News Type: Roundtable Weekly

Economic Uncertainty Follows Inflation and Interest Rate Increases

Posted on by Trey Jackson

Fed Reserve building close-up

This week’s flurry of key economic data offered mixed signals about the state of the economy and whether the Federal Reserve’s interest rate increases can slow inflation without causing a significant increase in unemployment—a “soft landing” that could prevent a full-blown recession before the mid-term elections. (The Hill, July 28)

Economic Slowdown & Inflation

  • POLITICO described the week as a “Category 5 storm of economic news.” Developments included a drop in the consumer confidence index for the third straight month; an increase in the Fed funds rate by another 75 basis points; and a drop in the gross domestic product (GDP) at an annual rate of 0.9 percent.
  • Additionally, the Commerce Department reported today that the personal consumption expenditures price index (PCE)—a key inflation gauge closely tracked by the Fed—rose 1.0% increase last month and increased 6.8% since last June, the largest spike since January 1982. (Reuters and CNBC, July 29)
  • President Biden responded, “It’s no surprise that the economy is slowing down as the Federal Reserve acts to bring down inflation.” (White House statement, July 28)
  • Fed Chair Jerome Powell commented after the increase in interest rates. “I do not think the U.S. is currently in a recession. And the reason is there are just too many areas of the economy that are performing too well. The labor market has remained extremely tight, with the unemployment rate near a 50-year low, job vacancies near historical highs, and wage growth elevated. We think there’s a path for us to be able to bring inflation down while sustaining a strong labor market.” (Federal Reserve press conference transcript, July 27)
  • The recent rise in interest rates are starting to hamper commercial real estate transactions and values. The Wall Street Journal reported on July 26 that “banks are lending less and charging higher interest rates for the loans they make to owners and buyers of office buildings, shopping centers and other commercial real estate.”

GDP & Jobs

National Bureau of Economic Research logo

  • Treasury Secretary Janet Yellen yesterday addressed this week’s drop in GDP. “Most economists and most Americans have a similar definition of recession: a broad-based weakening of our economy. That is not what we’re seeing right now.” She added, “Job creation is continuing, household finances remain strong, consumers are spending, and businesses are growing.” (Treasury Department press conference transcript, July 28)
  • Two straight quarters of economic contraction is usually considered a “technical” recession. Yet The National Bureau of Economic Research (NBR), as the official designator of recessions, has not released a decision yet based on the recent economic data. NBR bases its analysis of a wide variety of economic indicators such as employment, personal income, durable goods, housing permits, and other factors. (The Washington Post, July 27 and CNBC, July 26)
  • White House economist Brian Deese commented on NBR and this week’s economic data on CNBC yesterday. “We’re certainly in a transition and we are seeing slowing as we all would have expected,” Deese said, “but if you look at the full data and the type of data that NBR looks at, nothing signals that this period in the second quarter is recessionary in the labor market.” (CNBC, July 28)

Roundtable Chair John F. Fish on Bloomberg Markets

Roundtable Chair John F. Fish (Chairman & CEO, Suffolk), above, was interviewed July 27 on Bloomberg Markets: Americas about current economic conditions and real estate. He commented on the industry’s challenges, including fractious land use policy, supply shortages, and cost drivers. National economic conditions affecting CRE and the Fed’s monetary policies will be a focus during The Roundtable’s Fall Meeting on Sept. 21-22 in Washington, DC.

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New Treasury Guidance Allows Greater Flexibility in Using COVID-19 Rescue Funds for Affordable Housing

Posted on by Trey Jackson

Housing construction

The Biden administration issued new guidance this week that gives local and state governments greater flexibility when using their share of $350 billion in COVID-19 federal relief funds for affordable housing. The changes are in line with the administration’s recent Housing Supply Action Plan, which aims to boost the supply of affordable housing in communities throughout the nation. (Treasury Dept. news release, July 27 and Roundtable Weekly, May 20)

Expanded Use of Pandemic Funds

How-To Guide

How-To Guide Treasury and HUD cover

  • Treasury and the Department of Housing and Urban Development have also jointly published a “How-To” Guide to show governments ways of combining pandemic aid with other sources of federal funding.
  • According to the guide, recipients of Coronavirus State and Local Fiscal Recovery Funds (SLFRF) can “acquire properties that will be transitioned into affordable housing for households that experienced the negative economic impacts of the pandemic. This could include acquisition of market rate rental properties, motels, or commercial properties that will be converted to affordable housing, or acquisition and preservation of publicly supported affordable housing.”
  • SLFRF may also be used to “finance retrofits and weatherization of properties to improve energy efficiency, potentially by leveraging new federal funding such as the Department of Energy’s Weatherization Assistance Program, or infrastructure resources.”
  • Over the coming months, Treasury plans to conduct a series of webinars and briefings with states, local governments, nonprofits, and private sector entities involved in the development and preservation of affordable housing.

Multifamily Response

  • The National Multifamily Housing Council (NMHC) and National Apartment Association (NAA) applauded the flexibility provided by the new guidance.
  • NMHC also unveiled new research this week showing the need for the U.S. to produce 4.3 million more apartments by 2035 to address the underbuilding of housing after the 2008 financial crisis.

In conjunction with the study’s release, the website www.WeAreApartments.org breaks down the data by each state and 50 key metro areas.

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Proposed NASAA Rules Target REIT Guidelines, May Impact Real Estate Capital Formation

Posted on by Trey Jackson

NASAA logo border

The North American Securities Administrators Association (NASAA) is seeking public comment on proposed revisions to its Statement of Policy Regarding Real Estate Investment Trusts. The July 12 proposal would update the conduct standards for brokers selling non-traded REITs with references to the SEC’s Best Interest conduct standard. (NASAA news release, July 12 and Investment News, July 25)

Proposed Changes

  1. Update the conduct standards for brokers selling non-traded REITs by supplementing the suitability section with references to the SEC’s best interest conduct standard.
  2. Update to the individual net income and net worth requirements—up to (a) $95,000 minimum annual gross income and $95,000 minimum net worth, or (b) a minimum net worth of $340,000—in the suitability section, by adjusting upward to account for inflation since 2007.
  3. Add a uniform concentration limitation prohibiting an aggregate investment in the issuer, its affiliates, and other non-traded direct participation programs that exceeds 10% of the purchaser’s liquid net worth. Liquid net worth would be defined as that component of an investor’s net worth that consists of cash, cash equivalents, and marketable securities. [NOTE: There is no carve out for accredited or other sophisticated investors.]
  4. Include, in multiple sections, a new prohibition against using gross offering proceeds to fund distributions, “a controversial product feature used by some non-traded REIT sponsors . . . having the potential to confuse and mislead retail investors.”

Potential Impact

Chicago skyward

  • The proposed revisions have the potential to influence other sets of NASAA Guidelines under development, including those for Asset-Backed Securities, Commodity Pools, Equipment Leasing, Mortgage Programs and Real Estate Programs other than REITs. (NASAA Request for Public Comment, July 12)
  • NASAA works to coordinate state regulation of broker-dealers, investment advisers and securities offerings—including non-traded REITs, which are publicly offered REITs not listed on any exchange.
  • NASAA’s Corporation Finance Section Committee Chair and Ohio Securities Commissioner Andrea Seidt said, “The REIT guidelines have not been updated for more than 15 years and these revisions are long overdue. If adopted, the proposed revisions will make key inflationary adjustments to existing suitability standards and promote uniformity in state concentration limits, both of which are key to limiting retail investor risk.” (NASAA news release, July 12)

Final comments on NASAA’s 44-page request are due by Aug. 11, 2022. The Real Estate Roundtable is working with several other organizations on a coalition response. Roundtable members can direct their comments and questions to Roundtable Senior Vice President Chip Rodgers or call 202-639-8400.

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Small-Business Owners Descend on Capitol Hill to Urge SBA Reauthorization, CRE Leaders Address Market Conditions

Posted on by Trey Jackson
Goldman Sachs 10k Businesses

Over 2,500 small-business owners gathered on Capitol Hill this week to meet with more than 400 lawmakers and federal officials to urge reauthorization of the Small Business Administration (SB) for the first time in over 20 years. Small businesses throughout the nation are facing inflationary pressures, supply chain shortages, labor challenges, limited access to capital and a looming possibility of recession. (The Hill, July 20) 

10,000 Small Businesses 

  • The business owners urged lawmakers to modernize the SBA, enact tax credits and provide incentives to help small businesses retain workers and access capital.
  • Sens. Kyrsten Sinema (D-AZ) and Tim Scott (R-SC) commented on Tuesday during the summit that the SBA should be simplified and supported reauthorization. (The Hill, July 20)
  • Joe Wall, director of Goldman Sachs’s small-business program, said, “Our goal this week is to generate a lot of momentum so that heading into next year it’s a real priority.” (The Hill, July 20)

Owner Challenges

Goldman Sachs 10,000 Businesses survey

  • A recent survey of the program’s participants shows 93 percent of small-business owners are worried about the US economy experiencing a recession in the next 12 months. Nearly all respondents (97 percent) also say inflationary pressures have increased or remained the same compared with three months ago. Additionally, 88 percent of respondents say it is important for Congress to prioritize the Small Business Administration (SBA), which has not happened in 20 years. (Survey news release, July 13) 
  • Alumni of the 10,000 Small Businesses program collectively represent over $17.3 billion in revenues and employ 245,000 people. 

Industry Views

Marty Burger, far right, interviewed on CNBC's Squawk on the Street

Dr. Linneman commented that inflation is transitory with supply lagging demand due to 23% of the workforce collecting unemployment insurance. He also offers his views on national debt concerns, the Fed and interest rates, and return-to-the-office concerns. (Watch “The Best Hour in CRE” with Economist Peter Linneman, July 21)

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The Fed Requests Comments on Proposal to Implement LIBOR Transition

Posted on by Trey Jackson
The Federal Reserve

The Federal Reserve Board on July 19 invited comment on a proposal that implements the Adjustable Interest Rate (LIBOR) Act, which Congress enacted last year. The LIBOR Act provides a safe harbor for market participants who need to switch existing LIBOR-referencing financial contracts to a replacement benchmark for debt instruments before LIBOR reaches its final replacement date on June 30, 2023. (The Fed’s Notice of Proposed Rulemaking, July 19 and Roundtable Weekly, March 11)

LIBOR and CRE
  • LIBOR, formerly known as the London Interbank Offered Rate, is the interest rate benchmark that was the dominant reference rate used in recent decades and remains in extensive use today in outstanding financial contracts — including commercial real estate debt, mortgages, student loans and derivatives — worth an estimated $223 trillion. (Roundtable Weekly, Dec. 10, 2021)
  • The LIBOR Act also provides that all contracts with no adequate fallback provisions for an alternative benchmark substitute will be replaced by the Secured Overnight Financing Rate (SOFR).
  • The Real Estate Roundtable and 17 national trade groups submitted letters last year on April 14 and July 27 to policymakers in support of measures to address “tough legacy” contracts during the transition away from LIBOR. (Roundtable Weekly, Dec. 10, 2021)

What’s Next

LIBOR document with border

  • The Federal Reserve is working to mitigate potential risks and promote a smooth global transition away from LIBOR with both domestic and foreign supervisors. The Fed has emphasized the importance of preparation and transitioning to the market to ensure that supervised institutions can transition away from LIBOR. (The Fed Libor Transition webpage)

The Roundtable welcomes comments from its members on the proposed rulemaking and plans to work with its Real Estate Capital Policy Advisory Committee (RECPAC) on a response. For any questions, please contact The Roundtable’s Senior Vice President Chip Rodgers or call 202-639-8400.

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Senate Finance Committee Focuses on Low-Income Housing Tax Credit and Other Affordable Housing Incentives

Posted on by Trey Jackson

Senate Finance Committee

Numerous congressional committees have recently addressed the nation’s scarcity of affordable housing—including this week’s Senate Finance Committee hearing, “The Role of Tax Incentives in Affordable Housing,” which focused on the Low Income Housing Tax Credit (LIHTC) and other legislative incentives. 

Tax Focus 

  • Senate Finance Chairman Ron Wyden (D-OR), Ranking Member Mike Crapo (R-ID) and several witnesses expressed support during the hearing for the Affordable Housing Credit Improvement Act (S.1136), introduced by committee member Maria Cantwell (D-WA). The bill would expand and strengthen the LIHTC.
  • The bill (detailed summary here) would expand the pool of tax credits that are allocated to states for new affordable housing, make it easier to combine LIHTC with other sources of capital like private activity bonds, and facilitate LIHTC rehab projects. (Tax Notes, July 21)

Dana Wade, Walker & Dunlop

  • Hearing witness Dana Wade—an executive at Walker & Dunlop and a former commissioner of the Federal Housing Administration (above)—noted that 25 percent of all renters spend more than half of their monthly income on rent. Wade also testified extensively about the causes of the housing affordability crisis.
  • “An estimated 40 percent of development costs can be attributed to regulation at the federal, state, and local levels,” testified Wade. “Zoning policies like density limits, requirements for parking, height restrictions, lengthy permitting and approval processes, and other land-use restrictions create a perfect storm that can often stymie new development.”
  • One of the largest multifamily lenders and LIHTC syndicators in the country, Walker & Dunlop is chaired and managed by Roundtable Member Willy Walker.

Jeffrey DeBoer Real Estate Roundtable President and CEO

  • “Overly restrictive land-use and zoning policies, construction cost increases, and labor shortages are deepening our housing challenges, which now extend across the entire country,” said Real Estate Roundtable President and CEO Jeffrey DeBoer (above). “Government at all levels needs to be part of the solution, not part of the problem. The Affordable Housing Credit Improvement Act would be an important step forward.”
  • The future of S. 1136 is uncertain after key centrist Sen. Joe Manchin recently said he would not support any legislative package that included tax increases until more economic data affecting the 40-year high inflation rate becomes available. Chairman Wyden did not promise a timetable for committee action. (Roundtable Weekly, July 15) 

Congressional Hearings 

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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Democrats Focus on Pared-Down Reconciliation Bill, Biden Takes Action on Climate

Posted on by Trey Jackson

US Capitol

Democrats scaled down their ambitions for a budget reconciliation bill in the wake of Sen. Joe Manchin’s (D-WV) recent rejection of any climate and tax legislative package. Instead, congressional Democrats this week focused on a limited prescription drug pricing and health care subsidy bill as President Biden announced executive actions to make progress on climate initiatives. (Roundtable Weekly, July 15 and New York Times, July 20)

Senate Democrats Pivot

  • Senate Majority Leader Chuck Schumer (D-NY) said this week that Democrats are moving forward on a smaller party-line package before the Senate summer recess begins on August 5. Policymakers are also mindful that budget reconciliation rules expire on Sept. 30 as the November mid-term elections approach. (AP, July 19 and July 15)
  • Roundtable Tax Policy Advisory Committee Member Russ Sullivan (Brownstein Hyatt Farber Schreck, LLP) profiles the steps and timeline involved to produce a reconciliation bill in his article, “How Likely is it that we see a Reconciliation Law Passed in this Congress?” (JD Supra, July 12)

White House Climate Action

President Biden speech on Climate

  • Biden’s executive actions “to turn the climate crisis into an opportunity” fell short of declaring a federal emergency, which would have unlocked broad federal powers to develop clean energy. (Wall Street Journal and White House fact sheet, July 20)

  • With climate legislation stalled in Congress, and constrained by a recent SCOTUS ruling that restricts the EPA’s ability to regulate greenhouse gases, Biden’s actions to increase offshore wind capacity and help communities cope with extreme heat have been described as “incremental” and “minuscule compared to his ambitious plan” for a net-zero emissions economy by 2050. (Wall Street Journal and POLITICO, July 20)
  • Given the limited federal response, Biden stressed that governors, mayors, state agency heads, and public utility commissioners—as well as developers—need “to stand up and be part of the solution.” (President Biden remarks and video, July 20)

Trends in CRE, the congressional agenda, and the upcoming lame-duck session of Congress after the mid-term elections will be among the topics discussed during The Roundtable’s Fall Meeting on Sept. 20-21 in Washington, DC.

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Roundtable Elects New Board Members, Releases FY 2022 Annual Report

Posted on by Trey Jackson
Partial image of 2022 Real Estate Roundtable Board of Directors

The Real Estate Roundtable recently approved a 25-member Board of Directors and released its FY2022 Annual Report, “Building a More Resilient And Dynamic Future.” 

New Board Members 

  • The Roundtable membership approved, effective July 1, the addition of the following three industry leaders to the Board:

  • Roundtable President and CEO Jeffrey DeBoer commented, “The Roundtable is excited to welcome these business leaders who bring important perspectives from CRE’s hospitality, financial services and development sectors to our Board and Policy Agenda.”

  • “We are also grateful for the three years of successful service that Amy Rose (President and Chief Executive Officer, Rose Associates) devoted to our Board of Directors, and look forward to her continued participation as a Roundtable member. Amy is stepping down after lending her expertise during an especially challenging time that spanned a pandemic-driven economic shock.” DeBoer added.

Annual Report 

Real Estate Roundtable President Jeffrey DeBoer & 2022 Roundtable Annual Report
  • The Roundtable’s 2022 Annual Report addresses the strength and resilience of CRE as the nation seeks greater economic stability, growth, and fairness during an evolving pandemic.

  • Roundtable Chair John F. Fish (Chairman & CEO, Suffolk) and DeBoer, above, state in the introduction: “As the world faces challenges such as inflation and rising interest rates, supply chain and labor shortages, other local public policy challenges, and increased uncertainty caused by the conflict in Ukraine, the importance of a strong and resilient real estate industry has been underscored yet again. While the way these challenges manifest may be new, the threat of such challenges is something the industry has risen to time and time again.”

The Roundtable’s membership represents over 3 million people working in real estate; some 12 billion square feet of office, retail, and industrial space; over 4 million apartments; and more than 5 million hotel rooms. It also includes senior, student, and manufactured housing as well as medical offices, life science campuses, data centers, cell towers, and self-storage properties. The collective value of assets held by Roundtable members exceeds $4 trillion. 

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House Ways and Means Committee Focuses on Affordable Housing

Posted on by Trey Jackson

House Ways and Means Committee

Policymakers discussed the nation’s scarcity of affordable housing, legislation that could boost the housing supply, and institutional ownership in the single—family home market during a July 12 House Ways and Means Committee hearing, which followed a similar House Financial Services Subcommittee hearing last month. (Roundtable Weekly, July 1) 

Housing Market Challenges 

  • Ways and Means Democrats focused on the role of the pandemic in exacerbating the shortage of affordable housing, expressed concerns regarding growing institutional ownership of homes and the practices of corporate landlords, and reiterated support for policies such the low-income housing tax credit (LIHTC).
  • Committee Republicans emphasized how high inflation has shut many buyers out of the market. (Hearing video and testimony, July 13)
  • Committee Chairman Richard Neal (D-MA) stated, “Our families and communities can’t thrive without quality, affordable housing. But too many Americans face skyrocketing housing costs, long waiting lists, new pressure from institutional investors, and unprecedented bidding wars that keep them out of the housing market.” (Neal opening statement)
  • Neal added that an expansion of the Low-Income Housing Tax Credit (H.R. 2573) and passage of the Neighborhood Homes Investment Act (H.R. 2143) would create nearly 1 million additional affordable homes. (Joint Committee on Taxation, Present Law and Background Relating to Tax Incentives for Residential Real Estate, July 13)
  • Committee Ranking Member Kevin Brady (R-TX) blamed Democratic policies for driving the annual inflation rate to 9.1 percent and increasing the average home price by $100,000. (CNBC, July 13) 

Housing Affordability and Institutional Investment 

New York Times - housing supply shortage

  • Christopher Herbert of the Joint Center for Housing Studies at Harvard University, which recently published The State of the Nation’s Housing 2022, noted that although institutional investors have contributed to the demand for single-family homes, supply shortages predating the pandemic are the primary culprit behind rising prices. (Herbert testimony, July 13)
  • Edward Pinto of the American Enterprise Institute testified, “Vilifying institutional landlords distracts from the underlying issues facing the housing market.” He continued, “On the single-family side, they account for too small a share of purchases and of the housing stock nationally. Even in the few metros where their share is higher, it is not enough to move the price needle, especially at the low end of the market.” (Pinto testimony, July 13)
  • Several witnesses addressed legislative proposals that would boost the supply of housing—including H.R. 2143, introduced by Rep. Brian Higgins (D-NY), that would establish a new tax credit for developers rehabilitating vacant properties into affordable homes—and H.R. 2573, introduced by Rep. Suzan DelBene (D-WA), that increase the low-income housing tax credit. (CQ, July 13 | Higgins news release, July 1, 2020 and DelBene news release, April 15, 2021)
  • The New York Times reported this week on how the lack of affordable housing, once a problem largely limited to the coastal markets, now has spread across the country. Freddie Mac estimates the nation needs 3.8 million housing units to keep up with household formation. (Image above, New York Times)
  • Roundtable President and CEO Jeffrey DeBoer recently addressed the issue of housing costs, “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.” (Roundtable Weekly, July 1) 

Roundtable Support 

RER 2022 Policy Agenda Cover

  • The Roundtable Policy Agenda, above, states, “More can be done to incentivize builders, developers, and owners to create low- and middle-income affordable housing. Low-income housing tax credits and incentives for land-use permitting and zoning reform should be enhanced.”
  • Additionally, 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. 

Next week, a Senate Finance Committee hearing will focus on “The Role of Tax Incentives in Affordable Housing.” The July 20 hearing will include testimony from Dana Wade, Chief Production Officer, Real Estate Finance at Walker & Dunlop.  

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Sen. Manchin Narrows Scope of Possible Reconciliation Bill While Waiting for More Inflation Data

Posted on by Trey Jackson

Sen. Joe Manchin (D-WV)

Sen. Joe Manchin (D-WV), a key centrist in Democrats’ ongoing efforts to pass a party-line budget reconciliation bill, said this week he would not move forward on an economic package that contains climate provisions or tax increases, upending weeks of negotiations with Senate Majority Leader Chuck Schumer (D-NY). Manchin, above, added he would support a limited measure this month aimed at reducing pharmaceutical prices and extending federal subsidies for buying health care coverage. (The Washington Post, July 14, Bloomberg, July 15 and Roundtable Weekly, June 17)

Inflation & Timelines

  • Manchin explained his position during a West Virginia MetroNews interview this morning: “I said, Chuck [Schumer], until we see the July inflation figures, until we see the July Federal Reserve rates, interest rates, then let’s wait until that comes out so we know that we were going down the path that won’t be inflammatory to add more to inflation. Inflation is absolutely killing many, many people.” (Full interview and The Hill, July 15)
  • The July Consumer Price Index is scheduled for release Aug. 10, after surging to an annual inflation rate of 9.1% in June. (U.S. Bureau of Labor Statistics, July 13)
  • Democrats are pushing to pass a bill before the Congressional recess begins on Aug. 8. If any agreement is reached, a bill would have to be drafted, scored, and debated, which could take several weeks as the midterm elections loom. The underlying budget reconciliation instructions authorizing a filibuster-proof bill do not expire until September 30. (The Washington Post, July 15)
  • The Roundtable on July 13 commented on the evolving reconciliation talks on its Twitter feed, “As policy negotiations continue, we are working to ensure that any scaled-back bill doesn’t include anti-growth, anti-real estate tax hikes such as repeal of like-kind exchanges; increased capital gain tax rates; or revisions to taxation of pass-through entities.”

The only option for Democrats to pass a reconciliation bill this month may be reduced to a limited version focused on prescription drug pricing and a two-year extension of Affordable Care Act funding to prevent major insurance premium hikes. The prescription drug legislation should raise more than sufficient revenue ($288 billion) to pay for a temporary extension of the health care insurance subsidies. (CNBC, July 15)

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