News Type: Roundtable Weekly

Ray Torto, Pioneer of Real Estate Research and Former Roundtable Research Committee Chairman

Posted on by Abigail Grenadier
Ray Torto

Real estate industry research pioneer Ray Torto passed on April 7 after an accomplished professional career spanning roles in academia, government, and the private sector that included service as chairman of The Real Estate Roundtable’s Research Committee. (Torto obituary)

  • Roundtable President and CEO Jeffrey DeBoer said, “Ray was well-known throughout the industry for decades as an astute leader who offered original insights about the important role of data in real estate markets and its application to national policy. The Roundtable will always remember his valuable guidance leading our Research Committee, and we will miss him.”
  • In 1982, Ray partnered with Bill Wheaton of MIT to start Torto-Wheaton Research (TWR, now CBRE Econometric Advisors). TWR was among the first to bring data analysis and econometrics to the real estate industry, paving the way for increased institutional capital investment. See an appreciation by current Roundtable Research Committee Chair Spencer Levy, CBRE Global Client Strategist and Senior Economic Advisor.

After Ray retired from CBRE, he returned to the classroom to become a lecturer at the Harvard Graduate School of Design. Reflecting on his career in an interview in 2014, Ray said that his favorite part of the real estate industry was the many people he worked with over the years. An additional interview from 2017 is available from The Counselors of Real Estate (CRE).

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Fed Cautions About Office Sector as Vacancies Climb and Loan Modifications Surge

Posted on by Abigail Grenadier
La Salle Street, Chicago, Illinois, USA

Recent reports show U.S. office vacancies climbed to nearly 20% during Q1 2024 after loan modifications more than doubled last year compared to 2023. Meanwhile, Federal Reserve Board Vice Chair for Supervision Michael Barr cautioned this week that federal regulators are “looking carefully at banks with heavy concentrations in office commercial real estate where there are significant, expected price declines.” (Moody’s Analytics, April 2 | CRED iQ, March 28 | (C-SPAN video, April 3)

Office Sector

  • Preliminary data from Moody’s Analytics reinforces the long-term, negative ramifications of hybrid work models. The Q1 2024 office vacancy rate set a new record at 19.8%, up from 19.6% in the prior quarter, and beating two historic peaks of 19.3% in 1986 and 1991. (Bloomberg, April 2 | Quartz, April 3 | CRE Daily, April 4)
  • “The office stress isn’t quite done yet,” said Thomas LaSalvia, Moody’s head of commercial real estate economics and an author of the report. He added, “This is part of a longer-term evolution where we are seeing obsolete buildings in obsolete neighborhoods.” (Bloomberg, April 2)
  • Brookfield’s Feb. 14 report, “The Misunderstood U.S. Office Market,” emphasizes that high vacancy rates are due to an excess of dated, functionally obsolete office buildings and an undersupply of offices that satisfy tenants’ changing needs.
  • A Roundtable-led coalition of 16 national real estate organizations urged the expansion of a 20 percent tax credit for qualified property conversion expenditures in an Oct. 12, 2022 letter to policymakers. The recommended enhancements included expanding the category of properties eligible for the credit to various types of commercial buildings such as shopping centers and hotels. (Roundtable Weekly, Nov. 11, 2022)

Fed Oversight & CRE Sectors

Federal Reserve Board Vice Chair for Supervision Michael Barr
  • The Fed’s top market supervisor told the National Community Reinvestment Coalition on April 3 that CRE refinancing deals will “take some time to work through” as the Fed closely monitors office sector conditions. (C-Span | BGov, April 3 | Roundtable Weekly, March 8)
  • Barr said, “This is the kind of thing where it is likely a slow-moving train as the financial sector and commercial real estate market move forward. Over the next two to three years, we are going to see how properties deal with refinancing in a higher interest rate environment. Occupancy rates have lowered because of work-from-home, so for some categories of office CRE they are more exposed to risk.”
Kathleen McCarthy
  • Kathleen McCarthy, global co-head of Blackstone Real Estate and chair-elect of The Real Estate Roundtable, commented to CNBC’s “Closing Bell Overtime” on April 3 that the office sector is different from other CRE investment areas that have performed well. “We do feel like there’s a bottoming happening. There’s no V-shaped recovery … but we do see the cost of capital coming down, we’re seeing more liquidity in markets, and perhaps more importantly for the long term, we’re seeing a sharp decline in new supply,” she said.
  • Barron’s recognized McCarthy this week as one of the 100 Most Influential Woman in Finance. She commented on her upcoming role as Roundtable Chair: “To bring together my interest in policy and have a position to help our whole industry in Washington is really exciting.” (Barron’s, April 4)

Commercial and multifamily market conditions will be discussed during RER’s April 15-16 Spring Meeting in Washington DC (Roundtable-level members only) with guests including White House Council of Economic Advisers Chairman Jared Bernstein,  House Democratic Leader Hakeem Jeffries (D-NY), and House Financial Services Member French Hill (R-AK). 

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Biden Administration Outlines Options to Cut Building Emissions

Posted on by Abigail Grenadier
Department of Energy's “Decarbonizing the U.S. Economy by 2050: A National Blueprint for the Buildings Sector”

Reducing greenhouse gas (GHG) emissions from buildings is the focus of a “national strategy document” released this week by the Biden administration. The Department of Energy (DOE) “blueprint” has no regulatory impact on private sector assets, but it articulates aspirational goals to reduce building-related emissions 65% by 2035 and 90% by 2050. (Department of Energy (DOE) news release, April 2 and Politico EnergyWire, April 3)

Four Pathways

“Decarbonizing the U.S. Economy by 2050: A National Blueprint for the Buildings Sector” outlines four action categories:

  1. Increase Building Energy Efficiency
    DOE acknowledges the value of federal tools that help building owners and jurisdictions benchmark, track, and improve efficiency (e.g., ENERGY STAR Portfolio Manager, Portfolio Manager Data Explorer)—all supported by The Real Estate Roundtable. (Roundtable Weekly, March 22)

  2. Reduce On-site Emissions
    DOE notes that building electrification with heat pumps is a primary strategy for reducing on-site, fossil-fuel fired building emissions. DOE’s goal also includes reducing on-site emissions from fluorinated gas (including equipment refrigerant leakage), foam-blowing agents, and fire suppressants. (DOE document pages 26-28)

  3. Transform the “Grid Edge”
    Federal efforts could help buildings better connect with the power grid through storage methods, on-site renewable generation, and EV charging. (DOE document pages 28-30)

  4. Minimize Embodied Life Cycle Emissions
    The document lists strategies to reduce embodied emissions, including repurposing existing buildings, new construction methods, and reducing emissions intensity of construction materials. (DOE document pages 31-32)

Noteworthy Recommendations

Los Angeles
  • The Biden administration framework acknowledges the need for CRE owners to access whole-building utility data. Metrics on building energy usage can be used to complete requirements for benchmarking and building performance disclosures. State regulators and local governments could support emission reduction goals by requiring utility companies to provide customers with access to tenant-meter data. (DOE document page 52)
  • The blueprint recognizes the need for government-sponsored low-interest loans and tax credits to support clean power projects at buildings. (DOE document page 40 and Table 5, page 43)
  • The blueprint also encourages federal-level resources to help city and state governments implement building performance standards (BPS). The Roundtable supports non-binding federal guidelines that bring order and national consistency to the conflicting patchwork of local BPS mandates. (DOE document pages 24-25 and 50-51 | Roundtable Weekly, Sept. 15)

DOE plans to vet these recommendations for federal actions to reduce building emissions in the future with a wide range of stakeholders, track progress on their implementation, and amend the document as needed.

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Fed Signals Significant Changes Ahead for Basel III Endgame Proposal

Posted on by Abigail Grenadier

Federal Reserve Board Vice Chair for Supervision Michael Barr said in a recent speech that he is working with other regulators on “broad and material changes” to a sweeping banking proposal known as the “Basel III Endgame.” The proposal, opposed by The Roundtable, would hike capital requirements for banks with at least $100 billion in assets by approximately 19 percent. (Bloomberg, March 22, 2024 and Congressional Research Service, Nov. 30, 2023)

Fed Statements

  • Barr said during his March 22 University of Michigan remarks, “I am working very closely with (Fed) Chair (Jerome) Powell and other members of our Federal Reserve board to try to reach a broad consensus” on revisions to the proposal.
  • The Fed, Office of the Comptroller of the Currency (OCC), and Federal Deposit Insurance Corporation (FDIC) approved the 1,100-page proposed rulemaking last July by an unusually close 4-2 vote.  See Interagency Overview of the Notice of Proposed Rulemaking for Amendments to the Regulatory Capital Rule, July 27. (Roundtable Weekly, July 28, 2023)
  • Powell voted for the original rulemaking proposal but noted a significant tone of caution. Statements by Fed Governors Michelle W. Bowman and Christopher J. Waller bolstered their opposition to the proposal.

Basel III and CRE

The Federal Reserve Building in Washington DC
  • The Real Estate Roundtable urged federal regulators to withdraw the proposed rulemaking in a Jan. 12 letter that raised industry concerns about its negative impact. The comments outlined how the proposal would decrease real estate credit availability, increase commercial and multifamily properties’ borrowing costs, and negatively impact the U.S. economy.
  • Real Estate Roundtable President and CEO Jeffrey DeBoer also stated in a March 2023 comment letter to Barr and other key regulators, “At this critical time, it is important that the agencies do not engage in pro-cyclical policies such as requiring financial institutions to increase capital and liquidity levels to reflect current mark to market models. These policies would have the unintended consequence of further diminishing liquidity and creating additional downward pressure on asset values.”
  • The Mortgage Bankers Association (MBA) reported last month that 20 percent ($929 billion) of the $4.7 trillion of outstanding commercial mortgages held by lenders and investors will mature in 2024. That represents a 28 percent increase from the $729 billion that matured in 2023, according to MBA’s Commercial Real Estate Survey of Loan Maturity Volumes.

The Roundtable’s Real Estate Capital Policy Advisory Committee (RECPAC) will respond to any further changes to the Basel III proposal or other federal policies impacting capital and credit issues.

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Office Vacancy Rates Rise as Remote Work Arrangements Linger

Posted on by Abigail Grenadier

Recent media reports show the U.S. commercial real estate office market continues to adapt to pressures from remote work, increased vacancy rates, and difficulties with price discovery.

Building Value and Rent

  • On March 26, the Wall Street Journal cited CoStar data showing that average U.S. asking office rents rose despite lower office demand and more empty space.
  • David Bitner, the head of global research for Newmark told the Journal that if rents were cut to fill empty space, it “would significantly reduce the appraised values of their buildings. This in turn could lead to a covenant default on their loans or at minimum would make it harder for them to refinance.” 
  • The Journal noted that the value of office buildings will reset after owners and lenders manage to restructure mortgages or sell distressed properties. Another major influence on office rental rates is the adoption of new hybrid workplace arrangements by businesses that require less space. (Article: “The Office Market Is in Turmoil. So Why Are Rents More Expensive?”)
  • According to an MSCI index, the average value of office buildings in central business districts fell nearly 41% from July 2022 to the beginning of this year. (Wall Street Journal, March 26)
  • The New York Times reported on March 14 about the options facing municipal officials as nearly $3 trillion of outstanding commercial real estate debt is coming due by 2028 while tax revenues from commercial properties drop. The consequences of remote work and a post-pandemic shift in the use of the built environment are leading city officials to assess lower tax revenue assessments and consider policy changes to incentivize commercial-to-residential conversions, cutbacks to local services, or raise taxes.

Vacancy Rates Increase

  • Commercial Edge’s National Office Report reported on March 22 that there was a noticeable adjustment in demand for office spaces in the first two months of this year, partly due to the ongoing shift towards remote and hybrid work models. These challenges were exacerbated by higher interest rates and ongoing economic uncertainties that put pressure on upcoming maturing loans.
  • The report also shows that the national office vacancy rate is 17.9 percent, up 140 basis points year-over-year. It also stated that San Francisco’s vacancy rate climbed 480 basis points year-over-year to 23.4 percent.

Government Remote Work

Real Estate Roundtable President and CEO Jeffrey DeBoer
Real Estate Roundtable President and CEO Jeffrey DeBoer spoke at the PREA conference last week.
  • For public buildings, the influence of return-to-office trends on federal employees was reflected in the $1.2 trillion government funding package recently signed by President Biden. (Reuters, March 23 | Roundtable Weekly, March 22)
  • The fiscal 2024 measure included six new requirements for agencies to report data about federal telework, return-to-office trends, and use of federal office space. (Federal News Network, March 21)
  • Roundtable President and CEO Jeffrey DeBoer has consistently emphasized that federal policies promoting remote work undermine the health of cities, local tax bases, and small businesses. The Real Estate Roundtable has urged President Biden and national policymakers to end government policies that encourage remote working arrangements for federal employees. (RER letter to President Biden, Dec. 2022; RER letter to Senate, April 2023)

Mr DeBoer, speaking last week in Nashville at the Pension Real Estate Association (PREA) conference, noted that office vacancy rates are a bit misleading given the significant number of aging and obsolete building that do not functionally meet modern tenant demands. The Roundtable continues to urge incentives to encourage the conversion of these buildings to much-needed housing.  

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Policymakers Aim to Pass $1.2 Trillion Budget, Avoid Shutdown

Posted on by Abigail Grenadier

Lawmakers pushed a sprawling $1.2 trillion legislative package through Congress today that would avoid a government shutdown at midnight by funding more than half the government through Sept. 30. After the House passed the funding measure today, the Senate will likely approve the package and send it to President Biden for his signature. (Bloomberg and Forbes, March 22)

Minibus Faces Fiscal Cliff

  • If the Senate debate goes past the midnight “fiscal cliff,” the White House budget office can delay a shutdown order before Monday. Congress is aiming to pass the budget before departing Washington for their two-week Easter break. (Washington Post, March 20 and AP, March 22)
  • The 1,012-page, six-bill “minibus” (H.R. 2882) includes funding for the IRS, Pentagon, Department of Homeland Security, and foreign aid. Five and a half months after FY2024 began on Oct. 1, 2023, the government has operated on temporary funding extensions. (PBS, March 22)
  • The Congressional Budget Office listed a detailed breakdown of this week’s funding bundle on March 21. The other half of the government’s budget was enacted earlier this month under a two-tiered congressional agreement. (NBC News, March 9 and Roundtable Weekly, March 1)

House Republicans

  • Rep. Marjorie Taylor Greene (R-GA) filed a motion (H. Res. 2203) to remove House Speaker Mike Johnson (R-LA), above, from his leadership post in protest over the legislation. Since the motion was filed but not brought up for a vote, no immediate action will be taken. “This is more of a warning than a pink slip,” she said. (Wall Street Journal, March 22)

Speaker Johnson’s House Republican caucus is about to drop to a one-vote majority, as retiring Rep. Mike Gallagher (R-WI) will exit the House as soon as next month. (Politico, March 22)

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White House Recommends Policies to Increase Affordable Housing

Posted on by Abigail Grenadier
2024 Economic Report of the President & Council of Economic Advisers

The White House Council of Economic Advisers released a report yesterday on policies to boost the supply of affordable rental and ownership units—proposals that could form the foundation of a housing push during a second Biden term. (2024 Economic Report of the President and New York Times, March 21)

Zoning Reform, LIHTC

  • The report explains that the federal government could reduce exclusionary zoning via grants and other spending, and directly subsidize affordable unit construction through programs like the low-income housing tax credit (LIHTC). The report adds, “Ultimately, meaningful change will require State and local governments to reevaluate the land-use regulations that reduce the housing supply.”

Addressing Equity

  • The Council’s report addresses how increasing the housing supply could increase access and equity for groups with few financial resources, increase overall wealth, and reduce disparities across groups. (Page 163 of the Annual Report of the Council of Economic Advisers)
  • The report notes that exclusionary zoning policies, such as prohibitions on multifamily homes, are a “subset of local land-use regulations that can constrain the housing supply and thus decrease affordability.”

This week, President Biden also spoke in Las Vegas about his plans to “establish an innovative program to help communities build and renovate housing or convert housing from empty office spaces into housing, empty hotels into housing.” (White House remarks, March 19 and Roundtable Weekly, March 15)

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EPA Releases “NextGen” Criteria for Low-Carbon Buildings

Posted on by Abigail Grenadier
EPA's NextGen Building Label

The Environmental Protection Agency (EPA) released long-awaited final criteria on Tuesday for ENERGY STAR’s voluntary “NextGen” certification to recognize buildings with reduced carbon footprints.

Three Criteria

  • NextGen builds upon ENERGY STAR’s popular “label” for highly efficient buildings. The new label has three criteria that must be independently verified to:

    • Demonstrate Superior Energy Performance
      The building must achieve an ENERGY STAR score of 75 or higher and meet all criteria associated with ENERGY STAR certification.

    • Use Renewable Energy
      At least 30 percent of a building’s total energy used onsite must derive from renewable sources. Market-based measures like power purchase agreements (PPAs) and renewable energy certificates (RECs) can qualify as long as they meet certain quality control criteria (e.g., Green-e certified).

    • Meet a Direct Emissions Target
      The building must meet a GHG intensity target for its property type, which adjusts to account for days of extra heating required in colder climates.

CRE Recognition

Tony Malkin (Chairman, President and Chief Executive Officer, Empire State Realty Trust, Inc.), chair of The Roundtable’s Sustainability Policy Advisory (SPAC) Committee.
  • “NextGen highlights RER’s constructive engagement with decision makers who translate policy to action,” said Tony Malkin, above, (Chairman, President and Chief Executive Officer, Empire State Realty Trust, Inc.), chair of The Roundtable’s Sustainability Policy Advisory (SPAC) Committee.
  • He added, “The NextGen voluntary standard provides specific metrics-based criteria to recognize the very best performers who increase efficiency, reduce emissions, and help expand the nation’s supply of renewable energy. This new framework allows our members to urge cities and states to look to these researched and logical federal standards rather than create their own unduly complicated and punitive mandates.”
  • “Our work with EPA is not done,” Malkin continued. “Our next project with our EPA partners is to recognize inefficient buildings which will never reach ENERGY STAR levels and still take steps to reduce materially energy use in common areas and tenant spaces.”      

Planning Considerations

  • Companies can apply online to EPA for the NextGen label starting in Sept. 2024.
  • EPA’s response to public comments noted the agency will explore “separate recognition” for inefficient buildings that significantly improve energy performance.
  • In February, RER and Nareit urged that EPA’s NextGen label should be considered a critical intermediate step for an asset to show it is “on a path” to meet the Energy Department’s yet-to-be-released, voluntary Zero Emissions Building (ZEB) definition.
  • Building owners may report to investors about assets certified with the NextGen label. Information on green-labeled buildings could be within the scope of disclosure requirements released earlier this month by the U.S. Securities and Exchange Commission (SEC) and passed last year in California. (See RER’s facts sheets on the SEC and California requirements).
  • Court challenges are currently underway against both the SEC and California corporate climate reporting rules. The SEC’s rule has been stayed at least temporarily by a federal appeals court. (POLITICOPro, March 20 and Roundtable Weekly, March 15).

EPA staff overseeing the NextGen program will participate on SPAC’s next Zoom meeting on April 11 to field questions on the new building label.

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Business Coalition Urges Congress to Delay Implementation of Beneficial Ownership Rules

Posted on by Abigail Grenadier

The Real Estate Roundtable joined more than 120 other national business organizations in a letter this week that urged Senate Banking Committee leaders to support a one-year filing delay for new beneficial ownership regulation requirements, which took effect Jan. 1 under the Corporate Transparency Act (CTA). (Coalition letter, March 19)

CTA Delay Bills

  • The CTA impacts more than 32 million existing entities and an additional 5 million newly created entities every year. These companies and other legal entities face increased paperwork, privacy risks, and potentially devastating fines and prison terms. (New York Times, March 4)
  • Companion legislation in the House (H.R. 5119), introduced by Reps. Zach Nunn (R-IA) and Joyce Beatty (D-OH), passed by a vote of 420-1 on December 12, 2023.
  • Initial filings under the CTA began more than two months ago in accordance with the new law, yet fewer than 2 percent of covered entities have submitted their required information to FinCEN. One reason for this low compliance rate is that most business owners are ignorant of the new law. A one-year delay would provide the business community and FinCEN additional time to educate millions of small business owners about the new reporting requirements and its onerous penalties.

Legal Challenge

The U.S. District Court for the Northern District of Alabama
  • This week’s coalition letter also explains that a one-year delay would accommodate the time it will take for a March 1 District court decision, which ruled the CTA regulations as unconstitutional, to work its way through Appellate and Supreme Courts. (Roundtable Weekly, March 8)
  • The ruling earlier this month from the District Court for the Northern District of Alabama was narrow, applying only to National Small Business Association (NSBA) member plaintiffs named in the case. As a result, non-NSBA firms should continue to comply with the CTA pending further developments. (FinCEN’s current requirements) 
  • The March 19 letter to the Senate Banking Committee states, “It is obvious more time is needed. Congress did not enact the CTA in order to turn millions of law-abiding small business owners into felons.”
  • The Roundtable has consistently opposed the beneficial ownership rules. We continue to work with policymakers to identify a balanced position that would inhibit illicit money laundering activity but does not place unnecessary costs and legal burdens on the real estate industry. (Coalition letter, Nov. 2023)

The Roundtable’s Real Estate Capital Advisory Committee (RECPAC) will continue to monitor legislative and legal developments as they impact beneficial ownership requirements.

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White House Focuses on Affordable Housing Policy Proposals

Posted on by Abigail Grenadier

This week President Biden and his top economic advisor previewed a new Housing Innovation Fund and forthcoming proposals to encourage additional housing development. The White House’s focus on affordable housing confirmed it will be a top administration priority as the presidential election season picks up momentum. (Politico, March 14)

Administration’s Housing Remarks

  • Following his March 6 State of the Union address, which addressed new tax incentives for homebuyers and an expansion of the Low-Income Housing Tax Credit (LIHTC), President Biden spoke this week about other aspects of his housing plan. (Roundtable Weekly, March 8 | White House Fact Sheets: Budget, March 11 and Housing, March 7)
  • Biden stated during comments at the National League of Cities, “The federal budget that I’m releasing today has a plan for 2 million more affordable homes, including housing — a housing innovation fund to help communities like yours build housing, renovate housing, and convert empty office space and hotels into housing. The bottom line is we have to build, build, build. That’s how we bring housing costs down for good.” (White House transcript and C-Span video, March 11)

New Initiatives

White House National Economic Advisor Lael Brainard
  • White House National Economic Advisor Lael Brainard, above, also addressed the president’s housing proposals this week. “While tax credits are a proven way to boost supply, it is also vital to support the efforts of governors, county executives, and mayors who are pioneering new approaches that can be scaled. That’s why the president is proposing a new $20 billion Innovation Fund for Housing Expansion to help communities expand their housing supply,” Brainard remarked. (White House transcript, March 12)
  • Brainard also previewed forthcoming administration housing policies. “In the months ahead, we will take further action– from supporting communities in identifying and removing barriers to housing production to promoting the use of federal resources for conversions from office to residential,” Brainard said. (Urban Institute video of speech and interview, March 12)
  • She confirmed that “the centerpiece of the president’s Plan is an expansion of the Low Income Housing Tax Credit (LIHTC) that would produce or preserve 1.2 million affordable units over the next decade.” (HousingWire, March 12)

During a Senate Banking hearing on March 12 on Housing Affordability, Availability, and Other Community Needs, bipartisan support was also expressed for expanding the LIHTC—a policy strongly supported by The Roundtable. (Roundtable Weekly, March 1 and Feb. 16)

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