The Politics of CRE

5 min read

Sharon Wilson Géno is the President of the National Multifamily Housing Council and a housing industry veteran with over 30 years of experience. Throughout her tenure in the housing industry, she has worked with countless for-profit, not-for-profit, and government entities in the housing sector. Before her work at the National Multifamily Housing Council, she was the Executive Vice President and COO for the Volunteers of America National Services, overseeing the operation of over 240 properties, totaling over 13,000 units, across 40 states.

Jeff DeBoer has helped shape national real estate policy for over 35 years and is the founder and CEO of the Real Estate Roundtable. The Real Estate Roundtable is an organization that represents the country's 150 largest private and publicly owned real estate ownership, development, lending, and management firms. The member firms have over $4 trillion in real estate holdings.

I had the pleasure of talking with both Sharon and Jeff about everything real estate, from the politics behind the scenes to how recent bank failures will affect lending.

Recent Bank Collapses and Real Estate Lending

The collapse of Silicon Valley Bank and Signature Bank led to panic in the regional bank sector, which has the potential to cause turmoil in the real estate lending space. Many real estate investors and property developers leverage their relationships with regional banks as a go-to source for financing real estate deals.

However, due to the recent erosion in trust for the regional banking sector, many customers have been moving their funds out of regional banks and into large, national banks such as JPMorgan Chase, Bank of America, and Wells Fargo. This flight in capital away from regional banks has the potential to hamstring the real estate market, as a decrease in deposits will lead to decreased ability to originate loans.

One potential solution that has been proposed is raising the FDIC insurance limits on deposits. Currently, the FDIC insures all deposits up to $250,000. The SVB collapse illustrated that this cap is not nearly high enough in many cases (especially for businesses). This has led many to believe that the FDIC should increase the cap on insured funds, but doing so might not solve the problem completely, as increased insurance would mean increased fees and barriers to entry, which would not bode well for smaller regional banks.

A Slow in New Construction Loans

Rising interest rates have stifled new construction activity in recent months. This will lead to a sharp decline in new inventory as we move into 2024 and 2025. This situation, plus the fact that the U.S. is already facing a housing shortage and an even larger affordable housing shortage, creates the perfect recipe for rent raises. Housing inflation is something that the federal government has been trying to avoid at all costs. However, it seems it will be hard to stop now.

The Movement for Renter’s Rights

Renter’s rights have been a hot topic of discussion for quite some time now, with advocates for tenant’s rights calling for widespread change to how landlords and tenants do business. A few tremendously vocal groups have called for sweeping changes to the residential housing industry. These groups have been working to highlight situations where tenants have been wronged by their landlords, using these situations to call for what they deem to be “much-needed change” in the industry.

Some have even gone as far as calling for universal rent control, something that landlords would surely fight. Others have called for a mandate stating that all Fannie Mae/Freddie Mac loans on multifamily properties must be subject to rent control. This would seriously handicap landlords and lenders alike. Rent control significantly limits the profitability of developers in particular. With limited upside potential, developers would be less likely to take on the risk of building new developments, which would only make the housing supply problem we’re currently facing even worse.

Organizations such as the National Multifamily Housing Council have been lobbying for landlord rights. Sharon and her team were instrumental in helping craft the recent changes to legislation announced by the Biden administration. Organizations like hers play a difficult role in working diligently to help craft legislation that is both good for the American people and for businesses.

Converting Office Buildings to Multifamily

In the wake of the COVID-19 pandemic, the U.S. is oversupplied with office space and undersupplied with residential space. This has led many to the conclusion that converting existing office buildings into multifamily buildings could be a great way to solve our current housing supply issue. This notion has become incredibly popular, especially in cities like San Francisco, which are in dire need of residential space and have an abundance of empty office buildings.

Every empty office building will not be a proper candidate for this kind of project. In many cases, converting existing office buildings into multifamily housing is simply not possible or is prohibitively expensive. These options have historically been overlooked because there aren’t many options or incentives to finance such projects. If proper financing methods are developed, converting office buildings into multifamily buildings could be a very lucrative type of project in the near future.

Want to Hear More?

Every week, I have the privilege of sitting down with some of the most influential in the political and business spaces, such as Jeff DeBoer and Sharon Wilson Géno. If you want to hear the full interview with Jeff and Sharon, be sure to watch the full webcast. Also, subscribe to our YouTube channel to stay up-to-date with the Walker Webcast.

Read The Walker Webcast Transcript

The Politics of CRE with Jeff DeBoer and Sharon Wilson Géno

Willy Walker: Good afternoon, everyone. It is a real joy to have Jeff and Sharon with me today. Before I read their bios and dive into a conversation with them, today happens to be my birthday and I've gotten a lot of texts from clients of ours saying as my birthday gift that I give the market a 327 10 year. I obviously didn't have anything to do with the 327 10-year, but I will say that it is welcome news to many people in the commercial real estate industry. It's a real pleasure for me to have these two incredible professionals with me to talk about what's going on in the markets today, more broadly about the overall markets, banking sector and SVB and sovereign bank failure, down into commercial real estate, what's happening in the various different asset classes and anything and everything going on in Washington that people on this webcast ought to know about. So let me dive into two quick bios on Sharon and on Jeff, and then we'll start.

Sharon Wilson Géno is the president of the National Multifamily Housing Council. is a 30-year veteran of the housing industry, during which she has helped guide numerous for-profit, nonprofit, and governmental entities around housing affordability, community development, and other housing policy challenges.

Sharon most recently served as Executive Vice President and Chief Operating Officer of Volunteers of America National Services (VOANS), the housing and healthcare affiliate of the Volunteers of America parent organization and one of the largest nonprofit affordable and mixed income/mixed-use housing operators in the nation. VOANS operated 240 properties and nearly 13,000 units in over 40 states during her tenure.

Before joining Volunteers of America, Sharon was a partner in a private practice in Washington DC, where she advised on housing and community development projects, government contracting, corporate structure, internal governance, and compliance with federal, state, and local laws.

Jeff DeBoer has been at the forefront of national policy affecting the real estate industry for the past thirty-five years. He is the founding President and CEO of The Real Estate Roundtable.

The Real Estate Roundtable represents the leadership of the nation’s top 150 privately owned and publicly held real estate ownership, development, lending, and management firms, as well as the elected leaders of the 19 major national real estate industry trade associations. Roundtable member portfolios contain over 12 billion square feet of office, retail and industrial properties valued at nearly $4 trillion; (Jeff we might need to update that $4 trillion number) and over 4 million apartment units; and in excess of 5 million hotel rooms. Participating trade associations represent nearly three million people directly employed in the real estate industry.

So, let's start here. Let's start big and why, failure of SVB and Sovereign and the impact on commercial real estate. Let me turn to you first, Jeff, of what you've seen since those two banks failed, the government's reaction and actions to them and how you think things sit today.

Jeff DeBoer: Yeah. Well, first of all, thank you, Willy, for inviting me. I'm honored to see you again. And Sharon brings a wealth of experience to helping us in Washington sort things out. But let's be honest, Susan Weber runs the whole show so thank you, Susan.

You know, interest rates go up 475 basis points in 12 months. So, something's going to break. We saw it break in in Silicon Valley Bank and to a certain extent, Signature and you know, I think that that is a wakeup call to a lot of people that we've had an era of very easy money for 12 years where interest rates are about right around one, one and a half percent for most business borrowers and so forth with a little bump on it. And so, for very, very long. And that obviously created upward pressure on values. When those interest rates went up so steep and so fast, it's not that most people in the industry, in our industry, didn't want normalization of rates going up so fast, obviously impacted those banks because of their security holdings. But it's indicative of what I think, if not, watch very carefully what could happen to other banks, regional banks, small banks across the country in terms of if they had to immediately account for these new values. And we can get into that a little more deeply.

Willy Walker: Sorry to jump in, but do you still get right now in talking to legislators that they're still concerned that the crisis, if you will, is still underway and that there's still work to be done? I mean, should we expect the FDIC, should we expect the Treasury to come out with anything or do you think they're sitting there with their fingers and toes crossed saying, hey, maybe nothing else happens and the worst is behind us?

Jeff DeBoer: Well, no, I think members of Congress are very focused on this and very concerned, not that they're all that well informed on it necessarily, but they're informed by publications and so forth. And publications are certainly indicating that there are problems out there. So, I think Congress is going to exercise a great deal of oversight and probably try and reinstitute some of the regulatory provisions that had been rolled back over the last few years. So, they're highly focused. And I think at the Fed and the regulatory agencies, their focus, their concern, you know, this is a new, new game that they're into a certain extent. So, I don't think anybody is just saying let's move on. I think everyone is focused very much and concerned about what some of the unintended consequences might be here.

Willy Walker: Sharon, do you think that the FDIC or the Treasury needs to step in and change the insurance rules and raise the limit of deposit insurance from 250? And is there any real work being done on that or any proposals being contemplated?

Sharon Wilson Géno: There's a lot of talk about it right now. I think the lawmakers have said they're going to have a thoughtful review before they make any precipitous changes. But again, regional banks have been such an important part of the multifamily sector, especially in recent years and especially over the last year or two, as we've seen an interest rate environment increasing for construction lending. And you know that can be a riskier business, but it's vital to the success of building the housing supply that we need in our nation. And any regulatory changes that would cause those institutions to take a step back or reevaluate their role and it's already starting to happen quite a bit. We're hoping that ultimately things calm down and that the resources of regional banks remain an important part of the construction lending part, which is a huge part of getting any housing done. Period.

Jeff DeBoer: Obviously, the reason that you would want to raise that insurance on that is to stem the fear and the outflow of capital from these banks to the money center banks, because as Sharon says, that's a lifeblood source of capital. So, you know, I do think people are going to talk about it. I've been starting to hear about the concept of private insurance where people would get private insurance to cover. I don't know. But I do think that we obviously don't want depositors pulling their money out as rapidly as they did in SVB.

Willy Walker: So, I guess the issue here, though, is I mean, you mentioned it, Jeff, that members of Congress are concerned. They obviously have lots of local and regional banks in their districts and in their states. And therefore, they're concerned about it. They clearly are not the most well informed, (not trying to throw darts at any of our very well elected politicians.) But nonetheless, this isn't sort of their strength, if you will. I mean, is there a fire drill going on inside of FDIC and the OCC right now to say we've got to do something and do it quick? And my sense is that the crisis sort of happened now that the regionals have sort of stabilized. It feels like people are just kind of waiting. I mean, I saw the First Republic stock chart this morning on Squawk Box, and it falls off precipitously and it's been flat ever since. It's not going back up and it hasn't gone down. It's just flat. My sense is, are regulators happy to see a flat line or First Republic or do they want to see that move back up to where First Republic's stock valuation was previously? And do they mean they need to do something to make that happen?

Jeff DeBoer: Well, let me say one sentence and then I'll get out of the way for Sharon. I don't think there's a fire drill going on at the regulatory agencies to look at this stuff. I think there's a serious concern and serious watching. But I don't think that there's a fire drill. There's more of a fire drill, if you will. Maybe. But I don't want to call it that. But I need Congress to learn how this risk wasn't expected.

Sharon Wilson Géno: No, I completely agree with Jeff. If you talk to the regulators, I think they very much feel like we got this, like this is the work we do. We know what we're doing. We're working through it. But I do get the sense that there is some concern, to Jeff’s point, the other fire drill, which is the congressional oversight and trying to overcorrect in a place that could truly have detrimental impacts on capital markets moving forward. So, I think that's probably the bigger danger.

Jeff DeBoer: Yeah, And apropos to real estate, I think that there's an intense focus on concentration by banks and real estate and what could happen or may not happen. And, you know, so to that extent, I think the regulators are very much looking at institutions. We've sent a letter over to the Fed to urge that they give a little time, as all these this trillion plus wall of loans comes to maturity in the next 24-36 months and just give people a little time to settle down a little bit coming out of the pandemic, understand where the demand is going to come from. It's obviously changed in terms of telework and everything. And where's inflation? I mean, if inflation suddenly drops to the floor, as was suggested by a few well-known real estate mavens in the last few days, then, maybe interest rates will come back down at the end of this year? I don't know.

Sharon Wilson Géno: Yeah. And so will you have a bigger impact as we start to see, we'll talk more about today, as things roll out of the office sector. We haven't really seen the full impact of it, I think, in the multifamily side yet. But that could come as banks are trying to balance what happens in their office side.

Willy Walker: Yeah. So, I mean, one of the things that you mentioned Sharon, is that the banks writ large, not just local, and regional banks, but the banking system has 65% of the commercial real estate loans in the United States on their balance sheets, 65%. So, a massive supply of capital to the markets. If you look at what the Biden administration came out with last week as it relates to we need more liquidity and we need more oversight in the banking system. Those two things to me say liquidity as much as SVB has the most liquid balance sheet of almost any bank in the United States, which is the irony of all of this. But they're going to push for more liquidity, which says you're not going to extend capital to commercial real estate because it's illiquid. And then oversight, increased regulatory oversight, to make sure that what happened at SVB doesn't happen. And so almost any way you kind of look at it, doesn't that mean that banks pull back from commercial real estate lending? And then the question would be, other than the agencies and HUD in multifamily who fills the void?

So, Jeff, I'm assuming your phone has been ringing off the hook for the last three weeks from predominantly your non-multifamily constituents on the Real Estate Roundtable saying we've got a liquidity crisis, we don't know where we're going to get financing for our next office project, retail project, Industrial, whereas Sharon’s phone has probably been ringing a little bit, but not quite to the same amount as yours. Am I accurately depicting the last three weeks of your life. Mr. DeBoer?

Jeff DeBoer: Well, yeah, yeah, yeah. Before this I had a full head of hair and was six foot eight!

Willy Walker: And so, what’s the answer when they call you and say we're concerned about liquidity? Are you going to say that private capital is coming? Banks are going to come back in. FDIC is going to raise the insurance limit, which is going to make it so that regional and local banks can start to lend again?

Jeff DeBoer: Well, first of all, I kind of think that the concept of additional regulations and expanding liquidity are kind of counter to each other. And I think, from our perspective, yeah, the phones are ringing a lot in the office sector. But also, as Sharon, you said, I think we all ought to be concerned about how these regulations and if they criticize these office loans too much, they're going to have to reserve again. There's going to have to be a lot more equity put in. That's going to take capital out of the possibility of being lent on all kinds of assets across the country and good ones as well as not so great ones. And so, we're concerned about this kind of spiral maybe starting. I don't want to overstate it, but you don't want to get in a situation where they're criticizing these loans or reserving against them, then their values are going down further than reserving against them and it just spirals out. I think they're aware of it. The regulators are well aware of this and watching it. But, again, we're coming out of the pandemic. Look, you guys in the industry, people assume certain risks. You assume market risk, demographic risk, financing risk, and so on and so forth.

But I don't think anybody assumed a 12-year period of basically zero interest rates, followed by a steep 500-point jack up in the financing costs in the midst of a pandemic that shut everybody down and changed a lot of the ways that offices and all types of the built environment would be used. And this has to settle out. I think it has to be allowed to settle through and transition. We ought to be working together and the federal government ought to be helping people transition to that new world.

Sharon Wilson Géno: Willy, to your point. My phone has been ringing more and more about the agency lending. And this was the whole reason the agencies exist, right, to provide that kind of liquid capital to the housing sector at times of more volatile private market circumstances. So, while, Jeff, I totally agree with you, the ripple effect of what happens in office and what's happened to this SVB, and Signature is going to push down on the multifamily side, on the banking side. Our members are looking ahead and saying, okay, what's going on with the agencies and how can I be sure that I continue to rely on them? And at the same time, this banking situation has sort of come up.

We're seeing this whole other overlay of the federal government taking steps through the White House's blueprint for Renters Bill of Rights. To signal that it may step in here and change some of the rules, the game in how it does its investment and put additional regulatory constraints on that. So that that's the bigger uncertainty right now for folks on the multifamily side is like, okay, I know how to pivot from more of a banking source to the agency source, and that's okay. But if that agency source is going to change the rules of the game significantly, then what am I going to do? And that's a real big question for folks right now.

Jeff DeBoer: Sharon, how about housing construction financing? I don't I honestly don't know whether agencies are financing that or how it's done?

Willy Walker: Jeff, it's a great question. I want to jump to that in a second. But I want to pull on Sharon's point for a moment as it relates to the Renters Bill of Rights. So, do you think, Sharon, that there will be significant changes to agency lending guidelines based off of the Biden Administration's push to get various component parts of the tenant Bill of Rights put forward? In other words, do you think that there could be a measure in there that would either make it so that there has to be some type of rent control on properties financed by the agencies or anything else of that nature?

Sharon Wilson Géno: There are a lot of proposals out there, most certainly. I do see the agencies and the other federal agencies struggling with what they know best, which is they step in between the regulatory sort of government side of it, and they have to interact with the private markets. They know that these kinds of overcorrection on the regulatory side are going to hurt the private market investment in the multifamily sector. And again, we have some really good people, I think, in this administration that are working on this issue. So, they're trying to balance political concern with what they know is the ultimate goal and the best thing for the American people, which is creating a market that supports increasing the housing supply in this nation so we can have affordable housing and so people can have a roof over their head. Increased supply is really the answer to that question. Do I think there's going to be national rent control? I think, again, the research on this is strong, that rent control does nothing but hurt both quality and quantity of housing, which we desperately need. So, to the point where, like, we've been talking to economists about doing some updated research and they don't even want to do it because they think the question is sort of asked and answered.

So, I think the data and the information is on our side. There are political headwinds, most certainly. I think that there will be some enhancements to both the agencies that have some voluntary programs, and not too many people have taken advantage of them because they don't think the incentives are strong enough to control rents at a certain level, predictably, to serve some group at an affordable rate over an extended period of time. But we have made the effort and we will continue to make the effort to enhance those programs. So, there are opportunities to do this on a voluntary basis rather than a mandatory basis. And the agency has been very clear with us. There's not there's no effort to go backward on existing loans. So that's good.

Willy Walker: So the one thing that I would say from having been in Washington for the past couple of days and doing my rounds both on Capitol Hill and with regulatory agencies at the agencies, blah blah, is that there clearly is a voice that has gotten its way into D.C. that is focused on renters rights and evictions and unjust evictions and things of that nature. And to anybody who is listening to this webcast, who is an owner, I know personally, and as I said to certain regulators that I met with yesterday, I said, the renters rights people and my rent is too high have done a very good job of bringing in X, Y, Z renter who got evicted because of X, Y, Z reason. And what they've missed is the flip side to it all, that many, many owners, you know, a friend of mine who is a landlord said, there are few worse terms today in America than being a landlord. Many of these landlords have done incredible work to keep people in their homes, to give them rent forbearance during the pandemic. The industry needs to speak up and for every person who has “wrongfully has been evicted,” there needs to be 15 other cases of landlords doing the right thing to keep people in safe and affordable housing.

And so, I would just say this issue is a big one. I know both of you are on it, but to anyone who is listening to this webcast and this thing does go quite far and wide. If you are concerned about this issue and you have cases where you have extended help, you have sat there and allowed someone to sit in an apartment for six months’ rent free. Those stories need to make their way to Washington and to the regulators because the voice of the renter right now is winning the day.

Sharon Wilson Géno: Well, and it's something of a false choice, too, because there's this perception that the relationship between the housing provider and the resident is always contentious, like it always has to be a bad relationship. That is simply untrue. Those of you on this call and those of you that have worked in this industry for a long time, know that is the exception, not the rule. And that's the perception that we're really trying to change through some targeted media, through some research that we're doing and some other and other initiatives as well.

Willy Walker: Jeffrey, you were saying?

Jeff DeBoer: I was just because I pushed back a little bit on what you said, Willy, in terms of I think that Sharon and her team in particular helped shape that Biden statement in a way that it really there wasn't much in it, you know, and it could have gone the wrong way because you're right, the renter advocates, if you will, are quite loud. But I think that at a national level, it's been muted a little bit. But I do wonder why they get to be called housing advocates. And we have to be called housing lobbyists. That just isn't fair.

Sharon Wilson Géno: I told Jeff when we met last week, I said, I am a housing advocate, and I will not let that term be stolen.

Willy Walker: Look, two things on that, Jeff, a) If you want to call out the white paper or whatever the White House put out as it relates to the tenant Bill of Rights and their proposals there that the industry and NMHC and the Roundtable and others did a fantastic job of informing the White House of not only what was going on the market but as well what was legally viable, if you will, as it relates to them going and trying to do, for instance, national rent control. With that said, the Administration, from my read of it, is hell bent on taking pieces of that and putting it into place. One of the areas that they actually have the ability to do something without Capitol Hill is with the agencies. And so that is the piece of all of this that is very delicate and needs to have the industry talk about all the great things that they're doing to protect their tenants, to give them safe, affordable housing. Because right now I know for a fact that the tenants' rights groups have been in and said, hey, we need Fannie and Freddie loans should only be made on properties with rent control. And at a time where liquidity across the system is challenged, the last thing we need is anything even close to that, anything that would go into saying you need to have X, Y or Z further restricting the deployment of capital from Fannie and Freddie.

Sharon Wilson Géno: That is our job moving forward. Willy, absolutely. And then this process is just starting. So, we will be starting next week. And we've been in there a lot. We spent a lot of time with the agencies and their regulator, and we've been having these conversations.

The good news is they also, in addition to having an obligation to serve on the affordable side, they also have an obligation for the safety and soundness of those agencies. So, they're trying very hard to balance those two things and being sure that any steps they take, if they are taking these steps, are deliberative, thoughtful and will not upset their really important obligation for the safety and soundness of agencies.

Jeff DeBoer: But you’re right to be concerned, Willy.

Willy Walker: Right. So, let's segue into construction lending, because that was one of Jeff's questions, because Fannie and Freddie obviously can't provide construction loans, whereas HUD can. One of the big issues that is on the table right now is that we've got an inflation fight going on with the Fed. We're trying to get, interestingly, one of the things I thought was interesting about this morning was we actually got a bad jobs report, if you will, and it's the first time that bad news actually has hurt the market. So maybe we're sort of getting back to a point where actually bad news is not helping the market. But actually, the market starts to adjust to bad news as bad news. And that, I guess, in the long run says that Powell's done his job and we can stop seeing these rate rises coming. But on construction lending, HUD's been good for about $5 billion a year of (d)4 construction lending. And if you think that all the regional and local banks in the rapidly raising rate environment of the back half of ‘22 wrote almost no new construction loans. Clearly at the beginning of ‘23, no one's writing construction loans.

You think about what that means for deliveries and we're speaking about multi right now, but we can talk about other asset classes in a second – deliveries in the back half of ‘24 into the beginning of ‘25, there will be no new inventory. Which will mean that asset values inflate, and rents go up, which is exactly what the federal government doesn't want to see happen. And so one of the big questions here, Sharon, is can we get HUD and the (d)4 program to become more market competitive, if you will, and go from a 9 to 12 month underwriting process to make a new loan to something that is more market rate of 1 to 3 months, which is what you get when you go to Bank of America or JP Morgan?

Sharon Wilson Géno: Yeah, I mean, I'm 110% behind you on this. I think the (d)4 program is a great program, but it has its issues, obviously. I think the biggest struggle at HUD is not the will, it is the bodies. They simply do not have the workforce that they need to process loans in a better way, and they're saddled with a regulatory scheme that is frankly antiquated. I think there is an opportunity here, especially given where the markets are going to sit for a while, for an interest rate environment, and the desperate need for housing, particularly the affordable side and the Administration's commitment. Keep in mind, before the Tenant Bill of Rights was issued, they made a commitment last May to increasing housing supply. This is an opportunity for them to step up and step in. What that can look like for them and how soon they can operationalize that, and can they do that in a way that's going to make sense for the markets and not put us further behind the supply side is a question that remains to be seen. But there is truly an opportunity here.

Willy Walker: Yeah. I sit there and think about the billions and billions of dollars that are being flooded into the banking system to prop it up, if you will. And 160 billion borrowed from the window last week. And I think about the fact that there are 1,200 people in the multifamily group at HUD. I mean, you'd think if it's a manpower issue, we could put more government resources to it. If it's a systems issue that the federal government would sit there and say we need to upgrade the system so that HUD looks like Fannie and Freddie, but woe be to me to poke too hard here. But I mean, if you added $5 billion of construction lending out of HUD and they doubled it from $5 billion to $10 billion on an annual basis, that would add back of the envelope 40,000 new units of multifamily supply into the system. That's by nature affordable.

And so, you sit there, and you sort of say, why is that not something that the Administration, as they talk about tenant Bill of Rights and potentially trying to do something on rent control, we all know it's a supply issue. So, why wouldn't they be looking at HUD and trying to marshal resources to say, let's get this going so HUD can supply that capital at a time when we know regional and local banks just don't want to part with those dollars thinking that there might be a run on the bank.

Jeff DeBoer: It definitely is a supply issue. But having said that, I think that last year at the end of last year, weren't there more multi units being constructed than at any time since the 1970s or something like that? Before the banks went on strike, so to speak.

Willy Walker: Deliveries into ‘23, so it’s delivery. So yes, the construction pipeline coming through in ‘22 into ‘23 was at an all-time high. But Jeff, that's all getting delivered now. We're talking ‘24, ‘25, ‘26, which if this banking crisis remains for a period of time, you're not going to have new shovels coming into the ground and you're not going to get new deliveries in the back half of ‘24 and the beginning of ‘25.

Jeff DeBoer: Yeah, not to go in a totally different direction, but all of this is inter-related. There's the workforce for construction projects across the industry, you know, people are looking for workers and so forth. But so, there's a lot of problems here.

Willy Walker: But let's segway that, Jeff, into another sector which you've been focusing a lot on, which is office. And one of the questions would be should HUD be doing construction loans to convert office buildings to multi? It's a question. Should they be writing loans and have an expert group inside of HUD that can sit there and say, we do construction on (d)4 ground up, but we also can do an adaptive reuse program to take abandoned, and I use that term probably loosely, but office buildings that are impaired and convert them to multifamily in some of these city centers, which right now have a real occupancy issue. Talk for a moment about what you're seeing on the office side because you were just in San Francisco, one of the most challenged office markets in the country. a) What do you see? and b) What’s the future on office?

Jeff DeBoer: Well, look, not every underutilized office building can be converted to housing anyway. It does require a certain type of building and so forth for this to work. So, it's not for every building, but at the margin it would help. And there are quite a number of conversions underway now and people looking at them. Whether HUD should provide financing or not, that's an interesting idea. I hadn't really considered that. But certainly banks, again, liquidity is going to be sucked a little bit out of the system here, right. And so, the idea that they're going to be able to provide that financing is a bit speculative, I think. So having HUD do it. But we're really focused more. And with Sharon on a tax credit idea to help owners, investors convert buildings into a housing modelled after the low-income housing tax credit, because it's very expensive to do this stuff. Everybody knows that. So, some government assistance, whether it's HUD lending, maybe it's both, you know, and it can be helpful to the office sector in general, obviously. Probably the most challenged part of the sector of the industry right now because of whipsaw government policy, frankly. Low interest rates and then demand changed dramatically. So, you know, we're trying to help on both. And we're either at the Fed trying to encourage a little more flexibility in working out these loans as they come due. There's a mountain of office loans that are coming due, and they're all across the country. It's not just New York or Chicago. It's all across the country. And they need to be worked out. They need to have new equity put in, no doubt. They need to be repriced, no doubt about it. But it will take time. So, we're asking the regulators to do that.

On the demand side, the public sector is slowly inching back to the workplace. And on this one, yes, we want to create and stand-up demand for office, but it's more of a big picture concern about cities, frankly. In some markets, the federal government has a big footprint. Here in D.C., they do. But in other markets across the country, they have a big footprint. And the federal government is still acting as if there is a pandemic going on. And so, they've got very liberal telework, work from home rules. So, we want to encourage… On May 11th, for the government, the reset will occur in terms of all of the emergency programs to respond to the pandemic are being reset and over. We're trying to get Congress to pass a rule that will require the federal government, that is the agencies to go back to pre-pandemic rules, would get a lot of people… Here in D.C., we got 800,000 workers in DC, 200,000 of which are federal employees. Now, if they're at home and they're not downtown, the small businesses suffer, the transportation suffers, safety issues suffer, the tax base suffers. And so, we're focused on getting people back to the office as much as possible, understanding that we're not going back to the old ways.

Willy Walker: Jeff, how is it that Chuck Schumer, who runs the Senate, has a slight majority, and also has one of the largest office markets in the country, forget about how many federal workers are in the New York office, just talk about the office market. How is it that he is not pushing the SHOW UP Act harder to get that passed? It's through the House and it's stalled in the Senate. How is it that the leader of the Senate isn't sitting there saying we should do nothing beyond passing the SHOW UP Act to get federal workers back in, because that's then going to cascade down into workers across the country to do exactly what you've just talked about. Because unless there's leadership on this issue, unless people get back into the office, all of those contagion effects that you just talked about, everything from the local deli that doesn't have anyone going to buy a sandwich at midday to the parking garages that don't have cars that are now coming in, to public transportation, to public safety, to police forces and then to tax base in the cities across the country. How is this not right at the top of the list, even close to where we're talking about the debt ceiling right now? And we'll talk about that in a moment. But how is it that Chuck Schumer goes home tonight and doesn't think the SHOW UP Act has to be passed?

Jeff DeBoer: Well, I'm not saying that he doesn't go home and think that. I do believe that there are behind the scenes conversations going on with Democratic senators predominantly about this issue. It was passed very partisanly - if that's a word in the House. We sent out a letter and said, you ought to do something about this. And all of a sudden, the House right when they came back, Republicans passed this with very little discussion. So, it became a partisan issue, which is too bad. And over in the Senate, I think that it's, we're pretty slowly up there. But I do believe that there are a lot of discussions going on. I think that this is possibly something that could be included in the debt ceiling negotiations. You know, look, Congress is back. You know, mayors have their people back. States have their people back, by and large, some don't. But by and large. Private industry is trending to come back. So, the federal government is a laggard here. And they should be helping this transition to the new world, not being a force of additional challenges here. Now, the reality is, from a political point of view, the federal employee unions, don't like it. Well, I mean, I would just as soon be at home myself.

Willy Walker: Sharon, Jeff had mentioned something that you all working on a tax credit for conversions. What's the genesis of that or what are you all looking at there as it relates to some type of tax credit on conversions?

Sharon Wilson Géno: So, Senator Stabenow from Michigan actually took the bull by the horns here and did something in the last Congress and is planning to reintroduce it again. And we recently had a conversation with her about doing about 20% and the details are a little bit unclear. The working draft of the bill that they have, we think, still needs some work to really target buildings that could be redacted to be really user friendly for the industry. So, we're working with her staff on that right now and we expect that to be reintroduced here, I hope, shortly.

There's also been some legislation kicking around the last Congress to expand the opportunity zone legislation to make it more user friendly for multifamily and adaptive reuse as well. We think there's opportunities there too, that could use it in both cases using the tax code to incentivize adaptive reuse. The third piece, and Jeff alluded to it earlier, query federal buildings. While we have a ton of them here in Washington, there are federal buildings all over the United States in different cities and different hubs. Could there be, if the federal workforce is coming back in some hybrid fashion, are they going to be consolidating their office space like others are? And would there be opportunities to use federal land for housing, particularly affordable housing? That's an opportunity potentially as well. I haven't seen that legislative language yet, but that's been something that's been sort of talked about among policymakers.

NMHC and ULI recently did a report, and it's more of a case study report on adaptive reuse. And in talking to a number of academics obviously there's a huge focus on this in New York. This is one opportunity, but it is not a panacea. As we all know, the floor plates and the utilities and the way office is structured doesn't necessarily make it well-suited in all cases for reuse. And our estimates are right now that maybe between ten and 15% of the office environment could be easily or readily adapted for multifamily use short of being over under where the tear down makes more sense. So, while it is one tool in the toolbox, we need every tool and toolbox, using the tax code to incentivize is certainly a great idea, but it's not going to take all of that office and retail space, I will throw that in there as well, and make it reusable.

Jeff DeBoer: Yeah, it's part of the menu. I mean, work out some of these loans, give flexibility to people, get people back in the workplace, convert some of these buildings into housing. But the problems will still be there for a lot of people, and we should just recognize that. But we've got to help at the margin and each one of these little pieces and there's other stuff, too, that I think would be helpful to particularly the office sector in cities.

Willy Walker: So, Jeff, just a little bit of sort of DC/your perspective on the debt ceiling and then the president's budget. Give listeners a little bit of, do we need to be concerned about the debt ceiling or do you think that McCarthy strikes a deal and gets that done? Can he strike a deal with I guess it's fair to call them the Tea Party members of his caucus and then on the president's budget?

Jeff DeBoer: Yeah, well, we've seen this movie a number of times, haven't we, where we go right up to the precipice and to jump off and on the debt ceiling. And then there's an agreement reached, and all of the chattering and nervousness was not worth it. But this one might be just a tad different. I think that it might go a little bit longer and go a little bit more to the edge. I'm optimistic that at the end of the day, they'll reach an agreement and extend the debt and not default on the United States government, that would be terrible. And I think that at the end of the day, there's enough people that realize that. Having said that, there's also a very strong contingent in the House that wants as part of this deal spending cuts, which will be very, very difficult to do because so much of the budget has already been taken off the table.

Willy Walker: Didn’t McCarthy take the entitlement reform off the table? I mean, hasn't McCarthy already? I mean, if you think back to Eric Cantor and Eric Cantor, and I guess it was even before Cantor, but in past impasses, it's been the Republicans asking for entitlement reform and the Democrats saying we're not going to touch entitlements. But didn't McCarthy take that issue off the table? So, then what's the rub?

Jeff DeBoer: Yeah, he did. But it's not necessarily always been entitlement spending. It's also been process. You know, the whole Gramm-Latta budget nonsense, all of these things were part of a deal, and they were a process issue not necessarily specific spending cuts and I think that there could be some of that in this. And I do think that the House Republicans are serious about that. And that does raise some more concerns than we've had in the past. And I would tell everybody that's listening to this thing, if you talk to a member of Congress, urge them to pass this debt ceiling particularly given what's going on in the capital markets already, this could not be good. But, you know, at a principle level, Schumer to McCarthy or, you know, principals talking about it, I'm not sure those conversations are going on in a very robust fashion right now. I think that staff is kicking things around and trying to develop things. And we don't know when we get to the cliff, you know, will it be next month or June or July, some people say how many of these gimmicks sort of speed can the Treasury use before we default on the debt? So, there's all these moving parts and, yeah, I'm more concerned than last time, I guess I would say.

Willy Walker: I don't like hearing that but that's helpful to hear.

Jeff DeBoer: It's one man's opinion.

Willy Walker: One man who spends a lot of time talking to the people who have their finger on the switch.

Jeff DeBoer: Look, when Speaker McCarthy went through the election, it took 15 ballots to write it.

Willy Walker: Exactly. Let's hope they at least have communication like the Republican caucus did on their 15 rounds. So, they were actually speaking to one another because as you rightfully say, Jeff, the way we've gotten through this in the past is actual communication between the White House during the Obama Administration when this first became an issue. And at that time, Speaker Boehner and by the way, we don't need to get into it, but Speaker Boehner shut down the government for, I believe it was 11 days due to the Hastert rule. But now we're really getting it really going on.

Jeff DeBoer: But that was over the budget, not the debt ceiling. We have not defaulted on debt payments before. And this is much more serious for markets and for financing if it were to go forward. And it's a tough thing to educate, to talk to members of Congress on this. That's why I'm saying that everybody out there ought to voice their opinion on this. All it means is that we pay our credit card bill, that the government's run up in the past and future spending should be in the budget. You mentioned the president's budget. I would just say it's interesting reading if you need to go to sleep sometime. But I mean, look, these are big ideas. They're the same ideas that the party, the Democratic Party has wanted. Well, the Democratic Party doesn't control everything, so it's not going to happen, you know. But having said that, all of these things have standing, in the sense that once they're out there, they might not get done now, but they have standing. That's why 1031 is always talked about, you know, it's a revenue raiser. It has standing. That's why, you know, all of this stuff comes up every time. And if you're not paying attention, you're not working hard. Sharon knows all about this and then it sneaks through the cracks.

Willy Walker: Sharon, there's a bunch of the president's budget for affordable housing and increasing everything from LIHTC to HAP contracts to all sorts of different things. Does the president's budget get through?

Sharon Wilson Géno: No. I'm not with Jeff in that I actually love the federal budget. I think it's fascinating reading and I really do read it every year. It really gives you sort of the blueprint of what a particular administration sees as the trajectory for the future, even though they don't have to be responsible for it, because they're not going to be in office for more than eight years. So, you know, to me, I think it's really fascinating.

Jeff DeBoer: Sharon, wait a minute. That is so sad.

Sharon Wilson Géno: I know it's twisted, but it's true.

Jeff DeBoer: One time somebody called me and said: “How you doing?” and I said, “Living the dream.” And they say, “It must be a nightmare.”

Sharon Wilson Géno: It's twisted, but it's true. I'm excited to see a lot of those affordable housing initiatives particularly in the budget proposal. This is, I think, an attempt by the Administration to do what they said they were going to do back last May, which is try to make good on this housing supply plan that they had proposed. The problem, as Jeff points out, is all the pay-fors are 1031 and other tax incentives that are also investing in housing, including preserving and developing new affordable housing. So, you're giving with one hand, you're taking away with the other. I mean, the bottom line, my view on this whole thing and I'll say something a little bit provocative.

I don't think this issue with the debt ceiling in the budget ever gets resolved until House numbers are elected for six years. And here's why - because the answer is in entitlement spending. When you take out entitlement spending and defense spending, non-defense discretionary makes up about 20% of the budget. So that's everything else. And you start pilfering through that and ensure you can cut it all 50%. But there are some significant parts of the government in that 20% that nobody wants to get too far down, and they'll continue squeeze them like they have. This comes up every decade or so. Then when you start talking of entitlement spending, the House is never going to deal with that because they have to get reelected every two years. There are some fundamental things that should be tweaked and fixed in entitlement spending, but no one's going to touch it as long as the House gets elected every two years.

Jeff DeBoer: Yeah, there are good things in the budget and Sharon mentioned some of them. And in the last tax bill, the Inflation Reduction Act, I mean, one of the things that we're highly focused on is implementing those energy saving provisions that were in that bill, to encourage people when they retrofit, to engage in more energy saving practices. And we're now talking to the EPA about how you can have a voluntary incentive to be a lower carbon emitter, not just saving energy, but a lower carbon and do this on a voluntary basis. We're trying to get ahead of it so that the government doesn't mandate you to do things. We want to do it in advance. But I didn't mean that the budget was a total waste of time. Only partially, I guess.

Willy Walker: Jeff, you did a bunch of work on TRIA and on the Terrorism Insurance Bill that got reauthorized. One of the issues that is coming up kind of across the landscape in commercial real estate is the cost of insurance and how due to the climate change, due to potential flooding and due to these storms that seem to get more and more ferocious every day, that the cost of insurance has gone up precipitously. Is there anything going on at the Roundtable? And Sharon, I'll come to you as it relates to trying to do anything about this, or is this just the market playing itself out and insurers will charge for insurance what they want to charge in the market will clear it?

Jeff DeBoer: We're following Sharon's lead.

Sharon Wilson Géno: We're actually in the process of completing an insurance survey, which a number of our multi-family members had a huge response this year. So, thank you to everyone for doing that. And obviously this is an enormous issue for folks. And when we see these cycles periodically. And so, I think there is an opportunity to have this conversation and because it dovetails nicely with a lot of the conversation around climate, generally speaking, these two things go together. While we've seen cycles before and then, you know, insurance rates drop and then ten years later they come back up and we have these we have these cycles. I don't think the reset this time is going to come back down to what we're used to, in part because we've had all of these climate and hazard incidences, particularly over the last five to seven years. And I think there is some recognition that those kinds of payouts are here to stay. So, we're going through the data right now, and it will be a tool that we use our advocacy to get some help and relief from potentially from Congress to help support the insurance piece.

Jeff DeBoer: And some people talk about having bad banks, other lenders do the sustainability testing and so on and so forth. And that's another aspect of all of this that could continue to drive out insurance up, I guess.

Willy Walker: I will say, just as it relates to environmentally friendly, both retrofitting, as you mentioned, Jeff, and then how it can have a big impact. It is too bad Sharon, that on the multifamily side with Fannie and Freddie, both were very focused on green lending for a period of time, and during the last FHFA directors tenure, they pulled out the incentives for them to focus on green lending and the impact that had as it relates to water conservation, energy conservation was dramatic. And it's a shame that that lending program, if you will, that was having a real impact on even the way that people were constructing new buildings, because they'd come to us and say, what do I need to do as far as low water usage, toilets and showers and LED lighting to build into this building so that it could be actually bought by someone who was going to put agency financing on it. And we don't hear that anymore. And it's a real shame that there isn't that focus anymore from the agencies on green lending.

Sharon Wilson Géno: I think that's true. And it took a while to get there, right. So, a lot of time and effort was invested in building the infrastructure to do that kind of lending, because it's not easy. I mean, you have to have the mechanisms in place to monitor, etc., etc. For the agencies to take a step back now under new administration and step up and really lean into that again, it's going to take a minute for that to really come back up to the forefront. But you're absolutely right. This is a long-term play and we've got to start now or we're not going to have an impact in the future. I think the substitute for that, though, for the time being is, as Jeff pointed out, there are a number of fairly aggressive tax incentives in the budget proposal that if they were enacted, could help support perhaps multifamily and other real estate in making some of those changes as well. But again, the pay-fors are going to undermine us, too. So, it becomes this sort of weird zero-sum game.

Willy Walker: So, let's focus on ‘24 for a moment. And just as people the two of you know Washington better than most and sort of how many seats the Dems and the Republicans have to defend come 2024 for the presidential election. Jeff, let me throw that hot potato over to you - before you go to focusing on ‘24, though, you're always really good, Jeff, at finding the new members of Congress, whether in the House or the Senate, who are exciting because they come to their jobs with a different perspective. They were in the military before coming in, but every roundtable meeting that I attend, you always bring in some new man or woman who has been elected to the Senate or Congress who's sort of that new voice on Capitol Hill. Can you give our listeners any insight into anyone in the House or the Senate who you think is kind of the exciting a man or woman right now who might gain some real headway as it relates to being an opinion leader inside the Republican or Democratic Party?

Jeff DeBoer: Yeah, I can. I wish I would have had time to prepare for that question, but I can off the top of my head.

In the house, there are two really, really, really, in my opinion, the young members of the House. There's a number I'm impressed, but two guys I've met recently that I think are just great. Both of these happen to be Democrats, Ritchie Torres from the Bronx, I guess, and Joe Neguse from Northern California. Both of these members of Congress, I think, are really, really dedicated members and not that the other ones aren't, but I mean, I think they really come to the office with fresh ideas and enthusiastic ways of doing things. So, there's two out of 434.

I think these men and women come to Congress and try to do their best job. And they do it the way that, you know, maybe we all don't agree with them, but somebody does, or they wouldn't get elected. And they're just promoting their point of view. And I think that most of them are trying to do good things. The vast majority are trying to do good things for the country and good things for people and good things for communities.

Willy Walker: Just flipping from two male Democrats. What about Katie Britt from Alabama in the Senate?

Jeff DeBoer: Look, I think Katie Britt is great. She's the first woman ever elected out of the state of Alabama. She was on the Hill for a long time. She's a business executive. She's only 41 or 42, you know, in the Senate. She's got to stand in line for a lot of things. But I think over time, her voice will be very, very loud, and very effective. Thank you for mentioning her.

Willy Walker: You're welcome. And, Sharon, as you think about housing and those members of Congress who sort of, if you will, get it. They are helping. When NMHC sits there and says okay who understands housing and the need for both the supply and demand and is a productive voice in the debate whether on the Senate side or on the House side. Who are those people that people ought to understand are doing a lot for the industry?

Sharon Wilson Géno: Well, I was honored to have the opportunity to testify before the Senate Finance Committee recently on housing, particularly on the affordable housing initiatives and other things. And I got to tell you, it was the most bipartisan hearing I have seen in Washington in 30 years. It was how Senator Wyden and Senator Crapo have managed that committee and are really focused on the opportunities that the tax code in particular can bring to housing all the way down both sides of the line. The person that I think is something of a surprise but has been involved in it for the last couple of years is Senator Young from Indiana. He's the co-sponsor of the Affordable Housing Tax Credit bill and he is on every single housing bill that has been proposed in that committee. And he's just taken a real interest in it. And I think that's a great opportunity for us.

Willy Walker: So, before I lose the two of you, not who's going to win in ‘24, but who are the two nominees a year from now on the Democratic side and on the Republican side? And you can't just sort of say, well, because he's an incumbent, Joe Biden would be it. So, Jeff, let me start with you. Who's going to be the Democrat? Who's going to be the Republican nominees? It won't be a year. Well, it'll be close to a year from now, right? It's coming up.

Jeff DeBoer: Yeah, it will. Well, signals are that Biden will run again. And so, if he runs, I guess he will be the nominee. And if he doesn't run, then there's a long bench behind him, starting with the vice president and then transportation secretary Buttigieg, and on and on and on. He seems to be signaling that he's going to run. And on the Republican side, I don't know. You asked about young, impressive politicians. We did recently meet with the mayor of Miami, who was quite a charismatic fellow, and an ambitious fellow and Miami seems to be doing pretty well. So, I don't know on the Republican side. I don't know. Sharon, your turn.

Sharon Wilson Géno: Gee, thanks Jeff. On the Democratic side, it all depends on what Biden is or really isn't going to do. The sort of elevation of Gretchen Whitmer, I think is interesting. And that's been going on for a while and talking to folks that work closely with the Democratic Party there, they see that as a possibility, and it's something that they're continuing to talk to her about, although she remains like all politics, she's steadfastly focused on the office that she holds. On the Republican side, I just think especially today after yesterday, what happens with Trump is so uncertain and so volatile at this point. I don't even think you can make a prediction on it right now. It just depends on how that legal process moves forward.

Jeff DeBoer: But you know what, Willy? That question raises the issue about how Sharon and I work here in Washington and, we talk to everybody, Republicans, Democrats, Independent people, and try to impress upon them the value of strong real estate asset values, the contributions they make to the cities and budgets, and for pensioners who are investing in them and all of that. And so, we work with everybody. And as long as they want to work with us and across the aisle. So, you kind of talk to them all.

Sharon Wilson Géno: And I think our most important job, Jeff, is to be sure that we don't get pulled or weaponized in that I see that happening in housing already, which is really my biggest concern. Housing and real estate, generally. But housing in particular is a bipartisan issue. It must be people of all political persuasions who need a roof over their heads in a civil society and insisting that no party try to take credit or demonize the other on different proposals, I think is critically important to what we do.

Willy Walker: Thank you both. I love those public service announcements at the end for both of your organizations in the great work they do on behalf of everyone in our industry. And the third thing I will say as someone who doesn't have to be as careful with my words as the two of you do, given who you interface with every single day. I would just say I am hoping that a Democrat will pull a Ted Kennedy and run against the incumbent president, as Ted Kennedy did against Jimmy Carter for the Democratic nomination in 1979 into the 1980 election. That would be really interesting to see. And then the other thing I would say on the Republican side, a lot of focus on Trump, a lot of focus on DeSantis. There are some Republican governors who term in ‘24. The one thing I've known about politicians is they like new jobs in government and they don't like to go back to the private sector. And so, someone like Glenn Youngkin, for instance, in Virginia, he's one term and he's done, and he has an option to either run for president of the United States or try and beat Tim Kaine for his Senate seat. I would honestly say to you as they're doing their numbers in Virginia. They may think they got a better chance at national office than at state office if he's got to run against Tim Kaine. So, I just throw out a Youngkin or a Polis in Colorado out there as potential people who might not be so mainstream that could actually surprise all of us come a year from now. Anyway, that's it from my Monday morning quarter backing..

Jeff DeBoer: The work goes on, the dream continues. The march will never end or whatever.

Willy Walker: You got it. And I get to do it on a Monday morning. You guys both go to battle every Sunday morning, if you will, to use the football analogy. So, I get to just say it from my seat in the back of the theater.

Thank you both and really appreciate your insights and input. As Susan said at the top, I'm going to Philadelphia next week for my quarterly discussion with Peter Linneman, and I can guarantee you it will be really good and really, really interesting. So, I hope many of you can join us.

Have a great day, everyone. Thank you.

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