Author: Trey Jackson

Bipartisan Legislation Reintroduced to Allow Greater REIT Equity Investments in Distressed Retail Tenants

Posted on by Trey Jackson

Retail tenant distress

Bipartisan legislation reintroduced this week by House Ways and Means Committee Members Darin LaHood (R- IL) and Brad Schneider (D-IL) would allow real estate investment trusts (REITs) to make greater equity investments in retail tenants that have yet to recover from the pandemic’s economic impact. 

Support for Retail Tenant Assistance

  • The Retail Revitalization Act (H.R. 3749) is aimed at unlocking capital for productive investment and helping prevent further large-scale job losses and bankruptcies in the retail sector and its supply chain. (Congressional Record, May 30)
  • As of May 5, ten major retailers had filed for bankruptcy protection in 2023. The number of retail failures, which includes Bed Bath & Beyond, David’s Bridal, and Party City, is already twice the level of 2022. More bankruptcies are anticipated. (Forbes, May 5 and Forbes, May 15)
  • Real Estate Roundtable President Jeffrey DeBoer stated, “The Retail Revitalization Act would reform an outdated section of our tax code that currently prevents the commercial real estate industry from stepping forward and deploying its own capital to solve significant economic challenges. Retail bankruptcies have negative consequences for employees, surrounding businesses, and local communities. This bipartisan legislation to allow REITs to invest more heavily in their tenants is exactly the type of cost-effective, commonsense measure that everyone can and should support. The bill will save jobs, increase local tax revenue, and create a stronger foundation for future economic growth.”

Amending REIT Rules

REITs - graphic

  • The LaHood-Schneider legislation—strongly supported by The Real Estate Roundtable—would modify tax provisions limiting REITs’ ability to invest equity capital in their retail tenants. The bill would amend existing “related-party rent” rules by:
    • increasing the capacity of a REIT to own the equity of a distressed tenant from 10% to 50% and from 10% to 30% for all other tenants;

    • changing the ownership attribution rules used to determine what is considered related party rent under current REIT rules to the general ownership attribution rules used elsewhere in the tax code, and;

    • changing the limitation on space that a REIT can lease to its taxable REIT subsidiary.

Tax Policymakers

  • House Ways and Means Committee Chairman Jason Smith (R-MO)Tax proposals such as H.R. 3749 and others will be discussed during TPAC, held in conjunction with The Roundtable’s all-member Annual Meeting on June 13-14 in Washington, DC. TPAC speakers will include:

    • House Ways and Means Committee Chairman Jason Smith (R-MO), above

    • House Ways and Means Committee Member Brad Schneider (D-IL)
    • Joint Committee on Taxation Chief of Staff Thomas Barthold
    • Senior staff from Senate Finance Committee and House Ways and Means Committee

TPAC will also feature a panel session on “Post-Pandemic Real Estate Challenges and Tax Policy: Debt Workouts / Tax Incentives for Property Repurposing, Community Revitalization, and Housing.” All Roundtable members are encouraged to attend.

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Roundtable and Industry Coalitions Urge Congress to Act on Affordable Housing Measures

Posted on by Trey Jackson
Affordable Housing Industry Coalition May 2023

The Real Estate Roundtable and 18 other real estate organizations urged Congress on May 23 to work with the Biden administration, housing providers, lenders, and other stakeholders to pursue bipartisan solutions to increase the nation’s supply of housing. (Coalition letter, May 23)

“Yes in My Backyard”

  • This week’s joint letter from the Housing Affordability Coalition detailed a wide range of legislative proposals and policy measures that lawmakers should immediately enact to address the nation’s housing affordability crisis.

  • The industry coalition supports legislation that would eliminate harmful land use policies, promote affordable housing near public transit, and support local government efforts to expand housing supply.

  • Separately, The Roundtable joined another coalition of 285 housing, business, and municipal organizations with a show of focused support for the bipartisan, bicameral Yes In My Back Yard (YIMBY) Act, reintroduced on May 18. (YIMBY Coalition letter)

  • The bill requires localities that receive certain federal HUD grants to submit a public report on whether they have local policies in place that remove exclusionary zoning tactics. Encouraging high-density development is “an essential first step in decreasing barriers to new housing of all price levels,” the YIMBY Act coalition letter states.

  • The YIMBY Act passed the House without opposition in 2020. It is championed in the Senate (S. 1688) by Todd Young (R-IN) and Brian Schatz (D-HI), and in the House (H.R. 3507) by Reps. Derek Kilmer (D-WA) and Mike Flood (R-NE). (YIMBY Act summary by Up for Growth)

Tax Measures

  • This week’s Housing Affordability Coalition letter encourages Congress to expand the low-income housing tax credit, create a new middle-income housing tax credit, and establish a dedicated tax incentive to promote the conversion of underutilized office and commercial buildings to rental housing.

  • The letter also supports tax measures that have not been reintroduced yet in the 118th Congress, including incentives to encourage neighborhood revitalization, accelerated depreciation of high-performance building equipment, and reduction of the basis increase necessary to qualify a multifamily rehabilitation project for Opportunity Zone purposes.

  • The industry coalition expressed support for the Biden administration’s proposed solutions such as its Housing Supply Action Plan and investments that are part of its FY2024 federal budget proposal. (Roundtable Weekly, May 22, 2022 and White House fact sheet, March 9, 2023)

On March 7, the National Multifamily Housing Council (NMHC) and National Apartment Association (NAA) offered joint testimony before a Senate Finance Committee hearing on “Tax Policy’s Role in Increasing Affordable Housing Supply for Working Families.” (Roundtable Weekly, March 10)

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New Research Shows Severe Impact of Remote Work on Office Sector

Posted on by Trey Jackson

empty office remote work

An updated study released this month by New York University and Columbia University researchers concludes “remote work is shaping up to massively disrupt the value of commercial office real estate in the short and medium term.” (Work From Home and the Office Real Estate Apocalypse, May 15) 

Municipal Finances and Financial Stability 

  • The researchers—Arpit Gupta, Vrinda Mittal, and Stijn Van Nieuwerburgh—find a $506.3 billion value destruction for the U.S. office market between 2019 and 2022. Post-pandemic hybrid work arrangements have led to large drops in lease revenue, occupancy, lease renewal rates, and market rents in the commercial office sector, according to the updated research, affecting CRE cash flow at a time when the Federal Reserve has aggressively raised interest rates. (Fortune, May 25)
  • The report notes, “Higher quality buildings were buffered against these trends due to a flight to quality, while lower quality office is at risk of becoming a stranded asset. These valuation changes have repercussions for local public finances and financial stability.”
  • The report also concludes that the fiscal hole left by declining office and retail property tax revenues may lead municipalities to increase taxes or cuts in spending—negatively affecting the attractiveness of cities as places to live and work, which may risk the activation of an “urban doom loop.” The authors note, “Future research should explore these implications and study the role for local and federal policy.” 

Moody’s Outlook 

Moody's Chief Economist Mark Zandi

  • Moody’s Analytics Chief Economist Mark Zandi, above, noted in a series of tweets this week that CRE prices fell in the first quarter of 2023 for the first time in more than a decade, led by drops in multifamily residences and office buildings, according to Moody’s Repeat Sales Index. (Zandi will be a guest speaker at The Roundtable’s all-member Annual Meeting on June 13 in Washington, DC.)
  • “Lots more price declines are coming with prices expected to be off 10% peak-to-trough by mid-decade. Demand for space is weak due to remote work and online retailing. Lots of multifamily units are being built. And credit to refinance and purchase properties is tough to get,” Zandi tweeted.
  • Bloomberg reported on May 17 that Zandi noted if the US economy slips into a recession, the price declines could get worse. “We’re on a razor’s edge here,” Zandi said. 

Roundtable Request for Flexibility 

Roundtable Chair John Fish

  • The Real Estate Roundtable continues to emphasize the need for federal regulators to allow more flexibility for lenders and borrowers to restructure commercial real estate loans facing potential default—as the Federal Reserve reported recently that CRE poses a potential risk to financial stability. (Fed’s Financial Stability Report, May 2023)
  • Real Estate Roundtable Chair John Fish, above, (Chairman and CEO, SUFFOLK) summarized the industry’s views in a May 9 MarketWatch article, noting that the Fed and regulatory agencies should grant more flexibility for borrowers, including corporate real estate developers, to restructure CRE loans. 

In addition to Mark Zandi and House Ways and Means Committee Chairman Jason Smith (R-MO), The Roundtable’s Annual Meeting next month will also include Sen. Kyrsten Sinema (I-AZ), Sen. Bill Hagerty (R-TN), and other policymakers. 

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House Tax Package Expected to Follow Debt Ceiling Resolution

Posted on by Trey Jackson

US Capitol sunsetThe House Ways and Means Committee may release a tax-focused economic growth package in June after a final resolution is reached between President Joe Biden, House Speaker Kevin McCarthy (R-CA), and their negotiation teams on the debt ceiling. The intense talks on federal spending limits have less than a week before the Treasury Department estimates the nation may default on its debt obligations. (Wall Street Journal, May 25 | PoliticoPro, May 23 | Roundtable Weekly, May 19) 

Tax Measures & CRE 

  • The House Republican tax package is about 90% complete and “buttoned up pretty tight,” according to Ways and Means Member Kevin Hern (R-OK). “We’re making sure that we don’t disrupt any of the debt limit conversations and distract from that, but it would be ready to go very quickly,” Hern said. (Tax Notes, May 24)
     
  • Ways and Means Committee Member Randy Feenstra (R-IA) commented that the package will likely include measures that expired last year, including full bonus depreciation and certain taxpayer-favorable rules related to the deductibility of business interest under Section 163(j)—both supported by The Real Estate Roundtable. (PoliticoPro, May 23 and BGov, May 25)
     
  • Under the Tax Cuts and Jobs Act (TCJA) of 2017, 100% bonus depreciation applies to capital investments made between 2018 and 2022 (as well as capital improvements made to the interior of nonresidential buildings). However, the bonus depreciation benefit began phasing down this year. In addition, real estate businesses that elect out of TCJA’s limits on business interest deductibility do not qualify for the bonus depreciation benefit.
     
  • The House tax package is expected to extend 100% bonus depreciation through at least 2025, allowing many taxpayers to continue immediately expensing qualified interior improvements. Moreover, by reinstating certain expired provisions from section 163(j), the tax bill would allow more real estate businesses to avail themselves of the bonus depreciation benefit without inhibiting their ability to deduct their business interest expense. 

Additional Provisions and TCJA Permanency 

House Ways and Means Committee doorway

  • The economic growth package could also include provisions extending the enhanced child tax credit and the deductibility of R&D expenditures.  Housing-related measures, such as an expansion of the low-income housing tax credit, are also under consideration. 
  • Separately, the Ways and Means Committee may also consider the TCJA Permanency Act (H.R. 976), reintroduced by Committee Vice Chairman Vern Buchanan (R-FL) in February. The bill would permanently extend TCJA provisions scheduled to sunset at the end of 2025, including the 20 percent deduction for qualified pass-through business income (Section 199A). (Tax Notes and Roundtable Weekly, Feb. 24)
  • While a TCJA permanency bill is likely dead on arrival in the current Senate, the House economic growth tax package could be the starting point for bipartisan negotiations with congressional Democrats on a limited number of tax and economic priorities as the year further unfolds. 

House Ways and Means Committee Chairman Jason Smith (R-MO) will be a guest at The Roundtable’s June 13-14 all-member Annual Meeting and policy adivisory committee meetings will include discussions on a debt ceiling agreement and potential tax legislation. 

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Real Estate Industry Trailblazer Sam Zell Passes

Posted on by Trey Jackson

Sam Zell

Sam Zell, the founder and chairman of Equity Group Investments died yesterday due to complications from a recent illness. Mr. Zell was a leader in modernizing the REIT structure and was well known for his ability to revive distressed real estate assets, as well as turnaround troubled manufacturing, retail, travel, healthcare, and energy businesses. (Fortune and Wall Street Journal, May 18) 

  • Equity Residential, the multifamily REIT Zell founded, released a statement mourning the death of its founder and chairman, noting he led the transformation of the public real estate market, and that under his leadership, grew the company into a $31B apartment owner, developer, and operator listed on the S&P 500 (NYSE: EQR).   
  • Mark Parrell, Equity Residential President and CEO, and member of The Real Estate Roundtable Board of Directors said, “The world has lost one of its greatest investors and entrepreneurs. Sam’s insatiable intellectual curiosity and passion for deal making created some of the most dynamic companies in the public real estate industry.”  
  • Real Estate Roundtable President and CEO Jeffrey DeBoer said, “Sam was very quick to see the potential economic consequences of policy actions. He was a master of making complex issues simple and he was unambiguous in offering what could always be called a very unique and valuable perspective on national policy issues. His straight talk, clear vision and philanthropic generosity will be deeply missed. “ 

See www.samzelllegacy.com for a video retrospective of his many accomplishments and contributions to the investing and philanthropic communities. 

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Senate Republican Taxwriter Introduces Legislation to Permanently Extend 20% Pass-Through Income Deduction

Posted on by Trey Jackson

Senate Finance Committee member Steve Daines (R-MT)

Yesterday, Senate Finance Committee member Steve Daines (R-MT) reintroduced legislation to make permanent the 20 percent deduction for pass-through business income (Section 199A), one of the cornerstone provisions of the Tax Cuts and Jobs Act of 2017 that expires at the end of 2025. 

Deduction Sunset

  • House Ways and Means Committee Chairman Jason Smith (R-MO), who has long championed making Section 199A permanent, is anticipated to re-introduce the legislation in the House soon.
  • In 2017, Congress created the 20% deduction for pass-through business income to avoid putting businesses organized as partnerships, S corporations (S corps), and real estate investment trusts (REITs) at a competitive disadvantage relative to large C corporations (C corps).

  • Section 199A is scheduled to sunset on Dec. 31, 2025 as businesses continue to recover from post-pandemic price hikes, labor shortages, and supply chain disruptions.

Section 199A Permanency 

Coalition letter on Section 199A legislation

    • The Real Estate Roundtable and a coalition of more than 145 business organizations sent a letter yesterday to Sen. Daines in support of the bill. (Coalition letter, May 18)
    • The letter notes that the bill “would provide certainty to the millions of S corporations, partnerships and sole proprietorships that rely on the Section 199A deduction to remain competitive both here and overseas.”

    • Previously, The Roundtable and other stakeholders supported congressional efforts in 2021 to make the pass-through deduction permanent. (Coalition letter, Feb. 26, 2021 and Tax Notes, March 1, 2021)

    While House Republicans are expected to introduce an economic growth package in the coming weeks that includes tax cuts, it is unclear whether the bill will address provisions such as Section 199A that are not scheduled to expire until the end of 2025. 

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    Lawmakers Reintroduce Bill to Reform, Expand the Low-Income Housing Tax Credit

    Posted on by Trey Jackson

    Low income housing SFO residences

    Bipartisan, bicameral legislation introduced last Thursday would significantly expand and improve the low-income housing tax credit (LIHTC). The tax credit, strongly supported by The Real Estate Roundtable, subsidizes the construction, rehabilitation, and preservation of affordable rental housing for low- and moderate-income tenants. 

    Increasing Supply 

    • The Affordable Housing Credit Improvement Act (AHCIA) would finance nearly two million affordable homes over the next 10 years. (Affordable Housing Tax Credit Coalition, 2023)
    • Led by Sens. Maria Cantwell (D-WA) and Todd Young (R-IN), along with Reps. Darin LaHood (R-IL) and Suzan DelBene (D-WA), the AHCIA (H.R. 3238 and S. 1557) has already garnered nearly 90 cosponsors.  
    • Roundtable President and CEO Jeffrey DeBoer said, “The low-income housing tax credit is a critical and well-designed tool that addresses a pressing issue throughout the country–the lack of affordable rental housing. LIHTC harnesses market forces and the power of the private sector to incentivize the construction and rehabilitation of affordable homes. Countless studies have demonstrated LIHTC’s cost-effectiveness. Inflation has taken a toll on working Americans, but Congress can help reduce the burden of high housing costs by passing the AHCIA reforms.”  
    • A March 7 Senate Finance Committee hearing showed bipartisan policymaker consensus on the need to increase the supply of affordable housing by expanding the LIHTC and other tax incentives. The National Multifamily Housing Council (NMHC) and National Apartment Association (NAA), two key supporters of the AHCIA, offered joint testimony during the hearing. (Roundtable Weekly, March 10) 

    AHCIA Provisions 

    AHCIA summary

    • A summary of the AHCIA is available here. Among its many provisions, the legislation would:
      • Boost the allocation of low-income housing credits to states by restoring the temporary 12.5% increase enacted in 2018 (expired at the end of 2021) and phasing in a 50% increase in the LIHTC allocation cap over two years.
      • Lower the threshold of private activity bond financing—from 50 to 25%—required to trigger the maximum amount of 4% housing credits available to individual properties. 
    • The bill would also ensure that low-income housing credit projects that seek to maximize their energy efficiency through use of the section 179D commercial building deduction are not penalized by existing provisions of the law that reduce the basis of the development by the 179D deduction amount. 
    • While movement on LIHTC legislation is unlikely before the debt ceiling debate is resolved, the broad-based, bipartisan support for AHCIA could lead to Congressional action on the bill later in the year. (News – The Affordable Housing Tax Credit Coalition)

     Domestic Content 

    • In related news, the Internal Revenue Service (IRS) released a notice this week on “made in the USA” guidance that can increase clean energy tax credits. The Inflation Reduction Act (IRA) offers a “bonus” tax credit of up to 10%  for solar, wind, battery storage, and other projects that use iron, steel, and components manufactured in the U.S. (JD Supra, May 16) 

    The “domestic content” notice provides initial guidance until the Treasury Department proposes rules on the subject. A fact sheet prepared by The Roundtable keeps track of various federal agency actions that implement IRA tax incentives of significance to the real estate sector.      

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    Administration Unsuccessfully Seeks to Add Like-Kind Exchange Restrictions to Debt Ceiling Talks

    Posted on by Trey Jackson
    LKE form 8824 held by business person

    President Joe Biden and House Speaker Kevin McCarthy (R-CA) signaled progress this week on debt limit and federal spending talks after they assigned teams of negotiators to bang out an agreement before a looming national default “x-date” is reached in June. (BGov and CQ, May 18)

    LKE Restrictions Rejected

    • One cost-cutting measure proposed by the administration’s team, and rejected by Republicans, would have imposed limitations on the use of Section 1031 like-kind exchanges. (Washington Post, May 15)
    • President Biden has consistently proposed limiting the use of LKEs, most recently as part of his FY2024 budget proposal submitted earlier this year. (Roundtable Weekly, March 10)
    • “The administration’s proposal to severely limit the use of section 1031 would destroy jobs, lock properties into unproductive uses at a time when a realignment of real estate assets is needed, harm housing supply, and end a mechanism used by environmental groups to conserve land and natural spaces,’ said Real Estate Roundtable President and CEO Jeffrey DeBoer.
    • “It is an idea that has been debated by Congress numerous times and always rejected, most recently in a unanimous vote on the Senate floor,” DeBoer continued. “Perhaps most importantly, the proposal would eliminate one of the only real estate market liquidity tools available at a time when credit markets and banks are tightening, as they are today.”
    • Academic and other economic research has repeatedly demonstrated the positive economic contribution of LKEs and their importance to the US economy. (Roundtable Weekly, July 1, 2022 and EY report—“Economic Contribution of the Like-Kind Exchange Rules to the US economy in 2021: An Update”)

    Looming Deadline

    US Capitol
    • President Biden and Speaker McCarthy assigned five Washington insiders on May 16 to the immense negotiation task, in hopes that an “agreement in principle” can be reached this weekend, which would allow the House and Senate to vote before June 1. (The Hill and BGov, May 17 | Associated Press, May 18)
    • “I’m confident that we’ll get the agreement on the budget and America will not default,” Biden said before departing this week for a meeting of world leaders at the G-7 annual summit in Japan. (CBS News, May 17)
    • McCarthy said yesterday, “I see the path that we can come to an agreement. And I think we have a structure now and everybody’s working hard.” (Politico, May 18)

    House Democrats this week began preparing an emergency “discharge petition” to raise the debt ceiling if negotiators are unable to reach an agreement, though its odds of passing are uncertain. (Wall Street Journal, May 17)

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    Debt Ceiling Talks Inch Forward as Republicans, Democrats Prioritize Permitting Reform for Energy Projects

    Posted on by Trey Jackson

    Big Four with President Biden

    A May 9 meeting between President Joe Biden and the “Big Four” congressional leaders about the debt ceiling and federal spending ended with little progress—yet the policymakers agreed to meet early next week as their respective staffs begin separate budget discussions. (The Hill, May 11 and Axios May 9 | Roundtable Weekly, May 5)

     Talks Begin 

    • As the “X date” for defaulting on the national debt looms in June, House Speaker Kevin McCarthy (R-CA), Senate Minority Leader Mitch McConnell (R-KY), Senate Majority Leader Chuck Schumer (D-NY), and House Minority Leader Hakeem Jeffries (D-NY) met to discuss raising the $31.4 trillion U.S. debt limit with President Biden, who described the gathering as “productive.” (Associated Press and Reuters, May 10)
    • McCarthy commented he “didn’t see any new movement,” but added he was willing to discuss spending cutbacks such as clawing back funding for pandemic programs. He added that Biden may also be open to discussing permitting reform for energy infrastructure projects, though the two parties are far apart on the specifics of their legislative proposals. (Washington Post and CNN, May 10 and BGov, May 9)

    Energy Infrastructure Priorities 

    White House Senior Advisor John Podesta

    Related Energy News  EPA logo

    • The Environmental Protection Agency released a proposed rule today to cut carbon emissions by 90% from the nation’s power plants, drawing a “counterattack from Republicans and coal-state Democrat Sen. Joe Manchin” (D-WV), chairman of the Senate Energy Committee. (New York Times, May 11 and POLITICO, May 11)
    • De-carbonizing the electric grid, and moving utilities away from combusting coal and natural gas, would help building owners and commercial tenants reduce their “indirect” Scope 2 GHG emissions attributable to the electricity they purchase.
    • Meanwhile, the General Services Administration (GSA) announced yesterday it will leverage $3.4 billion it received under the IRA to pursue new public-private partnerships that will improve energy efficiency, reduce onsite emissions, and encourage electrification in federal buildings. (GSA news release, May 10)
    • The GSA will advance the White House’s  Climate Smart Buildings Initiative. It aims to modernize 41 federal facilities in DC and the Midwest through long-term “performance contracts” with private sector companies that guarantee projects will pay for themselves over time through energy savings that accrue from retrofit installations. (BGov, May 10). See GSA’s National Deep Energy Retrofit program. 

    The Roundtable will focus on the impact of the debit ceiling and federal energy policy priorities during its all-member Annual Meeting on June 13-14 in Washington. 

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    Roundtable Leaders Emphasize Need for Regulators to Allow More Flexibility for Restructuring CRE Loans

    Posted on by Trey Jackson

    Roundtable Chair John Fish

    This week, Real Estate Roundtable leaders emphasized the need for federal regulators to allow more flexibility for lenders and borrowers to restructure commercial real estate loans facing potential default—as the Federal Reserve reported that CRE poses a potential risk to financial stability. (Fed’s Financial Stability Report, May 2023) 

    Request for Time 

    • Real Estate Roundtable Chair John Fish, above, (Chairman and CEO, SUFFOLK) summarized the industry’s views in a May 9 MarketWatch article, noting that the Fed and regulatory agencies should grant more flexibility for borrowers, including corporate real estate developers, to restructure CRE loans.
    • Fish explained how an impending wave of $1.5 trillion in CRE loans—combined with tight lending conditions and higher, unsustainable interest rates—could stifle construction and development in major cities struggling to bounce back from the pandemic. (MarketWatch article pdf)
    • Post-pandemic CRE values have dropped $453 billion, according to the U.S. National Bureau of Economic Research, especially in cities with high vacancy rates due to ongoing work-from-home policies. Prior to the pandemic, 95% of U.S. offices were occupied. Today, that number is closer to 47%. Collapsing property values are threatening the fiscal health of cities across the nation. (GlobeSt, March 3)
    • Defaults on CRE loans hit a 14-year high in February. Fish emphasized that further economic damage can be avoided if federal regulators grant additional time for markets to stabilize, as they have done in the past. (See regulatory notices from 2009, 2020, and 2022)

    Roundtable Board Member Bill Rudin, left

    • Real Estate Roundtable Chairman Emeritus Bill Rudin, above left, (Co-Chairman and CEO, Rudin Management Co.) discussed similar topics today on CNBC’s Squawk on the Street.
    • “We are going to have to figure out a plan with the federal government to allow banks to have some time to work through some of these loans. It has been done before, so you can restructure, and get more equity into the deal, so that we don’t see this cascade of defaults that we’ve already started seeing happening. There has to be some thought to give banks, owners, and developers time to restructure loans,” Rudin said.

     Fed Reports 

    Most cited potential risks -- CRE is # 4

    • A pair of recent Federal Reserve surveys show the state of CRE conditions and the potential risks the sector poses to the financial system.  (Enlarged graphic, above | Axios, May 9 and New York Times, May 8)
    • On Monday, the Fed released its bi-annual Financial Stability Report—a survey of market experts, economists, and academics that assesses concerns about the nation’s financial and economic health. The report, which includes a special section on commercial real estate-related risks, identifies CRE as the fourth-largest financial stability concern. (Commercial Observer, May 10 and ConnectCRE, May11)
    • Many survey respondents noted CRE as a “possible trigger for systemic risk,” listing concerns about higher interest rates, valuations, and shifts in end-user demand. “With CRE valuations remaining elevated … the magnitude of a correction in property values could be sizable and therefore could lead to credit losses by holders of CRE debt,” according to the May report. (GlobeSt, May 10)
    • Additionally, the Fed’s April 2023 Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS) addressed changes in the demand, standards and terms for bank loans over the past three months. The survey notes, “Banks reported having tightened all the terms surveyed on all categories of CRE loans.”

    • Over the first quarter of this year, the SLOOS shows a majority of banks reported concerns about an uncertain economic outlook, reduced tolerance for risk, worsening of industry-specific problems, and deterioration in their current or expected liquidity position. Mid-sized banks generally reported tightening both price and non-price terms more frequently than the largest banks and other banks, according to the loan officer survey. 

    The Roundtable continues to urge federal regulators to issue guidance that would give financial institutions increased flexibility to refinance loans with borrowers and lenders. The various market pressures facing CRE will be discussed during The Roundtable’s all-member Annual Meeting on June 13-14 in Washington. 

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