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CRE Finance Council Focuses On Commercial/Multifamily Debt Markets, Housing Affordability, ESG, CRE Technology, and LIBOR Transition At Recent Miami Conference

The CRE Finance Council (CREFC), the industry association that exclusively represents the $4.4 trillion commercial and multifamily real estate finance industry, completed its Annual January Conference last Wednesday in Miami. Over the course of the four-day conference, industry leaders and member organizations participated in thought provoking panels, roundtables, forum discussions and networking events at the Loews Miami Beach.

“We pride ourselves on a long history of substantive panels and forums that provide our conference attendees not just a glimpse into the issues at hand, but a deep dive into critical developments affecting the future of our industry,” noted Lisa Pendergast, CREFC Executive Director. “To the good, we are entering a new decade with strong market fundamentals and an economy fueled by both robust labor markets and historically low interest rates. We are watching as several issues come to the forefront this year including the systemically important transition from the longstanding LIBOR floating-rate benchmark to SOFR, housing affordability, fintech, climate change and the potential impact the results of the 2020 elections will have on commercial and multifamily assets.”

Key themes, many of which will take center stage during the 2020 election and beyond, dominated the discussions among industry leaders at CREFC’s January Conference:

Policy and Government Relations

Legislative and regulatory decisions made by policymakers in Washington, D.C. continue to have a significant impact on our industry. The conference delivered inside-the-Beltway analyses of what occurred in Washington, D.C. in 2019 and what lies ahead in 2020.

CREFC’s Policy and Government Relations Team highlighted several positive developments for the industry in 2019, including the seven-year reauthorization of The Terrorism Risk Insurance Program (TRIA) and the shorter-term extension of the National Flood Insurance Program (with long-term reauthorization still in negotiation). The final High Volatility Commercial Real Estate (HVCRE) rules were also published and substantially conformed to CREFC’s recommendations. The industry is currently implementing the final HVCRE rules. Also notable, the Current Expected Credit Losses (CECL) rules were finalized and became effective for most CREFC members on January 1; importantly, the deadline for some medium and smaller financial institution compliance was extended for one year to January 2023 to allow for further preparation to comply.

In 2020, CREFC members will continue work with policymakers to revise Dodd-Frank rulemakings such as the Volcker rule, finalize capital rules such as the Net Stable Funding Ratio and implement legislative reforms to ‘know your customer’ rules such as beneficial ownership requirements and cannabis banking.

Housing Affordability + Rent Control

CREFC continues to be an important voice for the industry on the issues of GSE multifamily reform and Housing Affordability. Its members have provided federal policymakers such as Treasury and the FHFA with first-hand insights into these issues and cemented CREFC as an integral component in this dialogue. In 2020, CREFC’s membership will focus on a host of housing affordability and multifamily reform issues, including revisions to the Home Mortgage Disclosure Act (HMDA), the Community Reinvestment Act (CRA), GSE capital rules and FHLB eligibility. CREFC will continue to support the development of a vibrant multifamily finance marketplace in both the public and private sectors through its work with regulators, legislators and member stakeholders with the long-term goals of releasing the GSEs from conservatorship and meeting the nation’s housing affordability demands.

LIBOR to SOFR Transition

Expert background and updates of the transition from LIBOR to the Secured Overnight Financing Rate (SOFR) were shared through a dynamic conversation about its industry implications. A number of 2020 developments should ease the way for the development of a robust SOFR term structure, including ISDA’s finalizing its amended definitions to include SOFR as the replacement rate for USD LIBOR in the coming months as well as a change in discounting methodology to include SOFR by the major central counterparty clearinghouses (CCPs). CREFC expects these events to drive increased liquidity in both SOFR futures and debt issuance – both critical components to derive a term structure for SOFR, which does not exist today. In addition, the New York Fed announced plans to publish 30-, 90-, and 180-day compounded averages for SOFR in the first half of 2020. In December, Freddie Mac successfully priced a CMBS transaction with a bond class indexed to SOFR and CREFC anticipates more securitizations to follow. CREFC plays an important role in bringing awareness of these critical events and will work with its members to help facilitate a smooth transition. Note that in 2020 CREFC enters its second year as a full member of the Federal Reserve’s Alternative Reference Rates Committee (ARRC).

Technology + ESG

2020 will be the year to fully embrace CRE technology and focus on ESG issues more than ever before. Many of the conference’s panels and keynote speakers focused on how to capture and organize data to streamline industry functions and improve overall reporting. Panelists and conferees debated the current state of climate change, the status of implementing ESG objectives and the future implications to the CRE finance industry. The overarching theme is that what we do now matters. It was noted that Millennials are driving much of the momentum, and that those who choose not to embrace ESG may see reduced liquidity in the finance and debt markets.

“We are very proud of the robust and energetic participation of our members at Miami 2020 as they are the true lifeblood of our organization,” noted Chuck Lee, Head of CRE Securitization and Warehouse Finance at Credit Suisse Securities and Chair of CREFC’s Executive Committee. “I want to specifically thank the amazing panelists and forum leaders, participants and CREFC staff, as well as our keynote speakers, industry greats Barry S. Sternlicht, Chairman and CEO of Starwood Capital Group, and Thomas Flexner, Vice Chairman of Citigroup Global Markets, as well as David Gergen, Professor at the Harvard Kennedy School and former advisor to several presidents who added tremendous insight into yesterday’s, today’s and tomorrow’s politics and public policy. We are proud of the health of our industry and look forward to a successful 2020.”


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Multifamily Investors See This As ‘The Biggest Risk To Our Industry’

Local governments from New York to California have moved forward with new rent control laws this year in an attempt to address the housing affordability crisis. But multifamily investors say the laws are pushing them away from those markets, and they fear the trend could spread to other cities.

New York in June passed a law expanding rent regulations that affect nearly 1 million apartments in New York City, which was widely condemned in the commercial real estate industry. Oregon in February passed the nation’s first statewide rent control bill and California followed suit last month with passage of its own statewide rent control law.

TruAmerica Multifamily co-Chief Investment Officer Matt Ferrari, whose firm has over 40,000 units under management across 11 U.S. states, including California and Oregon, said the new laws are hurting those markets. He said they disincentivize owners from renovating properties, depress property values and decrease investment. He said he already sees capital fleeing those markets, and he is worried about more markets expanding rent control.

“It’s probably the biggest risk to our industry is this having a contagion effect from these deep blue states, New York and California, and eventually spreading across the country,” Ferrari said Thursday at Bisnow’s Multifamily Annual Conference East in D.C. “It could really impact our business long term.”

D.C. is currently considering expanding its rent regulations. The District has a law in place that passed in the 1980s and regulates rent for about 80,000 apartments built before 1975. But that is down significantly from a peak of 130,000 rent-controlled units, and the remaining 80,000 could become market-rate units next year if the D.C. Council doesn’t extend the law.

Council Member Anita Bonds, who chairs the D.C. Council’s housing committee, introduced a bill to extend the rent regulations to 2030 and is scheduled to hold a hearing on it Wednesday. In addition to expanding the program, activists are calling for the D.C. Council to adopt more aggressive rent control measures that would lower the rent increase cap, cover all buildings constructed before 2005 and make all new units subject to rent control after 15 years.

The D.C. Building Industry Association has come out against these proposals, arguing it would make it harder for the city to reach Mayor Muriel Bowser’s goal of building 36,000 new housing units by 2025.

“Rent control exacerbates the housing shortage because it does not do anything to address why rents are rising,” DCBIA CEO Lisa Maria Mallory wrote in a Washington Business Journal op-ed last week. “The one issue that nearly every economist agrees is that rent control just makes housing worse.”

Some investors are already shying away from the D.C. area for fear of new rent control laws, Melnick Real Estate Advisors founder Scott Melnick said. He said he recently had a buyer seeking to invest $110M as part of a 1031 exchange deal, and they limited their search to less-regulated states like Georgia, Texas and Florida.

“We’re seeing people want to skip over this region because they know it’s coming,” Melnick said of rent control. “Investors now are not just looking at the House and the Senate, they’re looking at the county council and how it’s made up to see what’s coming.” Harbor Group International Director of Acquisitions Matt Jones, whose firm has a nationwide portfolio of 33,000 multifamily units, also said he expects stronger rent control laws to be enacted in the D.C. area.


“We’re definitely seeing capital that used to be New York City multifamily-focused fleeing that regulatory environment,” Jones said. “My view is that regulatory environment is following them down I-95, and we’re not a decade away from those concerns in many of the markets down here.”

FCP principal Jason Bonderenko said several of his recent deals have involved buyers fleeing the New York City market, likely because of rent control.

“I can tell you we recently sold properties in Philadelphia, [D.C.], Atlanta, the Carolinas, and it was all New York buyers on all those deals,” Bonderenko said. “That trend is happening in a very big way.”

The Donaldson Group CEO Carlton Einsel, whose portfolio is largely concentrated in the D.C. area, said politicians support rent control because they want to appear to be tackling the affordable housing issue, even if most economists agree it is not an effective solution. He said it is up to commercial real estate leaders to come up with better solutions to the problem before more governments enact rent control.

“There is an affordable housing issue, and as an industry we have to do something to help solve it, because if we can’t, it will be solved for us by politicians that are going to do rent control,” Einsel said.

Jefferson Apartment Group CEO Jim Butz said he sees housing affordability and rising rents in major cities as an important issue, but he said cities trying to address it with rent control laws are only creating new problems. He is worried about the increased regulations spreading across the East Coast.

“One of the bigger trends we have to be careful about in Washington, in Philly, obviously in New York, and a little bit in Boston, is rent control,” Butz said. “That would potentially shut down the market and really put a chill on institutional investment.”

Morgan Properties President Jonathan Morgan, one of the region’s most active multifamily buyers in recent years, said rent control measures are forcing investment firms like his to expand to less-regulated markets.

“We’re concerned about rent control as well,” Morgan said, after hearing several other investors express their concerns. “The affordability issue in this country is not going away any time soon, but rent control I think is the wrong solution … it’s making a lot of the owners like us and others invest in new markets.”

The criticism of rent control at Thursday’s event was not limited to investors that own apartments — a federal government official also referred to the local laws as having harmful consequences.

Department of Housing and Urban Development Deputy Chief of Staff Alfonso Costa Jr. cited reports from the National Multifamily Housing Council and Stanford University that detail the negative impacts of rent control.

“Although rent control in the short-term might reduce displacement, it can have a very deleterious impact on housing supply and prices,” Costa said. “You have landlords that are going to be less likely to address capital repair needs, that will defer maintenance and will turn their rental units into owner-occupied units and sell them. Ultimately it can have a very adverse impact and unintended consequences.”

Costa joined NHMC CEO Doug Bibby and U.S. Sens. Chris Van Hollen (D-MD) and Todd Young (R-IN) on the event’s keynote panel. The senators did not discuss rent control, but stay tuned for more coverage on the ideas they raised to address housing affordability.

Source:  Bisnow

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Rent Reform In New York, California Propels New Wave Of Multifamily Investors To Miami

First, it was tax reform that pushed CEOs, hedge fund managers and other high-net-worth individuals to South Florida. They were lured in by the favorable climate, luxury residential properties and most of all, substantial tax savings.

Now, it is the multifamily investors who are heading to South Florida, and for a different reason: rent control, something the Sunshine State lacks.

In June, New York state passed a sweeping rent reform law, expanding its protections for millions of rent stabilized tenants. The law dramatically limits how landlords can increase rents on stabilized apartments and opens the door for rent stabilization to expand outside of New York City. It stopped short of a rent cap, but that is expected to be on the table in some form in the next legislative session.

In Illinois, although rent control advocates lost a legislative battle earlier this year, they’re gearing up for a push to overturn the statewide ban on rent control in Springfield next year. And California is now poised to implement a statewide cap on annual rent increases.

Multifamily investors are moving quickly and making offers on properties in South Florida, brokers say. But they are also encountering a strong rental market and low supply, which have pushed up prices.

Eleventrust, a commercial brokerage in Miami, is working with investors from New York and Los Angeles who are looking to shift their focus to Florida because of the impact the new laws will have on their current investments.

Jose Ramos, a broker with Eleventrust, said at least 40 percent of the calls it’s getting have been from New York investors who want to close on properties in South Florida. “There’s a lot of confusion, a lot of focus on getting their money out of there and getting it into high-yield markets,” he said.

The brokerage is negotiating with two groups of investors to acquire apartment properties, via 1031 exchanges. One is for the River Lofts Apartments, a 43-unit complex at 500 to 522 Northeast 78th Street in Miami’s Upper East Side neighborhood, which hit the market with Ramos and Rafael Fermoselle, Eleventrust’s managing partner, earlier this year. It’s on the market for about $7.8 million.

Ramos and Fermoselle are showing investors properties in gentrifying markets like Little River, Little Havana and Allapattah. “The thing with Miami-Dade specifically is there’s not a lot of product that’s big enough,” Fermoselle said.

The investors they’re dealing with are looking for deals in the $5 million to $30 million range.

Deme Mekras, managing partner of MSP Group, has also received offers from New York buyers who plan to invest in South Florida multifamily properties because of the recent rent reform measures. New Yorkers especially, are more comfortable with properties in the urban cores, he said.

Rent reform is also becoming a national issue, as more than a third of Americans are considered rent-burdened. The problem is worse in South Florida, according to a report from Freddie Mac earlier this year, which found that Miami ranked as the most rent-burdened market in the U.S.

Vermont Sen. Bernie Sanders, a self-described Democratic socialist, is proposing a $2.5 trillion housing plan that would cap annual rent increases at 3 percent or one and a half times the consumer price index, whichever is higher.

Searching For Yield

Multifamily investors from out of state would prefer to spend their money on one large deal but are challenged by a lack of supply, brokers said. They’re non-institutional players, looking to spend in the range of $30 million and $40 million.

But because South Florida’s rental market has remained strong, some sellers aren’t willing to part with their property. And if they are, the prices are too high. Rents have increased by 15 to 20 percent over the last eight years, according to Hernando Perez, director of multifamily investment sales for residential brokerage Franklin Street. More people are also moving to Florida, in part because of the favorable tax climate.

“There are not a lot of deals that make sense and not a lot of deals to buy,” he said.

Perez said he is seeing a number of California buyers looking to use the proceeds of 1031 exchanges to buy in South Florida. They cited the pending statewide rent control legislation, known as AB 1482, as a reason. Perez said he is working with a group that wants to spend $10 million for a multifamily building. The group, which Perez declined to identify, is looking at properties in Hallandale Beach, Fort Lauderdale and Pompano Beach.

And what if Florida was to enact similar statewide rent regulations? Simple, Perez said.

“It would crush the profitability of the real estate market.”


Source:  The Real Deal

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