News Type: Roundtable Weekly

Fed Adopts SOFR as Fallback Benchmark Rate to Replace LIBOR on Certain Legacy Contracts

Posted on by Trey Jackson

Federal ReserveThe Federal Reserve Board on Dec. 16 adopted SOFR (Secured Overnight Financing Rate) as the fallback benchmark rate to replace LIBOR (London Interbank Offered Rate) in certain financial contracts after the use of LIBOR expires on June 30, 2023. (Federal Register notice and Bloomberg Law, Dec. 16)

LIBOR to SOFR

  • LIBOR was the dominant reference rate used in recent decades for financial contracts—including commercial real estate debt, mortgages, student loans and derivatives—worth an estimated $223 trillion. (Roundtable Weekly, Dec. 10, 2021.)
  • The Fed’s action this month implements a final rule from the Adjustable Interest Rate (LIBOR) Act (H.R. 4616)—passed by Congress in March to provide a uniform, nationwide solution for so-called tough legacy contracts that do not have clear and practicable provisions for replacing LIBOR. (Roundtable Weekly, March 11, 2022)
  • The Real Estate Roundtable and 17 national trade groups submitted letters in 2021 on April 14 and July 27 to policymakers in support of measures to address “tough legacy” LIBOR-based contract issues. (Roundtable Weekly, Dec. 10, 2021)

Final LIBOR Rule

Libor transition to SOFR image

  • The final rule identifies replacement benchmark rates based on SOFR to replace overnight, one-month, three-month, six-month, and 12-month LIBOR in contracts subject to the LIBOR Act. These contracts include U.S. contracts that do not mature before LIBOR ends and that lack adequate “fallback” provisions that would replace LIBOR with a practicable replacement benchmark rate. (Fed Reserve Board’s memo, Dec. 2 and Fed news release, Dec. 16)
  • The final rule also restates safe harbor protections contained in the LIBOR Act for market participants who need to switch existing LIBOR-referencing financial contracts to a replacement benchmark for debt instruments before the replacement date on June 30, 2023. (Federal Register notice on LIBOR)

The LIBOR transition will be among the issues discussed during The Roundtable’s Real Estate Capital Policy Advisory Committee’s (RECPAC) next meeting on Jan. 24 in Washington, DC during The Roundtable’s State of the Industry Meeting.

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Federal Regulators Identify CRE as a Risk to U.S. Financial Stability

Posted on by Trey Jackson

U.S. Treasury DepartmentA council of federal financial regulators chaired by Treasury Secretary Janet Yellen stated in their 2022 Annual Report released today: “the commercial real estate (CRE) and residential real estate sectors have the potential to increase risks to U.S. financial stability significantly.” (Treasury Department news release and PoliticoPro, Dec. 16) 

A Top Concern 

  • The Financial Stability Oversight Council (FSOC) identified CRE among its top market and credit concerns heading into 2023, given rising interest rates and borrowing costs. (FSOC Annual Report, pages 18-20)
  • Among the FSOC’s report conclusions:
    • “Rising interest rates, uncertain economic conditions, continuing weakness in urban commercial real estate, and the possibility that some post-pandemic changes in demand for CRE will become permanent have heightened concerns about CRE.”

    • “The Council recommends supervisors and financial institutions continue to monitor CRE exposures and concentrations, ensure the adequacy of credit loss allowances, assess CRE underwriting standards, and review contingency planning for a possible increase in delinquencies.” 
  • “In extreme cases, CRE credit losses can lead to outright bank failures, particularly for banks with high exposure to CRE loans,” according to the regulators’ report. 

Office Markets & Remote Work 

FSOC report on CRE

  • The Council emphasized that the office property market may face the most uncertainty, with the prospect of weak future demand as return-to-office plans evolve and users decide how much space they need.
  • The 2022 Annual Report notes that office property demand may take time to stabilize as tenants navigate remote work decisions and adjust leasing decisions. The FSOC also reports that a slow return to densely populated urban office centers could reduce the desirability of office properties and nearby retail space.
  • “This may be especially true for older, less desirable office spaces with fewer modern amenities,” the report acknowledges.
  • The report also notes, “structural changes in the demand for office space can lead to weaker credit quality for loans secured by office properties over the long term.”

The Fed’s Influence

  • FSOC regulators also caution that more aggressive action by the Fed—either in its interest rate decisions or changes in its holdings of mortgage-backed securities—could lead to further increases in mortgage rates that could negatively affect financial stability. (FSOC 2022 Annual Report and PoliticoPro, Dec. 16 ) 

The Council’s mission is to identify risks to the financial stability of the United States, promote market discipline, and respond to emerging risks to the stability of its financial system. (FSOC website) 

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Roundtable Urges President Biden to Weigh Negative Impacts of Remote Work on Cities, Broader Economy

Posted on by Trey Jackson

RER Letter to Biden on Remote Work

The Roundtable wrote to President Joe Biden on Dec. 12 about the ongoing, harmful economic impacts of widespread remote work on cities, local tax bases, and small businesses—and how work-from-home policies by federal agencies threaten to magnify these negative economic and social consequences. (Roundtable letter | GlobeSt and CoStar, Dec. 15) 

Roundtable Requests 

  • The letter from Real Estate Roundtable Chair John Fish and President & CEO Jeff DeBoer urges President Biden “to direct federal agencies to enhance their consideration of the impact of agency employee remote working on communities, surrounding small employers, transit systems, local tax bases and other important considerations.”

  • The federal government maintains facilities in 2,200 communities, influencing local leasing activities, property values, and surrounding small businesses. Cities may continue to struggle if federal agencies encourage their employees to work-from-home on a permanent basis. Unfortunately, some federal officials view agency remote work simply as a recruiting tool or cost-saving measure. [Office of Personnel Management testimony, Future of Federal Work Part II, before House Committee on Oversight and Reform (July 21, 2022), and OPM’s Future of Work FAQ]
  • The Roundtable letter notes that federal agencies’ actions to emphasize the benefits of permanent remote work differ from the current direction of private sector employers, who are increasingly recognizing the need to bring employees back to the workplace.
  • The Roundtable comments also encourage President Biden to support legislation that could help facilitate “the increased conversion of underutilized office and other commercial real estate to much-needed housing.” The letter states that incentives for conversion projects could be modeled on the rehabilitation tax credit as a cost-effective means to increase the housing supply, create jobs, and boost the local tax base. 

Economic Impact of Remote Work 

Chicago cityscape sky view

Roundtable Members in the News 

  • Roundtable Chair John Fish (Chairman and CEO, SUFFOLK) spoke with Bloomberg Intelligence on Dec. 9 about the consequences of rising interest rates, the impact of remote work, labor force participation, and the general economic outlook. (Chair Fish interview begins at 26:05)
  • Former Roundtable Chair Bill Rudin (Co-Chairman & CEO, Rudin Management Company, Inc.) discussed real estate challenges and the potential for office-to-residential conversions in New York City on Dec. 14 during an interview with CNBC’s Squawk on the Street.
  • Roundtable Board Member Kathleen McCarthy (Global Co-Head of Blackstone Real Estate) was interviewed on Dec. 9 by Bloomberg Radio on a wide range of real estate investment issues, asset types, and her experience in the industry. 

Commercial real estate trends and potential policy responses will be discussed during The Roundtable’s Jan. 24-25 State of the Industry Meeting in Washington, DC.

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Congress Extends Funding Deadline to Dec. 23; Democrats Pushing Full-Year Omnibus Spending Bill

Posted on by Trey Jackson

U.S. CapitolThis week, Congress passed a government funding extension package until Dec. 23 while appropriators continue working on a $1.7 trillion FY2023 “omnibus” spending deal that they may unveil on Monday. (CQ News and BGov, Dec. 16) 

Omnibus Negotiations 

  • President Biden is expected to sign the extension today, as bipartisan efforts to reach a funding agreement continue among congressional policymakers. Some Republicans, including House Minority Leader Kevin McCarthy (R-CA), are urging their colleagues to postpone negotiations until January when the GOP assumes majority control of the House. (Wall Street Journal, Dec. 14)
     
  • The logjam in reaching a final deal focuses on $26 billion in non-defense, domestic spending. Both sides have agreed on $858 billion for defense spending. (Forbes, Dec. 14)
     
  • If an agreement on an omnibus cannot be reached next week, Democrats may forego new legislation in favor of a one-year continuing resolution that would freeze government funding at current levels and allow certain tax policies to expire. (Roundtable Weekly, Dec. 2 and Dec. 9) 

Tax Policy Prospects 

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

  • Chances that a spending agreement will include tax policy—including “extenders” of tax incentives that have expired or are set to lapse after 2022—are uncertain. (Roundtable Weekly, Dec. 9)
  • House Ways and Means Committee Chair Richard Neal (D-MA), above, said on Thursday, “We continue the negotiations. The conversations are ongoing. I still can see the contours of a big deal.” (BGov, Dec. 16)
  • Senate Minority Whip John Thune (R-SD) said earlier this week that he is doubtful that a year-end tax deal will be added to an omnibus. (Politico, Dec. 13)

Implementing IRA Tax Provisions

  • The Internal Revenue Service (IRS) will open a new office to monitor the agency’s implementation of the 2022 Inflation Reduction Act’s clean energy provisions, according to a new IRS report released Thursday.
  • The Inflation Reduction Act (IRA) Transformation & Implementation Office will include units focused on “implementation of new tax law provisions, taxpayer services transformation, tax compliance transformation and human capital transformation.” (BGov, Dec. 15)
  • Additionally, The White House released a guidebook this week on the IRA’s clean energy provisions as a compendium reference to the large amount of federal energy and climate programs financed by the IRA. (White House Fact Sheet, Dec. 15) 

The Roundtable will discuss energy and tax policy developments during our 2023 State of the Industry and Policy Advisory Committee meetings on Jan. 24-25 in Washington, DC.

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Spending Bill Negotiations at Impasse as Deadline Looms; Senate Democrats Re-Elect Leadership Team

Posted on by Trey Jackson

Capitol at dusk

Congress reached an impasse on a government spending package this week, leaving lawmakers with limited options before Dec. 16 when the expiration of current funding would cause a partial shutdown. Policymakers may opt to pass a short-term Continuing Resolution (CR) to fund the government at current levels while they attempt to reach an agreement by year-end on a massive “omnibus” package—which could include tax, affordable housing, and other measures important to commercial real estate. (Roll Call, Dec. 8 and Roundtable Weekly, Dec. 2)

Funding Logjam

  • Policymakers are reportedly gridlocked over $26 billion in non-defense, domestic spending that would be part of an estimated $1.7 trillion overall funding bill. Both sides have agreed on $858 billion for defense spending. (PoliticoPro, Dec. 7 and CQ, Dec. 8)
  • With the clock ticking, Democrats may introduce their own omnibus proposal next week with measures designed to attract the 60 votes needed to pass the Senate, along with a full-year CR. (Punchbowl, Dec. 8)
  • If an agreement cannot be reached, Democrats may forego new legislation in favor of a one-year CR that would freeze government funding at current levels and allow certain tax policies to expire. Some House Republicans are urging their colleagues to take another course—wait until early next year when they assume majority control and can exert greater influence over funding negotiations with the Senate’s Democratic majority. (Washington Post, Dec. 8)

Other Policy News

Sen. Kyrsten Sinema (I-AZ)

  • Senate Democrats on Tuesday voted unanimously to re-elect their entire leadership team to another term for the 118th Congress, with Majority Leader Chuck Schumer (D-NY), above right, at the helm.
  • Today, Schumer stated that Sen. Kyrsten Sinema (D-AZ), above, will keep her committee assignments after she registered as an independent and published an op-ed in the Arizona Republic about why she is leaving the Democratic Party. (The Hill, Dec. 8 and Dec. 9 | Wall Street Journal, Dec. 9)
  • Sinema suggested her decision would not affect the power balance in the Senate because she will not caucus with Republicans and her voting behavior will not change. (Politico, Dec. 9)

Separately, the Treasury Department’s recently released, initial guidance on labor standards for companies to qualify for increased incentives in the Inflation Reduction Act (IRA) will be the focus of two Department of Labor webinars next week. Register for the Wednesday, December 14 or Thursday, December 15 webinars, both scheduled for 1pm EST. (Roundtable Weekly, Dec. 2)

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White House Announces Federal Building Performance Standards

Posted on by Trey Jackson
The White House

The White House on Wednesday released a new standard to reduce scope 1 “direct” emissions from fossil fuels combusted to heat and cool federal buildings. (CNBC |UPI | PoliticoPro, Dec. 7)

Federal Building Performance Standard (BPS)

  • The Federal BPS from the White House Council on Environmental Quality (CEQ) applies to the 300,000 existing buildings owned by the U.S. government. It sets a 2030 goal for each federal agency to eliminate scope 1 emissions in 30% of its facilities. (White House Fact Sheet)

  • The Federal BPS “prioritiz[es] energy efficiency and the elimination of on-site fossil fuel use.” It is a stepping-stone toward the Biden administration’s ultimate goal of “net zero” emissions by 2045 across all federal facilities. (Exec. Order 14057, Dec. 8, 2021)

  • The Federal BPS’s “performance pathway” would achieve the goal for zero scope 1 emissions “through efficient electrification of all equipment and appliances.”

  • The Federal BPS also offers a “prescriptive pathway” for specific replacement of gas-fired furnaces and boilers. This alternate compliance route recognizes that “full decarbonization may not be practicable today” considering a building’s size and climate zone—and is designed to account for the market availability and cost-effectiveness of electrification equipment.

Relevance to Other GHG Standards

Energy.gov map of BPS
  • While the Federal BPS intends to reduce on-site scope 1 emissions, it will likely increase scope 2 emissions from electricity purchased by the federal government to power electric heat pumps, hot water heaters, and similar equipment.

  • Furthermore, the Federal BPS—and its focus to reduce fossil fuels on-site—might set an easier standard compared to a number of emerging BPS mandates at the state and municipal level.

  • Some local BPS laws may effectively require buildings to reduce overall GHG emissions at their source, which depends on whether local power grids provide “clean” electricity from solar, wind, or other renewable energy. EPA data that profiles “fuel mixes” used to generate electricity, however, indicate that coal, gas and other non-renewables account for 80 percent of the fuels that power electric grids nationally.

  • Also, local BPS laws may not offer a “prescriptive” compliance path similar to the Federal BPS that contemplates cost effectiveness in building electrification retrofits.

  • Notably, the Federal BPS sets no requirements for U.S.-owned buildings to reduce their upstream and downstream “scope 3” emissions outside of an owners’ control. (EPA website)

  • Possible measurement and reporting of scope 3 emissions has been a controversial element of a private sector, corporate GHG disclosure rule proposed by the U.S. Securities and Exchange Commission that has not yet been finalized. (Roundtable Weekly, June 10)

Other Building Policies  

Department of Energy sign

The White House’s announcements touted DOE’s Better Climate Challenge—a voluntary “pledge” that includes Roundtable members as “partners” who have committed to reduce portfolio-wide scopes 1 and 2 emissions by at least 50% within 10 years. The Roundtable is an “ally” supporting DOE’s Challenge. (Roundtable Weekly, March 4)

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Roundtable Responds to EPA’s Inquiry Regarding  Indoor Air Quality

Posted on by Trey Jackson

EPA logoThe Real Estate Roundtable on Dec. 5 responded to a recent Environmental Protection Agency (EPA) Request for Information on Indoor Air Quality (IAQ) management, which posed questions about a possible new building “label” program. (Roundtable comments and EPA’s Federal Register Notice) 

Roundtable Comments 

  • A public-private partnership federal recognition program that commends leadership in IAQ design and management could be a key component of a return to healthy workplaces, The Roundtable stated in its comments.
  • The Roundtable urges policymakers and business leaders to push for the safe return of employees to their physical workspaces to benefit productivity and help reinvigorate small businesses in downtown neighborhoods—an essential contributor to urban communities and their tax bases. (Roundtable Weekly, Dec. 2)
  • Should EPA move forward to propose any criteria for a potential IAQ label, The Roundtable commented that the agency must: 
    • Identify clear statutory authority and adequate federal resources to ensure its long-term viability;
    • Conduct an initial pilot program for testing in actual buildings to reflect real-world experiences of commercial real estate practitioners (including private sector and federal building owners); and
    • Demonstrate support for best practices and procedures that sequentially (I) control emissions and off-gassing from indoor sources, (II) improve ventilation rates, and (III) enhance air filtration and cleaning. (EPA’s IAQ best practices webpage) 

The Roundtable’s Sustainability Policy Advisory Committee (SPAC) has a long, successful track record of collaboration with EPA and the Department of Energy in the development of numerous voluntary recognition programs, which are listed in the comments.

Healthy Return to Office 

Healthy Workplace Coalition logo

Return-to-the-office is a significant industry priority that will be discussed during The Roundtable’s all-member State of the Industry Meeting on January 24-25 in Washington, DC. 

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The Roundtable’s Jeffrey DeBoer Recognized as One of DC’s “Top Lobbyists” for 2022

Posted on by Trey Jackson

Real Estate Roundtable President Jeffrey DeBoer & 2022 Roundtable Annual ReportReal Estate Roundtable President and CEO Jeffrey DeBoer, above, is one of the “Top Lobbyists” in Washington, DC for 2022, according to the prominent policy news publication, The Hill. This is the fifth consecutive year that DeBoer has earned the recognition. (The Hill, Dec. 7)

  • The publication noted their list of individual lobbyists is comprised of those who “played a key role in shaping an avalanche of legislation in 2022, including Democrats’ Inflation Reduction Act and several bipartisan bills that brought sharply divided lawmakers together.”
  • The Hill also notes the list recognizes “advocates won hard-fought battles to secure some of this year’s most significant bipartisan measures” and “demonstrated a track record of success in the halls of Congress and the administration during a critical year for policy.” (pdf of The Hill’s 2022 Top Lobbyists)
  • The Roundtable’s DeBoer commented, “I am honored to be recognized for my advocacy successes on behalf of the commercial real estate industry. However, I’m smart enough to know that they are not individual successes but are actually successes resulting from the hard work of the entire Roundtable team … our membership and staff. It is particularly rewarding to be honored by The Hill knowing that, in leading the team, my approach is grounded by a positive, bipartisan foundation built around overall community betterment and advancement.”

DeBoer added, “We will continue to advocate long-term, sustainable public policy relating to taxation, access to housing and capital, job creation and energy efficient buildings that are safe and secure—and I hope that our efforts will continue to be positively recognized.”

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Washington Leaders Aim for December Funding Deal; Lawmakers Seek to Include Tax Measures

Posted on by Trey Jackson

Capitol with cirrus clouds

President Biden met with congressional leaders on Tuesday to discuss the legislative agenda for the remaining weeks of the lame duck session before the new Congress begins on Jan. 3 with a House Republican majority. 

Omnibus vs CR

  • The meeting between President Biden and Senate Majority Leader Charles Schumer (D-NY), Senate Minority Leader Mitch McConnell (R-KY), House Speaker Nancy Pelosi (D-CA) and House Minority Leader Kevin McCarthy (R-CA) also focused on lawmakers efforts to reach a potential deal on a massive “omnibus” spending bill before current government funding expires on Dec. 16. (Politico, Nov. 29)
  • There is a possibility that Congress could pass a one-week continuing resolution (CR) to extend current funding until Dec. 23 to buy more time to reach an agreement.

  • Sen. McConnell commented on the White House meeting that there is “… widespread agreement that we’d be better off with an omnibus than a CR, but there are some significant hurdles to get over to do that.” (The Hill, Nov. 29)
  • Attempts to attach a wide variety of other policy riders to an omnibus package—including tax extenders affecting commercial real estate—could become more difficult as the holiday break draws closer. (Wall Street Journal, Nov. 29 and Roundtable Weekly, Nov. 18)
  • House Ways and Means Chairman Richard Neal (D-MA) this week expressed optimism about negotiations on tax measures that may be included in an omnibus, including “extenders” of tax incentives that have expired or are set to lapse after 2022. (CQ, Nov. 30) 
  • House Speaker Pelosi said yesterday that if Congress fails to reach a year-end spending bill in the coming weeks, then a “last resort” would be a year-long CR. (Politico video and Politico Pro, Dec. 1) 

Real Estate-Related Tax Measures 

Gavel and books with city in background

  • A bipartisan group of 54 House lawmakers sent a letter this week to House leadership that requested the inclusion of two affordable housing provisions from a bipartisan bill (H.R. 2573) “in any year-end legislative vehicle.” (BGov, Nov. 28 and PoliticoPro, Nov. 29)
  • The Nov. 28 letter led by Reps. Suzan DelBene (D-WA) and Brad Wenstrup (D-OH) urged House Speaker Pelosi and Minority Leader McCarthy to expand and strengthen the Low Income Housing Tax Credit (LIHTC). 

  • The letter recommended extending a temporary increase in credit allocations enacted in 2018—and decreasing the amount of private activity bonds that are needed to access low-income housing credits (in the absence of specific credit allocation from a state housing authority). Studies suggest the latter proposal could increase affordable rental housing production by more than one million units over 10 years. (Novogradac 2020) 
  • Other important tax proposals vying for consideration include bipartisan, real estate-related bills. The first would modify REIT-related party rules to allow REITs to provide additional equity investment in struggling tenants. The second would modernize outdated tax rules that unfairly accelerate the income of condominium developers that pre-sell condo units during the construction process.

The Roundtable strongly supports these efforts and will discuss affordable housing and tax policy developments during our 2023 State of the Industry and Policy Advisory Committee meetings on Jan. 24-25 in Washington, DC.

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Increase in Office Vacancy Rates Threaten Municipalities’ Tax Base; Remote Work Seen as Contributing Factor

Posted on by Trey Jackson

Chicago cityscape sky view

The Roundtable’s Q4 Economic Sentiment Index released this month noted the influence of hybrid work arrangements on the office market. (News Release and Entire Q4 Report, Nov. 18) 

Roundtable View 

  • Roundtable President and CEO Jeffrey DeBoer commented, “We continue to urge policymakers and business leaders to push for the safe return of workers to their shared, physical workspace,” DeBoer said. (Connect CRE, Nov. 22 and CoStar, Nov. 21)
  • He added, “A back-to-the-workplace movement would increase overall economic productivity and competitiveness, help preserve urban small businesses, and lower the threat to the property tax base of municipalities throughout the nation.” (News Release and Entire Q4 Report, Nov. 18) 

National Vacancy Rates 

Vacant office space NYC view

  • Recent industry reports show hybrid work arrangements are contributing to increased office vacancy rates nationwide and threatening the health and well-being of American cities. 
  • A national report issued this month by CommercialEdge shows that large swaths of companies that have embraced remote and hybrid work since the onset of the pandemic have influenced the current decrease in demand for office space in most markets. (Commercial Observer, Nov. 21)
  • CommercialEdge reports U.S. vacancy rates rose over the previous 12 months in 86 of 120 markets, including 22 of the 25 leading office markets. (National Office Report webpage and pdf, Nov. 2022)
  • CommercialEdge Senior Manager Peter Kolaczynski stated in the report, “Work-from-home solidifying itself, plus broader economic uncertainty, are set to continue the stress on the office industry as we enter the new year.” 

Risks to Local Tax Revenue 

DC city view

  • In Washington, DC, office owners alerted city officials this week that a dramatic and persistent decline in commuter activity—exacerbated by remote work—has contributed to deteriorating market conditions. The landlords warned that DC may face a significant loss of tax revenue that could threaten the city’s fiscal health, and that other cities are experiencing similar conditions. (Commercial Observer, Nov. 29 and Bisnow, Nov. 28) 
  • Prominent DC office landlords sent a letter on Monday to the city’s chief financial officer about eroding local market conditions, including increased vacancy rates, lackluster leasing activity, equity flight, and a financing drought—especially for assets with high levels of vacancy. “The pandemic and work from home have further eroded fundamentals and all indicators of the health of the District’s office market point increased systemic risk and distress,” the letter states.
     
  • “For every decline of $100 million in commercial property tax assessments, annual property tax revenue falls by $2 million. It is vitally important for city officials to fully comprehend the difficult environment commercial office buildings are operating under and the risks to the future tax revenue,” the letter noted. 

Signatories to the Nov. 28 letter—including Carr Properties, JBG Smith, Boston Properties, Brookfield, Trammel Crow and Hines—offered to work with DC officials to discuss potential means of addressing “this enormous challenge.” 

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