Policymakers Debate Timing of Next COVID-19 Response; Fed Report Warns Pandemic May Force Significant CRE Asset Repricing
After the House of Representatives last Friday passed a $3 trillion coronavirus relief bill, Republican policymakers have signaled they may be open to another COVID-19 bill, but on a measured basis. (Forbes, May 21)
- Senate Republican Leader Mitch McConnell yesterday said, “I think there is a high likelihood we will do another rescue package. But we need to be able to measure the impact of what we’ve already done, what we did right, what we did wrong ... We’re not quite ready to intelligently lay down the next step, but it’s not too far off.” (Fox News, May 21)
- Treasury Secretary Mnuchin said yesterday during a forum hosted by The Hill that "We're going to carefully review the next few weeks. I think there is a strong likelihood we will need another bill, but we just have $3 trillion we're pumping into the economy." (Advancing America's Economy forum, May 21)
- Sen. Lindsey Graham (R-SC), chairman of the Senate Judiciary Committee and close ally of President Trump, told CNN, "I want to do infrastructure. I told Trump, this is the time. We got it teed up. This is the time to go big. ... It really is a once-in-a-lifetime opportunity to give a facelift to the country.” (CNN, May 20)
The debate in Washington on what will constitute the next large legislative response to the coronavirus pandemic continued as the Federal Reserve released its bi-annual Financial Stability Report, which analyzes vulnerabilities in the economy and identifies significant risks to the U.S. banking system. (Bloomberg, May 15)
CRE a Focus of Fed’s Financial Stability Report
The Fed report offered a stark warning that asset prices remain vulnerable to significant price declines if the COVID-19 pandemic persists – especially in the commercial real estate sector. (GlobeSt, May 18)
- The report states, “The vulnerability stemming from elevated CRE valuation pressures, coupled with a dim outlook for the sector as indicated by recent declines in equity REIT prices, suggests that CRE may undergo a substantial repricing in response to disruptions generated by the COVID-19 pandemic.” (The Fed’s 2020 Financial Stability Report)
- The Fed report also notes that non-agency commercial mortgage-backed securities (CMBS) market, which had previously been funding about one-fifth of CRE mortgage debt, stopped new securitizations toward the end of March. “CRE loans that would normally be securitized have been accumulating on bank balance sheets. In addition, data from the April 2020 Senior Loan Officer Opinion Survey on Bank Lending Practices indicated that a major fraction of banks reported weaker demand for CRE loans and tighter lending standards, on net, in the first quarter of 2020,” the report adds.
- Fed Chairman Jay Powell told a virtual Senate Banking Committee hearing on Tuesday that the Main Street Lending credit facility – a loan program designed to lend to small and medium businesses – should be ready to launch by the end of May.
- In an April 22 letter sent to Treasury Secretary Steven Mnuchin and Fed Chairman Jay Powell, The Real Estate Roundtable and Nareit urged that the scope of the Federal Reserve’s “Main Street” Lending Programs should be expanded to forestall further disruption and economic dislocations in commercial real estate.
- Chairman Powell also testified that the Term Asset-Backed Securities Loan Facility (TALF) is one of four Federal Reserve credit facilities that will become operational soon. Powell testified, "We expect all of them to be stood up and ready to go by the end of this month," Powell said of the remaining programs. "People are working literally around the clock and have been for weeks." (Markets Insider, May 18)
Previous industry letters to the Fed on March 24 and April 14 addressed the need to broaden the range of TALF, requested that eligible collateral include both outstanding (legacy) CMBS, commercial mortgage loans and newly issued collateralized loan obligations. On April 9, the Fed confirmed that the TALF would be expanded to include triple-A rated legacy non-agency CMBS and loans.
Roundtable Video Interview
Economic and other policy issues facing the CRE industry in today’s pandemic environment were discussed recently in a video discussion with Roundtable Chairman Emeritus (2009-2012) Dan Neidich (Chief Executive Officer, Dune Real Estate Partners LP) and Real Estate Roundtable President Jeffrey DeBoer. The video, done as part of several remote Roundtable interviews about pandemic-related policy issues, was hosted by the alumni club of Stanford University – Stanford Professionals in Real Estate (SPIRE).
- Neidich and DeBoer address the importance of restoring the “Rent Obligation Chain” and the need for policy makers to help maintain business and residential rental income streams so local governments receive property tax revenues they need to provide essential community services.
- Steady rent revenues drive building values that support American pensions and retirement savings. Rents to property owners also pay the compensation, health, and other benefits for the millions of workers – at all skills levels – that make U.S. building infrastructure safe, healthy, and functioning.
- The SPIRE interview also covers a range of other policy matters at the forefront of discussions in our nation’s capital – such as business liability and proposals to help manage risks associated with reopening places of work, education and recreation.
Policymakers’ response to the contagion crisis, whether legislative or regulatory – and how the industry is participating in the process – will be a focus of The Roundtable’s June 11-12 Remote Annual Business and Committee Meetings.# # #
Senate, House Signal Openness to PPP Reforms as Business Coalitions Urge Policymakers to Strike “75/25 Rule,” Extend Loan Forgiveness Period
Congressional lawmakers are taking steps to improve key terms of the Paycheck Protection Program (PPP) to help small business borrowers deal with the economic impact of the global pandemic. (Washington Post, May 20 and Wall Street Journal, May 21)
- Under the CARES Act, a portion of PPP loans can be forgiven for the eight week period after origination. (See “CARES Act and Implications for Real Estate”)
- Implementing rules and guidance from the U.S. Treasury and Small Business Administration further establish a “75/25 Rule,” whereby 75% of PPP loan proceeds and forgiven amounts must be for payroll. No more than 25% can be devoted to non-payroll business expenses like rent, mortgage interest, and utility bills.
- Business coalitions (including the The Real Estate Roundtable) sent letters yesterday urging policymakers to take immediate action to modify these requirements by extending the PPP loan forgiveness period and striking the “75/25 Rule.”
- A broad business coalition initiated by the U.S. Chamber of Commerce also recommends extension of the PPP’s June 30 safe harbor date for rehiring and restoration of pay.
- A separate letter focuses support for specific legislation, the Paycheck Protection Flexibility Act (H.R. 6886). This bipartisan bill is a stand-alone “spin-off” of PPP reform provisions passed by House Democrats last week in the HEROES Act. (Roundtable Weekly, May 15, 2020) H.R. 6886 would likewise strike the “75/25 Rule” and extend the PPP forgiveness period to 24 weeks after loan origination.
- A sponsor of the PP Flexibility Act, Rep. Dean Phillips (D-MN), informed in a press release that House leadership has committed to bring up H.R. 6886 for its own vote possibly as early as next week. House Speaker Nancy Pelosi (D-CA) reportedly called the 75/25 limitation on small businesses “debilitating.” (Roll Call, May 20)
- Over in the Senate, Marco Rubio (R-FL), Chairman of the Senate Small Business Committee and author of the PPP provisions in the CARES Act, predicted in a tweet yesterday that the Senate would pass reforms (S. 3833) to extend the time period beyond the current June 30 deadline by which qualifying small businesses can apply for and use PPP loans.
- Senator John Cornyn (R-TX), meanwhile, has spearheaded a bipartisan effort to amend the “75/25 Rule” to a “50/50 Rule” – where up to 50% of PPP loan and forgiveness amounts could be used for rent and other ordinary business expenses. (Cornyn letter, May 5) (Roundtable Weekly, May 8, 2020)
- Since passage of the CARES Act on March 27, The Roundtable has recommended elimination of the “75/25 Rule” as an inappropriate “one-size-fits-all” restriction that unduly limits businesses in meeting their rent obligations and paying for other ordinary operating expenses. (RER’s “8-Point Plan to Reform the PPP”)
- Treasury Secretary Steven Mnuchin yesterday endorsed congressional efforts regarding extension of the PPP loan forgiveness period. “One of the things we’re working with Congress on, and there is bipartisan support, is lengthening the eight-week period. [T]hat’s something we definitely want to fix,” he said. (Advancing America's Economy forum, May 21)
- At The Hill’s Advancing America's Economy forum, Mnuchin also stated he did not support reforming the “75/25 Rule.” “We want most of this money to go to workers and that we believe the 75 percent was exactly consistent with the way the program was designed,” he said.
- A recent “tracker tool” released by the American Action Forum charts the allocation of PPP loans since the program’s inception in the CARES Act.
The Paycheck Protection Program will be discussed at The Roundtable’s Remote Annual Business and Committee Meetings from June 11-12.
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CDC Summarizes “Re-Opening America” Initiatives; EPA Provides Building Water Quality Checklist; Roundtable Board Member Interviewed on Office Return
The Centers for Disease Control and Prevention (CDC) this week released a comprehensive summary of its initiatives and tools to enable fuller reopening of communities and businesses, as all 50 states are taking steps to return to a “new normal” after months of COVID-19 shutdowns and stay-at-home orders. (CDC’s “Activities and Initiatives Supporting the Covid-19 Response” and NYTimes national map, May 21)
- CDC’s “Activities and Initiatives” summary describes its measures to date to control the spread of the pandemic and enable contact tracing to slow transmission. CDC’s initiatives support the White House’s guidelines for “Opening Up America Again” through a phased approach that governors, mayors, and state/local public health officials may implement statewide or community-by-community.
- Six “gating criteria” that consider a community’s “downward trajectory” of patients treated for the virus over a 2-week period, availability of Covid-19 testing, and public health capacity, provide the basis to guide officials’ decisions to “move between phases” toward gradual re-opening. (CDC’s “Activities and Initiatives,” p. 7)
- CDC’s “Activities and Initiatives” also sets forth a “menu of safety measures” as “interim guidance” (Appendix F) to supplement its recent “decision tools” to advise businesses, restaurants and bars, mass transit systems, and schools on how to safely reopen during the pandemic. (Roundtable Weekly, May 15, 2020)
Meanwhile, the U.S. Environmental Protection Agency (EPA) recently issued an information resource and checklist to address water quality in buildings as they ramp-up operations. EPA recommends that owners and managers take proactive steps to minimize water stagnation in plumbing systems during temporary shutdowns or reduced operations, prior to building re-population. See:
Additionally, Roundtable Board Member Owen Thomas (CEO, Boston Properties) was interviewed yesterday on CNBC’s Squawkbox (photo above) about the pandemic’s impact as employees return to office environments and how cities may compare to suburbs as major work hubs of the future. (CNBC interview, May 21)
- “We have a pandemic underway; there will be a gradual return to the office. But I do think companies will be actively using their offices in the long-term,” Thomas said.
- “I also hear from customers that remote work is not an acceptable replacement for the in-person interactions that happen in the office space. The ability to mentor younger employees. The spontaneous collaboration and creativity that occurs and also the culture that companies develop – it’s very difficult to do it when we’re all on Zoom and Webex.” (Thomas CNBC interview, May 21)
- Roundtable members who have recently been interviewed about workplace return strategies and technologies include Immediate Past Chair Bill Rudin, Roundtable Member Scott Rechler and others. (Roundtable Weekly, May 15)
Two industry reports issued this month also address return-to-work guidelines and COVID-19 operational contingency plans:
- A CBRE analysis of 203 companies’ operations across the globe – “ReEntering the World’s Workplaces” – shows many companies have implemented return-to-work guidelines stricter than local government requirements (CBRE news release, May 15) / (GlobeSt, May 18)
- A Deloitte survey of 100 senior financial service institutions’ (FSI) executives with responsibility for crisis management and business continuity planning reveals that at least half of the respondents are developing COVID-19 operational contingency plans spanning at least the next three months. Part of the complexity around re-opening has to do with the scale and scope of FSI real estate. (Deloitte, May 15)
The Roundtable’s Building Re-Entry Working Group continues to meet weekly to address issues associated with the restarting of the economy.
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