News Type: Roundtable Weekly

The Federal Reserve Cuts Interests Rates

Posted on by Abigail Grenadier

On Wednesday, the Federal Reserve reduced interest rates by half a percentage point, marking the
first rate cut in four years. The target rate now stands at 4.75-5%, with important implications for the commercial real estate industry and broader economy. (Federal Reserve Press Release | Washington Post, Sept. 18)

Fed’s Decision           

  • Fed Chair Jerome Powell emphasized that while inflation is easing, falling below 3% from a peak of 9.1% in June 2022, the labor market needs support to prevent further weakening.
  • At a news conference after the meeting, Chair Powell said, “This recalibration of our policy stance will help maintain the strength of the economy and the labor market, and will continue to enable further progress on inflation.” (WSJ, Sept. 18)
  • Fed officials project the target rate will decrease to 3.4% by the end of 2025, indicating four quarter-point cuts over the next year.    

Impacts on CRE    

  • The rate cut comes at a time when the real estate capital markets landscape remains challenging. However, this move could improve credit capacity and capital availability and help stabilize asset values.
  • Prior to the rate cut, The Roundtable’s Q3 2024 Sentiment Index revealed that a majority of respondents expected improvements in the availability of both equity capital (71%) and debt capital (60%) within the next year.
  • Meanwhile, 88% of respondents expressed optimism that asset values will either increase (57%) or remain stable (31%) over the same period. Stay tuned for The Roundtable’s Q4 Sentiment Index, which will provide further insights into how the rate adjustment is impacting real estate markets.

Looking Ahead

  • Chair Powell added that decisions regarding further rate adjustments will be data-driven and made on a meeting-to-meeting basis.
  • Roundtable President & CEO Jeffrey DeBoer commented on the impact for commercial real estate: “The Fed’s rate cuts will bring much-needed relief to the industry. Lower borrowing costs could help address the wave of maturing commercial real estate loans, reignite stalled projects and encourage new investments, helping stabilize property values as we move into a more favorable lending environment.”
  • A mix of lower rates and corporate decisions like Amazon’s office return could help stabilize the office sector still grappling with the post-pandemic shift toward remote work. (Business Insider, Sept. 18)
  • This environment also presents multifamily investors with opportunities to refinance properties, reduce payments, improve cash flow, and capitalize on lower borrowing costs, while exploring new asset classes as valuations stabilize. (JPMorgan, Sept. 19)

The Fed has two more opportunities to adjust interest rates in 2024, with meetings scheduled for November 6-7 and December 17-18.

The Roundtable’s Jeffrey DeBoer Honored at the Annual Lamplighter Awards

Posted on by Abigail Grenadier

Roundtable President & CEO Jeffrey DeBoer was honored this week with the Lamplighter Award by the American Friends of Lubavitch (Chabad), along with Speaker of the U.S. House of Representatives Mike Johnson, for their leadership and dedication to community and service.

Roundtable Leaders’ Comments

  • Coinciding with the 23rd anniversary of the September 11 terrorist attacks and approaching the first anniversary of the October 7 Hamas attacks in Israel, the evening began with a moment of silence, followed by a tribute from the United States Marine Corps Color Guard.
  • Immediate Past Roundtable Chair and event chair, John Fish (Chairman and CEO, Suffolk), introduced House Democratic Leader Hakeem Jeffries (D-NY), who, alongside Rabbi Levi Shemtov, presented the Lamplighter Leadership Award to Speaker Johnson.
  • In his introductory remarks as the event chair and last year’s recipient of the Lamplighter Award, Fish stated, “On this important day, we are all reminded there is far more that unites us as Americans, than divides us.”
(L-R): Rabbi Levi Shemtov, John Fish, Jeffrey DeBoer, Norm Brownstein
  • After accepting his award, DeBoer commented,
  • “I am honored to support the American Friends of Lubavitch, particularly because of my deep respect and appreciation for the good deeds the Chabad does. But also because of my utter dismay and disgust by the rise of anti-Semitism in America and in many places around the world.

    Moreover, I am moved to provide assistance because of my deep distress over the violence that has been planted and allowed to grow on the campuses of our nation’s greatest universities. We must realize that speech is sometimes violent, but violence is never speech. One is allowed, up to a point. The other should never be allowed particularly on university campuses where young people are supposed to be learning.

    Together, we must continue to stand up against hate and bigotry in all its forms.” (Jeffrey DeBoer’s Speech)

Lamplighters

  • The American Friends of Lubavitch (Chabad) is part of the largest network of Jewish educational, cultural and humanitarian institutions in the world, with branches in all 50 states and over 100 countries on six continents.
  • The annual Lamplighter Awards honor exceptional communal, political, corporate and academic leaders.

Several hundred people attended the event, reception and dinner, including several Senators and House members; Gold Star families and members of the U.S. armed forces; and nearly two dozen ambassadors.

Senate Finance Committee Tackles 2025 Tax Policy Debate

Posted on by Abigail Grenadier

The Senate Finance Committee held a hearing on the 2025 tax policy debate, highlighting sharp divides between Republicans and Democrats over the future of the key provisions of the Tax Cuts and Jobs Act of 2017 (TCJA) that are set to expire in 2025. (Watch Hearing | Bloomberg, Sept. 12)

2025 Tax Policy Debate

  • Chair Sen. Ron Wyden (D-OR) pushed for reforms targeting tax avoidance by the ultra-wealthy. Wyden pointed out tactics like “buy, borrow, die,” which he argues allow billionaires to accumulate wealth without paying appropriate taxes, and criticized corporate tax loopholes​. (Sen. Wyden Statement)
  • Ranking Member Sen. Mike Crapo (R-ID) defended the TCJA, emphasizing its positive impact on economic growth, job creation, and tax relief for middle-class Americans. Sen. Crapo warned that allowing the TCJA to expire would result in significant tax increases for individuals and businesses, harming the economy. (Sen. Crapo Statement)
  • Jeff Brabant, VP of Federal Government Relations at the National Federation of Independent Business, testified on the importance of making the 20% pass-through business income deduction (Section 199A) permanent and shared new data detailing the critical impact the deduction’s looming expiration will have on the small business economy if Congress fails to act. (Brabant Testimony)
  • Republicans also pushed back on potential changes to estate taxes, including lowering exemptions or eliminating stepped-up basis, which they argue would hurt family-owned businesses. (Bloomberg, Sept. 12)
  • Speaking on the consequences of eliminating stepped-up basis on small businesses, Brabant said, “If you get rid of stepped-up basis and you have an increase in the death tax, you’re looking at a double death tax. Our members who are nearing retirement, this is a critical issue for them. The concern for the small business sector is, often these small businesses are selling these businesses—because they can’t afford to pay these taxes—to larger businesses that don’t have the same footprint in these same small rural communities.”

199A Coalition

  • The Roundtable is a founding member of the newly formed PROTECT Coalition, an alliance of small, medium and large pass-through businesses and industries that oppose the expiration of Section 199A. (Politico, Sept. 5)
  • The coalition’s mission is to defend vital tax incentives that support the growth and sustainability of successful entrepreneurial businesses across the nation.
  • The Real Estate Roundtable’s SVP & Counsel Ryan McCormick said, “Over four million businesses, including two million in real estate, are organized as partnerships. Section 199A was enacted to ensure that these entrepreneurial businesses could compete on a level playing field with large corporations. Permanently extending Section 199A will allow partnerships and other pass-through businesses to continue advancing careers, investing in communities, and expanding economic opportunity for all.”

What’s Next

  • The TCJA expiration looms large, with both parties framing the debate around small businesses, working families, and economic growth. Republicans argue that letting it expire would stifle economic activity, while Democrats are focused on shifting more of the tax burden on higher-income earners.
  • Next week, on September 18 at 2:00 PM EDT, the Senate Banking, Housing and Urban Affairs Subcommittee on Economic Policy, chaired by Senator Elizabeth Warren (D-MA) will hold a hearing on the macroeconomic impacts of potential tax reform in 2025.

The Roundtable’s Tax Policy Advisory Committee (TPAC) will continue to closely track ongoing tax debates in Congress.

Fed Revises Basel III Endgame Proposal

Posted on by Abigail Grenadier

Federal Reserve Vice Chair for Supervision Michael S. Barr previewed the latest revisions to the Basel III Endgame capital requirements this week. Amid industry opposition, Barr scaled back his initial proposal to raise capital requirements for large banks, offering a more measured approach to the rule. (Bloomberg, Sept. 10)

Basel III & CRE

  • The revised proposal would increase aggregate Common Equity Tier 1 (CET1) capital requirements for global systemically important banks by roughly 9%—half of what would have been required in the original proposal.
  • Banks with assets between $100 billion and $250 billion are now exempt from most of the proposed changes, except for recognizing unrealized gains and losses in regulatory capital. (Politico, Sept. 10)
  • “There are benefits and costs to increasing capital requirements,” Barr said during his September 9 remarks at the Brookings Institution. “The changes we intend to make will bring these two important objectives into better balance, in light of the feedback we have received.” (Barr’s Speech | Bloomberg, Sept. 10)
  • The proposal reduces risk weights for certain residential mortgages, and retail exposures, extending this reduction to low-risk corporate debt. However, commercial real estate risk weights remain unclear.
  • Non-GSIB banks would see a long-term increase of 3 to 4% in capital requirements, mainly from the inclusion of unrealized gains and losses. Other changes are expected to add just 0.5% to their capital obligations.
  • The Roundtable raised industry concerns about the negative impact of the Basel III proposal in a Jan. 12 letter to the Fed and other agencies. The comments outlined how the proposal would decrease real estate credit availability, increase borrowing costs for commercial and multifamily real estate properties, and negatively impact the U.S. economy, concluding with a call to federal regulators to withdraw their proposed rulemaking. (Roundtable Weekly, Mar. 29)

What’s Next

  • An open Board meeting is expected to be scheduled to review the revised plan, with an announcement expected as early as Sept. 19. The plan will be open to public comment for 60 days once released.
  • While this new proposal is an improvement of the original plan, we remain concerned that any increase in capital requirements will have a pro-cyclical impact on credit capacity and still carry a cost for commercial real estate and the overall economy.

The Roundtable’s Real Estate Capital Policy Advisory Committee (RECPAC) will continue to monitor and respond to any further changes to the Basel III Endgame proposal and other federal policy issues impacting credit capacity and capital formation.

NEWS: Sentiment Index Reflects Growing Optimism Amid Persistent Market Challenges

Posted on by Abigail Grenadier

(WASHINGTON, D.C.) — The Real Estate Roundtable’s Q3 2024 Sentiment Index, which measures commercial real estate executives’ confidence and expectations about the industry environment, suggests a growing confidence in the future of the commercial real estate market despite ongoing challenges. The Q3 Sentiment Index reported an overall score of 64, reflecting an increase of three points from the previous quarter, and the Future Index at 70, up four points from the previous quarter. This rise in sentiment marks an 18-point increase in the overall score since last year.

Roundtable President and CEO Jeffrey DeBoer said, “The increase in our Q3 Sentiment Index indicates that while uncertainty remains, the industry is gradually regaining confidence. Leaders are seeing signs of stabilization in asset values and a potential improvement in the availability of capital, which are encouraging signals as we navigate this complex environment.”

He added, “The results of the report reflect the resilience of the commercial real estate industry. The fact that a majority of executives expect better conditions in the coming year is a strong signal that although serious challenges remain, the worst may be behind us.”

The Q3 Sentiment Index topline findings include:

  • All indices of The Roundtable’s Q3 Index are up, compared to the previous quarter and one year ago. The Q3 2024 Real Estate Roundtable Sentiment Index registered an overall score of 64, an increase of three points over the previous quarter. The Current Index registered 59, a four-point increase over Q2 2024. The Future Index posted a score of 70 points, an increase of four points from the previous quarter, indicating that uncertainty surrounding the future of asset values and availability of capital persists, but has lessened.
  • In Q3 2023, the Overall Index registered at 46, while the Current Index registered at 33, reflecting a notable 26-point gain in the Q3 2024 Current Index compared to the previous year. The Index is scored on a scale of 1 to 100 by averaging the scores of Current and Future Economic Sentiment Indices. Any score over 50 is viewed as positive.
  • Evolving market trends continue to shape the real estate landscape. A majority (70%) of Q3 survey participants expect general market conditions to show improvement one year from now. Additionally, 48% of respondents said conditions are better now compared to this time last year. Only 6% of Q3 participants expect general market conditions to be somewhat worse in a year, a decrease from 11% in Q2. Some subsector asset classes, such as data centers and student housing, are well-positioned from both a fundamentals and capital availability perspective. However, Class B office properties continue to face ongoing challenges, and the fast pace of multifamily and industrial rent growth has subsided.
  • A significant 88% of Q3 survey participants expressed optimism that asset values will be higher (57%) or the same (31%) one year from now, indicating some semblance of expected stability. 76% of Q3 survey participants believe asset values are slightly lower (50%) or about the same (26%) today compared to a year ago.
  • The real estate capital markets landscape remains challenging. However, 71% of respondents believe the availability of equity capital will improve in one year, while 60% said the availability of debt capital will improve in one year. 40% of participants said the availability of debt capital would be the same or worse in one year, an increase from 36% who voiced the same expectation in Q2 of this year.

Some sample responses from participants in the Sentiment Index’s Q3 survey include:

“Investors still want to allocate dollars to real estate, but there is still sentiment for defensive positioning and risk mitigation.”

“Pricing is all over the board and has reset since the post-Covid boom. The magnitude of the reset depends on where the asset is in its life cycle and its financing structure.”

“Banks have pulled back, but insurance companies have a reasonable level of capital and pricing has been stable. For higher quality assets, there’s demand.”

“Spreads are tightening on construction loans, but acquisition financing is more available. There is a lot of debt capital on the sidelines for high quality asset acquisitions.”

Data for the Q3 survey was gathered by Chicago-based Ferguson Partners on The Roundtable’s behalf in July. See the full Q3 report.

The Real Estate Roundtable brings together leaders of the nation’s top publicly-held and privately-owned real estate ownership, development, lending and management firms with the leaders of major national real estate trade associations to jointly address key national policy issues relating to real estate and the overall economy.

#     #     #

Biden Administration Announces $240 Million of IRA Grants for Building Efficiency Upgrades

Posted on by Abigail Grenadier
Department of Energy building in Washington, DC

On August 27, the U.S. Department of Energy announced plans to allocate $240 million from the Inflation Reduction Act (IRA) to 19 state and local governments to help communities adopt energy-efficient building codes and retrofit structures to meet updated standards. (Politico, Aug. 27)

Key Details

  • The initiative is expected to reduce utility costs for multifamily residents and commercial building operators, enhance grid resilience, and lower emissions.
  • “DOE is helping jurisdictions move further and faster in implementing stronger codes that will provide Americans safer, healthier, and more comfortable places to live, work, and play,” said U.S. Secretary of Energy Jennifer Granholm. (US-DOE Press Release, Aug. 27)
  • The 19 selected projects will receive direct technical assistance to support the adoption and implementation of traditional energy codes, zero energy codes, and building performance standards.
  • The grants also align with the Justice40 Initiative, designed to direct 40% of federal investments to disadvantaged communities overburdened by pollution.
  • This latest announcement follows an initial $90 million awarded to 27 projects last year from the 2021 Infrastructure Investment and Jobs Act, commonly known as the bipartisan infrastructure law, to implement updated building codes. (Politico, Aug. 27)
  • Chosen jurisdictions must go through a “negotiation process” with US-DOE before the agency ultimately awards Round 1 grants. Applications for the second round of IRA funding will close on Sept. 13. (US-DOE Press Release, Aug. 27)

What’s Next

The Roundtable is developing a “primer” for real estate stakeholders, highlighting key issues in the state and local BPS trend, with a release planned for this fall.

Sentiment Index Reflects Growing Optimism Amid Persistent Market Challenges

Posted on by Abigail Grenadier

The Real Estate Roundtable’s Q3 2024 Sentiment Index, which measures commercial real estate executives’ confidence and expectations about the industry environment, suggests a growing confidence in the future of the commercial real estate market despite ongoing challenges.

Roundtable View

  • The Q3 Sentiment Index reported an overall score of 64, reflecting an increase of three points from the previous quarter, and the Future Index at 70, up four points from the previous quarter.
  • Roundtable President and CEO Jeffrey DeBoer said, “The increase in our Q3 Sentiment Index indicates that while uncertainty remains, the industry is gradually regaining confidence. Leaders are seeing signs of stabilization in asset values and a potential improvement in the availability of capital, which are encouraging signals as we navigate this complex environment.”
  • This rise in sentiment marks an 18-point increase in the overall score since last year.
  • He added, “The results of the report reflect the resilience of the commercial real estate industry. The fact that a majority of executives expect better conditions in the coming year is a strong signal that although serious challenges remain, the worst may be behind us.”

Topline Findings

  • All indices of The Roundtable’s Q3 Index are up, compared to the previous quarter and one year ago. The Index is scored on a scale of 1 to 100 by averaging the scores of Current and Future Economic Sentiment Indices. Any score over 50 is viewed as positive.
  • The Q3 2024 index registered an overall score of 64, an increase of three points over the previous quarter. The Current Index registered 59, a four-point increase over Q2 2024. The Future Index posted a score of 70 points, an increase of four points from the previous quarter, indicating that uncertainty surrounding the future of asset values and availability of capital persists, but has lessened.
  • In Q3 2023, the Overall Index registered at 46, while the Current Index registered at 33, reflecting a notable 26-point gain in the Q3 2024 Current Index compared to the previous year.
  • Evolving market trends continue to shape the real estate landscape. A majority (70%) of Q3 survey participants expect general market conditions to show improvement one year from now. Additionally, 48% of respondents said conditions are better now compared to this time last year. Only 6% of Q3 participants expect general market conditions to be somewhat worse in a year, a decrease from 11% in Q2.
  • Some subsector asset classes, such as data centers and student housing, are well-positioned from both a fundamentals and capital availability perspective. However, Class B office properties continue to face ongoing challenges, and the fast pace of multifamily and industrial rent growth has subsided.
  • A significant 88% of Q3 survey participants expressed optimism that asset values will be higher (57%) or the same (31%) one year from now, indicating some semblance of expected stability. 76% of Q3 survey participants believe asset values are slightly lower (50%) or about the same (26%) today compared to a year ago.
  • The real estate capital markets landscape remains challenging. However, 71% of respondents believe the availability of equity capital will improve in one year, while 60% said the availability of debt capital will improve in one year. 40% of participants said the availability of debt capital would be the same or worse in one year, an increase from 36% who voiced the same expectation in Q2 of this year.

Data for the Q3 survey was gathered by Chicago-based Ferguson Partners on The Roundtable’s behalf in July. Read the full Q3 report.

The Roundtable Files Amicus Brief in Sirius Solutions v. Commissioner

Posted on by Abigail Grenadier

On August 19, The Roundtable submitted an amicus brief to the Fifth Circuit Court of Appeals in Sirius Solutions v. Commissioner, a pivotal case that could redefine the tax obligations of limited partners under the self-employment tax in the Self-Employed Contributions Act (SECA). (Amicus Brief)

Why It Matters

  • There are more than 441,000 limited partnerships in the U.S., with over 10 million partners. Nearly half of these limited partnerships are real estate partnerships.
  • If the IRS position prevails, it could result in widespread tax increases on real estate limited partners who provide some services to the business and effectively raise the tax burden on real estate investments.
  • The IRS’s position would requires limited partners to be “passive investors” to qualify for the exemption from the 3.8% SECA tax under Section 1402(a)(13).

Roundtable Amicus Brief

  • The Roundtable’s amicus brief argues that the IRS’s interpretation is flawed, pointing to decades of state law that allows limited partners to provide services and still retain their status.
  • The brief emphasizes that pre-1977 state court decisions and the IRS’s own 1994 proposed regulations contradict the government’s position that limited partners must be passive to avoid SECA taxes.
  • The Tax Court’s imposition of the passive investor test is found nowhere in the statute and rests on a fundamental misunderstanding of state laws that Roundtable members and others have relied on for decades.  
  • Ignoring an established body of partnership law, the IRS is relying on a recent Tax Court decision, Soroban, that imposes a judge-made test requiring a limited partner to be a “passive investor.” The Roundtable believes this fundamental error should be reversed. 

What’s Next

  • The Fifth Circuit’s ruling in Sirius will set a precedent for future SECA tax cases, with significant consequences for real estate and other industries that use limited partnerships for business purposes.
  • A successful outcome in the Sirius case could reduce the likelihood that the government moves forward with formal tax guidance that expands the reach of SECA taxes.    

The Roundtable remains committed to protecting entrepreneurs’ ability to flexibly organize in partnerships and other pass-through entities that promote capital formation, risk-taking, and economic growth, and it will remain engaged as the SECA dispute moves forward.   

New Study on Rent Control Shows Proposals Impede Housing Production

Posted on by Abigail Grenadier

In July, the White House announced a nationwide rent control plan that aims to cap rent increases at 5%. Owners of rental housing would only be able to take advantage of depreciation write-offs if they limit annual rent increases to no more than 5%, effectively trading depreciation deductions for price controls.

Economists on Rent Control Proposals

  • The White House’s recent rent control plan, while intended to make renting more affordable, would impede the production of much-needed housing, particularly for affordable units. (RW, July 19)
  • Last week, The Roundtable and a coalition of national real estate associations, wrote to President Biden expressing strong opposition to the proposed rent control measures. (RW, July 26)
  • Economists across the political spectrum widely agree that rent control is a discredited policy. Jason Furman, the former Obama administration’s top White House economist, asserts that rent control would worsen housing supply issues instead of solving them.
  • A recent study by the University of Chicago surveyed 45 economists from elite institutions, revealing near-universal agreement that national rent control measures would do little to aid Americans and would ultimately worsen the housing shortage. (NMHC, July 30)

Survey Findings:

  • No economist agreed rent control would substantially reduce income inequality.
  • 2% of economists surveyed agreed that a national rent cap would substantially improve the lives of middle-income Americans over the next 10 years.
  • 62% of the economists agreed or strongly agreed that the Administration’s rent cap proposal would substantially reduce the amount of available apartments over the next 10 years, compared to 7% who disagreed.

The Roundtable will continue to encourage policymakers to enact measures that will expand the nation’s housing infrastructure, develop more affordable units and reduce the costs of housing. 

Fed Holds Rates Steady: Implications for Commercial Real Estate

Posted on by Abigail Grenadier

The Federal Reserve chose to maintain current interest rates at the same level since last July, despite calls from economists and policymakers to implement a cut. (AP News, July 31 | Axios, July 31)

Fed’s Decision

  • Fed chair Jerome Powell emphasized the need for data-driven decisions, indicating that future rate adjustments will hinge on economic indicators. (Washington Post, July 31)
  • During the June meeting, Fed officials released their Summary of Economic Projections report, which showed that policymakers penciled in just one rate cut this year, down from the three initially estimated at the start of the year. (RW, June 14)
  • After the decision, Powell said, “a reduction in our policy rate could be on the table as soon as the next meeting in September.” (Barrons, Aug.1)
  • In June, Senators Elizabeth Warren (D-MA), Jacky Rosen (D-NV), and John Hickenlooper (D-CO) wrote to Powell, urging the Fed to cut the federal funds interest rates from a two-decade-high of 5.5 percent, citing that high interest rates are increasing the costs of housing and insurance, and exacerbating the housing supply crisis. (Letter)
  • In their letter on housing prices, they emphasized that “The country is already facing a severe housing shortage, and the Fed’s refusal to bring down interest rates is exacerbating this shortage and driving higher inflation rates…Lower mortgage rates would encourage more people to sell their homes, which would in turn increase housing supply, decrease prices, ease the costs of renting, and ultimately increase homeownership.”

CRE Markets

RER board member Owen Thomas (BXP)
  • With interest rates unchanged at a 23-year high, the commercial real estate sector faces significant challenges, particularly in financing and investment, as higher rates increase borrowing costs and reduce demand for development.
  • Higher interest rates and the pandemic-induced shift to remote work have left a lasting impact on office demand, prompting landlords to rethink space utilization.
  • In a recent interview with Bloomberg Television, RER board member Owen Thomas (BXP) discussed the transformation of the office market and the need for innovation and adaptability in the face of changing tenant needs and market conditions. (Watch interview)

The Fed’s next meeting is scheduled for September 17-18, 2024.