they are—and even if the Fed lowers them a bit—we still expect to see interest rates remain much higher than historical averages. Most of us in this country are sitting on loans in the 2% to 3% range and have no incentive to leave our homes at this time or sell, dispose, or do any of that sort of stuff to get out of our properties.
Since home prices are currently sky high, you’d assume that developers would step in and build more inventory for the market. Unfortunately, as it stands now, construction costs are likely the highest they’ve ever been. There are several reasons for that, one being the historical shortage of construction labor, primarily influenced by the Great Recession of 2008, when many construction professionals exited the industry during those horrendous times. We haven’t really resupplied or encouraged the development of trades in the United States over the past 10-plus years. Only now are we starting to see individuals entering trades like plumbing, electrical, and carpentry, which will take years to make a noticeable impact on the market.
On top of that, there’s a significant demand for construction, especially after the Inflation Reduction Act of 2022, which allocated a lot of funding for public infrastructure across the United States. This demand for labor is also driven by the push to build more car manufacturing facilities, the rise in AI, and the construction of additional data centers. There doesn’t seem to be any slowdown in terms of overall construction demand. The same trades—whether they’re building bridges, roads, highways, data centers, or EV car manufacturing facilities—would potentially be used for housing, which means we won’t be seeing any relief in housing market construction costs anytime soon. Until these costs come down, or prices move up significantly, developers won’t have a compelling reason to build more housing stock, especially considering that incomes aren’t growing as quickly as they have in the past.
With that being said, it’s tough right now to enter the market. However, if you’re a current holder of an apartment complex or if you currently own your home, you’re probably in a fantastic position. I’d recommend holding on for a while, as you’ll likely see some level of rental growth. If you’re in places like California, although some expenses like insurance are increasing, your real estate property taxes will probably stay flat or move up only a couple of percentage points due to state law.
Let’s move on to another sector that has me very interested: office. As you may know, at the time of this video, people are highly interested in working from home and not going into the office. As a result, office vacancies have absolutely skyrocketed. In the United States right now, there’s a tale of two different office markets. The first one would be in primary markets and primary locations. Take Los Angeles as an example—a market I’m familiar with. Century City has gone bonkers, with sky-high rents and very low vacancy rates. Meanwhile, about eight miles east in downtown Los Angeles, the situation is bleak. There are very high vacancies, rents have been dropped, and many landlords are handing back their keys to the banks because they can no longer service their debt.
We’ve recently seen some transactions in the office sector trading at prices you wouldn’t believe—somewhere between 60% and 70% off what they paid 10 years ago. Under today’s market and today’s construction costs, you probably couldn’t even build the first three floors of those buildings for what they sold for. In my opinion, there’s a strong play here in buying office space, because I don’t see it going much lower. At this point, you’re likely buying at the bottom. If you have a long-term hold strategy—five to ten years—you might see your investment skyrocket.
The main question you might ask is: how do you get into a Class A office building in downtown Los Angeles that trades for $140 million if you don’t have $30 or $40 million (or even $50 or $60 million) for a down payment? One option is to look into REITs that hold office buildings, or there might be private syndications targeting office space. You’ll want a long-term hold strategy, and I’d advise not counting on that money for the next decade. However, you’d likely be very happy in ten-plus years.
Why am I so enthusiastic about office buildings? For several reasons. One is that some of these properties, depending on their size and profile, can be repurposed into multifamily in the future or used for mixed-use development. That would be a fantastic revitalization tool, especially as city governments prefer not to see vacant office buildings leading to blight. They may even provide tax incentives or direct financial incentives for redevelopment. Also, the market could shift, with more employers mandating a return to the office, possibly boosting demand. For now, I’d definitely consider exploring office as a viable investment opportunity.
Now let’s shift gears to taxes. With Trump having won the presidency, we’re probably going to see the Tax Cuts and Jobs Act of 2017 renewed or expanded. One of the biggest items we’re anticipating as tax professionals is the return of robust bonus depreciation. Currently, for 2024, placing any equipment or property into service with a 20-year or less life is eligible for 60% bonus depreciation, with the remaining 40% to be depreciated over its useful life. Next year, 2025, that number would drop to 40%. However, we expect it could be reset back to 100%, meaning huge depreciation deductions—especially for those doing cost segregation studies.
We’ve heard that the future Trump administration wants to cut taxes, so we believe the bonus depreciation law may be one of those changes. Meanwhile, you might have heard about the EV credit potentially going away. It’s currently helpful but not as beneficial as it used to be. We expect it might be eliminated in the coming year, due to an administration that’s slightly more anti-electric vehicles. With all that said, as tax professionals, we’re unable to predict exactly what will happen. Congressional approval is needed, and the president has to sign off on it. So far, no one has given concrete guidance on their exact tax plans.
In light of this uncertainty, one thing we recommend is diversifying and spreading risk. One approach is to obtain multiple residencies worldwide and park money in different countries—investing in foreign real estate to spread out risk. Some countries to consider might include the United Arab Emirates, Saudi Arabia, and Paraguay. They’re all interesting for residencies and have growing popularity, particularly in Europe. We’re strong advocates of multiple residencies because, number one, you can spread risk by having assets in different nations. Number two, it opens up new investment opportunities, especially in real estate. Often you need permanent residency or citizenship to own property legally in those countries, and these processes can take years to complete, so the best time to start is now, not in five or ten years. Finally, you get to experience different lifestyles—lower labor costs in some nations, for instance.
As I mentioned in a previous video, these visa or residency opportunities aren’t guaranteed forever. They can change at any time, based on immigration policies or public sentiment. At some point, they could revoke your chance to secure residency, which would limit your future choices.
In conclusion, housing will likely stay persistently high. We don’t see a significant drop in interest rates any time soon. Office could be a good bet if you buy at the right price and play the long game. On the tax side, bonus depreciation is probably coming back in a big way. If you’re considering buying equipment or real estate, 2025 might be a more advantageous year once 100% bonus depreciation is reinstated. Lastly, as an all-around contingency plan, we always recommend multiple residencies and diversifying assets outside the U.S. for peace of mind against whatever the future holds.
Thank you so much for watching. I hope this was helpful. If you have any questions or want more details on why we said what we said in this video, feel free to reach out to us at the email provided. We’ll gladly help you out. Thanks for watching, and have a wonderful day!
