The House Ways and Means Committee unveiled a tax package today that includes measures impacting commercial real estate, and announced a legislative mark-up on June 13. (Politico and Tax Notes, June 9)

Committee Chairman Jason Smith (R-MO), above, Ways and Means Member Brad Schneider (D-IL), and committee staff will speak on June 14 during The Roundtable’s all-member Annual Meeting in Washington, DC at the Tax Policy Advisory Committee (TPAC) meeting.

GOP Proposal & CRE

• Chairman Smith released a statement today about the package, which includes the following bills scheduled for markup next week:
  
  
  • H.R. 3936, Tax Cuts for Working Families Act summary
    
    
  • H.R. 3937, Small Business Jobs Act summary
    
    
  • H.R. 3938, Build It in America Act  summary
    
    
• The proposals relevant to real estate include:
  
  
  • Business interest deduction. The Build It in America Act (H.R. 3938) would provide a 4-year extension (through 2025) of certain, taxpayer-favorable business interest deductibility rules that applied from 2018-2021. The proposal would allow more real estate businesses to operate under the general rules of section 163(j) and its preferable cost recovery schedules.
    
    
  • Bonus depreciation.  H.R. 3938 also includes a 3-year extension (through 2025) of 100% bonus depreciation for qualifying capital investments, including equipment, machinery, and interior improvements to nonresidential property (“qualified improvement property”).  Bonus depreciation is 80% in 2023 and gradually phasing down. 
    
    
  • Opportunity Zones. The Small Business Jobs Act (H.R. 3937) would establish special, favorable rules for investments in rural opportunity zones. It would also create a new and detailed information-reporting regime for all opportunity funds.

• The GOP package (H.R. 3938) also contains proposals that would repeal some clean energy provisions from the Inflation Reduction Act (H.R. 5376), including electric vehicle tax credits, clean energy production, and investment tax credits.

Prospects for Passage

• The Ways and Means proposal may pass through committee—and possibly pass the Republican-majority House—but such a package faces steep obstacles in the Democrat-controlled Senate and with the White House.   

The proposals are a good indication of the priorities that House Republicans will bring to any bipartisan economic policy negotiations as the year unfolds. 

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Real Estate Roundtable members will meet next week to discuss policy issues, market conditions, and the significant economic pressures facing the office sector. In an interview with CNBC’s Squawk Box, Treasury Secretary Janet Yellen acknowledged the increasing stress on the office market this week, including the potential for further problems with banks with exposure to weakening CRE valuations.

Stress on Office Sector

• On June 7, Treasury Secretary Yellen said, “Well, I do think that there will be issues with respect to commercial real estate. Certainly, the demand for office space since we’ve seen such a big change in attitudes and behavior toward remote work has changed and especially in an environment of higher interest rates.” She added that banking supervisors continue to closely monitor “a range of banks to make sure that they are adequately prepared to deal with it.” (CNBC’s Squawk Box and MarketWatch, June 7)
  
  
• Roundtable Member David O’Reilly (CEO, Howard Hughes Corporation) was interviewed by CNBC’s Power Lunch on June 7 about the distress facing sectors of CRE, noting how capital markets are constraining borrowers from financing real estate projects.
  
  
• The Roundtable continues to emphasize the need for federal regulators to allow more flexibility for lenders and borrowers to restructure a wave of $1.5 trillion in CRE loans maturing in the next three years. Real Estate Roundtable Chair John Fish (Chairman and CEO, SUFFOLK) summarized the industry’s views in a May 9 MarketWatch article.

Policymakers at Next Week’s Roundtable Meeting

• These compelling industry issues, among others, will be the focus of The Roundtable’s Annual Meeting on June 13-14 in Washington, DC.

• Roundtable members are encouraged to attend all sessions, which will feature policy discussions with:
  • Sen. Kryrsten Sineman (I-AZ)
  • Sen. Bill Hagerty (R-TN)
  • Thomas Barthold, Chief of Staff, Joint Committee on Tax
  • Mark Zandi, Chief Economist, Moody’s Analytics
    
    
• Sen. Hagerty is a featured guest at the June 13 joint Real Estate Capital Policy Advisory Committee (RECPAC) and Research Committee meeting, which will also include a real estate capital market panel with CRE leaders and a presentation by CBRE.
  
  
• The June 14 TPAC meeting will feature key House tax policy leaders (see Tax story above), tax counsels from the House Ways and Means and Senate Finance Committees; and a panel on “Debt Workouts / Tax Incentives for Property Repurposing, Community Revitalization, and Housing.”
  
  
• The Sustainability Policy Advisory Committee (SPAC) on June 14 will include David Crane—confirmed by the Senate on June 7 as Under Secretary for Infrastructure at the U.S. Department of Energy—and Alejandra Nunez, Deputy Assistant Administrator, Office of Air and Radiation.
  
  
• Also on June 14, a joint session of The Roundtable’s Homeland Security Task Force and Risk Management Working Group will include a discussion with Rep. Andrew Garbarino (R-NY), chairman of the House Homeland Security Committee’s Subcommittee on Cybersecurity and Infrastructure Protection. Additionally, officials from the Department of Homeland Security will speak on efforts to enhance information sharing with the CRE industry.

The Roundtable will conclude its 2023 fiscal year this month and will release its annual report to the membership in early July.

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Stress in Office Sector Threatens Cities, Jobs

(WASHINGTON, D.C.) — The Real Estate Roundtable’s Q2 2023 Sentiment Index dropped to an overall score of 41, three points lower than the previous quarter. Commercial real estate executives noted how remote work, high interest rates, operating cost escalations, and difficult price discovery has led to significant uncertainty in the post-pandemic office sector and reduced liquidity for nearly all commercial real estate asset classes. (See entire Q2 report)

Industry leaders also reported relatively healthy Q2 demand for industrial, multifamily, and strip center retail assets. Solid rental growth in multifamily, senior, student, and assisted living sectors was another positive trend reported by sentiment survey participants.

Roundtable President and CEO Jeffrey DeBoer said, “The commercial real estate market is at the center of a major transition. Maturing office loans in particular face a new environment of higher operating and financing costs, much tighter bank lending requirements, and uncertainty in business space needs.”

“However, while there is relatively good current news from non-office CRE sectors, the combination of reduced liquidity, increased costs, and post-pandemic business uncertainty threatens to spread to these other sectors as well—and potentially cause great damage to communities, jobs, and the economy. 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.”

“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.

The Roundtable’s Sentiment Index—a measure of senior executives’ confidence and expectations about the commercial real estate market environment—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 Q2 Sentiment Index topline findings include:

• The Q2 2023 Real Estate Roundtable Sentiment Index registered an overall score of 41, a decrease of three points from the previous quarter. The Current Index registered 27, a four-point decrease from Q1 2023, and the Future Index posted a score of 55 points, a decrease of three points from the previous quarter.
  
  
• Participants noted the continued disparity between asset classes as well as within them. On one hand, rental demand continues to hold up in the multifamily and industrial sectors. Hotel and retail markets are also largely performing well and niche asset classes continue to generate interest and attract capital. On the other hand, while Class A offices remain desirable, the rest of the office industry is struggling to reposition itself.
  
  
• Similar to last quarter, 93% of survey participants believe that asset values have repriced to the downside vs. last year. However, limited trades in 2023 are making it difficult to gauge the market. Survey respondents continue to observe wide disparities in bid-ask spreads.
  
  
• The availability of capital, both debt and equity, continues to be a pressing topic. Regarding the availability of debt and equity, 93% and 75% of survey participants, respectively, believe that today’s conditions are more difficult than a year ago. While the cost of capital has universally increased, platform scale and relationships largely determine access and ability to secure debt financing.

Looking to the future, 48% of survey participants stated general market conditions will be more favorable a year from now—although only 20 percent of respondents believe asset values will be more favorable in one year.

Data for the Q2 survey was gathered in April by Chicago-based Ferguson Partners on The Roundtable’s behalf. See the full Q2 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.

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