Roundtable Weekly - May 11, 2018
Impact of Tax Reform on Economic Investment, Commercial Real Estate
As landmark tax reform enacted last December begins to reverberate through the economy, economists, Congress and industry experts are starting to assess its impact on economic investment and commercial real estate.
The House Ways and Means Committee plans to hold a series of hearings on the Tax Cuts and Jobs Act (TCJA) impact on job creation and the economy starting May 16.
- The House Ways and Means Committee plans to hold a series of hearings on the Tax Cuts and Jobs Act (TCJA) impact on job creation and the economy starting May 16.
- Ways and Means Chairman Brady: "It is exciting to see tax reform boosting our economy and giving families and workers across the country the relief they deserve. Wages are growing at their fastest pace in 10 years, unemployment claims are at their lowest since the 1960s, and Main Street businesses are expanding like never before." (Ways and Means Advisory, May 9)
TCJA & Economic Investment:
New data shows tax reform is resulting in more capital investment and expenditures.
- Trump Tax Windfall Going to Capex Way Faster Than Stock Buybacks, Bloomberg (April 16) – Capital spending increased by 39 percent in S&P 500 companies, the fastest rate in seven years.
- US Groups Plough Tax Cash into Capex Ahead of Investors, Financial Times (May 1) – "The median S&P 500 company expanded its investment spending by a more modest 13 per cent year on year, according to Bank of America. … Analysts have been surprised to see the growth in capital spending among S&P 500 companies outstrip the increases in buybacks and dividends."
- Cycle Watch: U.S. Economic Expansion Reaches Historic Point, Cushman & Wakefield (May 1) – On July 1, 2019, the current (economic) expansion may become the longest in U.S. history. "Current estimates of the probability of a recession within the next 12 months are between 0-25%. A majority of forecasters have predictions between 10-15%. Tailwinds from fiscal stimulus and the revival of emerging markets as a global growth engine bode well for the economy in the near-term."
TCJA's Positive Impact on Commercial Real Estate:
- The Impact of Tax Reform by Peter Linneman, Commercial Property Executive (May 2) – "… Tax reform legislation is neutral to positive for commercial real estate and very positive for the economy in general. Because the changes to commercial real estate are not dramatic, most investors should feel fairly confident."
- Marcus & Millichap CEO Hessam Nadji interview , Fox Business (May 1) – "The tax reform was very favorable, not just for corporations but also for commercial real estate investing. For over 50 years, the American Dream has been centered around real estate ownership, which was home ownership. That's shifting towards renting and investing in commercial real estate in the form of small apartments or small office buildings or shopping centers - and the tax reform really made that a lot more favorable.
- Investors Find Confidence Thanks to U.S. Tax Reform, Hotel Management (April 30) – "According to the firm's NREI/Marcus & Millichap Investor Sentiment Survey from the first half of the year, the Investor Sentiment Index grew to 163. …[D]ue to tax-law changes, 68 percent of survey respondents said that they expect the economy to grow faster. Meanwhile, 71 percent said that tax reform will have a favorable impact on commercial real estate."
The Impact of Tax Reform by Peter Linneman, Commercial Property Executive (May 2) – "… Tax reform legislation is neutral to positive for commercial real estate and very positive for the economy in general. Because the changes to commercial real estate are not dramatic, most investors should feel fairly confident."
- U.S. Apartment Investment Market to Enjoy Boost From New Tax Plan, World Property Journal (May 11) – "According to a new report by CBRE that analyzed the implications of tax reform on the multifamily sector in the largest 35 U.S. property markets, the recently enacted U.S. tax reform is poised to benefit the U.S. multifamily investment market."
- Commercial Real Estate: A Clear Winner From Tax Reform, Clarion Partners (March 2018) – "Tax reform will likely raise consumer spending, employment levels, business investment, and wage growth ... interest rates will likely stay low over the long‐term due to the deflationary pressures associated with the global savings glut, ongoing technological innovation, and weakening demographic trends."
- The Budget and Economic Outlook: 2018 to 2028, Congressional Budget Office (April 9) – CBO projects that tax reform will spur investment in nonresidential structures to increase by an average of more than $23 billion from 2019-2028, and rise nearly $10 billion this year alone. (Roundtable Weekly, April 13)
Along with TCJA rulemaking and implementation, the legislation's impact on CRE will be a focus of discussion at The Roundtable's Annual Business Meeting and Policy Advisory Committee Meetings on June 14-15 in Washington, DC
House Will Vote on Dodd-Frank Reform and HVCRE Before Memorial Day
House Majority Leader Kevin McCarthy (R-CA) yesterday said the House will vote on the Senate's Dodd-Frank reform bill (S. 2155), before Memorial Day. S. 2155 includes a measure to reform the Basel III High Volatility Commercial Real Estate (HVCRE) Rule – a top Roundtable priority. (Roundtable Weekly, May 4)
House Majority Leader Kevin McCarthy (R-CA) said the House will vote on the Senate's Dodd-Frank reform bill ( S. 2155 ), before Memorial Day.
- Ryan: GOP has deal on bill easing Dodd-Frank, The Hill (May 8) – House Speaker Paul Ryan (Wisconsin) on Tuesday said the House will hold a vote on the Senate Dodd-Frank reform bill in exchange for the Senate taking up a separate set of financial reform bills supported by House Financial Services Committee Chairman Jeb Hensarling (R-TX) Texas).
- House Speaker Ryan, American Banker (May 8) – "I had a good meeting with [Senate Majority Mitch McConnell] over the break on this and so we've got an agreement to be moving different pieces of legislation."
- Bill to Roll Back Post-Financial-Crisis Banking Rules Gets Clear Path to Passage, Washington Post,
May 8 –- As the sponsor of more ambitious Dodd-Frank reforms approved by the House last year, Hensarling said he was confident that the new approach to separate the legislative effort into two bills would "create regulatory policy that
will help us achieve sustained 3% economic growth."
The Roundtable and 12 other real estate organizations on March 2, 2018 sent a comment letter urging all members of the Senate Banking Committee to enact the HVCRE measure by including the measure in the broader Dodd-Frank reform package (S. 2155).
HVCRE Reform Measure Included
- (Roundtable Weekly, Jan. 12) – The Senate bill would clarify which types of loans should be classified as High Volatility Commercial Real Estate Loans (HVCRE) to ensure they do not impede credit capacity or economic activity, while still promoting economically responsible commercial real estate lending.
- GlobeSt.com, (March 19) – "The HVCRE rule, promulgated by Basel III, went into effect in 2016. It established a new risk-weight category requiring banks to hold more capital - 150% or one and half times as much - for such loans. The result has been a pull back on construction lending among other types of bank finance."
- Real Estate Industry Comment Letter, (March 2) – The Roundtable and twelve other real estate organizations on March 2, 2018 sent a comment letter urging all members of the Senate Banking Committee to enact the HVCRE measure by including it in the broader Dodd-Frank reform package (S. 2155).
Since 2015, The Roundtable's HVCRE Working Group and industry coalition partners have played a key role in advancing specific reforms to the HVCRE Rule. During next month's Real Estate Roundtable Annual Meeting, HVCRE will be a focus of discussion, with more specific details offered during the Real Estate Capital Policy Advisory Committee (RECPAC) meeting on June 14.
Commercial Real Estate Industry Leaders See Balanced Market Fundamentals for Q2
The Roundtable's Q2 2018 Economic Sentiment Index released yesterday shows that as plentiful financing and equity continue to drive commercial real estate investment activity, industry leaders continue to see balanced market fundamentals, despite rising costs of construction and an uncertain outlook for markets in 2019.
The Roundtable's Q2 2018 Economic Sentiment Index shows plentiful financing and equity continue to drive commercial real estate investment activity.
The report's Topline Findings include:
- The Q2 index came in at 51, a three point drop from Q1. Awareness of the length of current cycle and trepidation about economic conditions in 2019 has led to a general feeling of cautiousness. That said, availability of affordable financing and plentiful equity for the best quality investments are driving continued investment activity.
- Despite rising costs of construction, development continues somewhat unabated. Some responders pointed to the expectations of the millennial generation as the driver for reimagined building uses and new developments.
- Asset values are perceived as peaking for the most property types and markets. Industrial and multifamily assets are viewed as classes with room to continue pricing growth, whereas many felt retail assets are overpriced and possibly overbought.
Roundtable President and CEO Jeffrey DeBoer, "As our Q2 Index show, with debt and equity readily available for quality investments and new development opportunities, industry leaders are being forced to reevaluate, innovate, and reimagine their buildings – driven by an influx of the millennial generation and their new set of expectations for office and multifamily markets."
- Responders noted the absence of previously ubiquitous Asian capital this quarter. Despite this absence, all responders felt debt and equity was readily available for quality investments.
"Real estate fundamentals continue to remain strong into 2018, where balance between supply and demand in almost every sector is healthy, while debt and equity for real estate as an asset class remains abundant," said Roundtable President and CEO Jeffrey DeBoer. "There are fears about political uncertainty, trade wars and interest rate increases, which are having some impact and creating a manageable amount of uncertainty for the markets for the remainder of 2018 and looking ahead to 2019."
DeBoer added, "As our Q2 Index shows, with debt and equity readily available for quality investments and new development opportunities, industry leaders are being forced to reevaluate, innovate, and reimagine their buildings – driven by an influx of the millennial generation and their new set of expectations for office and multifamily markets. It is vital for our industry to continue developing new technology solutions for the ever evolving demands of the market."
Data for the Q2 survey was gathered in April by Chicago-based FPL Associates on The Roundtable's behalf. The next Sentiment Survey covering Q3 2018 will be released in August.