Post-Election Lame Duck Session Faces Crowded Agenda
CRE โ€œAdaptive Reuseโ€ Report Shows Increase; Industry Coalition Urges Expansion of Conversion Incentive
Fed Reports U.S. Financial Stability Risks Include Inflation, Asset Valuation Pressures, and Cyber Attacks
Roundtable Weekly
November 11, 2022
Post-Election Lame Duck Session Faces Crowded Agenda
Capitol after storm

Congress returns next week for a lame duck session after the midterm elections, which have left party control in the Senate and House uncertain as final votes are tallied in races throughout the country. A new policy landscape for 2023 will take shape as current policymakers work on a funding deal by Dec. 16 to avert a partial government shutdown. (CBS News, “The unresolved 2022 House and Senate races that will determine control of Congress,” Nov. 10) 

Omnibus Riders 

  • Lawmakers return Nov. 14 but the official lame-duck session will not begin until Nov. 28, when the top priority will be an “omnibus” spending bill. (BGov, Nov. 7)

  • A diverse array of policy priorities will be considered as possible add-ons to the must-pass fiscal 2023 appropriations package, including several issues of importance to commercial real estate. (Roundtable Weekly, Oct. 21)

  • Among the many tax issues under consideration are recently expired provisions passed as part of the Tax Cuts and Jobs Act of 2017 (TCJA), including rules related to business interest deductibility. Also in play are an expired, temporary increase in allocations of low-income housing tax credits (LIHTCs) to states. Additionally, the 100% bonus depreciation benefit starts phasing down at the end of this year.

  • A key element of House Republicans’ Commitment to America policy agenda released in September is to make permanent provisions from the TCJA that have recently expired or are scheduled to sunset. (Tax Notes, Nov. 10 and Bloomberg, Sept. 23)

What’s Next

Reps. Neal and Brady Ways and Means
  • Rep. Kevin Brady of Texas, the top Republican on the tax-writing House Ways and Means Committee who is retiring at the end of the year, said he is talking with Democrats about a potential lame duck deal on taxes, but is ambiguous about its prospects. According to PolticoPro, Brady said, “It’s so difficult to predict,” noting that lame ducks “can be lightning quick or they can go through mid-December.” [Photo: Brady, right, with Ways and Means Chairman Richard Neal (D-MA)]

  • A massive end-of-year spending package may also include another extension of The National Flood Insurance Program, which is now more than $20 billion in debt and extended on a short-term basis more than 20 times. (BGov, Nov. 7) 

Congress will also need to raise the federal borrowing limit within the next six months to avoid a government default. The 118th Congress convenes on January 3, 2023.

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CRE โ€œAdaptive Reuseโ€ Report Shows Increase; Industry Coalition Urges Expansion of Conversion Incentive
RentCafe chart of Top Conversion Building Types

The conversion of former offices to apartments reached an all-time high in the last two years—40% of all existing building repurposing projects—reflecting a rapid increase in “adaptive reuse” throughout the nation, according to a Nov. 7 RentCafe analysis of Yardi Matrix data. (Download pdf or see website)

Conversion Trend

  • Large cities such as Philadelphia, Cleveland, and Pittsburgh have embraced conversion projects to repurpose old buildings and unused office spaces, according to the report. (BusinessInsider, Nov. 8)

  • Offices are the largest share of all building types undergoing conversion, representing 28% of future apartments, followed by hotels (22%) and factories (16 %).

  • Los Angeles ranks first in the nation with the most converted apartments in the first half of 2022. (RentCafe analysis of Yardi Matrix data.)

Conversion Development Obstacles

Conversion difficult prospect
  • As building occupancy levels remain depressed due to lingering remote working arrangements, cities such as New York, Los Angeles and Chicago are proposing plans to relax building rules and create tax incentives for property owners undertake conversions. (Axios, Sept. 28)

  • A Roundtable-led coalition of 16 national real estate organizations on Oct. 12 recommended certain enhancements and expansions to a 20 percent tax credit for qualified property conversion expenditures, which is part of the Revitalizing Downtowns Act (S. 2511H.R. 4759).  The recommendations include expanding the category of properties eligible for the credit to various types of commercial buildings such as shopping centers and hotels.

  • The coalition letter also emphasized the significant obstacles that the industry continues to face with conversion projects. Obstacles that frequently arise include property acquisition, permitting, development review, toxic contamination, property age and code conformance, and a “not in my backyard” (NIMBY) sentiment. Additionally, the structural elements of an existing structure—columns, beams, floor layouts and size, ceiling height, etc.—often pose hurdles that add cost and extra delays to an otherwise desirable repurposing of a building. (GlobeSt, Oct. 12 and Roundtable Weekly, Oct. 14)

The letter to the bill’s sponsors, Sen. Debbie Stabenow (D-MI) and Rep. Jimmy Gomez (D-CA), offers several recommendations to help ensure the legislation drives additional economic investment and brings down housing costs.

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Fed Reports U.S. Financial Stability Risks Include Inflation, Asset Valuation Pressures, and Cyber Attacks
The Federal Reserve in Washington, DC Near-term risks to the U.S. economy and financial system include inflation, asset valuation pressures and cyber attacks, according to the Federal Reserve’s semiannual Financial Stability Report released this month. (Wall Street Journal, Nov. 4) Stability Threats Fed Report Risks Nov 2022
  • “Higher-than-expected interest rates could lead to increased volatility in financial markets, stresses to market liquidity, and declines in asset prices, including prices of both commercial and residential real estate properties,” the central bank states in its report.
  • The report warns that such effects could cause losses at a range of financial intermediaries, reducing their access to capital and raising their funding costs—and pose adverse consequences for asset prices, credit availability, and the economy.
  • Federal Reserve Vice Chair Lael Brainard stated the American financial system has held up through the turbulent developments of the past year. She said, "Household and business indebtedness has remained generally stable, and on aggregate households and businesses have maintained the ability to cover debt servicing, despite rising interest rates."
Cybersecurity Concerns Financial Risks Chart - Federal Reserve
  • Respondents to the central bank’s survey on stability threats also noted continuing concerns about the Russian invasion of Ukraine, high oil prices and a potential conflict between China and Taiwan. Cyber attacks pose an additional risk that “could come as retaliation for sanctions imposed on Russia,” according to the Fed’s report.
  • The Roundtable’s Homeland Security Task Force will hold a conference call on Monday, November 28 that will focus on a new Cyber Risk Summary briefing on Commercial Facilities—includes Commercial Real Estate—from the Cybersecurity and Infrastructure Security Agency (CISA). [To register, contact Andy Jabbour of the Real Estate Information and Sharing Network (RE-ISAC)]
  • U.S. financial institutions processed approximately $1.2 billion in ransomware-related payments last year, a nearly 200 percent increase compared to 2020, according to the Treasury Department’s Financial Crimes Enforcement Network. (FinCEN report, Nov. 1)
Cybersecurity issues and CRE will be discussed during the next HSTF meeting on Jan. 25, 2023—held in conjunction with The Roundtable’s State of the Industry meeting. (Roundtable Weekly, Oct. 7) #  #  #