Art Services Update:
Summer 2019

At Bank of America Private Bank, we maintain a keen focus on the art market and on the collectors, dealers, auctions specialists, and institutions that make it function. We work closely with many of you across four pillars: art lending, art planning, consignment services, and arts institutional endowment management. What follows are observations on the state of the art market from a business perspective.

The Market

• Current low interest rates, solid equity markets, and more stratified wealth creation worldwide continues to drive capital towards art. The maturation and globalization of the art market has expanded the collector base and transformed the art market from a niche lifestyle into a $60 billion global industry¹. Still, overall art market growth in terms of total art sales has stalled since 2012, even as the S&P 500 has currently more than doubled since that time.
• If the Federal Reserve (Fed) continues its dovish policy, we expect collectors’ continued allocation of capital to art. When interest rates fall, the opportunity cost of holding non-interest-bearing assets like art goes down. The art market is driven by sentiment, so the greatest risk we see is a geo-political event that impedes the global flow of capital and credit prompting collectors to pause.
• We anticipate that financial returns for contemporary art will be lower over the next decade than some may expect. The market has absorbed a lot of art since the turn of the century. An exceedingly large percentage of those works may be worth close to zero in a generation or so. And because we’re in a more mature and efficient art market, there may be fewer upside surprises than in decades past. We feel that you should not buy art purely as an investment. Buy it for love, desire, legacy, culture, pleasure, addiction, status, and community.

The Auctions

• During the New York Spring Auctions, the market absorbed over $2 billion of art at Christie’s, Sotheby’s, and Phillips, handily above the $1.6 billion presale estimate. It was the first auction-season defined by large estates of post-war and contemporary art. Eye-catching results such as the $91 million Koons Rabbit, the $110 million Monet Haystack and the rapidly growing market for KAWS belie a more modest 5.1% annualized return² achieved for repeat sales during the season. Given recent performance of London auctions and the lack of clarity around a Brexit deal, New York will continue to be the premiere sale site for high-end post-war and contemporary art for the foreseeable future. Fresh-to-market works, typical of the artist’s oeuvre, in good condition, with strong provenance, continue to perform strongest at auction. Works by female and black artists continue also their rise.
• You likely saw that in June, Sotheby’s accepted a $3.7 billion buyout offer from French media entrepreneur, Patrick Drahi. Interestingly, Bonhams was also bought out earlier this year. Going private will allow Sotheby’s more flexibility to compete for top lots, which will benefit major collectors, and will provide time and space to evolve its business model, which, like Christie’s, is challenged. Competition for top pictures has become a race-to-the-bottom: China isn’t the growth engine everyone hoped it would be, and online sales have yet to deliver meaningful scale or margin expansion. With business margins at around 10% for the industry, auction houses are officially on the hunt for new revenue streams.
• Look for the auction houses to continue to expand into art advisory, financial services, brand licensing, and even investment research as they look beyond their supply-constrained auction business. As a collector, you may see better terms when consigning top works at auction, but expect higher commissions for lower value works. Buyer premiums will continue to expand at all levels. Finally, get ready for more convenience. Virtual reality will change how you view upcoming sales and artificial intelligence will soon be sending you an endless array of Netflix-style lot recommendations (across all categories) based on what you’ve perused across the internet.

The Collector

• We’re currently in the age of the collector. The art market is now a solar-system where dealers, museums, auction specialists, art advisors, and private bankers orbit around the gravitational pull of the collector. You now join top dealers and museum executives as lead actors, taste-drivers, and status-makers. One major gallerist told us that he used to collect artists, and now he collects collectors.
• The industries producing the greatest number of new art collectors are Private Equity, Hedge Fund and Real Estate. This new guard tends to view their collection as an extension of their financial life. They unlock capital from their art to redeploy elsewhere, pay attention to tax implications, and incorporate their art early on into legacy-planning. The new collector also is increasingly willing to sell on the way up. Collectors aren’t sellers will soon no longer be a thing.
• The new enterprising collector understands that an artist’s influence on other artists drives price in the long run. We’ve noticed more collectors promoting the artists they collect, strategically collaborating with museums, and taking a more active role in an artist’s career. Museums, now priced out of the market, have become more receptive to partnering with collectors early in their journey.
• Rising collectors still go to lengths to show they’re not purely investors. They market themselves quietly to dealers, work with reputable art advisors, acquire non-commercial works such as installations, and become trustees of the local museum or arts institution, all to signal that they will not flip a hot artist at auction.

Art Fairs

• Dealers we spoke to following the most recent edition of Art Basel said it was their strongest fair ever. The art market has become event-driven. We expect the major art fairs to become increasingly critical nodes for the primary and even the secondary art market.
• Galleries tell us that now almost 50% of their annual sales stem from art fairs, which benefit from two behavioral impulses. Induced scarcity: art fairs are ephemeral and high stakes, encouraging you to make snap decisions. And the sunk cost fallacy: you feel obligated to acquire if you’ve trekked to Basel, Maastricht, or Hong Kong.
• With over 300 fairs globally, the majors like Basel, Frieze, and TEFAF are aiming to solidify their status as dominant umbrella brands that the satellite fairs will increasingly be tethered to.Earlier this year, MCH Group, the parent of Art Basel, sold its stake in Art Dusseldorf to focus on its tent-pole fairs in Basel, Hong Kong, and Miami. In February, Frieze expanded beyond London, Hong Kong and New York into L.A. as its parent company, Endeavor, run by Hollywood super-agent Ari Emanuel, filed for IPO. TEFAF Maastricht, long an exemplar of sophistication, has quickly solidified its spot on the calendar with two New York editions, which we sponsor.

Art and Technology

• The art market remains one of the few industries still largely undisrupted by technology. We’re seeing innovation but it’s still at the fringes. While online transactions are increasing, the growth of online sales has slowed, growing at 9.8% in 2018 versus 12% in 2017.³
• Internet-native art companies are trying to help. In June, private equity firm Cove Hill made an investment in online marketplace LiveAuctioneers, aiming to accelerate online sales growth for their auction house partners, while Invaluable has made it easier to source and buy lower value items. Major galleries like Gagosian and David Zwirner launched digital sales channels. But the digital revolution still eludes the art world.
• On the transparency front, Christie’s became the first major auction house to record sales via Blockchain with the sale of the Ebsworth collection in November. At the request of the Seller, Christie’s partnered with Blockchain-secured registry Artory to record its transactions. It’s an interesting development but we’re a long way from Blockchain becoming industry standard.
• The most significant art world technology has been the rise of Instagram. Artists market themselves, museums announce exhibits, dealers initiate sales, and collectors tout their purchases through the platform. In 2017, when the “Untitled” Basquiat sold at Sotheby’s for over $110 million, Yusaku Maezawa posted his photo on Instagram to let the world know of his acquisition. Younger collectors, artists, dealers, and auction specialists are increasingly using Instagram to enhance their personal and professional brands. Expect the new status loop to fuel a herd mentality for some artists and more price volatility. So collector beware.

Art Lending

• Our art lending business grew by 20% year-over-year, as you all continue to unlock capital from your art to build hotels, buy sports franchises, expand companies, and even buy more art, just to name a few. The four most common situations we’re seeing are.
  • The balance sheet arbitrage: With historically low interest rates, more of you are unlocking capital from your art to redeploy into higher return areas of your financial life like private equity.
  • Working capital line: During the current economic expansion more of you are using art loans to fund the growth of your privately held companies.
  • Monetizing a collection: The passage of the 2017 Tax Cuts and Jobs Act Act eliminated the 1031 Like-Kind Exchange, making it more expensive to sell art. Instead of selling art, and dealing with paying the 28% federal tax + 3.8% healthcare surtax + State taxes + sales commission, many of you have chosen to leverage your art via an art line to generate liquidity.
  • Guarantees: Finally we’re seeing more of you using art facilities to back guarantees at auction (just be careful).
• We estimate that total U.S. art loan commitments stand at $16 billion. We’re proud to have significant portion of those loans and we remain staunchly committed to the space. Given our forecast of continued low-interest rates, stratified wealth creation, and expansion of the collector base, we expect continued growth in the space.

Opportunity Zones

• Capital gains tax on the sale of artwork is high, up to 28% on the federal level, plus 3.8% healthcare surtax, plus applicable state income tax. Many of you qualified to use Section 1031 like-kind exchanges, which indefinitely deferred your federal capital gains and healthcare surtax.
• The 2017 Tax Act repealed that provision for all taxpayers, except for real estate investors. An unrelated provision allowing a temporary deferral and partial elimination of capital gains has caught the attention of the art world—Opportunity Zones. These are designated low-income areas across the country and Puerto Rico, in which taxpayers may invest capital gains and receive the following tax benefits:
  • Federal capital gain timely reinvested in an Opportunity Zone investment is deferred until the earlier of the sale of the Opportunity Zone investment, or December 31, 2026;
  • If the Opportunity Zone investment is held for 5 years (before 12/31/26), then 10% of the original capital gain is eliminated; if the Opportunity Zone investment is held for 7 years (before 12/31/2026), then an additional 5% is eliminated. The remaining gain will be recognized on December 31, 2026 (subject to certain adjustments); and
  • If the Opportunity Zone investment itself is held for at least 10 years (but sold before the end of 2047), any gain on the Opportunity Zone investment itself is avoided altogether. This benefit may prove most beneficial to investors.
• By way of example, say you purchased a Jeff Koons Balloon Animal for $1 Million years ago and decided to sell it now for, let’s say, $21 Million. The federal tax on that $20 Million gain would be $6.36 Million. You could invest part or all of your gain in an Opportunity Zone investment, defer the gain until December 31, 2026, eliminate 15% of the original gain, and most important, if the Opportunity Zone investment appreciates, avoid any capital gains tax on that investment.

Sales Tax

• As states feel pressure to collect more revenue, some have increasingly focused on sales and use tax collection efforts. The auction houses and reputable art galleries are experts in sales and use taxes. There have been several high profile sales tax cases in recent years, some involving criminal charges. So do not get fancy here…heed the advice of the experts!

Art Services at Bank of America Private Bank

To learn more about how we can help you manage and protect your collection, or understand how our institutional services can benefit your organization, contact your private client advisor or the Bank of America Private Bank Art Services group at 646.855.1107. Visit privatebank.bankofamerica.com/art for more information.