Author: Trey Jackson

CRE “Adaptive Reuse” Report Shows Increase; Industry Coalition Urges Expansion of Conversion Incentive

Posted on by Trey Jackson

RentCafe chart of Top Conversion Building Types

The conversion of former offices to apartments reached an all-time high in the last two years—40% of all existing building repurposing projects—reflecting a rapid increase in “adaptive reuse” throughout the nation, according to a Nov. 7 RentCafe analysis of Yardi Matrix data. (Download pdf or see website)

Conversion Trend

  • Large cities such as Philadelphia, Cleveland, and Pittsburgh have embraced conversion projects to repurpose old buildings and unused office spaces, according to the report. (BusinessInsider, Nov. 8)
  • Offices are the largest share of all building types undergoing conversion, representing 28% of future apartments, followed by hotels (22%) and factories (16 %).
  • Los Angeles ranks first in the nation with the most converted apartments in the first half of 2022. (RentCafe analysis of Yardi Matrix data.)

Conversion Development Obstacles

Conversion difficult prospect

  • As building occupancy levels remain depressed due to lingering remote working arrangements, cities such as New York, Los Angeles and Chicago are proposing plans to relax building rules and create tax incentives for property owners undertake conversions. (Axios, Sept. 28)
  • A Roundtable-led coalition of 16 national real estate organizations on Oct. 12 recommended certain enhancements and expansions to a 20 percent tax credit for qualified property conversion expenditures, which is part of the Revitalizing Downtowns Act (S. 2511, H.R. 4759).  The recommendations include expanding the category of properties eligible for the credit to various types of commercial buildings such as shopping centers and hotels.
  • The coalition letter also emphasized the significant obstacles that the industry continues to face with conversion projects. Obstacles that frequently arise include property acquisition, permitting, development review, toxic contamination, property age and code conformance, and a “not in my backyard” (NIMBY) sentiment. Additionally, the structural elements of an existing structure—columns, beams, floor layouts and size, ceiling height, etc.—often pose hurdles that add cost and extra delays to an otherwise desirable repurposing of a building. (GlobeSt, Oct. 12 and Roundtable Weekly, Oct. 14)

The letter to the bill’s sponsors, Sen. Debbie Stabenow (D-MI) and Rep. Jimmy Gomez (D-CA), offers several recommendations to help ensure the legislation drives additional economic investment and brings down housing costs.

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Post-Election Lame Duck Session Faces Crowded Agenda

Posted on by Trey Jackson

Capitol after storm

Congress returns next week for a lame duck session after the midterm elections, which have left party control in the Senate and House uncertain as final votes are tallied in races throughout the country. A new policy landscape for 2023 will take shape as current policymakers work on a funding deal by Dec. 16 to avert a partial government shutdown. (CBS News, “The unresolved 2022 House and Senate races that will determine control of Congress,” Nov. 10) 

Omnibus Riders 

  • Lawmakers return Nov. 14 but the official lame-duck session will not begin until Nov. 28, when the top priority will be an “omnibus” spending bill. (BGov, Nov. 7)
  • A diverse array of policy priorities will be considered as possible add-ons to the must-pass fiscal 2023 appropriations package, including several issues of importance to commercial real estate. (Roundtable Weekly, Oct. 21)
  • Among the many tax issues under consideration are recently expired provisions passed as part of the Tax Cuts and Jobs Act of 2017 (TCJA), including rules related to business interest deductibility. Also in play are an expired, temporary increase in allocations of low-income housing tax credits (LIHTCs) to states. Additionally, the 100% bonus depreciation benefit starts phasing down at the end of this year.
  • A key element of House Republicans’ Commitment to America policy agenda released in September is to make permanent provisions from the TCJA that have recently expired or are scheduled to sunset. (Tax Notes, Nov. 10 and Bloomberg, Sept. 23)

What’s Next

Reps. Neal and Brady Ways and Means

  • Rep. Kevin Brady of Texas, the top Republican on the tax-writing House Ways and Means Committee who is retiring at the end of the year, said he is talking with Democrats about a potential lame duck deal on taxes, but is ambiguous about its prospects. According to PolticoPro, Brady said, “It’s so difficult to predict,” noting that lame ducks “can be lightning quick or they can go through mid-December.” [Photo: Brady, right, with Ways and Means Chairman Richard Neal (D-MA)]
  • A massive end-of-year spending package may also include another extension of The National Flood Insurance Program, which is now more than $20 billion in debt and extended on a short-term basis more than 20 times. (BGov, Nov. 7) 

Congress will also need to raise the federal borrowing limit within the next six months to avoid a government default. The 118th Congress convenes on January 3, 2023.

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Fed Reports U.S. Financial Stability Risks Include Inflation, Asset Valuation Pressures, and Cyber Attacks

Posted on by Trey Jackson

The Federal Reserve in Washington, DC

Near-term risks to the U.S. economy and financial system include inflation, asset valuation pressures and cyber attacks, according to the Federal Reserve’s semiannual Financial Stability Report released this month. (Wall Street Journal, Nov. 4)

Stability Threats

Fed Report Risks Nov 2022

  • “Higher-than-expected interest rates could lead to increased volatility in financial markets, stresses to market liquidity, and declines in asset prices, including prices of both commercial and residential real estate properties,” the central bank states in its report.
  • The report warns that such effects could cause losses at a range of financial intermediaries, reducing their access to capital and raising their funding costs—and pose adverse consequences for asset prices, credit availability, and the economy.
  • Federal Reserve Vice Chair Lael Brainard stated the American financial system has held up through the turbulent developments of the past year. She said, “Household and business indebtedness has remained generally stable, and on aggregate households and businesses have maintained the ability to cover debt servicing, despite rising interest rates.”

Cybersecurity Concerns

Financial Risks Chart - Federal Reserve

  • Respondents to the central bank’s survey on stability threats also noted continuing concerns about the Russian invasion of Ukraine, high oil prices and a potential conflict between China and Taiwan. Cyber attacks pose an additional risk that “could come as retaliation for sanctions imposed on Russia,” according to the Fed’s report.
  • The Roundtable’s Homeland Security Task Force will hold a conference call on Monday, November 28 that will focus on a new Cyber Risk Summary briefing on Commercial Facilities—includes Commercial Real Estate—from the Cybersecurity and Infrastructure Security Agency (CISA). [To register, contact Andy Jabbour of the Real Estate Information and Sharing Network (RE-ISAC)]
  • U.S. financial institutions processed approximately $1.2 billion in ransomware-related payments last year, a nearly 200 percent increase compared to 2020, according to the Treasury Department’s Financial Crimes Enforcement Network. (FinCEN report, Nov. 1)

Cybersecurity issues and CRE will be discussed during the next HSTF meeting on Jan. 25, 2023—held in conjunction with The Roundtable’s State of the Industry meeting. (Roundtable Weekly, Oct. 7)

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Roundtable Submits Comments to IRS on New Clean Energy Tax Incentives

Posted on by Trey Jackson

The Real Estate Roundtable submitted extensive comments to Treasury and the Internal Revenue Service (IRS) today that address various clean energy tax incentives in the Inflation Reduction Act (IRA) passed by Congress in August. [Nov. 4 letter and Roundtable Weekly, Aug. 12]

Need for Clarifications

  • The Roundtable’s comments are in response to recent IRS notices on a host of issues affecting CRE. [Roundtable Weekly, Oct. 7 and Roundtable Fact Sheet, Sept. 20]. The letter requests further guidance and clarifications that would:
    • Allow businesses to “layer” multiple credits and deductions on the same buildings;
    • Support building retrofits that contemplate an asset’s “conversion,” such as from multifamily to office, within the revised building efficiency incentive under Section 179D;
    • Maximize installations of solar, wind, and other technologies to feed renewable power to buildings onsite—while also allowing property owners to “sell” excess generation back to the grid;
    • Optimize clean power deployment in low-income housing and economically distressed areas;
    • Offer a “safe harbor” for employers seeking the IRA’s credit boosts when they pay prevailing wages to laborers and mechanics involved in energy project construction and installation; and
    • Capitalize on changes to the tax code that would allow REITs, partnerships, and other businesses to “transfer” certain clean energy credits to third parties.

Roundtable Advocacy

  • Roundtable President and CEO Jeffrey DeBoer stated, “The Roundtable’s comments to policymakers will help ensure that the Inflation Reduction Act spurs new investments in clean energy and climate-saving measures that benefit our industry and our country.”
  • The Roundtable letter was developed with input from its Sustainability and Tax Policy Advisory Committees. Treasury and the IRS are expected to start issuing implementing guidance before the end of the year.
  • Roundtable Board Member and Sustainability Policy Advisory Committee Chair Tony Malkin, center in photo above, (Chairman, President, and CEO, Empire State Realty Trust, Inc.) led a panel discussion in September with Roundtable staff on how the IRA’s “clean energy” tax incentives impact CRE. [Watch the discussion].

IRA incentives were discussed this week during a Blackstone ESG Summit panel featuring former Vice Chair of The Roundtable’s Sustainability Committee, Dan Egan (BX’s Americas Head of Real Estate ESG) and Duane Desiderio, Roundtable Senior Vice President and Counsel.

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“Emerging Trends in Real Estate” Reveals Bifurcated Market as Industry Adapts to Pandemic and Economic Influences

Posted on by Trey Jackson

Emerging Trends in Real Estate 2023 - cover image

The Roundtable’s Real Estate Capital Policy Advisory Committee (RECPAC) met this week to discuss the current state of credit and capital markets. The Urban Land Institute (ULI) and PwC US also provided data points about market fundamentals in their recently issued publication, Emerging Trends in Real Estate 2023.

Shift to “New Normal”

  • RECPAC’s meeting in New York City focused on interest rate trends, global capital flows, and the implications for financing and property development. (For more information on RECPAC, contact Roundtable Senior Vice President Chip Rodgers or call 202-639-8400.)

  • ULI-PwC reports that industry participants are cautiously optimistic amid diminishing pandemic tailwinds and the potential for a “short yet shallow” recession. (ULI, Oct. 28 | download 125-page report)
  • The annual report—a compilation of data and insights from 2,000 real estate experts—shows the industry is:
    • Reassessing the use of office space,
    • Addressing climate change impacts and ESG demands,
    • Experiencing a shift in investor sentiment and capital, and
    • Facing new opportunities from government infrastructure spending.

  • The report’s survey revealed bifurcated market trends, with some aspects of the industry reverting to pre-pandemic patterns as others shift to a “new normal” that includes remote work arrangements. (PWC website | download full report)

Asset Classes in Flux

Emerging Trends 2023 CRE Price Index - graphic

  • ULI Senior Vice President Anita Kramer commented that as people continue to adapt to pandemic-influenced changes in their lives, property asset classes are in flux as owners and investors assess how to move forward. (Bisnow, Oct. 27 and  (ULI news release, Oct. 27)
  • Byron Carlock, US real estate leader for PwC and a member of The Real Estate Roundtable, told REjournals this week that challenges facing CRE include rising interest rates, return-to-the-office issues, and the possibility of converting office space to alternative uses. (Interview with Midwest Real Estate News, Nov. 2)
  • Carlock said, “The downtown buildings with large floor plates built from the ‘60s to the ‘80s might need a change. That’s significant because about 80% of our office stock was built in the ‘80s or before. We will see a great change in which office space is relevant and which is not.” (Roundtable Weekly, Oct 12—“Real Estate Industry Urges Lawmakers to Consider Tax Incentive for Property Conversions”)

Roundtable Reports

ARDA panel - group shot

  • Roundtable President and CEO Jeffrey DeBoer this week discussed the industry’s public policy agenda on the verge of the midterm elections during the American and Development Association’s Fall 2022 Conference in Washington. [Photo, left to right: ARDA President and CEO Jason Gamel, Former Congressman (R-PA) and Chair of the House Transportation Committee Bill Shuster, Jeffrey DeBoer, and U.S. Travel Association President and CEO Geoff Freeman.]

The Roundtable plans to release its Q4 Economic Sentiment Index report next week. The quarterly index provides a gauge of CRE leaders’ views about the overall health of property markets, debt and capital availability, pricing, and asset values.

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Ways and Means Chair Supports LIHTC in Year-End Tax Extenders Package

Posted on by Trey Jackson

House Ways and Means Chairman Richard Neal (D-MA)

Ways and Means Chairman Richard Neal (D-MA) this week expressed support for including the low-income housing credit (LIHTC) in a year-end tax extenders legislative package. (Roll Call, Oct. 25). 

Affordable Housing & LIHTC 

  • This week, Neal referred to the LIHTC in an interview with Roll Call, stating, “But for that credit, there’s a lot of housing that doesn’t get built at a time when the housing crunch is substantial across the country. I think it’s a pretty important tax vehicle. It’s demonstrated its value time and again.”
  • A 12.5% temporary increase in the annual LIHTC allocation to states enacted in 2018 expired at the end of 2021. The credit increase may be extended or further expanded when Congress returns from the midterm elections. (GlobeSt, Oct. 25 and Roundtable Weekly, Oct. 21)
  • In 2020, nearly a quarter of American renters spent 50% or more of their income on housing, according to the most recent data available from the U.S. Census Bureau. (Pew Research Center, March 23) 

Congressional Action

Affordable Housing row

  • The Roundtable-supported Affordable Housing Credit Improvement Act (S.1136 and H.R. 2573)—introduced in 2021 by Washington Democrats Sen. Maria Cantwell and Rep. Suzan DelBene—would expand the pool of tax credits, make it easier to combine LIHTC with other sources of capital like private activity bonds, and facilitate LIHTC rehab projects. (Detailed bill summary and (Tax Notes, July 21)

Beyond Legislation

Jeffrey DeBoer, Real Estate Roundtable President and CEO

  • Roundtable President and CEO Jeffrey DeBoer, above, recently stated, “Expanding the supply and availability of affordable housing deserves a coordinated local, state, and national policy action plan. Local zoning restrictions, permitting issues, and the oversized influence of NIMBYs—coupled with high and now significantly rising labor and material costs—are the true factors limiting housing supply, and in turn, increasing housing costs. Government at all levels needs to be part of the solution, not part of the problem.” (Roundtable Weekly, July 1 and July 22) 

The Roundtable’s Real Estate Capital Policy Advisory Committee (RECPAC) has formed an Affordable Housing Working Group, which is working with the Research Committee to develop proposals on expanding the nation’s housing infrastructure.  

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Federal Officials, Roundtable Focus on Potential Election-Related Threats

Posted on by Trey Jackson

CISA Presentation to HSTF Oct 2022 start

This week, U.S. security officials released information on their efforts to secure the nation’s election infrastructure and protect American voters from intimidation, discrimination or threats of violence related to the Nov. 8 midterm elections. The potential for political violence, cyberattacks and mitigation strategies were also among the topics of discussion during yesterday’s Real Estate Roundtable Homeland Security Task Force (HSTF) virtual meeting. (Presentation to HSTF | Justice Department bulletin and Politico, Oct. 24)

Election Security

CISA Presentation Slide to HSTF Oct 2022

  • As election sites and offices are hardening formerly soft targets, hiring security guards, and installing bulletproof and bomb-resistant glass, the HSTF meeting featured a discussion with Mohamed Telab—Deputy Regional Director (DRD) for the Cybersecurity and Infrastructure Security Agency’s (CISA) Region II—on federal resources available for securing elections. (Axios, Oct. 9 and CISA website)
  • Earlier this month, CISA Director Jen Easterly said, “At this time, we are not aware of any specific or credible threats to compromise or disrupt election infrastructure” although the current threat environment is “more complex than it has ever been.” (Politico, Oct. 24 and Reuters, Oct. 17)
  • The FBI previously issued a public service announcement on Oct. 12 warning about election crimes and the Department of Homeland Security announced in June that “calls for violence by domestic violent extremists” against election workers, candidates and democratic institutions will likely rise closer to the midterms. (CNBC, Oct. 27)

Local Tactics

Mail Ballot Drop Box

  • Domestic disinformation campaigns and homegrown threats to poll workers are emerging as the more significant concerns ahead of midterm elections than foreign interference. Extremists are reportedly focusing their efforts locally, monitoring neighborhood ballot boxes and signing up as poll workers. (Axios, Oct. 26)

The Roundtable’s HSTF and the Real Estate Information Sharing and Analysis Center (RE-ISAC) work closely with federal officials on potential cyber and physical threats to CRE. Roundtable members interested in participating in the HSTF or RE-ISAC can contact Roundtable Senior Vice President Chip Rodgers or call 202-639-8400.

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White House Seeks to Speed Up Infrastructure Implementation

Posted on by Trey Jackson

Mitch Landrieu -- White House Infrastructure Coordinator

A White House “Accelerating Infrastructure Summit” on Oct. 13 showcased actions by the administration to hasten infrastructure project construction by improving coordination with mayors and governors. (Summit video and White House Action Plan)

Accelerating IIJA Investment

  • Mitch Landrieu, the White House’s infrastructure coordinator (photo above) stated, “With over 90% of Bipartisan Infrastructure Law funding being delivered by non-federal agencies, our state, tribal, regional, territorial, local and industry partners must also find ways to accelerate the delivery of infrastructure.” (ABC News, Oct. 13)
  • The plan—funded under the $1.2 trillion bipartisan Infrastructure Investment and Jobs Act (IIJA) enacted last November and supplemented by the Inflation Reduction Act in August—is the most significant investment in infrastructure since the interstate highway initiative during the Eisenhower administration. The Roundtable strongly backed the IIJA as it moved through the legislative process. (Roundtable Weekly, Nov. 12, 2021)
  • The IIJA broadens access to federal funding programs by targeting resources toward communities. The administration launched a webpage on Grants.gov and a Technical Assistance Guide to help communities with infrastructure project resources, from grant writing to funding eligibility requirements. A web-based interactive map also shows where IIJA funds have been disbursed in communities across the nation.

On Time, On Task, and On Budget

Cover -- Infrastructure Acceleration Report

The Roundtable continues to support federal transportation infrastructure investments to spur economic growth, support local communities, and enhance America’s competitiveness. (Roundtable Weekly, May 20 and Roundtable’s 2022 Policy Agenda)

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White House “Clean Air in Building Challenge” Invites Owner Participation; SEC Delays Climate Rule

Posted on by Trey Jackson

White House Indoor Air Quality Summit

Real estate and other industry leaders recently participated in the first White House Summit on Indoor Air Quality (IAQ) as part of the Biden administration’s continued focus on the benefits of healthy buildings in the pandemic era. (Summit video, Oct. 12 and International WELL Building Institute, Oct. 13) 

Building Owner “Pledge” 

    • Create a clean indoor air “action plan” (e.g., regular HVAC inspections and maintenance)
    • Optimize fresh air ventilation (e.g., use economizers, open operable windows)
    • Enhance air filtration (e.g., install MERV-13 filters)
    • Communicate IAQ practices with building occupants  
  • Speakers at the summit included Silverstein Properties’ Chief Innovation Officer Guy Vardi and Dr. Joseph Allen, Healthy Buildings Program Director at Harvard University. Roundtable President Jeffrey DeBoer interviewed Dr. Allen at the height of the COVID-19 lockdown. (Roundtable Weekly, May 8, 2020 | Watch the video interview) 

Agency Developments 

EPA logo

  • The Environmental Protection Agency (EPA) recently released a Request for Information to solicit feedback from industry, researchers, and the public on key characteristics and measures of improved ventilation, filtration, and air cleaning in buildings. Comments are due by Dec. 5, 2022. 

In other news, the Securities and Exchange Commission will reportedly delay by “months” its release of a long-anticipated final rule on corporate climate disclosures. (Bloomberg Law, Oct. 19) The agency continues to assess the legality of its proposal under recent U.S. Supreme Court case law and sift through more than 14,000 comments received from the public—including input provided by The Roundtable and other CRE groups in June. (Roundtable Weekly, Sept. 16 and June 10) 

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Congressional Lame Duck Session May Include Tax Policies Impacting Real Estate

Posted on by Trey Jackson

Capitol Dome Stormy weather

Lawmakers returning after the midterm elections for a lame duck session will work on a possible FY2023 “omnibus” budget package that may include tax policies of importance to commercial real estate. 

Omni First 

  • The first congressional priority will be a massive “omnibus” budget package that needs to pass by December 16—the deadline set by a Continuing Budget Resolution passed in September—to avoid a partial government shutdown. (Roundtable Weekly, Sept. 30)
  • Whether business tax relief—e.g. a delay in the pending phase-out of 100 percent bonus depreciation, tax extenders, or a fix to the business interest deductibility rules—will be attached to an omni package may depend on whether a bipartisan deal can be struck on child tax credit relief. (Politico, Oct. 6 and Tax Policy Center, Oct. 6)

Tax Extenders

Tax issues grid choice image

  • Certain provisions from the Tax Cuts and Jobs Act of 2017 (TCJA) recently expired, including rules related to business interest deductibility. TCJA’s 100% bonus depreciation benefit starts phasing down at the end of this year. Other expired tax provisions include a temporary increase in allocations of low-income housing tax credits (LIHTCs) to states.   

  • The Real Estate Roundtable has long supported well-designed, targeted tax incentives like the LIHTC that are aimed at boosting the construction and rehabilitation of badly needed affordable and workforce housing. (Roundtable 2022 Policy Agenda Tax Section)
     
  • House Republicans have made the permanent extension of the TCJA tax cuts a key element of their Commitment to America policy agenda. (Bloomberg, Sept. 23 and ABC News, Sept. 22) 

Packed Lame Duck 

Congress in session

  • A cascade of other national policy issues will vie for attention in the tightly packed lame duck agenda, including reauthorization of defense programs, hurricane relief, immigration, election reform, marriage equality and more. (Axios, Sept. 29)
  • House Republican Minority Leader Kevin McCarthy (R-CA) said that if the GOP controls the House in 2023, they will use raising the debt limit as leverage to force spending cuts—which could include cuts to Medicare and Social Security—and possibly limit funding to Ukraine. (PunchBowl, Oct. 18 and Bloomberg Law, Oct. 11) 

The House returns Nov. 9 and the Senate on Nov. 14.

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