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CREFC Survey Reveals Climate and Property Resilience Are Top of Mind for CRE Market Participants

NEW YORK, June 27, 2022 – The CRE Finance Council (“CREFC”), the industry association that exclusively represents the $5.1 trillion commercial real estate finance industry, today released new data from its 2022 ESG Survey, gauging its members’ sentiment on Environmental, Social and Governance (“ESG”) issues in commercial real estate (“CRE”) finance. The survey reveals that regulatory considerations and investor demand for transparency are increasingly important drivers behind ESG disclosure and reporting frameworks. The findings come as the Securities and Exchange Commission (“SEC”) looks to mandate, for public companies, ESG disclosure frameworks, and has taken a more watchful eye on potentially misleading ESG investment activity.

Regulatory compliance top of mind, but disclosure frameworks unclear
With an increasing focus on ESG in CRE lending and investing, CREFC’s survey finds that while 55% of industry participants have an ESG framework in place, more than half (55%) report that they do not use the ESG disclosure frameworks promoted by policymakers, primarily the Task Force on Climate-Related Financial Disclosures (“TCFD”). This framework serves as a template for many regulatory agencies, with the SEC acknowledging that its proposed climate disclosures are similar to those based on the TCFD.

“While the CRE industry anticipates increased regulatory oversight of ESG investments and offerings, the lack of standardization for compliance and disclosure requirements across different sectors, subsectors, and industries creates challenges,” says Sairah Burki, Managing Director, Regulatory Affairs & Sustainability, CREFC. “To help our members understand the regulatory landscape and adapt to new requirements, CREFC’s Sustainability Initiative is in the process of developing climate-related disclosures for our Investor Reporting Package™.” Such data fields once developed and finalized can be utilized by and highly useful to balance sheet lenders as well.

From an investment perspective, a majority of market participants (67%) view property-level data as the most important information when making an investment decision. Tenant data is also gaining significance, ranking as the second top consideration (34%), followed by sponsor ESG policies (33%).

Property resiliency at the forefront
According to the survey, environmental components rank highest among respondents’ ESG priorities, with a focus on the impact of climate on property and buildings’ ability to weather the impacts of the environment such as natural disasters and overall longevity to the elements. Nearly three-quarters (71%) rank property resilience as their top concern in their ESG assessments, followed by the impact of property on climate (64%), such as building carbon emissions.

“It’s not at all surprising that resiliency reigns supreme in terms of data requirements. Before the moniker ESG became popular, CRE investors still needed to understand the ability of collateral to withstand climate stress. Resiliency contributes to overall creditworthiness,” adds Burki. “And as the focus on climate change accelerates, many investors also want to know more about a property’s impact on climate. Therefore, it will be imperative for property owners and operators to accurately disclose relevant data in a way that is easily understood by investors, lenders and other market participants.”

Interest in the Social and Governance components of ESG are evenly split among respondents in their ESG assessments. Housing affordability dominated social considerations, with two-thirds (66%) of industry participants listing it as the most important factor in their ESG social frameworks. Such considerations are informed by the current housing affordability crisis here in the United States. .

Enhancing ESG in commercial real estate finance
As the CRE finance industry continues to navigate evolving ESG regulations, CREFC recently submitted a response to the SEC’s proposed climate-risk disclosure requirements to improve and establish clear, standardized disclosure rules. It also led a similar joint-trade effort.

CREFC established its Sustainability Initiative in early 2021 to align the objectives of its members and the CRE finance industry with the opportunities and challenges of ESG. With an initial focus on climate risk in CRE finance, the organization is launching its social effort in 2022 with a focus on identifying the social policies within ESG that are impacting the industry.

CREFC’s ESG survey comes on the heels of its first Sustainability Summit, hosted on June 15, 2022 as part of its Annual Conference. The Summit featured industry-leading speakers from Blackstone and J.P. Morgan, exploring the intersection of ESG and CRE finance and key considerations for the industry looking ahead.

To learn more about CREFC’s Sustainability Initiative, click here.

Survey methodology
CREFC surveyed 115 of its members, which include banks, commercial and multifamily real estate owners, investors, lenders, rating agencies and service providers, among others. Respondents were surveyed online from March 29 to April 18, 2022. To view the full results, click here.

About CREFC
The CRE Finance Council (CREFC) is the trade association for the commercial real estate finance industry with member firms including balance sheet and securitized lenders, loan and bond investors, private equity firms, servicers and rating agencies, among others. CREFC promotes liquidity, transparency, and efficiency in the commercial real estate finance markets, and acts as a legislative and regulatory advocate for the industry, playing a vital role in setting market standards and best practices, and providing education for market participants.

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House Committee Markup Includes Affordability Bills

June 27, 2022

On June 23, the House Financial Services Committee advanced 10 bills during a markup session, including several housing-related bills. The partisan legislation is unlikely to advance in the closely divided Senate. Legislation of interest to CREFC members is highlighted below:

• H.R. 4495, the Down Payment toward Equity Act
  • A bill offered by Chairwoman Maxine Waters (D-CA) that would authorize $100 billion for a new HUD grant program to provide financial assistance to first-time, first-generation homebuyers to put toward a down payment and other upfront costs to purchase a home. This funding would help address multigenerational inequities in access to homeownership and help close the racial wealth and homeownership gaps in the United States.
  • Passed the Committee by a vote of 28-23.
    
    
• H.R. 68, the Housing Fairness Act of 2021
  • A bill offered by Representative Al Green (D-TX) that would authorize increased funding for the Department of Housing and Urban Development’s (HUD) Fair Housing Initiatives Program (FHIP) and make a number of reforms to FHIP. It would also establish a new competitive grant program at HUD to support comprehensive studies of the causes and effects of ongoing discrimination and segregation, and the implementation of pilot projects to test solutions.
  • Passed the Committee by a vote of 28-24.
    
    
• H.R. 3111, the Grandfamily Housing Act of 2021
  • A bill offered by Representative Ayanna Pressley (D-MA) and Representative Jim McGovern (D-MA) that would authorize $100 million to establish a pilot program at the Department of Housing and Urban Development (HUD) to support the housing needs of intergenerational families through supportive services.
  • Passed the Committee by a vote of 29-24.
    
    
• H.R. 6841, the Small Business Fair Debt Collection Protection Act
  • A bill offered by Representative Al Lawson (D-FL) that would amend the Fair Debt Collection Practices Act (FDCPA) to extend protections that are currently in place for consumers to guard against certain predatory debt practices, to also apply to small business borrowers. Specifically, it would expand the definition of debt to include debt incurred from small business loans, restrict the means and methods by which collectors can contact small business debtors, and limit actions of third-party debt collectors who attempt to collect debts on behalf of another person or entity.
  • Passed the Committee by a vote of 29-24.
    
    
• H.R. 4586, the Risk-Based Credit Examination Act
  • A bill offered by Representative Ann Wagner (R-MO) that would provide discretion to the Securities and Exchange Commission (SEC) to prioritize its examination process of credit rating agencies as it deems appropriate, which means the SEC would only examine agencies if it determines there is a reason to do so. The bill does not remove the requirement that the SEC examine credit rating agencies annually.
  • Passed the Committee by a voice vote.

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Regulatory Agenda Highlights

June 27, 2022

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After a Record 2021, Housing Markets Reach an Inflection Point

June 27, 2022

On June 22, Harvard's Joint Center for Housing Studies (JCHS) released its State of the Nation's Housing Report for 2022. The report highlighted the soaring costs of housing in both the ownership and rental markets. Home price appreciation nationwide hit 20.6% in March 2022, topping the previous high of 20.0 percent in August 2021 and marking the most significant jump in three decades of recordkeeping. At the same time, rents for apartments in professionally managed properties were up 12% nationally in the first quarter of 2022 from a year earlier, with increases in several metro areas exceeding 20%.

While housing markets are likely to remain tight in the near term, the steep rise in interest rates has cooled homebuyer demand and should give inventories a chance to rebuild and help slow the pace of price growth. On the rental side, demand should remain brisk given the large number of adults now in their 20s, 30s, and 40s that continue to form new households at a rapid clip. The tight conditions on the supply side are expected to ease somewhat given the record number of new units now under construction.

The JCHS report also highlighted the growing affordability challenges nationwide. With inflation resulting in soaring prices for everyday necessities, household budgets have become increasingly strained, especially among lower-income households and households of color. An immediate concern highlighted by the JCHS is the risk of an economic downturn or recession as a result of tightening monetary policy, which would further exacerbate the affordability crisis the country is facing.

The report stressed the need for more moderate-priced housing and expanded support for the lowest-income households. "Developing the policies and practices to meet this need will take concerted efforts by both the public and private sectors," the authors noted. "The Biden Administration's Housing Supply Action Plan makes a good start with a blueprint for reducing the severe shortfall in affordable housing."

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Abortion, Gun Safety as Reconciliation Negotiations Continue

June 27, 2022

Three decades-long elemental shifts in policy shook Washington and the nation last week:

• The Supreme Court eliminated the constitutional right to abortion, after nearly 50 years.
  
  
• The Supreme Court affirmed that carrying a handgun in public is a constitutional right, the largest 2nd amendment case in over a decade, (although states can still require a license the AP notes).
  
  
• President Joe Biden signed a bipartisan gun safety bill into law, the first major gun legislation in nearly 30 years

The gun legislation, called the Bipartisan Safer Communities Act (S. 2938), was signed into law on Saturday after the Senate passed the legislation in a 55-33 vote and the House passed it in a 234-193 vote. The legislation:

1. Provides $750 million to states to keep guns out of the hands of individuals who a court determines to be a significant danger to themselves or others;
   
   
2. Adds convicted domestic violence abusers in dating relationships to the National Instant Criminal Background Check System (NICS);
   
   
3. Cracks down on criminals who illegally evade licensing requirements and clarifies which sellers need to register and conduct background checks;
   
   
4. Requires investigation of juvenile and mental health records for gun buyers under 21;
   
   
5. Creates new federal straw (illegal) purchasing offenses;
   
   
6. Expands community behavioral health centers and mental health and supportive services in schools; and
   
   
7. Improves school-wide learning conditions and school safety.

In the Senate, 15 Republicans crossed the aisle to vote with Democrats: Cornyn (TX), Blunt (MO), Burr (NC), Capito (WV), Cassidy (LA), Collins (ME), Ernst (IA), Graham (SC), McConnell (KY), Murkowski (AK), Portman (OH), Romney (UT), Tillis (NC), and Young (IN).

In the House, 14 Republicans crossed the aisle to vote with Democrats: Cheney (WY), Kinzinger (IL), Jacobs (NY), Rice (SC), Chabot (OH), Turner (OH), Gonzalez (OH), Joyce (OH), Gonzales (TX), Katko (NY), Salazar (FL), Upton (MI), Meijer (MI), and Fitzpatrick (PA).

The bill enacts the most significant changes in federal gun laws in nearly 30 years, which Punchbowl News describes as a, “triumph for gun control advocates, whose demands for new restrictions on guns and gun sales previously failed to spur action in Congress despite decades of mass shootings.” Not included in the legislation are mandatory waiting period for gun sales, license requirement to purchase an assault weapon, prohibition on the purchase of a semiautomatic weapon by anyone under 21, universal background checks, or a ban on the sale of large-capacity magazines.

Manchin and Schumer in Active Talks on Budget Reconciliation
Meanwhile, Senator Joe Manchin (D-WV) and Majority Leader Chuck Schumer (D-NY) continue active discussion of a climate, tax reform and prescription drugs bill through budget reconciliation. Sen. Ron Wyden (D-OR), who chairs the tax-focused Finance Committee, told Politico:

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In another positive sign for the reconciliation bill, Politico reports that “Manchin and Schumer are going line by line over what a possible deal would look like, building a potential agreement from the ground up rather than rehashing disagreements from last year.”

Yet, Manchin said, “A reconciliation deal between him and Senate Majority Leader Chuck Schumer isn’t particularly close.”

ACA Premium Fix New Hurdle in Reconciliation, and SALT
Another major hurdle tied up in the reconciliation discussions and that could be a major headache for Democrats just weeks before the midterm election are expiring tax credits for health coverage under the Affordable Care Act. If Congress does not act before the end of the year, 13 million Americans will see their health care premiums under the ACA “skyrocket” as much as 50% in January 2023, Punchbowl News reported last week.

Although Democrats expect to be able to insert language in a budget reconciliation package to avert a premium increase for ACA enrollees, Punchbowl News said that after speaking to “a number of people in House and Senate leadership and in the White House and none of them seemed to have any idea where Manchin stood on this issue.”

A Schumer spokesperson said the New York Democrat “strongly supports extending the ACA subsidies but Sen. Manchin asked that this topic not be discussed before other core issues are settled.”

A second potential roadblock to a reconciliation bill could be House Democrats in high-tax states, who insist that such a bill must address the current $10,000 limit on Federal income tax deductions for state and local taxes paid (SALT), which is set to expire at the end of 2025.

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New York Gubernatorial Primary Review

June 27, 2022

Tomorrow, voters across the Empire State will choose who will run in November’s general election in New York’s gubernatorial race. Incumbent Gov. Kathy Hochul (D) is comfortably fending off a primary challenge according to a recent Real Clear Politics poll. Hochul leads with 58.5% of the vote, Rep. Tom Suozzi (D) at 21.5%, and Jumaane Williams (D) at 11%.

The Republican gubernatorial primary field is slightly more competitive and crowded. Recent polling shows Rep. Lee Zeldin (R) leads with 25% of the vote and is closely followed by Andrew Giuliani (R) with 23%. Trailing behind are Harry Wilson (R) with 13% and Rob Astorino (R) with 8%.

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ICYMI: Recent Primary Results

June 27, 2022

Twenty-five states have hosted Congressional primaries to select candidates to run in the general election, and the remaining will wrap up by September 13. Below are highlights of a few recent notable results:

Alabama
In the Alabama Republican primary run-off, Katie Britt (R) won with 63% of the vote to succeed retiring Senator Richard Shelby (R-AL), and her opponent Rep. Mo Brooks (R) finished with only 37%. In November, Britt will be the heavy favorite against Democrat Will Boyd.

Virginia
Two Republican primaries last week set the races for who would run against vulnerable House Democrats in this fall’s general election.

• District 2 – to face incumbent Rep. Elaine Luria (D) in November:
  • State Senator Jen Kiggans (R) won the GOP nomination with 55.8% of the vote.
    
    
• District 7 – to face incumbent Rep. Abigail Spanberger (D) in November:
  • Yesli Vega (R) won her GOP primary with 28.9% of the vote.

To view the full results of the Virginia primaries, click here.

Texas
Peter Cuellar (D) survived his primary challenge from progressive candidate (and his former intern) Jessica Cisneros (D) by only 289 votes. A lengthy recount process followed the May 24th run-off. Cuellar will face Republican Cassy Garcia in November’s general election.

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CREFC Capital Markets Update: Week of 6/27

June 27, 2022

Support Builds for Another 75 Basis Point Rate Increase
The newest Fed Governor, Michelle Bowman, recently indicated early backing for a 75 basis point increase at the next policy meeting in July. "Depending on how the economy evolves, further increases in the target range for the federal funds rate may be needed," she said in remarks delivered at an event hosted by the Massachusetts Bankers Association. Bowman joins Christopher Waller in supporting another large hike. In remarks delivered on June 18, Waller affirmed the central bank's commitment to tackling the worst inflation problem in more than 40 years, saying it was "all in on re-establishing price stability."

Mounting support for another aggressive rate adjustment came just days after the Fed implemented the first 75 basis point increase since 1994 and signaled its support for significantly more monetary tightening this year. Most officials now expect the federal funds rate to rise to around 3.75% by December, up from the current target range of 1.50% to 1.75%.

Bowman's comments echoed Fed chair Jay Powell's testimony in front of Congress last week. Powell told Senate lawmakers that a recession was "certainly a possibility" as the central bank steps up its efforts to counter soaring prices. "The other risk, though, is that we would not manage to restore price stability and that we would allow this high inflation to get entrenched in the economy," Powell noted. "We can't fail on that task. We have to get back to 2% inflation."

Slow Issuance Week amidst Macro Volatility and Rising Rates

• Private-Label CMBS and CRE CLOs. Only one private-label transaction priced last week: a $754 million CRE CLO. The market is facing continued macro uncertainty and the challenges of originating new loans at higher coupons and lower valuations.
  • The risks of the U.S. entering a recession have picked up sharply in recent weeks following the Fed's decision to go big on rate increases to counter surging inflation. Goldman Sachs doubled the risk of a U.S. recession this year from 15% to 30%, with a 48% probability of a recession over a two-year horizon.
    
    
• As of June 24, CMBS and CRE CLO issuance stood at $71.8 billion, only 7% higher than the same period in 2021 ($67.0 billion), with much of the heftier issuance coming earlier in the year.
  • Lower issuance in recent months has significantly narrowed the overall year-over-year margin following a solid start to the year. At the end of Q1 2022, total issuance was 70% ahead of the same period in 2021.
  • According to BofA Global Research, some 21 private-label transactions totaling ~$13 billion are in the current pipeline consisting of five conduit, seven SASB CMBS, and nine CRE CLO transactions. However, if current market conditions persist, it is expected that pricing will be delayed and timelines extended as issuers wait for less volatile markets and more assured execution.
  • Secondary spreads narrowed slightly at the top of the capital stack while widening at the bottom:
    • Conduit BBB- spreads widened by 23 bps on the week and 70 bps month-to-date as investor concerns grow over the potentially negative impact higher rates and an economic slowdown will have on the sector.
    • BBB- spreads widened by 23 bps on the week and 70 bps month-to-date as investors became concerned with the impact of higher rates and an economic slowdown.
      
      
• Agency CMBS. Last week saw just over $6 billion in new agency issuance with advances in Fannie DUS, Freddie K, and Ginnie Project Loan transactions.
  • Total agency issuance reached $90.4 billion for the year-to-date period ended June 24. Agency issuance is down 5% from last year's point ($94.9 billion).
  • Benchmark agency spreads were all unchanged over the week.

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Powell Testifies Before House and Senate

June 27, 2022

Last week, Federal Reserve Chair Jerome Powell testified before the Senate Banking Committee and House Financial Services Committee as part of the semi-annual monetary policy updates. Unsurprisingly, inflation and a possible recession dominated both hearings.

Powell admitted that ensuring a soft landing is becoming increasingly difficult and will depend on factors outside of the Fed’s control, i.e. the length of the war in Ukraine, supply chain problems, and commodities prices. He provided little insight on the size of future rate hikes but said the Fed would never take something off the table.

Senate Banking Dems on Inflation: Putin, Pandemic, Price Gouging
Committee Democrats emphasized the culprits of rising prices, or as Sen. Van Hollen (D-MD) called them, the three P’s:

• Putin’s war,
• Pandemic supply chain disruptions, and
• Price gouging.

The lawmakers argued that Russia’s invasion of Ukraine, supply chain bottlenecks, and industry consolidation are the primary drivers of high inflation. Powell declined to weigh in on these political matters, instead focusing on what the Fed can do to rein in inflation, such as shrinking its balance sheet and assisting in realigning supply and demand.

However, Democrats feared that raising interest rates could slow other parts of the economy without lowering the costs of gas, food, and rent. Senator Warren (D-MA) argued that higher rates make it more expensive to invest, leading companies to fire workers and slash hours to shrink wage costs. She urged Powell to proceed cautiously with further rate hikes and expressed concern that the Fed could tip this economy into a recession. Powell admitted that a recession is “certainly a possibility” but not the Fed’s intention.

Senate Republicans Blame Biden Spending
Comparatively, Republicans blamed high prices on the Biden administration’s “spending spree,” as well as the Fed’s slow response. Sen. Tillis (R-NC) contended that excess government spending turbocharged consumption and drove record-high inflation. He added that any efforts to revive a budget reconciliation bill would no doubt worsen our economic condition. Powell avoided the politics of the pandemic relief package and emphasized that it is not the Fed’s job to pass judgment on legislation. Sen. Shelby (R-AL) drew connections to high inflation during the ‘70s, where similar conditions were present, namely loose monetary policy and significant government spending. Sen. Tillis agreed that monetary policy remains “loose,” adding that the Fed’s drastic action was long overdue and reactive policy measures (proposed by Democrats) could threaten the central bank’s credibility to manage the economy.

House Hearing
The House Financial Services Committee debated the Fed’s efforts to rein in inflation, with a particular focus on unemployment, mortgage-backed securities (quantitative tightening), digital assets, and systemic risk. Chair Powell reiterated many of the same points he made yesterday, affirming his “unconditional” commitment to returning inflation to the 2% area, realigning supply and demand, and restoring price stability.

Unemployment. Powell admitted there’s a risk that interest rate hikes could lead to a rise in unemployment, but added that the current rate is at a historically low level. Unemployment above 4% would still be very strong. Powell’s view is that rate increases will drive growth down to a sustainable level and give the supply side a chance to catch up. Yet, he cautioned that the Fed lacks “precision tools,” and blunt action could cause job losses.

MBS. As the Fed looks to shrink its balance sheet, lawmakers inquired about its plans to sell its mortgage-backed securities holdings (quantitative tightening). Ranking Member McHenry (R-NC) was curious as to how the roll-off might affect the housing market. Powell responded that the effects of shrinking the balance sheet will be marginal compared to the overall effects of rising mortgage rates.

Rep. McHenry went on to ask if there will be further balance sheet announcements in the coming weeks, to which Mr. Powell said that the Fed has a plan and has articulated it: The central bank will let these securities mature and run off the balance sheet at a pre-determined pace. He feels that the markets can absorb the supply and there will be demand for these assets, which Treasury can reissue in whatever form they deem appropriate.

However, Rep. Sherman (D-CA) wasn’t sold on the idea. He reasoned that an all Treasury portfolio will likely raise mortgage rates as Congress grapples with housing inflation and affordability issues. Powell responded that the Fed is committed to having a mostly Treasury balance sheet. To be clear, the central bank has not decided to start selling MBS, but will revisit it when the process is further along, he concluded.

Systemic Risk. Democrats touched on systemic risk as it relates to inflation and interest rates. Rep. Himes (D-CT) noted the seeing dramatic swings in the SPAC market, high yield market, equity markets, cryptocurrency markets, etc. He asked Powell what is most concerning with respect to systemic risk that may arise in the face of rising rates and inflation. Powell responded that the banking system in particular is very strong, well-capitalized, with lots of liquidity and better understanding and management of its risks.

He added that liquidity in the Treasury market has come down from where it was and the Fed is looking at ways to address the issue. But generally, the financial markets have been functioning “reasonably well,” he said. Shifting gears, Rep. Sherman (D-CA) thanked Powell for drawing attention over the last several years to the systemic risk posed by “tough legacy” LIBOR contracts. Congress passed relevant legislation to protect $16 trillion of instruments and provide a replacement interest rate. He asked if lawmakers can count on the Fed to complete its rulemaking process by mid-September. Powell assured him that the Fed is working hard to meet the tight deadline.

CREFC continues to monitor the LIBOR and SOFR transition. Please contact Raj Aidasani or Sairah Burki with any questions on the transition.

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