This week, Real Estate Roundtable leaders emphasized the need for federal regulators to allow more flexibility for lenders and borrowers to restructure commercial real estate loans facing potential default—as the Federal Reserve reported that CRE poses a potential risk to financial stability. (Fed’s Financial Stability Report, May 2023) 

Request for Time 

• Real Estate Roundtable Chair John Fish, above, (Chairman and CEO, SUFFOLK) summarized the industry’s views in a May 9 MarketWatch article, noting that the Fed and regulatory agencies should grant more flexibility for borrowers, including corporate real estate developers, to restructure CRE loans.
  
  
• Fish explained how an impending wave of $1.5 trillion in CRE loans—combined with tight lending conditions and higher, unsustainable interest rates—could stifle construction and development in major cities struggling to bounce back from the pandemic. (MarketWatch article pdf)
  
  
• Post-pandemic CRE values have dropped $453 billion, according to the U.S. National Bureau of Economic Research, especially in cities with high vacancy rates due to ongoing work-from-home policies. Prior to the pandemic, 95% of U.S. offices were occupied. Today, that number is closer to 47%. Collapsing property values are threatening the fiscal health of cities across the nation. (GlobeSt, March 3)
  
  
• Defaults on CRE loans hit a 14-year high in February. Fish emphasized that further economic damage can be avoided if federal regulators grant additional time for markets to stabilize, as they have done in the past. (See regulatory notices from 2009, 2020, and 2022)

• Real Estate Roundtable Chairman Emeritus Bill Rudin, above left, (Co-Chairman and CEO, Rudin Management Co.) discussed similar topics today on CNBC’s Squawk on the Street.
  
  
• “We are going to have to figure out a plan with the federal government to allow banks to have some time to work through some of these loans. It has been done before, so you can restructure, and get more equity into the deal, so that we don’t see this cascade of defaults that we’ve already started seeing happening. There has to be some thought to give banks, owners, and developers time to restructure loans,” Rudin said.

 Fed Reports 

• A pair of recent Federal Reserve surveys show the state of CRE conditions and the potential risks the sector poses to the financial system.  (Enlarged graphic, above | Axios, May 9 and New York Times, May 8)
  
  
• On Monday, the Fed released its bi-annual Financial Stability Report—a survey of market experts, economists, and academics that assesses concerns about the nation's financial and economic health. The report, which includes a special section on commercial real estate-related risks, identifies CRE as the fourth-largest financial stability concern. (Commercial Observer, May 10 and ConnectCRE, May11)
  
  
• Many survey respondents noted CRE as a "possible trigger for systemic risk," listing concerns about higher interest rates, valuations, and shifts in end-user demand. "With CRE valuations remaining elevated … the magnitude of a correction in property values could be sizable and therefore could lead to credit losses by holders of CRE debt," according to the May report. (GlobeSt, May 10)
  
  
• Additionally, the Fed’s April 2023 Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS) addressed changes in the demand, standards and terms for bank loans over the past three months. The survey notes, "Banks reported having tightened all the terms surveyed on all categories of CRE loans."
  
  
• Over the first quarter of this year, the SLOOS shows a majority of banks reported concerns about an uncertain economic outlook, reduced tolerance for risk, worsening of industry-specific problems, and deterioration in their current or expected liquidity position. Mid-sized banks generally reported tightening both price and non-price terms more frequently than the largest banks and other banks, according to the loan officer survey. 

The Roundtable continues to urge federal regulators to issue guidance that would give financial institutions increased flexibility to refinance loans with borrowers and lenders. The various market pressures facing CRE will be discussed during The Roundtable’s all-member Annual Meeting on June 13-14 in Washington. 

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A May 9 meeting between President Joe Biden and the "Big Four" congressional leaders about the debt ceiling and federal spending ended with little progress—yet the policymakers agreed to meet early next week as their respective staffs begin separate budget discussions. (The Hill, May 11 and Axios May 9 | Roundtable Weekly, May 5)

 Talks Begin 

• As the “X date” for defaulting on the national debt looms in June, House Speaker Kevin McCarthy (R-CA), Senate Minority Leader Mitch McConnell (R-KY), Senate Majority Leader Chuck Schumer (D-NY), and House Minority Leader Hakeem Jeffries (D-NY) met to discuss raising the $31.4 trillion U.S. debt limit with President Biden, who described the gathering as "productive." (Associated Press and Reuters, May 10)
  
  
• McCarthy commented he "didn't see any new movement," but added he was willing to discuss spending cutbacks such as clawing back funding for pandemic programs. He added that Biden may also be open to discussing permitting reform for energy infrastructure projects, though the two parties are far apart on the specifics of their legislative proposals. (Washington Post and CNN, May 10 and BGov, May 9)

Energy Infrastructure Priorities 

• POLITICO reports that streamlining the process to permit energy infrastructure projects is “one of the GOP’s biggest debt limit priorities”—while the Biden administration insists that the two must be de-coupled as part of negotiations to raise the nation’s borrowing authority. (POLITICO, May 10 and May 11)
  
  
• Nonetheless, the White House highlighted the need for permitting reform in its energy infrastructure priorities announced yesterday. (Roll Call, May 10)
  
  
• The White House’s priorities also include the accelerated deployment of upgraded transmission lines needed to deliver renewably sourced energy over long distances and bring it to the nation’s urban and suburban population centers—a policy supported by The Real Estate Roundtable. (White House fact sheet, May 10)
  
  
• White House Senior Advisor John Podesta, above, unveiled the administration’s policy priorities yesterday, citing the ongoing progress of clean energy incentives enacted as part of the Bipartisan Infrastructure Law, the CHIPS and Science Act, and the Inflation Reduction Act (IRA).
  
  
• Podesta said, "And thanks to all three bills working together … we’ve sent a powerful signal to the private sector. They’ve already responded with over $220 billion in new clean energy announcements since President Biden took office." ( Podesta remarks, May 10)
  
  
• See The Roundtable’s resources on the IRA:
   
  • “Clean Energy Tax Incentives Relevant to U.S. Real Estate”
    
    
  • Fact Sheet on relevant Clean Energy IRS/Treasury guidance to date
    
    
  • Inflation Reduction Act -- Section 48 Investment Tax Credit “Base” and “Bonus” Rate Amounts Relevant to Commercial and Multifamily Buildings 

Related Energy News 

• The Environmental Protection Agency released a proposed rule today to cut carbon emissions by 90% from the nation’s power plants, drawing a “counterattack from Republicans and coal-state Democrat Sen. Joe Manchin” (D-WV), chairman of the Senate Energy Committee. (New York Times, May 11 and POLITICO, May 11)
  
  
• De-carbonizing the electric grid, and moving utilities away from combusting coal and natural gas, would help building owners and commercial tenants reduce their “indirect” Scope 2 GHG emissions attributable to the electricity they purchase.
  
  
• Meanwhile, the General Services Administration (GSA) announced yesterday it will leverage $3.4 billion it received under the IRA to pursue new public-private partnerships that will improve energy efficiency, reduce onsite emissions, and encourage electrification in federal buildings. (GSA news release, May 10)
  
  
• The GSA will advance the White House’s  Climate Smart Buildings Initiative. It aims to modernize 41 federal facilities in DC and the Midwest through long-term “performance contracts” with private sector companies that guarantee projects will pay for themselves over time through energy savings that accrue from retrofit installations. (BGov, May 10). See GSA's National Deep Energy Retrofit program. 

The Roundtable will focus on the impact of the debit ceiling and federal energy policy priorities during its all-member Annual Meeting on June 13-14 in Washington. 

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