Roundtable Weekly

Commercial Real Estate Outlook Improves Significantly; Roundtable Welcomes Obama Proposals for Boosting Private-Sector Energy Efficiency Investment in Commercial Buildings;  Capital & Credit Policy & Dodd-Frank Reforms also discussed


Commercial Real Estate Outlook Improves Significantly, Although High U.S. Unemployment, Other Risks Remain; White House Launches Initiative to Spur Innovation, Entrepreneurship  

The Real Estate Roundtable’s Q1 2011 “Sentiment Survey” of senior commercial real estate executives, released Feb. 1, shows a decidedly more positive tone regarding the industry’s prospects for recovery, even though actual conditions have improved only modestly, and even though “legitimate headwinds remain.” According to Roundtable Chairman Daniel M. Neidich (Dune Real Estate Partners), risks include “an unacceptable unemployment level, a huge pipeline of maturing commercial mortgages, and large fiscal issues at the state and local levels of government.”  (News release and entire report here)

Some industry sectors are on the mend, he continued, “but until private sector job creation picks up, we are certainly not out of the economic danger zone.”

The nation’s unemployment rate dipped to a two-year low of 9 percent in January, yet the economy added only 36,000 jobs this past month, the U.S. Labor Department reported this morning. Economists had been expecting at least 146,000 new jobs to be created in the past month.

With the overall Sentiment Index hitting 77 points in the latest quarter, The Roundtable’s Sentiment Index showed its most positive results since the survey was launched in early 2008. After tumbling to a low of 33 in Q4 2008, the overall reading rose gradually in subsequent quarters, and has been in the low 70s since this time last year.

“The commercial real estate marketplace is improving, particularly in top-end urban cities,” Roundtable President and CEO Jeffrey DeBoer said at last week’s 2011 State of the Industry Meeting. “But smaller, more mainstream markets continue to face big challenges, and industry leaders in all parts of the country still have serious concerns about job growth.”

Respondents to the Q1 Sentiment Survey indicated equity is more available, while debt is rebuilding from a very low level, and transactions have begun to pick up. Values are also expected to trend upward modestly, although many expect relatively restrained price movement until fundamentals return and operating incomes improve, and that is not expected anytime soon. 

With property values down by an estimated 35-40 percent since 2007 and lenders requiring more equity on commercial mortgages (due to today’s stricter loan-to-value [LTV] ratios), the commercial real estate industry needs a capital infusion of roughly $1 trillion, in order to facilitate the refinancing of maturing commercial real estate debt. 

Among the federal policy actions The Roundtable advocates to help bridge this massive equity gap is to reform the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA), which imposes unfair and discriminatory tax penalties on foreign investment in U.S. commercial real estate.

FIRPTA reform is one of many policy recommendations The Roundtable will make to Congress and the Administration in its forthcoming 2011 Policy Agenda for improving U.S. employment, innovation and global competitiveness.

The Roundtable is encouraged by the new “Startup America” initiative launched by the White House on Monday— a campaign aimed at “promoting high-growth entrepreneurship across the country with new initiatives to help encourage private sector investment in job-creating startups and small firms, accelerate research, and address barriers to success for entrepreneurs and small businesses.”

Robust job creation would lift consumer confidence and spending; lift commercial real estate occupancy levels and operating income; and begin to repair badly eroded property values, which are fundamental to owners’ ability to obtain debt and equity capital.

More than 100 executives from the commercial real estate sector responded to The Roundtable’s Q1 2011 Sentiment Survey. The news release and PDF of the entire report is available on The Roundtable’s website here


Roundtable Welcomes Obama Proposals for Boosting Private-Sector Energy Efficiency Investment in Commercial Buildings  

President Obama yesterday unveiled the “Better Buildings Initiative,” a package of incentives supported by The Real Estate Roundtable that seeks to make U.S. commercial buildings 20 percent more energy efficient by the year 2020 and that complements energy efficiency initiatives the President has already launched for government and residential buildings. (see White House Blog that includes supportive Roundtable statement)

Each of the plan’s five components is designed to break down barriers to investment in energy efficient upgrades by the private sector. Specifically, the White House proposes:

Re-designing the outdated, ineffective Section 179D tax deduction by (a) turning it into a tax credit and (b) tying the amount of the credit to actual energy improvements in specific buildings. By making the incentive more generous, more useable for building owners, and extending it to real estate investment trusts (REITs), the Administration says these changes “could result in a ten-fold increase in commercial retrofit take up, leveraging job-creating investments”

Increasing access to financing for energy retrofits by authorizing a new pilot program at the Department of Energy (DOE) that would guarantee private loans for energy upgrade projects at schools, hospitals and commercial buildings

New competitive grants to states and/or local governments that “streamline” their building codes, regulations and standards in order to “encourage” building upgrades and “attract” private investment. The Roundtable has long urged U.S. policymakers to focus on voluntary incentives for increasing private-sector investment in energy upgrades — vs. mandatory, one-size-fits-all federal regulations that have adverse economic effects on businesses.

Providing more workforce training in areas such as energy auditing and commercial building operations  

  Challenging CEOs, non-profit leaders and school administrators to upgrade their facilities and make investments that will decrease energy use and operating costs, improve productivity and create jobs (BNA Daily Report for Executives, Feb. 3). Under the proposed “Better Buildings Challenge,” real estate and other companies that set themselves apart as leaders in saving energy and improving productivity would become eligible for benefits such as public recognition, technical assistance, and best-practices sharing through a network of peers.   

Roundtable President and CEO Jeffrey D. DeBoer welcomed the President’s initiative, saying it “sets forth an excellent blueprint to re-employ the construction workforce, modernize our built environment, and help ensure our nation’s energy security.” He added, “At a time when the real estate sector is still struggling to achieve full economic recovery, incentives to encourage building upgrade projects will leverage private investment, encourage lending, and create well-paying jobs that can’t be exported.”

The White House’s proposals – particularly those concerning tax incentives and loan guarantees – reflect recommendations developed over many months by The Roundtable’s Sustainability Policy Advisory Committee (SPAC), co-chaired by Denny Oklak (Duke Realty Corporation), Fred Seigel (Beacon Capital Partners, LLC), and vice-chaired by Brenna Walraven (USAA Real Estate Company). Joining with the U.S. Green Building Council, the Natural Resources Defense Council, and the leading energy services company Johnson Controls, Inc., The Roundtable submitted a report two weeks ago to the Obama Administration regarding its existing authorities in the energy efficiency arena, which addressed many of the same topics highlighted by The White House yesterday when it announced the Better Buildings Initiative. 


Real Estate Coalition Warns of Unintended Consequences Arising from DOL Proposal to Redefine “Fiduciary” Under ERISA  

A group of real estate organizations (including The Real Estate Roundtable) on Feb. 2 submitted a comment letter to the U.S. Department of Labor (DOL) spelling out concerns with a regulatory proposal that would broaden the definition of a “fiduciary” and significantly expand the types of investment advice activities that may give rise to fiduciary status under the Employee Retirement Income Security Act of 1974 (ERISA).  

The Feb. 2 comment letter asserts that the proposed rule is overly broad and will likely increase costs substantially for benefit plans needing real estate-related services (e.g., brokerage or valuation services, market research ) — without providing any material corresponding benefit.

Faced with the “substantial likelihood” of becoming “inadvertent ERISA fiduciaries” under the proposed rule — and the difficulty of determining “if the ultimate client is a benefit plan” — many real estate services providers “may simply stop doing business with benefit plans altogether,” the letter states. “To impose fiduciary status and its consequences on inadvertent or otherwise unknowing ‘fiduciaries’ seems an undue and inequitable burden.”

However, real estate appraisers that provide valuation services to a benefit plan would automatically become ERISA fiduciaries under the proposed regulation, the letter continued. “We echo the key observations” by the Appraisal Institute and American Society of Farm Managers and Rural Appraisers that “offering investment advice is vastly different than providing objective opinions of value.’”

In making the proposal public on Oct. 21, DOL stated that the current definition (contained in a 1975 rule) may “inappropriately limit the department’s ability to protect plans, participants and beneficiaries from conflicts of interest that may arise from today’s diverse and complex fee practices in the retirement plan services market.”

The new rule, DOL explained, “ is designed to remedy this limitation, and protect plan officials and participants who expect unbiased advice, by giving a broader and clearer understanding of when individuals providing such advice are subject to ERISA’s fiduciary standards.”

The real estate industry comment letter offered the following specific suggestions with regard to the proposed redefinition of fiduciary:  

Affiliation alone should not be relevant for purposes of determining whether a real estate service provider is an ERISA fiduciary

Appraisers should not be considered ERISA fiduciaries

The current regulatory regime should continue to apply to services provided outside the self-directed defined contribution plan context

At a minimum, the Feb. 2 comment letter concluded, DOL should “consider a moratorium” on applying the proposed rule outside the self-directed defined contribution plan context until it has more fully studied the potential effects of the proposed rule in other contexts (such as real estate services).

In addition to The Roundtable, signatories of the letter included the Real Estate Board of New York (REBNY), National Association of Real Estate Investment Managers (NAREIM), International Council of Shopping Centers (ICSC), Building Owners and Managers Association International (BOMA), the American Society of Farm Managers and Rural Appraisers and the Appraisal Institute. 



House Committee Plans “Vigorous” Oversight of Dodd-Frank Implementation; End-User Coalition Urges Senators to Co-Sign Johanns’ Letter to Regulators re: Derivatives  

House Financial Services Committee Republicans are planning “vigorous oversight” of bank regulatory agencies tasked with writing hundreds of regulations needed to implement last year’s financial regulatory overhaul law (“Dodd-Frank”), Bloomberg reported Feb. 1. This issue was also discussed at the Real Estate Capital Policy Advisory Committee (RECPAC) meeting last Wednesday, which featured HFSC Chief of Staff Larry Lavender and former White House Council of Economic Advisers Chairman Glenn Hubbard. 

According to a 22-page draft oversight plan circulated by Committee Chairman Spencer Bachus (R-AL), the panel intends to review the costs and benefits of forthcoming rulemakings, “in order to strike an appropriate balance between prudent regulation and economic growth” (BNA Daily Report for Executives, Feb. 2). The panel also intends to “identify and remedy” areas of the law that have “unintended consequences”— e.g., consequences for jobs and markets as a result of the “Volcker rule’s” limitations on proprietary trading by banks.

Also expected to come under heavy scrutiny will be rulemakings dealing with derivatives, securitization and risk retention, broker-dealers and investment advisers, and credit rating agencies — issues with implications for commercial real estate liquidity and financing.

Sen. Mike Johanns (R-NE) is planning to send a letter to regulators asking them to implement the derivatives provisions of Dodd-Frank in a careful, thoughtful way — one that follows the letter of the law as well as its intent. A draft version of Johanns’ letter urges regulators to:

Refrain from imposing margin requirements on end-user companies that engage in swaps transactions to manage risks

Preserve the legitimate expectations of companies by not imposing margin requirements on derivatives contracts entered into before the law’s effective date

Avoid creating rigid and expensive trading requirements that could cause companies to needlessly retain more risk or to seek more efficient risk management markets overseas

The Coalition for Derivatives End-Users, which includes The Real Estate Roundtable, sent a letter to all members of the U.S. Senate today (Feb. 4) asking them to sign onto Johanns’ letter. 

Source:  Real Estate Roundtable


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