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House Hearing on SEC Climate Rule

April 16, 2024

The House Financial Services Committee (HFSC) held a hearing on April 10 titled “Beyond Scope: How the SEC’s Climate Rule Threatens American Markets.”

Why it matters: This climate regulation hearing is the latest salvo from conservative lawmakers against the Securities and Exchange Commission’s (SEC’s) climate disclosure rule.

• Committee Republicans described the rule as SEC overreach, arguing that it deviates from the materiality standard and could potentially harm businesses by mandating costly and burdensome disclosures.
• Democrats stated that climate risk is undeniably material and is necessary to protect investors.

Lawmakers also discussed the exclusion of Scope 3 (related to an organization’s value chain) emissions disclosure requirements from the final rule.

As covered in previous CREFC Policy and Capital Markets Briefings, at least nine lawsuits have been filed against the SEC’s climate disclosure rule and consolidated in the Eighth Circuit Court of Appeals pending litigation.

On April 4, the SEC issued a stay on the rule to avoid regulatory uncertainty if registrants “were to become subject to the Final Rules’ requirements during the pendency of the challenges to their validity.”

Unfortunately, attempting to reduce regulatory uncertainty is likely impossible at this point, regardless of what transpires with the SEC rule.

• In the two years since the SEC issued the proposal, California passed more stringent climate disclosure laws, with related regulations likely proposed in the coming year.
• Additionally, U.S. organizations that do business in Europe also have tougher standards with which to comply. For example, under the EU’s Corporate Sustainability Reporting Directive, U.S.-headquartered companies doing business with EU companies may have to include Scope 3 emissions reporting.
• Finally, the International Sustainability Standards Board’s (ISSB’s) extensive climate disclosure requirements are being adopted by more and more countries.

CREFC will continue to monitor regulatory and legislative developments related to climate regulation.

Please contact Sairah Burki (sburki@crefc.org) with any questions. 

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Speaker Johnson Prevails Amid Surveillance Law Infighting

April 16, 2024

On Friday, April 12, the House passed a two-year reauthorization of the Foreign Intelligence Surveillance Act (FISA). The bill now heads to the Senate where it is expected to pass.

Why it matters: The reauthorization was another test for Speaker Mike Johnson (R-LA). Conservatives and progressives opposed various pieces of the surveillance program, forcing Johnson to juggle his narrow House majority with national security priorities and Trump’s distaste for the program.

Overview of FISA: Section 702 of FISA generally governs the surveillance of foreign nationals located outside the U.S. The government does not have to obtain a warrant for this surveillance, but the surveillance cannot target U.S. persons or those located in the U.S. FISA was renewed in 2012 and 2017 with bipartisan support.

• Critics have focused on instances where 702 surveillance of foreigners abroad also sweeps in communications with any Americans.
• An amendment to add a warrant requirement to some aspects of FISA failed in a tie 212-212 vote.
• The shortened timeframe from the traditional five-year authorization was part of a negotiation after former President Trump opposed the reauthorization.

Rule Vote Failures: Earlier this week, the House failed to pass a “rule” to govern debate and consideration of the FISA bill after 19 GOP members voted against the rule. Rules allow the majority party to limit debate and amendments (e.g., tough votes) on its priorities.

• This was Speaker Johnson’s fourth failed rule vote in the last six months. This dysfunction could be a sign of things to come, as Johnson is dealing with a possible vote to oust him as early as next week. More on that later.
• Previously, speakers John Boehner, Nancy Pelosi and Paul Ryan never lost a rule vote during their tenures. McCarthy lost three before his ouster.

The result: Amid tense and close amendment votes, the bill finally passed on a bipartisan vote of 273-147. Later the same day, Speaker Johnson traveled to Mar-a-Lago for a joint appearance with Trump, less than 48 hours after Trump had publicly opposed FISA reauthorization.

• While Johnson has faced criticism from all corners of Capitol Hill during his tenure, he has navigated a complicated political predicament on spending and national security issues.

Yes, but: The threat of a motion to vacate continues to loom over Johnson, and the FISA passage may stir up more critics.

• Rep. Marjorie Taylor Greene (R-GA) sent an open letter to her colleagues this week, detailing her reasons for wanting to oust Johnson, including a promise to vote on Ukraine funding and his passage of government spending deals.
• Trump voiced his support for Johnson and acknowledged the difficult tasks he's faced with, though he noted his own friendship with Greene.

Contact James Montfort at (jmontfort@crefc.org) or David McCarthy (dmccarthy@crefc.org) with any questions. 

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Overview of Foreign Investment Legislation

April 16, 2024

As we have previously covered, Georgia’s governor is considering legislation that would limit certain foreign investments in commercial real estate and agriculture.

What's next: Governor Brian Kemp (R-GA) has 40 days from March 30 to sign or veto the SB 420. If he does not act, the bill becomes law.

Why it matters: The limitation on foreign investment and ownership in real estate follows the trend of over a dozen other states that have enacted similar provisions, most notably Florida SB 264.

CREFC has prepared a high-level overview of federal and state proposals related to foreign investment in real estate.

• Click here for the overview.

Contact David McCarthy (dmccarthy@crefc.org) with any questions. 

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CREFC Joins Letter Defending Like-Kind Exchanges

April 16, 2024

Last week, CREFC joined 35 organizations in a letter to congressional leaders urging them to preserve Section 1031 like-kind exchange tax treatment for real estate. Click here for the letter.

Why it matters: The Biden administration’s 2025 budget once again seeks to limit the deferral-of-gain recognition.

• While the provision has virtually no chance of passing in the current Congress, CREFC and other stakeholders continue to educate policymakers on the importance of the provisions.

The big picture: In a like-kind exchange, an investor can elect to defer the taxation of capital gains on the disposition of investment or business-use real property if the taxpayer reinvests the proceeds in another property of a like kind, in a short window of time.

Go deeper: The letter highlights numerous arguments for preserving the tax treatment. Like-kind exchanges:

• Reduce the cost of capital and make the economy more efficient by getting real estate into the hands of new owners with the time, resources, and desire to restore and improve them;
• Increase the supply of affordable rental housing as multifamily represents 40% of real estate like-kind exchanges;
• Drive job creation, according to an Ernst and Young study that found in 2021 economic activity generated by like-kind exchanges supported 976,000 jobs generating $48.6 billion of labor income and contributing $97.4 billion to the U.S. GDP; and
• Generate state and local tax revenue, as well as property reassessments that increase the tax base, through the more frequent turnover of real estate attributable to section 1031.

The bottom line: Like-kind exchanges for real estate continue to have bipartisan support in Congress. But with numerous tax provisions expiring after 2025, the next Congress and administration will be highly focused on tax policy.

CREFC and its partners will continue to stress the importance of like-kind exchanges to policymakers throughout the legislative process.

Contact David McCarthy (dmccarthy@crefc.org) with any questions. 

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Capital Markets Update Week of 4/15

April 16, 2024

Private-Label CMBS and CRE CLOs

• Two private-label transactions totaling $510.3 million priced last week:

- SDAL 2024-DAL, a $270 million SASB backed by a floating-rate, five-year loan (at full extension) for Elliot Management and Chartres Lodging Group to refinance the Sheraton Dallas Hotel.

- DBWF2024-LCRS, a $240.3 million SASB backed by a floating-rate, five-year loan (at full extension) for Ohana Real Estate and DivcoWest to refinance the La Cantera Resort & Spa in San Antonio.

• According to Commercial Mortgage Alert, over $11 billion of conduit and SASB offerings are in the works through June of this year, including ~$4 billion this month.
• Year-to-date private-label CMBS and CRE CLO issuance totaled $21 billion, well ahead of the $8.9 billion for the same period last year.

Spreads Largely Unchanged

• Conduit AAA and A-S spreads were mixed with AAA spreads wider by 4 bps to +92, and A-S spreads were unchanged at +130. YTD, AAA and A-S spreads have tightened by 24 bps and 35 bps, respectively.
• Conduit AA and A spreads were unchanged at +150 and +250, respectively. YTD, they have tightened by 75 bps and 125 bps, respectively. ­
• Conduit BBB- remained at +675. YTD, BBB- spreads have tightened by 225 bps.
• SASB AAA spreads were also unchanged, ranging from +137 to +162, depending on property type. They narrowed from +160 to +188 at the start of the year.
• CRE CLO AAA spreads held at +160 / 165 (Static / Managed), and BBB- spreads at +650 (Static / Managed). For the year, spreads are tighter by 40/ 35 bps and 50 bps, respectively.

Agency CMBS

• Agency issuance totaled $1.4 billion last week, consisting of $757.1 million in Freddie-K and Multi-PC transactions, $628.6 million in Fannie DUS, and $37.4 million in Ginnie transactions.
• Agency issuance for the year is $27.3 billion, 8% lower than the $29.7 billion for the same period last year.

The Economy, the Fed, and Rates…

Economic Data

• Inflation has been more stubborn than anticipated, with the latest CPI data showing a year-over-year increase of 3.5% for March, exceeding expectations. This follows a trend where inflation has continually surpassed forecasts, raising concerns about the persistence of inflationary pressures.
• Core CPI, excluding food and energy prices, also remained elevated at 3.8%, indicating broad-based price increases across the economy. Core services inflation rose at an annualized rate of 6% in March, driven by increases in shelter, medical care, and auto services costs.
• Recent increases in oil prices – Brent crude recently surpassed $92 a barrel –and metal prices have further fueled inflationary pressures.

Fed Policy

• Fed officials, including those from Atlanta, Boston, and San Francisco, have emphasized a cautious approach to adjusting interest rates, citing the need for clear and convincing evidence of inflation moving towards the 2% target before any rate cuts are considered.
• Various Fed officials have expressed concerns about cutting rates too soon, with some suggesting that the next move could potentially be a rate hike if inflationary pressures re-emerged. This underscores a shift from earlier more dovish signals to a “higher for longer” stance.

Market Reaction

• After inflation last week beat forecasts for the third month in a row, traders and fund managers were forced to reassess their assumptions. Current market sentiment now forecasts fewer rate cuts, with some projections suggesting only one or two quarter-point reductions by the end of the year.
• That compares with the six or more cuts expected back in January and the three that the more conservative Federal Reserve had projected.
• In an article for Bloomberg, Pimco warned that the Federal Reserve could pivot back toward interest rate hikes if inflation moves higher, with the asset manager preferring to buy bonds in other markets.

Treasury Yields

• Treasury yields rose across the maturity curve, reflecting investors’ lower expectations for interest rate cuts.
• The 2-year Treasury yield rose 15 bps for the week to 4.90%, while the 10-year yield rose 12 bps for the week to 4.52%. At one point during the week, the 10-year yield reached 4.59%, a five-month high.

You can download CREFC’s one-page MarketMetrics with statistics covering the economy and the CRE debt capital markets here.

Contact Raj Aidasani (raidasani@crefc.org) with any questions.

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SEC Pauses Its Own Climate Disclosure Rule

April 9, 2024

The Securities and Exchange Commission (SEC) on April 4 issued a stay on its March 6 climate disclosure rulemaking. This unusual move comes in response to the multiple lawsuits brought against this rule since its promulgation.

As noted in previous CREFC Policy and Capital Markets Briefings, the SEC’s climate regulation is highly controversial despite having been significantly revised since the initial proposal.

Since March 6, nine lawsuits have been filed:

• Two lawsuits were filed by progressive organizations, including the Sierra Club and the Natural Resources Defense Council, claiming the final rule had been excessively scaled back from its proposed form.
• Seven suits, including those filed by energy companies and Republican-led states, have argued that the rule violates the First Amendment and fails the major questions doctrine.

Claims have now been consolidated in the Eighth Circuit Court of Appeals pending litigation.

What they’re saying: The SEC said it would continue "vigorously defending" the rules, which are “consistent with applicable law and within the Commission’s long-standing authority.”

However, the SEC also noted that:

“A stay avoids potential regulatory uncertainty if registrants were to become subject to the Final Rules’ requirements during the pendency of the challenges to their validity.”

What this means: The stay does not mean that organizations should stop preparing for climate-related disclosures.

In the two years since the SEC issued the proposal, its climate disclosure requirements have been eclipsed in stringency by other key entities, including the state of California, the EU, and the International Sustainability Standards Board. Many investors are also seeking greater climate disclosures.

The bottom line: Regardless of where we land with final SEC climate disclosures, organizations should continue to monitor climate disclosure requirements and ensure they will be able to meet applicable regulations.

What’s next: CREFC continues to closely monitor these regulatory and judicial developments and will keep membership apprised.

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Congressional Outlook  

April 9, 2024

The House and Senate are back this week from a two-week recess after funding the government.

What’s next: While the risk of a shutdown is no longer imminent, several difficult issues will confront lawmakers over the next few months. Senate Majority Leader Chuck Schumer (D-N.Y.) outlined his priorities in a Dear Colleague Letter last week.

• Action on Ukraine funding is a top priority for many Democrats and Republicans, and while Speaker Johnson is supportive of Ukraine funding, action on it might prompt his ouster. More on this below.
• The Foreign Intelligence Surveillance Act (FISA) expires on April 19 and progressive and conservative critics have demanded changes to FISA they claim will protect Americans. Proponents of FISA argue that some proposed changes will hamstring surveillance of foreign terrorists and adversaries.
• Federal Aviation Administration (FAA) reauthorization is needed by May 10.
• Funding to rebuild the Francis Scott Key Bridge in Baltimore could run into some partisan roadblocks.
• Homeland Security Secretary Alejandro Mayorkas’ impeachment trial will likely begin Thursday. The Senate is unlikely to reach the 67-vote threshold needed to convict and remove him.
• Additional Senate priorities include the bipartisan tax bill, the TikTok divestment bill, and appropriations for FY 2025.

Over in the House, Speaker Johnson is expected to take action on Ukraine funding, though it’s not clear how. The Senate-passed national security supplemental that packages Ukraine, Israel, and Taiwan funding is the quickest path, as any changes would have to be reapproved by the Senate and face procedural delays by opponents.

• Johnson has floated other options for Ukraine funding, including forgivable loans, in an attempt to compromise with GOP opponents of additional spending.
• Israel funding may come under additional scrutiny and opposition in the wake of the accidental killings of seven World Central Kitchen aid workers by Israeli forces.
• Any action on Ukraine will likely prompt action on a motion to vacate Speaker Johnson, which Rep. Marjorie Taylor Greene (R-GA) filed on March 22. Democrats are expected to save Johnson, though the situation is fluid. See the “Retirements” article below for more details.

Contact David McCarthy (dmccarthy@crefc.org) with questions.

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Congressional focus on Ukraine funding will be a major topic as Congress returns. 

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Capital Markets Update Week of 4/8

April 9, 2024

Private-Label CMBS and CRE CLOs

• Two private-label transactions totaling $1.1 billion priced last week:

- HTL 2024-T53, a $631.5 million SASB backed by a three-year, fixed-rate loan for MCR Hotels and Building and Land Technology (BLT) to refinance 53 hotels totaling 5,958 rooms across 14 states

- BX 2024-BRVE, a $428.5 million SASB backed by a floating-rate, five-year loan (at full extension) for Blackstone Real Estate Income to refinance 23 hotels totaling 4,002 rooms across 10 states

• According to Commercial Mortgage Alert, three additional SASB transactions are in the market and are expected to price this week.
• Year-to-date private-label CMBS and CRE CLO issuance totaled $20.5 billion, well ahead of the $7.8 billion for the same period last year.

Spreads Steady

• Conduit AAA and A-S spreads were unchanged at +88 and +130, respectively. YTD, AAA and A-S spreads have tightened 28 bps and 35 bps, respectively.
• Conduit AA and A spreads were unchanged at +150 and +250, respectively. YTD, they have tightened by 75 bps and 125 bps, respectively.
• Conduit BBB- remained at +675. YTD, BBB- spreads have tightened by 225 bps.
• SASB AAA spreads were also unchanged, ranging from +136 to +160, depending on property type. They narrowed from +160 to +188 at the start of the year.
• CRE CLO AAA spreads held at +160 / 165 (Static / Managed), and BBB- spreads at +650 (Static / Managed). For the year, spreads are tighter by 40 / 35 bps and 50 bps, respectively.

Agency CMBS

• Agency issuance totaled $2 billion last week, consisting of $1.4 billion in Freddie-K and Multi-PC transactions, $475.8 million in Fannie DUS, and $83.1 million in Ginnie transactions.
• Agency issuance for the year is $25.8 billion, 4% lower than the $26.8 billion for the same period last year.

The Economy, the Fed, and Rates…

Economic Data:

• The economy added 303,000 jobs in March, blowing past economists' forecasts of ~200,000. The unemployment rate edged down to 3.8%, as a separate survey showed 469,000 new entrants into the labor force. The labor participation rate climbed and, at 62.7%, is now above where it was a year ago.
• Notable job gains were observed in healthcare, leisure and hospitality, construction, and government. Average weekly earnings and the number of hours worked both showed positive trends, underlining the upward pressure on wages amid a competitive job market.
• Steadier goods spending and lower cost inflation seem to have relieved pressure on manufacturing. Last week’s ISM purchasing managers’ index confirmed that manufacturing returned to modest expansion in March after 16 months of contraction.
• In cycles since 1951, ISM manufacturing surveys have never shrunk for more than 14 months without a recession. Manufacturing leaving contraction removes one of the economy’s last few soft spots.

Fed Policy:

• The March jobs report underscored the robustness of the labor market, challenging the immediate necessity for Fed rate cuts and leading to a reassessment of the economic outlook among investors and policymakers.
• According to futures markets, market anticipation of Fed rate cuts shifted significantly, with the probability of a rate reduction by June dropping from 66% to about 50%.
• Federal Reserve officials, including Chair Jay Powell and Dallas Fed President Lorie Logan, signaled a cautious stance toward cutting interest rates amidst a robust labor market and inflationary pressures. They emphasized the need for more evident signs of inflation moving toward the Fed's 2% target.
• Analysts and economists will closely monitor upcoming economic data, especially CPI figures, to gauge the Fed's policy direction. A consensus is leaning towards eventual rate reductions but diverging on the timing and magnitude.

Treasury Yields:

• Bond yields rose after the release of the strong jobs data as investors scaled back bets that the Fed would cut interest rates soon. The two-year Treasury yield was up 13 bps on the week to 4.75%, while the 10-year was up 20 bps to 4.40%, its highest level since November.

You can download CREFC’s one-page MarketWatch with statistics covering the economy and the CRE debt capital markets here.

Contact Raj Aidasani (raidasani@crefc.org) with any questions.

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House Retirements in Focus

April 9, 2024

Members of Congress are retiring at rates comparable to other cycles, but in this election cycle some lawmakers are making their exits a bit earlier than 2025.

What’s happening:

• Rep. Ken Buck (R-CO): The Congressman from Colorado’s 4th district announced his retirement last November but resigned on March 23.
• Rep. Mike Gallagher (R-WI) announced in early February that he would be retiring from the House at the end of his term. He then clarified that his last day would be on Friday, April 19.

Why this timing raised a few eyebrows:

• If Gallagher had left the House just ten days earlier on April 9th, there would have been a special election to fill his seat as required by Wisconsin law. However, since he left after April 9th, the seat will stay vacant until November.
• Rep. Gallagher has openly expressed frustration with his party about how they have been governing. Recently, he stated he wouldn’t commit to attending the party’s convention this summer.
• The seat likely will stay in Republican hands come November, but candidates from both parties have declared interest in running for Wisconsin’s 8th Congressional District.

What this all means for Speaker Johnson and the Republicans:

The House is currently divided at 218-213 with four vacancies, which provides a challenge for Speaker Johnson who needs a two-vote majority.

• When Rep. Gallagher officially departs on April 19, the majority will drop to one vote, a narrow margin not seen since 1919.
• Speaker Johnson will have to contend with the motion to vacate from Rep. Marjorie Taylor Greene. The motion could be brought up as soon as Tuesday, April 9.

What they're saying: Rep. Greene contends that Speaker Johnson’s compromise with Democrats to keep the government open last month and his intention to bring additional Ukraine aid to the floor are reason enough to boot him from his post.

• However, some Democrats have promised that if Speaker Johnson brings Ukraine aid to the floor they will protect him and table Rep. Greene’s motion.

When this margin won’t matter: Three special elections will take place between May 21 and June 25, which will likely add to the GOP majority.

• California's 20th Congressional District on May 21, 2024. (Rep. Kevin McCarthy’s old seat)
• Ohio's 6th Congressional District on June 11, 2024. (Rep. Bill Johnson’s old seat)
• Colorado's 4th Congressional District on June 25, 2024. (Rep. Ken Buck’s old seat)

If all these elections break for Republicans, as expected, Speaker Johnson will have a larger margin, though the fractious GOP conference will continue to create challenges for party leadership as votes on foreign aid and other program reauthorizations loom.

The bottom line: There may only be 81 legislative days left in the 118th Congress but there’s still time for additional precedents to be set, as Speaker Kevin McCarthy’s ouster was a first.

• The government is only funded through September 30 and legislators will once again need to agree to take action for FY 2025 or risk a shutdown.
• The 2024 election 209 days from today.

Please contact James Montfort (jmontfort@crefc.org) with any questions.

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