For as long as I've been in commercial real estate, the 1031 exchange has followed a familiar script. You sell a property. You identify a replacement within 45 days. You close within 180 days. You defer the taxes and keep your capital working in real estate.
That script still works, and it's still the right move for plenty of investors. But a recent analysis by Erika Morphy, drawing on Green Street's latest report on small commercial property transactions, points to a shift I've been seeing in conversations with clients: more exchange dollars are going into Delaware Statutory Trusts (DSTs) instead of single replacement properties.
A DST lets an investor buy a fractional interest in a professionally managed property, or a portfolio of properties, and still qualify for 1031 treatment. Instead of finding, negotiating, and closing on a whole building under a tight deadline, the investor places proceeds into an interest in a managed vehicle and becomes a passive owner.
The numbers show investors are paying attention. According to Mountain Dell Consulting, DST fundraising in the first half of this year was up 31% from the same period last year. CBRE's head of private investor capital markets expects that trend to continue, with a growing share of 1031 capital heading into DSTs rather than one-off replacement assets.
I think three things are behind it.
The replacement market is competitive. Small-property sales are recovering. Green Street recorded more than $57 billion in U.S. transactions for properties valued between $5 million and $25 million in the first half of the year, up over 9%. Retail sales jumped nearly 18%, and small industrial hit a record. That's good news if you're selling. It's harder news if you're on the clock trying to buy. Well-located industrial and grocery-anchored retail draw a lot of interest, and a 45-day identification window doesn't leave much room to wait for the right deal.
Private investors are operating more like institutions. The line between private and institutional capital is blurring. Institutional buyers are underwriting smaller deals than they used to, and private investors are building investment committees, hiring analysts, and thinking about their holdings as a portfolio rather than a series of one-off purchases. In that context, a DST isn't a fallback. It's one tool among several for managing concentration and risk.
A lot of owners are ready to step back. Many of the investors I work with have owned a single net lease asset for years. They've handled the tenant relationship, the lease renewals, the roof. When they sell, not all of them want to take on another property to manage. A DST lets them stay invested in real estate, keep their tax deferral, and hand off the day-to-day.
DSTs solve some real problems, but they come with trade-offs that every investor should understand before committing:
The traditional replacement property isn't going anywhere. For investors who want control over an asset and its business plan, a direct acquisition is still the better fit. And a single-tenant net lease property can still be an excellent 1031 destination.
What's changing is the number of options on the table. In a market where buyers and sellers are meeting in the middle, rates are expected to stay higher for longer, and underwriting is based on today's numbers rather than hoped-for rent growth, flexibility has real value. For some investors, that means a DST for part or all of their proceeds. For others, it means a backup plan if the right replacement doesn't surface in time.
The best time to think about this is before you list your property, not on day 40 of your identification period. If you're considering a sale and want to talk through your options, whether that's a direct replacement, a DST, or a combination of the two, I'm happy to help you plan it out.
Justin Langlois, CCIM is a Commercial Real Estate Advisor with Stirling Investment Advisors serving Baton Rouge, Louisiana and the Gulf South. Please reach out to Justin to discuss your real estate investment strategies.