The number of office assets facing loan defaults or entering special servicing is growing in major markets as remote work and rising interest rates continue to exert pressures on metropolitan areas and city budgets, according to reports this week in Commercial Observer and Bloomberg.

Workplace Occupancy

• Workplace occupancy rates are measured in a weekly “Back to Work Barometer” series, above, by building security provider Kastle Systems, whose March 6 report showed a 10-city average occupancy rate of 50.1%. (Bloomberg, March 9)
  
  
• Kastle also reported that the Washington, DC metro area’s workplace occupancy rate registered 46.6%. Remote work’s influence on the DC tax base, reduced office transactions, and dropping asset values are projected to decrease the city’s tax revenue by nearly a half-billion dollars from 2024-2026. (Roundtable Weekly, March 4)

Congressional Hearings

• During a March 7 Senate Banking Committee hearing, Fed Chairman Jay Powell addressed a question from Sen. Mark Warner (D-VA) about low office occupancy rates in many major cities. Powell said the issue is “an area that requires a lot of monitoring,” noting that some smaller banks may have more significant exposure to CRE than large banks. “I’d say we’re on the case,” he added. (CQ News, March 7 and CQ hearing transcript)

• The issue of converting commercial buildings into affordable housing and mixed-use properties was also addressed during a Senate Finance Committee hearing this week by Sen. Debbie Stabenow (D-MI), who co-sponsored the Revitalizing Downtowns Act to encourage conversions. Hearing witness Sharon Wilson Géno—president of the National Multifamily Housing Council (NMHC)—noted a recent joint NMHC and Urban Land Institute study on adapting CRE to residential use.

The Real Estate Roundtable wrote to President Joe Biden last December about the need for federal employees to return to their workplaces—and encouraged the administration to support legislation that could incentivize conversion of underutilized buildings to more productive use such as housing. These two requests are included in the House-approved Stopping Home Office Work’s Unproductive Problems (SHOW UP) Act (H.R. 139). (Roundtable Weekly, Feb. 3 | GlobeSt and CoStar, Dec. 15, 2022)

#  #  #

• It is unlikely the tax proposals—detailed in the “General Explanations of the Administration’s Revenue Proposals” or Treasury “Green Book”—will be enacted as proposed. However, the budget reflects priorities that the White House is certain to emphasize when negotiations intensify this spring over the debt-limit and fiscal policies.

• Real Estate Roundtable President and CEO Jeffrey DeBoer said, “Congress has rejected several of these same tax proposals in the past. In particular, Congress has said no to proposals to double the capital gains rate, tax gains reinvested in property of a like-kind, or taxing unrealized gains. We will strongly urge that these counter-productive proposals again be rejected. They have weak policy support, are poorly timed and quite risky given the current uncertain economy.”

•  Of note for real estate:
  • Capital Gains Rate The top, combined tax rate on long-term capital gains would nearly double from 23.8% (20% + 3.8% net investment income tax) to 44.6%. This results from increasing the maximum capital gains rate from 20% to 39.6% and a new proposal to increase the net investment income tax from 3.8% to 5%.
  • Mark-to-Market Tax on Unrealized Capital Gains The FY 2024 budget carries over President Biden's proposal from last year, imposing a retroactive, annual minimum tax of 25% on the income and unrealized gains of taxpayers with wealth (assets minus liabilities) exceeding $100M.
  • Real Estate Professionals The budget also carries over a proposal to extend the 3.8% net investment income tax to real estate professionals and other pass-through business owners who are currently exempt from the tax because they are active in their business.

• Other real estate-related tax proposals include:
  • Taxing carried interest as ordinary income
  • Limiting the deferral of gain from like-kind exchanges
  • Increasing the top tax rate on ordinary income to $39.6%
  • Ending step-up in basis and taxing unrealized capital gains at death
  • Expanding the limitation on excess business losses for non-corporate taxpayers by converting the limitation from a 1-year deferral to a permanent compartmentalization of active pass-through losses
  • Modifying tax rules for grantor retained annuity trusts (GRATs) and grantor trusts
  • Recapturing and taxing real estate depreciation deductions at ordinary income tax rates
• The budget also devotes $59 billion to provisions aimed at increasing the supply and availability of affordable housing, as well as $10 billion “to incentivize State, local, and regional jurisdictions to make progress in removing barriers to affordable housing developments, such as restrictive zoning.” Tax incentives in the budget include an expansion of the low-income housing tax credit (LIHTC) and a new tax credit for the development of affordable, owner-occupied housing.

U.S. Securities and Exchange Commission (SEC) Chair Gary Gensler commented on March 6 that the agency’s forthcoming rule on climate reporting may be scaled-back, including its proposal for sweeping disclosures on Scope 3 GHG emissions, according to CNBC.

Scope 3 Proposal 

• Scope 3 refers to indirect emissions that are part of an organization’s value chain but not owned or controlled by the reporting company. The 2022 SEC proposal would require corporate issuers of securities to estimate and report Scope 3 emissions “if material” in 10-Ks and other filings. (SEC News Release, March 22, 2022)

• Roundtable comments submitted last June called the SEC’s proposed treatment of Scope 3 disclosures a “back-door mandate” and urged the agency to drop it. (Roundtable Weekly, June 10, 2022)

• The SEC’s final rulemaking process is ongoing. Gensler acknowledged that the agency received a record 15,000 public comments and “adjustments” to the proposed rule were likely. (Bloomberg Law, March 6; CNBC, Feb 10)

• Some stakeholders have signaled potential litigation by questioning whether the SEC has “clear” legal authority to regulate climate matters in light of recent Supreme Court precedent. (SCOTUSblog, June 30, 2022 | Pensions & Investments, March 7, 2023)

• Gensler told POLITICO this week that any final climate rule must be “durable” and “sustainable.” “It doesn’t protect investors … if we have a rule overturned in court,” he said.

Congress Weighs In 

• The SEC’s climate rule is the focus of dueling letters by members of Congress. Democrats wrote in a March 5 letter that the agency should not “soften” or “scale back” proposed climate discloures. Reports that the SEC might “curtail” Scope 3 reporting, among other matters, are “deeply concerning,” the Democrats wrote.

• Republicans wrote to Gensler on Feb 22, stating the proposed rule exceeds the Commission’s authority. The GOP letter states, “Congress created the SEC to carry out the mission of protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation—not to advance progressive climate policies.”

A final rule is anticipated from the SEC this spring. The Roundtable’s Sustainability Policy Advisory Committee (SPAC) will continue to track any developments on the agency’s proposed rule and other climate-related regulatory proposals affecting CRE.

#  #  #

• A new report from real estate brokerage Redfin shows that the number of affordable home listings fell 53% from last year—the largest annual drop in Redfin’s records, which date back to 2013. (The Hill and Redfin news release, March 3)
• The National Low Income Housing Coalition estimates there is a shortage of 7 million affordable and available rental homes in the United States, while a Rosen Consulting Group study reports the underbuilding gap is 5.5 million units.
• This week’s Senate hearing displayed bipartisan policymaker consensus on the need to increase the supply of affordable housing by expanding the Low-Income Housing Tax Credit (LIHTC) and other tax incentives. (TaxNotes, March 8 and Congressional Research Service, “An Introduction to the Low-Income Housing Tax Credit”)
• During the hearing, NMHC President Sharon Wilson Géno offered joint testimony that included recommendations to address the affordable housing crisis, including tax policy, regulatory reform, rental assistance, and development incentives. (NHMC News | Video of Géno’s remarks and Written testimony, March 7) 

• Senate Finance Committee Chairman Ron Wyden (D-OR), above, noted his support for the Affordable Housing Credit Improvement Act (AHCI), the Neighborhood Homes Investment Act, and the reintroduction of the Decent, Affordable, Safe Housing for All (DASH) Act in his opening comments. 
• Wyden’s DASH Act would strengthen the LIHTC and offer a new Middle-Income Housing Tax Credit (MIHTC) that would provide a tax credit to developers who house tenants between 60 and 100% of the area's median income. (DASH Act Text | Bill Summary | Section-by-section)
• The AHCI would expand the pool of tax credits allocated to states for new affordable housing, make it easier to combine LIHTC with other sources of capital like private activity bonds, and facilitate LIHTC rehab projects.
• Wyden added in his opening comments, “Members of Congress also need to keep pushing state and local authorities to cut back on the thicket of zoning rules that get in the way of building the housing Americans need.”
• The Roundtable has supported these Senate bills since they were introduced last year. Real Estate Roundtable President and CEO Jeffrey DeBoer previously stated, “Overly restrictive land-use and zoning policies, construction cost increases, and labor shortages are deepening our housing challenges, which now extend across the entire country. Government at all levels needs to be part of the solution, not part of the problem." (Roundtable Weekly, July 22, 2022) 

• Reintroduction of similar LIHTC legislation in the House is expected by Reps. Suzan DelBene (D-WA) and Brian Higgins (D-NY). (BGov, March 2)
• Additionally, House Ways and Means Tax Subcommittee Chair Mike Kelly (R-PA) and committee member Jimmy Panetta (D-CA) on March 1 reintroduced the More Homes on the Market Act, which would double the capital gains exclusion for home sellers to $500,000 for single individuals and $1 million for married couples. (TaxNotes, March 8)