Interest Rates Lead Real Estate Outlook for 2023

In a Jan. 1, 2023, article titled “Interest Rates Top Real Estate Pros’ Federal Agenda for 2023,” Law360 reported that the real estate industry is closely tracking the Federal Reserve’s handling of interest rates in the coming year amid lingering economic uncertainty, while also monitoring White House efforts to boost housing supply nationally. McDonald Carano Partner Rob McPeak was quoted in the article sharing his insights:

Tracking Housing Supply — “I think the intentions are good, but it does take some time to get the money from Washington out to where it needs to be, and then it’s also a process to get projects approved and zoned and financed,” said Robert E. McPeak, a partner at McDonald Carano in Las Vegas. “I think we’ll see improvement in that direction next year. I know locally there have been a number of new low-income housing projects and partnerships between private developers and the municipalities talked about and they’re being pursued. It’s kind of a wait-and-see.”

Keeping Tabs on Like-Kind Exchanges — Ultimately, the reform was put on hold and discussion about it has been muted since, but commercial real estate professionals continue to track it, said McPeak. The attorney added that several of his clients often rely on the like-kind property trades to extract equity for new investments, particularly at a time like this when they are not looking to realize their gains. “I think there was enough pushback from the industry, all the political parties to take a second look at that and maybe come out with something a little more considered that might work,” McPeak said.

 

 

The complete article is provided below.

Interest Rates Top Real Estate Pros’ Federal Agenda For 2023,Law360, 1/2/2023

 

The real estate industry is closely tracking the Federal Reserve’s handling of interest rates in the coming year amid lingering economic uncertainty, while also monitoring White House efforts to boost housing supply nationally. How Congress, whose control is once again divided, chooses to address spiking rents and what advocates see as lax tenant protections, and the administration’s approach to a controversial, if dormant, tax proposal that opponents believe would unfairly undercut real estate deals are among the other issues that several industry insiders said they are watching out of Washington. “For federal policy, interest rates are the one thing we are looking at most intently: where will they settle and when?” said Michael J. Rishty, co-head of Davis Polk & Wardwell LLP’s real estate practice in New York. “I think the uncertainty around that today is slowing the transaction volume, but we’re hopeful that once there is some sense of where the rates will stabilize, transactions will be able to get priced appropriately again and the volume will start to increase.”

All Eyes On The Fed
In 2022, stubbornly high inflation led the Federal Reserve to raise interest rates seven times. In its last hike of the year on Dec. 14, the central bank upped the rate half a percentage point after four consecutive 0.75% increases. The slightly smaller increase came amid tentative signals that price growth was finally slowing. The Fed’s policy piled on supply-chain disruptions stemming from the pandemic and Russia’s more recent invasion of Ukraine, sky-high costs for goods and services, and fears of a looming recession. Together, those dynamics put the brakes on real estate transactions, squeezing the housing market in particular between fast-rising mortgage payments and an intractable if long-running shortage of homes.  At the turn of the year, on the backdrop of a persistently tight labor market, it remained unclear whether the U.S. economy was indeed headed for a downturn or whether a soft landing was still in the cards. Fed officials indicated at their December meeting that they expect further interest rate increases in the new year, albeit more gradual ones. “Interest rates are key to our business,” said Brian S. Lichter, the other New York-based co-head of real estate at Davis Polk. “We are going to see more transaction flows, whether it’s the distressed transactions which we really didn’t see as much as I think most people were expecting with COVID, or whether there’s actually going to be some real upside transactions coming out of this. It’s just a question of when.”

Tracking Housing Supply
The higher interest-rate environment has had an outsized impact on the housing sector, piling on an already dire crunch that, according to an estimate by the White House, sees the country lacking more than 1 million affordable homes. The administration launched an ambitious push to boost the national housing supply in the spring. With local zoning and building rules constraining the ability of federal officials to directly influence the space, the White House relied on a slew of financial and fiscal incentives to convince states, counties and municipalities to embrace denser development centered on public transportation and affordable housing. “I think the intentions are good, but it does take some time to get the money from Washington out to where it needs to be, and then it’s also a process to get projects approved and zoned and financed,” said Robert E. McPeak, a partner at McDonald Carano in Las Vegas. “I think we’ll see improvement in that direction next year. I know locally there have been a number of new low-income housing projects and partnerships between private developers and the municipalities talked about and they’re being pursued. It’s kind of a wait-and-see.”

As part of the White House’s raft of initiatives, the Treasury Department in September finalized a long-awaited reform of the Low Income Housing Tax Credit, or LIHTC, to make it easier for developers and investors, primarily banks, to further avail themselves of this vital incentive to finance and build restricted-income properties. When and how the income-averaging rule translates into new affordable development is something that advocates will be watching in 2023, said Sarah Saadian, senior vice president of public policy and field organizing at the National Low Income Housing Coalition. “I don’t think that’s something that is going to immediately result in more housing being built, but it’s certainly something that we’re paying attention to,” she said. “We want to see how it works on the ground, how our community is using that new flexibility … we want to make sure that it’s actually resulting in more units that are serving people with the lowest incomes and the greatest needs, because, right now, on its own, the low-income housing tax credit often is not enough to serve those households.”

Keeping Tabs On Like-Kind Exchanges
Another federal tax initiative real estate pros have had their eyes on for more than a year involves the deferral of capital gain taxes on real property used in like-kind exchanges under the Internal Revenue Code Section 1031. President Joe Biden in September 2021 floated further restricting the program after a 2017 reform had imposed a cap on the deferral of $500,000 for individuals and $1 million per couple on exchanges of personal property. The proposal triggered opposition from multiple quarters, including several federal lawmakers and the commercial real estate industry, for which the new ceiling would essentially put the 1031 program out of reach. Ultimately, the reform was put on hold and discussion about it has been muted since, but commercial real estate professionals continue to track it, said McPeak. The attorney added that several of his clients often rely on the like-kind property trades to extract equity for new investments, particularly at a time like this when they are not looking to realize their gains. “I think there was enough pushback from the industry, all the political parties to take a second look at that and maybe come out with something a little more considered there that might work,” McPeak said.

Reckoning With A Split Congress
Regardless of the merits of individual proposals, real estate pros told Law360 they don’t expect far-reaching legislative activity coming out of Washington after Republicans took back control of the House of Representatives in the midterm elections in November while Democrats kept their Senate majority. “When there is divided government, there’s obviously not a lot that’s going to come out of Washington,” said Lichter of Davis Polk. “I think that actually leads to some certainty in terms of there likely being no new legislation coming out of the woodwork that people may not be expecting.”  In January, Rep. Patrick McHenry, R-N.C., will take the helm of the House Financial Services Committee from Maxine Waters, D-Calif., gaining the power to set the committee’s agenda on all things housing.  According to Saadian of the National Low Income Housing Coalition, it is unclear just how much attention he and his Republican colleagues plan to devote to housing.  “Ideally, there’s a potential here for Republicans to want to work on improvements to existing programs, or tweak things to streamline programs and make them work better,” she said. “If that’s the case, I think that you could see that sort of legislation move forward. But it’s a little harder to see new dollars being put into housing.”  A spokesperson for Republicans on the committee did not respond to requests for comment.

Watching Out For Democratic Action
Meanwhile, the Senate Committee on Banking, Housing and Urban Affairs plans to advance its ongoing efforts to tackle the lack of housing options for people with the lowest incomes, zoning’s role in constraining new construction, the growing presence of Wall Street landlords in the single-family and manufactured housing spaces, and the sudden and drastic rent increases seen across the country in recent months, according to a committee aide. The committee will also continue to focus on addressing racial and ethnic disparities as part of its work on all of these issues.  According to the aide, even though the outgoing Congress approved short-term relief for struggling homeowners and renters during the pandemic with various programs, such as those under the American Rescue Plan Act in the spring of 2021, some of the root causes of the housing crisis have become even more entrenched. “We are hoping to explore those issues and work on legislation to address them in the next Congress,” the aide said.  As advocates in particular wait to understand how Republicans might want to partner or respond to such plans, they are also looking at the president to take some action through his executive authorities.

“We’ve been encouraging the administration to take action on renter protections, look at things like anti-rent gouging measures or putting in place habitability standards, source-of-income protections and things of that sort on federally backed mortgages,” Saadian said. “In fact, we and many tenant leaders who we work with were invited to the White House recently to talk about the importance of renter protections.” A spokesperson for the Department of Housing and Urban Development told Law360 via email that HUD plans to push ahead with efforts to create more housing, ensure equity across its programs, and prioritize prospective owner-occupants and nonprofit organizations over institutional investors when selling foreclosed or vacant properties.  “In 2023, we will be using the Green and Resilient Retrofit Program, HOME Investment Partnerships American Rescue Plan Program funds, and partnerships with Treasury’s State and Local Fiscal Recovery Fund to achieve our goals to expand the supply of affordable housing,” the spokesperson wrote. HUD is also continuing the work of transposing new Department of Energyefficiency standards for manufactured homes into its construction manual, after an advisory committee met in Washington, D.C., in the fall to provide recommendations on the best way forward. “Feedback received from these meetings is being assessed,” the spokesperson wrote. “We cannot speculate at this time on the nature of, or timing for, a final rule.”


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