WASHINGTON—The Health Care and Financial Services Subcommittee held a hearing titled, “Removing Regulatory Impediments to Ensure the Health and Continued Strength of the Commercial Real Estate Market,” to examine the current state of the commercial real estate market and discuss how Biden Administration policies and regulations have impacted significantly increased costs and vacancies.
Highlights:
President Biden's policies during the pandemic have created an inflationary crisis that has led to high interest rates and record refinancing put-offs.
At the last Health Care and Financial Services Subcommittee hearing, the Subcommittee examined how the Democrats' so-called Inflation Control Act (IRA) did not control inflation, but rather doubled the budget deficit and increased prices. The Federal Reserve raised interest rates to combat the runaway inflation caused by the Biden Administration and Democrats, resulting in record loan originations and a 117% increase in commercial residential foreclosures.
A strong real estate industry is vital to both tax revenue and jobs in the local economy.
“The real estate industry directly supports more than 15 million jobs in our economy, and real estate asset values and transaction volumes are major sources of tax revenue for local budgets that fund education, road building, law enforcement and emergency planning,” said Jeffrey DeVore, president and CEO of the Real Estate Roundtable, in his opening remarks, emphasizing the value of commercial real estate to local communities.
Rising interest rates, combined with increased vacancies due to the post-COVID-19 shift to working from home, are posing challenges for property values.
“While private sector office space occupancy is slowly recovering, federal workers are continuing to act as if the pandemic is still alive, even as President Biden has called on agencies to resume operations. We applaud the Committee's work on the SHOW UP Act and believe more needs to be done,” DeVore said in his opening remarks.
READ MORE: Rep. Comer applauds House passage of SHOW UP Act
Member highlights:
Subcommittee Chairwoman Lisa McClain (R-Mich.) discussed the current state of the $20 trillion commercial real estate market.
Senator McClain: “How do we plan and what steps do we need to take now to ensure sustainability and to make sure we don't fall into crisis?”
“What concerns me is that inflation has been rising steadily over the past two years. In response, the Federal Reserve has raised interest rates by more than 550 basis points. We have consistent data showing that vacancies are increasing, delinquencies are rising, and foreclosures spiked last month. […] “How concerned are you about the current real estate market?”
DeVore: “I would say the level of concern is high. These mortgages need to be extended and restructured. The current banking system is not necessarily incentivized to do that.”
Rep. Eric Burleson (R-Mo.) discussed the impact that interest rate increases imposed by the Federal Reserve to combat inflation caused by Democratic spending are having on commercial real estate.
Senator Burleson: Do you think the Democratic bills, the Stop Inflation Act and the American Rescue Plan, have actually been successful in lowering inflation and ultimately interest rates?
DeBoer:[…] “I would say the rate hikes will mostly apply to the commercial real estate industry and car buyers. A large part of the economy isn't even covered by the rate hikes.”
Senator Burleson: “So, we’re experiencing higher interest rates than we’ve ever experienced before. […] What economic impact is it having on your industry?”
NorthMarq CEO Weidel: “From a mortgage finance perspective, this is pretty simple. And this is consistent with what's going on in the residential space. A lot of the existing mortgage rates seem to be around 4%. In the current market, let's say 6.5%. This is a big correction.”
Rep. Glenn Grothman (R-Wis.) examined how commercial operating costs have increased as prices have risen over the past few years.
Senator Grossman: “Can you give us an example of commercial development? Leaving aside interest rates, how much have properties under construction increased in value in the last three years since the government debt has increased so much?”
DeBoer: “I think it's tough to find a company like this in the last three years of the economy going up. Office buildings are down 30 to 40 percent. Interest rates have gone up, so all property values have gone down.” […] Regarding operational costs, keep in mind that insurance premiums have increased significantly over the last few years.”
Rep. Grossman: “The cost of building residential real estate has increased significantly. Has this affected the cost of building commercial real estate?”
DeVore: “Yes, that's true. The costs of land, labor and materials have all gone up. That's correct.”
Rep. Virginia Foxx (R-N.C.) noted that junk fees have a negative impact on commercial real estate development.
Senator Fox: “President Biden has bragged about his administration cracking down on junk fees and private industry, which he claims are unnecessary and driven by greed. Meanwhile, as you point out in your testimony, the Department of Housing and Urban Development appears to be enforcing its own junk fees, and their impact is undoubtedly significant. How will government-led junk fees affect commercial real estate development?”
Weidel: “Definitely a negative. The higher the fees, the less development there is. This is certainly something the MBA is working on, and there is a long list of fees that we would like to see reduced or eliminated.”
Senator Fox: “You also talked about mortgage insurance premiums that are required on certain loans guaranteed by the Federal Housing Administration. How would developers and communities benefit from lower premium rates or the opportunity to obtain insurance through other means?”
Weidel: “Again, financing costs are a key component of construction costs. The lower the financing costs, the more leverage and ability there is to build projects.”
Senator Fox: “What is the most significant federal or local barrier that developers face when deciding to build multifamily housing?”
DeBoer:[…] “There's the cost of the land, of course, but there are a few other things. You mentioned earlier the junk fees that come with owning real estate, which add to the operating costs and expenses of owning real estate. And then of course there are zoning issues and permitting issues.”
Click here to watch the full hearing.
Read more: McClain: Strong commercial real estate is a vital part of the community