Federal Reserve Chairman Jerome Powell testified this week before congressional committees on the state of the economy, identifying commercial real estate as an area the central bank is “very focused on” as the office sector faces significant pressures from declining demand and remote work issues. 

Banks & CRE 

• During Powell’s appearances before the House Financial Services Committee on Wednesday and the Senate Banking, Housing, and Urban Affairs Committee on Thursday, policymakers noted in their Q&A that an estimated $1.5 trillion of CRE loans will mature in the next three years. Powell responded that the Fed is applying a “supervisory toolkit” to banks it has identified with high concentrations of commercial real estate loans.

• During the Senate hearing, committee member Bob Menendez (D-NJ) said he was concerned CRE mortgages could be “a ticking time bomb” for many banks as office property values decline and interest rates increase. Powell noted, “We're being pretty proactive about reaching out to these institutions and trying to help them get through these significant issues.” Click on video clip above to watch the Menendez-Powell exchange or scroll to :31:33 in the full Senate hearing.
  
  
• In his opening remarks, House Financial Services Committee Chairman Patrick McHenry (R-NC) stated, “Now we are told these (bank) runs represent a systemic threat to the stability of our financial system. Add in the commercial real estate exposure facing financial institutions and it becomes very easy to understand the mounting anxiety of consumers and job creators. I share in that anxiety.” (Scroll to 1:44 in the House hearing)

• McHenry, above, also warned, "... a massive increase in capital standards for medium and large institutions... would limit banks’ ability to lend money, exacerbating the looming credit crunch, and starving families and small businesses of the capital they need.”  (The Roundtable wrote to federal regulators on March 17 about the importance of not engaging in pro-cyclical policies such as requiring financial institutions to increase capital.)
  
  
• Rep. Young Kim (R-CA) asked Powell during the House hearing if the Fed is thinking about policies that could provide time for refinancing commercial real estate loans—a position strongly advocated by The Real Estate Roundtable. Powell answered, “There's a playbook for working your way out of these loans. And it's particularly in the office sector where work from home is still a material factor in some areas.” (Scroll to 1:26:04 in the House hearing for Kim-Powell exchange)
  
  
• On June 16, a statement from the Financial Stability Oversight Council—which includes the heads of the Federal Reserve, the Treasury Department, and the Securities and Exchange Commission—addressed the results of their recent meeting where potential risks in the CRE market were on the agenda. The group commented, “Regulators are taking steps to emphasize risk management and examine exposures to CRE loans at their regulated institutions.”  

Roundtable Response 

• On June 21, CNBC’s Last Call interviewed Roundtable Board Member Scott Rechler, above right, (Chief Executive Officer and Chairman, RXR) on how a rise in office vacancies could have sweeping implications for the economy. Roundtable Board Member Barry Sternlicht (Chairman and CEO, Starwood Capital Group) joined CNBC’s Squawk Box on June 22 for a discussion about the Fed’s inflation fight and commercial real estate.

• The dropping value of various investments, including offices that provide crucial property taxes to fund municipalities, were the focus of a June 20 Wall Street Journal report “Wall Street Sours on America’s Downtowns.” 
  
  
• Real Estate Roundtable President and CEO Jeffrey DeBoer recently remarked on The Roundtable’s Q2 Sentiment Index findings and the role federal regulators can play as CRE faces these significant market developments. “Federal financial institution regulators must act quickly to provide greater supervisory flexibility—as they did in 2009, 2020, and 2022—to allow lenders and borrowers to responsibly restructure the large amount of maturing commercial real estate loans,” DeBoer said. (Roundtable Weekly, June 9)
  

“Businesses and individuals need more time to transition their space needs to the post-pandemic economy. Greater certainty in demand will allow commercial real estate markets, particularly the office sector, to stabilize and revert to its dominant position as the source for local budget revenue. In addition to regulatory flexibility, positive public and private action to encourage in-person, return-to-work policies is needed, where appropriate. As some buildings will need to be reimagined entirely, policy reforms are needed to encourage those buildings to convert to other uses such as housing,” DeBoer added.

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House Ways and Means Committee members Bill Pascrell Jr. (D-NJ) and Vern Buchanan (R-FL) this week reintroduced the Fair Accounting for Condominium Construction Act (H.R. 4280) to correct current condominium tax accounting rules that hamper construction financing.

 Discriminatory Tax 

• Current condo tax accounting rules require multifamily developers of condominium buildings to recognize income and pay tax on their expected profit as construction is ongoing. This “percentage-of-completion method” requires payment on pre-sale transactions well before a buyer closes and pays for a transaction.
  
  
• Homebuilders of single-family homes, townhouses and row houses are not subject to this tax accounting rule restriction, which unfairly accelerates federal income tax liability for new condominium construction.
  
  
• The Buchanan-Pascrell legislation would correct the discriminatory tax by providing condominium developers an exclusion from the percentage-of-completion tax method. 

Roundtable Support for Change 

• Real Estate Roundtable President and CEO Jeffrey DeBoer said, “Developers seeking construction loans face severe headwinds in today’s economy. Our tax accounting rules should not create additional barriers to the financing of new housing construction. Unfortunately, a quirk in the way that federal tax law works accelerates income from the pre-sale of condominium units and prevents developers from using their own revenue to finance condo construction.”
  
  
• “This tax aberration is unique to vertical condo development and does not apply to the construction of townhouses, row houses, or buildings with four or fewer units,” DeBoer continued. "The Buchanan-Pascrell bill would fix this issue and allow taxpayers to put their own capital to work expanding the supply and availability of housing.”
  
  
• The Roundtable is a long-standing advocate to correct this discriminatory rule as developers have struggled to access their own income (condo pre-sales) to self-finance new construction.
  
  
• On August 21, 2019 The Roundtable wrote to former Treasury Secretary Steven Mnuchin requesting regulatory relief from existing tax accounting rules that unfairly accelerate federal income tax liability for new condominium construction. (Roundtable letter)
  
  
• The Roundtable’s letter detailed how the completed contract method of accounting— rather than the percentage- of-completion method—would more accurately fit the economics of condominium construction. (Tax Notes, August 23, 2019)
  
  
• In 2008, the IRS and Treasury released proposed regulations (REG-120844-07) under section 460 that would treat individual condo units as townhouses or row houses. 

The Roundtable’s Tax Policy Advisory Committee (TPAC) continues to advocate for the passage of corrective legislation that would level the playing field for accounting rules impacting condominium construction. 

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A new Real Estate Roundtable report—Commercial Real Estate By The Numbers: 2023— illustrates CRE’s significant contributions to the economy, statistics on climate and the industry, and the important role of tax policy in CRE investment. (18-page report) 

Statistical CRE Reference 

• Roundtable President and CEO Jeffrey DeBoer said, “Our compilation of publicly available data shows the vital role commercial real estate plays as a driving force in the American economy. Whether it is real estate’s positive contributions to GDP, the workforce, local tax bases, or Americans' retirement savings, this report serves as a valuable resource in understanding the important role of CRE in our society.”
  
  
• DeBoer added, “Our report also presents data on CRE’s climate footprint, information on the economic impact of real estate tax proposals, facts on the affordable housing shortage, and statistics on the physical footprint of U.S. commercial real estate. We intend for this reference to be a ‘living document’ that can be updated when new government and private sector statistics become available.” 

Public Data 

• The report’s findings, footnoted throughout the publication, include:
  
  
• The total value of America’s commercial real estate is estimated between $18- $22 trillion.  The value of America’s commercial real estate is nearly 39%-47% of the market capitalization of all U.S. publicly traded companies. The U.S. multifamily housing sector alone is worth $3.8 trillion—worth more than the value of Microsoft, Google, and Amazon combined.
  
  
• The combined economic contributions of new commercial building development and the operations of existing commercial buildings contributed an estimated $2.3T to GDP in 2022.
  
  
• If U.S. commercial real estate was a country it would have the eighth-largest economy in the world as measured by GDP.
  
  
• The commercial real estate industry supports 15.1 million jobs in the U.S.
  
  
• CRE pays $559B in property taxes to local governments annually—comprising 72% of all local tax revenue. Commercial real estate owners pay property taxes that are 1.7X more, on average, than the tax rates paid by homeowners.
  
  
• Pension funds, educational endowments, and charitable foundations have invested $900B in real estate. 87% and 73% of public and private sector pension funds, respectively, contain real estate investments.
  
  
• The commercial and residential sectors represent 13% of total U.S. greenhouse gas emissions. This figure does not include “Scope 3” supply chain emissions beyond the direct control of CRE owners and developers—such as from tenant operations in leased spaces, and carbon embodied in the manufacturing process of cement, steel and other construction materials. (See March 17 Roundtable Weekly, “Reports Confirm Challenges in Scope 3 Reporting”) 

Download the 18-page pdf of The Roundtable’s Commercial Real Estate By The Numbers: 2023. 

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