Fed Cautions About Office Sector as Vacancies Climb and Loan Modifications Surge

La Salle Street, Chicago, Illinois, USA

Recent reports show U.S. office vacancies climbed to nearly 20% during Q1 2024 after loan modifications more than doubled last year compared to 2023. Meanwhile, Federal Reserve Board Vice Chair for Supervision Michael Barr cautioned this week that federal regulators are “looking carefully at banks with heavy concentrations in office commercial real estate where there are significant, expected price declines.” (Moody’s Analytics, April 2 | CRED iQ, March 28 | (C-SPAN video, April 3)

Office Sector

  • Preliminary data from Moody’s Analytics reinforces the long-term, negative ramifications of hybrid work models. The Q1 2024 office vacancy rate set a new record at 19.8%, up from 19.6% in the prior quarter, and beating two historic peaks of 19.3% in 1986 and 1991. (Bloomberg, April 2 | Quartz, April 3 | CRE Daily, April 4)
  • “The office stress isn’t quite done yet,” said Thomas LaSalvia, Moody’s head of commercial real estate economics and an author of the report. He added, “This is part of a longer-term evolution where we are seeing obsolete buildings in obsolete neighborhoods.” (Bloomberg, April 2)
  • Brookfield’s Feb. 14 report, “The Misunderstood U.S. Office Market,” emphasizes that high vacancy rates are due to an excess of dated, functionally obsolete office buildings and an undersupply of offices that satisfy tenants’ changing needs.
  • A Roundtable-led coalition of 16 national real estate organizations urged the expansion of a 20 percent tax credit for qualified property conversion expenditures in an Oct. 12, 2022 letter to policymakers. The recommended enhancements included expanding the category of properties eligible for the credit to various types of commercial buildings such as shopping centers and hotels. (Roundtable Weekly, Nov. 11, 2022)

Fed Oversight & CRE Sectors

Federal Reserve Board Vice Chair for Supervision Michael Barr
  • The Fed’s top market supervisor told the National Community Reinvestment Coalition on April 3 that CRE refinancing deals will “take some time to work through” as the Fed closely monitors office sector conditions. (C-Span | BGov, April 3 | Roundtable Weekly, March 8)
  • Barr said, “This is the kind of thing where it is likely a slow-moving train as the financial sector and commercial real estate market move forward. Over the next two to three years, we are going to see how properties deal with refinancing in a higher interest rate environment. Occupancy rates have lowered because of work-from-home, so for some categories of office CRE they are more exposed to risk.”
Kathleen McCarthy
  • Kathleen McCarthy, global co-head of Blackstone Real Estate and chair-elect of The Real Estate Roundtable, commented to CNBC’sClosing Bell Overtime” on April 3 that the office sector is different from other CRE investment areas that have performed well. “We do feel like there’s a bottoming happening. There’s no V-shaped recovery … but we do see the cost of capital coming down, we’re seeing more liquidity in markets, and perhaps more importantly for the long term, we’re seeing a sharp decline in new supply,” she said.
  • Barron’s recognized McCarthy this week as one of the 100 Most Influential Woman in Finance. She commented on her upcoming role as Roundtable Chair: “To bring together my interest in policy and have a position to help our whole industry in Washington is really exciting.” (Barron’s, April 4)

Commercial and multifamily market conditions will be discussed during RER’s April 15-16 Spring Meeting in Washington DC (Roundtable-level members only) with guests including White House Council of Economic Advisers Chairman Jared Bernstein,  House Democratic Leader Hakeem Jeffries (D-NY), and House Financial Services Member French Hill (R-AK). 

#  #  #

Fed Signals Significant Changes Ahead for Basel III Endgame Proposal

Federal Reserve Board Vice Chair for Supervision Michael Barr said in a recent speech that he is working with other regulators on “broad and material changes” to a sweeping banking proposal known as the “Basel III Endgame.” The proposal, opposed by The Roundtable, would hike capital requirements for banks with at least $100 billion in assets by approximately 19 percent. (Bloomberg, March 22, 2024 and Congressional Research Service, Nov. 30, 2023)

Fed Statements

  • Barr said during his March 22 University of Michigan remarks, “I am working very closely with (Fed) Chair (Jerome) Powell and other members of our Federal Reserve board to try to reach a broad consensus” on revisions to the proposal.
  • The Fed, Office of the Comptroller of the Currency (OCC), and Federal Deposit Insurance Corporation (FDIC) approved the 1,100-page proposed rulemaking last July by an unusually close 4-2 vote.  See Interagency Overview of the Notice of Proposed Rulemaking for Amendments to the Regulatory Capital Rule, July 27. (Roundtable Weekly, July 28, 2023)
  • Powell voted for the original rulemaking proposal but noted a significant tone of caution. Statements by Fed Governors Michelle W. Bowman and Christopher J. Waller bolstered their opposition to the proposal.

Basel III and CRE

The Federal Reserve Building in Washington DC
  • The Real Estate Roundtable urged federal regulators to withdraw the proposed rulemaking in a Jan. 12 letter that raised industry concerns about its negative impact. The comments outlined how the proposal would decrease real estate credit availability, increase commercial and multifamily properties’ borrowing costs, and negatively impact the U.S. economy.
  • Real Estate Roundtable President and CEO Jeffrey DeBoer also stated in a March 2023 comment letter to Barr and other key regulators, “At this critical time, it is important that the agencies do not engage in pro-cyclical policies such as requiring financial institutions to increase capital and liquidity levels to reflect current mark to market models. These policies would have the unintended consequence of further diminishing liquidity and creating additional downward pressure on asset values.”
  • The Mortgage Bankers Association (MBA) reported last month that 20 percent ($929 billion) of the $4.7 trillion of outstanding commercial mortgages held by lenders and investors will mature in 2024. That represents a 28 percent increase from the $729 billion that matured in 2023, according to MBA’s Commercial Real Estate Survey of Loan Maturity Volumes.

The Roundtable’s Real Estate Capital Policy Advisory Committee (RECPAC) will respond to any further changes to the Basel III proposal or other federal policies impacting capital and credit issues.

#   #   #

Fed Chairman Testifies on Regional Bank Loan Concentrations in CRE, Basel III Proposal Changes

Fed Chair Jerome Powell addressed CRE concerns in an exchange with Sen. Catherine Cortez Masto (D-NV)

Federal Reserve Chair Jerome Powell testified before congressional committees this week about the risks posed by commercial real estate loans to regional banks—and that he expects “broad and material changes” to a regulatory proposal to hike bank capital requirements known as “Basel III.” (The Hill, March 7 and Reuters, March 6)

CRE Concerns & Banking

  • The Senate and House hearings focused on the Fed’s March 1 Monetary Policy Report to Congress. The publication stated, “Credit quality at banks remained strong, although the quality of CRE loans backed by office, retail, and multifamily buildings continued its decline, a result of the lower demand for downtown real estate prompted by the shift toward telework.” The report also noted, “Low levels of transactions in the office sector likely indicated that prices had not yet fully reflected the sector’s weaker fundamentals.”
  • During a March 7 Senate Banking Committee hearing, Fed Chair Powell responded to questions from Sen. Catherine Cortez Masto (D-NV) that he expects some smaller banks with high commercial real estate office concentrations will fail, but that risks posed by these loans are “manageable.” (Watch a video clip of the exchange, above)
  • Similar concerns were raised by policymakers with Powell during a March 6 House Financial Services Committee hearing. The Fed chair addressed why he expects manageable bank losses and added, “We’ve had a secular change in the economy, which has left office demand significantly lower, at least temporarily, and perhaps for a long time. The same is true in some downtown retail (properties) associated with office workers. So it’s a shock to the system.”

Basel III Changes

Senate Banking Committee
  • The committees also heard Powell state that the “Basel III” regulatory proposal, which would significantly increase capital requirements for banks with at least $100 billion in assets, is likely to be overhauled after an enormous private sector response. He commented to the Senate panel, “We do hear the concerns and I do expect that there will be broad and material changes to the proposal.” He told House lawmakers that a rewrite of the proposal is a “very plausible option.” (Fortune and GlobeSt, March 7 | Bloomberg and PolitcoPro, March 6)
  • The Real Estate Roundtable raised industry concerns about the negative impact of the Basel III proposal in a Jan. 12 letter to the Fed and other agencies. The comments outlined how the proposal would decrease real estate credit availability, increase borrowing costs for commercial and multifamily real estate properties, and negatively impact the U.S. economy—and urged federal regulators to withdraw their proposed rulemaking.
  • The New York Times DealBook reported this week that Basel III could crimp lending as some banks struggle with office portfolios and a looming “maturity wall” of $1.5 trillion in CRE loans come due over the next two years. (New York Times, Feb. 7)

Industry Views

  • On March 6, Roundtable Board Member Scott Rechler (Chairman and Chief Executive Officer, RXR) told CNBC’s Squawkbox that high interest rates, price discovery, and the amount of maturing CRE loans have resulted in a “slow-moving train wreck” for regional banks.
  • Rechler, a member of the New York Fed’s Board of Directors, said, “There’s a balance. The longer rates stay higher, there’s more distress. For the industry, there’s enough imbalance right now that some level of rates moderating will help ease this transition.  Capital structures are upside down. They’re going to need to be re-equitized, there’s going to be write-offs. So if you can bring down (interest rates), it can create some transaction activity.” (Squawkbox, March 6)
  • Squawkbox also featured Roundtable Member Marty Burger (Infinity Global Real Estate Partners CEO and former Silverstein Properties CEO) on Feb. 28 to discuss office-to-residential conversion opportunities in the current CRE environment. (CNBC, Feb. 28)

Today, RER’s Immediate Past Chair Debra Cafaro (Chairman and Chief Executive Officer, Ventas, Inc.) discussed the CRE market with a focus on the senior housing sector on Bloomberg Markets. “For the commercial real estate sector writ large, those tightening financial conditions are having an impact, particularly in sectors like office, where you have the demand fall off. There will be an impact on the smaller lenders. It is something the system will have to absorb over time with $1 trillion of real estate loans coming due in 2024. It is having an effect. The best elixir for that might be lower rates,” Cafaro said.

#  #  #

Federal Reserve Supervisors Focused on Banks’ CRE Lending Risk

Michael Barr

Federal banking regulators are closely monitoring risk factors in commercial real estate bank lending throughout the United States, according to comments today from Federal Reserve Board Vice Chair for Supervision Michael Barr. This week, the Fed also released scenarios for its annual stress test for large banks that includes a 40 percent decline in commercial real estate prices—one of several hypothetical risks designed to assess the resilience of the banking system in the event of a severe recession. (Barr speech, Feb. 16 and Fed stress test, Feb. 15)

Managing CRE Risks

  • Barr stated today, “Let me turn to supervision of a specific risk: commercial real estate. The reduced demand for office space and higher interest rates have put pressure on some CRE valuations, particularly in the office sector.”
  • Barr noted that Fed supervisors are “closely focused on banks’ CRE lending in several ways.” He explained that regulators analyze how banks measure and report their risk, what steps they have taken to mitigate the risk of losses on CRE loans, and whether they have sufficient capital to buffer against potential CRE loan losses. (Barr speech, Feb. 16)
  • He also stated that today’s heightened financial risk environment has led the Fed to downgrade firms’ supervisory ratings at a higher rate in the past year and increase its issuance of enforcement actions. Barr said, “We continue to evaluate whether we should temporarily require additional capital or liquidity beyond regulatory requirements where the firm has trouble in managing its risks.” (PoliticoPro, Feb. 16)
  • Bloomberg reported that regulators determined that 22 regional banks late last year had CRE loan portfolios that merit greater scrutiny. (Connect CRE, Feb. 15)

Wave of CRE Refinance Meets Price Discovery

Roundtable Board Member Scott Rechler (Chair and CEO, RXR)
  • Bloomberg also reported this week that commercial property deals in the U.S. are starting to pick up at deep discounts, forcing lenders to brace for increased pressure on maturing loans. (Bloomberg, Feb. 14)
  • Roundtable Board Member Scott Rechler (Chairman and Chief Executive Officer, RXR) told Bloomberg that as more transactions add price discovery to the market, investors will have to recapitalize loans to reflect lower values.
  • Rechler said, “In 2024, we’re at that fifth stage of grief. People are now in acceptance.” He also commented on falling property values: “You can’t ignore that anymore. Depending on the severity of it, we’ll see who has actually marked appropriately and who hasn’t.”
  • RXR’s CEO told CNBC last week that “if you’re a borrower who’s willing to invest money, banks are willing to reduce their loan balances to reflect the current environment.” (CNBC, Feb. 6 and Roundtable Weekly, Feb. 9)
  • The Wall Street Journal reported this week that investors are starting to show interest in properties where building owners are unable to extend their loans. The article cites Trepp data that shows more than $2.2 trillion in commercial mortgages are scheduled to mature between now and the end of 2027. (WSJ, Feb. 12)

The Mortgage Bankers Association (MBA) reported this week that 20 percent ($929 billion) of the $4.7 trillion of outstanding commercial mortgages held by lenders and investors will mature in 2024. That represents a 28 percent increase from the $729 billion that matured in 2023, according to MBA’s Commercial Real Estate Survey of Loan Maturity Volumes.

#  #  #

Key Regulators View Banks’ Office Loan Concentrations as Manageable Risk

Fed Chair Jerome Powell and Treasury Secretary Janet Yellen this week said that federal regulators are closely monitoring bank loan concentrations in office properties for heightened economic risk but view the CRE sector’s financial challenges as manageable. (60 Minutes’ Powell transcript, Feb. 3 and Bloomberg video of Yellen testimony, Feb. 6)

Regulators Focus on CRE

Federal Reserve Chairman Jerome Powell on 60 Minutes
  • Chair Powell told CBS’ 60 Minutes, “We looked at the larger banks’ balance sheets, and it appears to be a manageable problem. It’s a secular change in the use of downtown real estate. And the result will be losses for the owners and for the lenders, but it should be manageable.”
  • Secretary Yellen also said economic pressures on office properties are “manageable” before the House Financial Services Committee on Feb. 6 and the Senate Banking, Housing and Urban Affairs Committee on Feb. 8.  Her testimony included a summary of findings from the Financial Stability Oversight Council’s annual report, which noted, “Elevated interest rates, high costs, and potential structural changes in demand for CRE have heightened concerns about CRE.”
  • CNBC’s Squawkbox interviewed Minneapolis Fed Pres. Neel Kashkari on Feb. 7 about the regulators’ CRE concerns. “It really is focused on the office sector. Many other segments within commercial real estate seem to be doing very well, so I think that delineation is important. And we think it’s going to be on a bank-by-bank basis where we see pressures flare up. Our bank supervisors are in very close contact with others around the country,” Kashkari said.

CRE Markets

Real Estate •	Roundtable Board Member Scott Rechler (Chairman and Chief Executive Officer, RXR)
  • Roundtable Board Member Scott Rechler (Chairman and Chief Executive Officer, RXR) told CNBC’s Squawkbox on Feb. 6 that commercial real estate markets in 2023 were “a little bit paralyzed” but that “if you’re a borrower who’s willing to invest money, banks are willing to reduce their loan balances to reflect the current environment.” (CNBC, Feb. 6)
  • A recent CRED iQ report found that more borrowers are modifying CRE loans. The report covers 441 loans with a total value of $13.6 billion (GlobeSt. Jan. 25)
  • CNBC’s Last Call interviewed House Financial Services Committee Member French Hill (R-AR) about capital and credit pressures on CRE on Feb. 1. Rep. Hill addressed the negative impacts of interest rates, fiscal policy, and inflation on the economy and the office sector—and the problems posed by the regulatory agencies’ Basel III “Endgame” proposal.

Separately, The Federal Reserve Board recently announced that its Bank Term Funding Program will cease making new loans on March 11. The program remains available as an additional source of liquidity for eligible institutions until that date. (Fed news release, Jan. 24)

#  #  #

Roundtable SOI Meeting Spotlights Monetary Policy, Liquidity, and Capital

The Roundtable’s State of the Industry (SOI) meeting this week explored monetary policy, international capital flows, commercial real estate market sector updates, and other national capital and credit issues included in RER’s 2024 Capital and Credit Policy Priorities.

Policy and CRE Markets

Debra Cafaro (Ventas) with former Fed Vice Chairman Randal Quarles
  • Debra Cafaro (Chairman & CEO, Ventas, Inc. | Immediate Past Chair, The Real Estate Roundtable) led a policy discussion with former Fed Vice Chairman Randal Quarles (Chairman, The Cynosure Group) on the “Basel III Endgame“ regulatory proposal to increase banks’ capital requirements; CRE loan exposure to the financial system; and the importance of retaining Fed independence from the political landscape.
  • CRE industry leaders offered market sector reports, including Roundtable Board Member Jodie McLean (Chief Executive Officer, EDENS) on retail; Thomas Toomey (Chairman and CEO, UDR) on multifamily; Dan Letter (President, Prologis) on industrial; Roundtable Board Member Owen Thomas (Chairman & CEO, BXP) on office; and Michael Lowe (Co-CEO, Lowe) on hospitality.
Foreign Investment panel during The Real Estate Roundtable's 2024 State of the Industry Meeting
  • Roundtable members also discussed market liquidity and international investment in U.S. real estate, including the negative impact of the Foreign Investment in Real Property Tax Act (FIRPTA) of 1980. A panel of experts included (left to right) David Friedline (Partner, Deloitte Tax LLP); Steve Hason (Managing Director, Head of Americas Real Assets, APG Asset Management US Inc.); Adam Gallistel (Managing Director, GIC Real Estate); and Max O’Neill (Managing Director, Blackstone). 
  • A presentation by Roundtable Senior Vice President Clifton E. (Chip) Rodgers, Jr. about the major capital and credit issues facing the industry can be downloaded here.

The Roundtable’s Real Estate Capital Policy Advisory Committee (RECPAC) plans to meet next in New York this spring.  Details on date, time and venue will be provided soon.

#  #  #

Roundtable and Industry Coalition Raise Concerns About Negative Impact of Basel III Endgame Proposal

The Real Estate Roundtable has raised concerns about the negative impact that the “Basel III Endgame” regulatory proposal would have on real estate credit and capital markets, urging federal banking regulators to withdraw their proposed rulemaking to increase capital requirements for banks with at least $100 billion in assets. The Roundtable’s letter Jan. 12 outlines how the proposal would decrease real estate credit availability, increase costs to commercial and multifamily real estate borrowers, and negatively impact the U.S. economy. (Roundtable comment letter)

Industry Opposition

  • The Roundtable letter states, “The largest U.S. banks’ capital and liquidity levels have grown dramatically since the original Basel III standards were implemented in 2013 in response to the 2008 Global Financial Crisis. So it is not clear what problem regulators are trying to solve with this proposed capital hike.”
  • The letter also noted that raising capital levels at the largest U.S. banks will only limit credit and feed a downward spiral that will put additional pressure on the financial system.
  • Additionally, The Roundtable filed a Jan. 16 letter, along with a coalition of nine national industry trade groups in opposition to the proposal, citing its potential negative impact on available credit capacity for commercial real estate transactions, market liquidity, and economic growth. (Industry coalition letter)

Fed Weighing Possible Changes

The Federal Reserve in Washington, DC

Federal Reserve officials are considering possible adjustments to key parts of the proposal, “including operational risk calculations and potential offsets for mortgage servicing,” according to the Federal Reserve’s Vice Chair for Supervision Michael Barr. “The public comment(s) that we’re getting on this is really critical for us getting it right. We take it very, very seriously,” Barr said. (Reuters and PoliticoPro, Jan. 9)

  • The Roundtable joined a coalition of 17 national trade associations in a letter to the Federal Reserve to oppose the proposal on Nov. 14. (U.S. Chamber of Commerce-led coalition letter, Nov. 14 and Axios, Nov. 16)
  • Real Estate Roundtable President and CEO Jeffrey DeBoer also stated in a March 2023 comment letter to Barr and other key regulators, “At this critical time, it is important that the agencies do not engage in pro-cyclical policies such as requiring financial institutions to increase capital and liquidity levels to reflect current mark to market models. These policies would have the unintended consequence of further diminishing liquidity and creating additional downward pressure on asset values.”

Wave of Impending CRE Maturities

  • This month’s Roundtable and industry coalition letters emphasize the banking proposal’s negative impact on real estate. The regulators estimate their own proposal would raise capital on the target institutions by 16% on average, which could have a profoundly negative impact on the availability of credit for commercial and multifamily real estate development—especially as interest rates remain high and the need for more affordable housing continues to grow.
  • The coalition letter also notes that the commercial and multifamily real estate industry is a $20 trillion dollar market supported by $5.82 trillion of commercial real estate debt, of which 50% is held by commercial banks.
  • Of that total debt, more than $2 trillion of CRE loans are maturing over the next four years. The letters address how the risks of raising capital levels at the largest U.S. banks would limit credit and exert downward pressure on the financial system.

National Media Reports Focus on CRE Pressures

Scott Rechler, left, speaks with 60 Minutes
  • This week, The Wall Street Journal reported on the impending wave of commercial real estate debt, which increases “the prospect of a surge in defaults as property owners are forced to refinance at higher rates.” The article also cited Trepp data showing that $602 billion in total debt backed by office buildings and other commercial real estate comes due in 2027. (WSJ, Jan. 16)
  • Additionally, CBS’ 60 Minutes on Jan. 14 televised a report on the pressures facing CRE that featured Roundtable Board Member Scott Rechler (Chairman and CEO, RXR), above left. “This post-COVID world of higher interest rates, the changing nature of how people work and live, we’re not going back to where we were,” Rechler said. “And it’s going to be turbulent.”

Capital and credit issues facing CRE will be a focus of discussion at next week’s all-member Roundtable State of the Industry meeting on Jan. 23-24 in Washington, DC.

#  #  #

The Roundtable and Coalition Request Reproposal of Basel III Capital Rulemaking as Banking Regulators Face Bipartisan Congressional Opposition

The Real Estate Roundtable joined a coalition of 17 national trade associations in a Nov. 14 letter to the Federal Reserve, urging regulators to repropose a sweeping set of proposed rules—known as the “Basel III Endgame”—that would increase capital requirements for the nation’s largest banks. Meanwhile, the nation’s top federal banking regulators testified this week before congressional committees, where they faced stiff bipartisan opposition to the proposal. (U.S. Chamber of Commerce-led coalition letter, Nov. 14 and Axios, Nov. 16)

Bipartisan Opposition

  • In July, the regulators jointly approved the 1,100-page proposed Basel III rulemaking, which aims to guard against potential risk by increasing capital requirements for banks with at least $100 billion in assets. The proposal could have a significant impact on available credit capacity for commercial real estate transactions, as well as undermine liquidity and economic growth. (Roundtable Weekly, Nov. 10 and CQ, Nov. 15)
  • Sen. Chris Van Hollen (D-MD) stated that higher capital standards could impede investment in clean energy while Sen. Bob Menendez (D-NJ) emphasized that higher capital requirements pose a risk for mortgage loans to low-income and minority buyers. (Axios, Nov. 14)
  • Before the hearings, Senate Banking Committee Ranking Member Tim Scott (R-SC) led 38 of his colleagues in a Nov. 13 letter to the Federal Reserve, Federal Deposit Insurance Corporation (FDIC), and Office of the Comptroller of the Currency (OCC) to withdraw the Basel III Endgame proposal.
  • House Financial Services Committee Chairman Patrick McHenry (R-NC) and Subcommittee on Financial Institutions and Monetary Policy Chairman Andy Barr (R-KY) also sent letters to the regulators on Nov. 14, claiming the Basel III regulations would put the nation’s financial system at a competitive disadvantage.

More Feedback for Basel III

Federal Reserve Vice Chair for Supervision Michael Barr
  • During the hearings, the Fed’s Vice Chair for Supervision Michael Barr defended the proposals, yet responded that regulators are “quite open to comment, and we want to improve the rule before we get to a final rule.”
  • On Oct. 20, the Federal Reserve, FDIC, and OCC announced an extension of the comment period on the Basel capital proposal from Nov. 30, 2023 to Jan. 16, 2024. The agencies also launched a quantitative impact study to clarify the estimated effects of the proposal, with the data collection deadline also due Jan. 16.
  • Since the deadline for stakeholder comments is the same day as the impact study’s final data collection deadline, there is broad concern that the regulators’ failed to provide industry participants with an opportunity to assess and comment on any of the Agencies’ collected data.  (Roundtable Weekly, Oct. 27)

The Roundtable’s Real Estate Capital Policy Advisory Committee (RECPAC) discussed the capital requirements proposal during its Nov. 8 meeting in New York. RECPAC welcomes Roundtable membership input as it works on a Basel III comment letter due in January. (Contact Roundtable Senior Vice President Chip Rodgers)

#  #  #

Policymakers Address Basel III Endgame’s Capital Requirements Proposal

This week, policymakers addressed proposed regulations to increase capital requirements for the nation’s largest banks, known as the “Basel III Endgame,” which could have a significant impact on available credit capacity for commercial real estate transactions, as well as undermine liquidity and economic growth.

Congressional Hearings

  • The House Financial Services Subcommittee on Financial Institutions and Monetary Policy, chaired by Rep. Andy Barr (R-KY), held a Nov. 7 hearing focused on an array of federal financial regulations, including the Basel III proposal.
  • Chairman Barr stated that U.S. financial regulators have increasingly ceded portions of their authority to international and domestic intergovernmental organizations, which has decreased transparency in development of U.S. regulatory frameworks and reduced regulators’ accountability. (Barr’s opening remarks, Nov. 7 and Committee memo, Nov. 2)
  • House Financial Services Committee Chairman Patrick McHenry (R-NC) and Subcommittee Chairman Barr recently requested the Government Accountability Office (GAO) to examine the role U.S. federal banking agencies played in developing the recent international Basel proposal. (McHenry-Barr Letter, Oct 20)
  • The Senate Banking Committee announced that top U.S. financial regulators will testify on Nov. 14 about their sweeping plan to increase bank capital requirements.

Views from the Regulators

  • Federal banking regulators announced last month an extension of the comment period on the Basel capital proposal from Nov. 30, 2023 to Jan. 16, 2024. Additionally, the agencies announced a quantitative impact study to clarify the estimated effects of the proposal, with data collection due the same date as the comments—Jan. 16. (Fed news releases, Oct 20)
  • While the quantitative impact study is a positive development, the timing of the study fails to provide industry participants with the opportunity to assess its results or comment on the collected data before the Jan. 16 deadline. Regulators often grant the public ample time (120 days) to analyze and comment on such an impact study after it is released. (Roundtable Weekly, Oct. 27)
  • This week, Fed Governor Michelle Bowman criticized the scope of the Basel proposal in two speeches. On Nov. 7 and today, Governor Bowman stated, “While the capital proposal reflects elements of the agreed upon Basel standards, it is not a mere implementation of the Basel standards. In this proposal, the calibration—with a large increase in capital requirements for U.S. firms—far exceeds the Basel standards mandate. There has been growing support for improving the proposal’s quantitative, analytical foundations, including the need for and impact of capital increases of this scale.”

The Roundtable’s Real Estate Capital Policy Advisory Committee (RECPAC) met in New York City yesterday to discuss the Basel proposal, other federal policies impacting capital and credit issues, and market conditions. RECPAC has established a working group on Basel III to develop comments, due by Nov. 30, on the Basel III Endgame proposal.

#  #  #

SEC Commissioner and Key Senators Support Further Analysis of Climate Disclosure Proposal

The U.S. Securities and Exchange Commission (SEC) headquarters in Washington, DC

One of the commissioners from the Securities and Exchange Commission (SEC) and two U.S. Senators suggested this week that further analysis may be needed for a highly anticipated SEC rule on climate reporting, which includes a proposal for sweeping disclosures on Scope 3 GHG emissions. (Bloomberg Law, Nov. 7 | SEC headquarters in Washington, DC, above)

Stakeholder Comments

  • Given that the SEC has received more than 16,000 stakeholder comments on the proposal, Republican SEC Commissioner Mark Uyeda said, “Before the Commission adopts any final rule that significantly deviates from the proposal, it should seriously consider re-proposing the rule with revised rule text and an updated economic analysis.” (Ayuda’s comments, Nov. 7 and The Hill, April 6)
  • SEC Chair Chair Gary Gensler indicated in March that the agency’s climate-related reporting rule may be scaled back. (CNBC, March 7 and Roundtable Weekly, March 10)

Senators Support Additional Feedback

Sen. Bill Hagerty (R-TN), left 
Member, Senate Committee on Banking, Housing and Urban Affairs
and Roundtable Board Member Geordy Johnson (CEO, The Johnson Group)
Sen. Bill Hagerty (R-TN), left, and Roundtable Board Member Geordy Johnson (CEO, The Johnson Group) at The Roundtable’s 2023 Annual Meeting in June.
  • Sens. Bill Hagerty (R-TN) and Joe Manchin (D-WV) also expressed support this week for obtaining additional feedback about the SEC’s proposed rule. Sen. Manchin chairs the Senate Energy and Natural Resources Committee and Sen. Hagerty serves on the Senate Banking Committee. (Hagerty-Manchin letter and PoliticoPro, Nov. 9)
  • The lawmakers wrote to SEC Chairman Gary Gensler about recent California state laws that require companies to disclose their emissions, which beat the SEC to the punch on releasing final climate reporting rules. (Roundtable Weekly, Sept. 22 and The Real Estate Roundtable’s summary of the California legislation.)
  • The Senators’ letter states, “The interconnectedness of the California requirements and the SEC’s proposal is undeniable: thousands of businesses would end up being subject to both the California requirements and the SEC’s rule, if finalized. However, key differences between the two raise significant compliance questions that the SEC should thoroughly review.”

Roundtable Comments on Scope 3

Philadelphia center city
  • 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 in June 2022 emphasized that the SEC’s proposed directive, which would mandate that companies report on Scope 3 emissions “only if material,” is a “back-door mandate” that should be dropped. The comment letter added, “No registrant should be effectively required to report on indirect emissions beyond its organizational or operational boundaries.” (Roundtable Weekly, June 10, 2022),

The Roundtable’s Sustainability Policy Advisory Committee (SPAC) plans to respond to any further developments on the SEC’s proposed climate disclosure rule or other climate-related regulatory proposals affecting CRE.

#  #  #