The Trump administration on Thursday formally repealed the Waters of the U.S. rule, an Obama-era environmental regulation that drew criticism from the real estate industry for imposing burdensome restrictions on housing development near water sources.
The National Association of REALTORS® expressed support for the move, saying WOTUS overreached its statutory jurisdiction by giving the federal government authority to regulate isolated and minor water features, such as ephemeral streams and manmade ditches. “From the perspective of the real estate industry, this would have decreased the supply of affordable housing by increasing the regulatory burdens and costs of building new housing units,” Kathleen M. McQuilkin, chair of NAR’s Land Use, Property Rights, and Environment Committee, said at an event in Washington, D.C., announcing the repeal. “Regulatory consistency is critical for real estate markets to function effectively.”
Earlier this year, NAR sent a letter to Andrew Wheeler, administrator of the Environmental Protection Agency, urging WOTUS reforms. In the letter, NAR commended the White House for striking “an appropriate balance between regulatory clarity and transparency and the need for robust environmental protection of waters and wetlands.”
Since the rule first emerged in 2015, NAR has contended that a responsible, pragmatic repeal of WOTUS would reinject certainty and consistency in the construction permitting and development process while protecting water quality and property rights. “Clean water is essential to life. It creates the opportunity for a healthy environment, a growing economy, and allows us to live in vibrant neighborhoods across this country,” NAR President John Smaby said in a statement. “We commend White House efforts to repeal this rule and continue to push for market-based solutions that enhance the quality of our water resources while protecting private property rights.”
Last December, the EPA and Department of the Army signed a proposal to revise the definition of WOTUS and clarify the federal government’s authority under the Clean Water Act. Thursday’s repeal of the rule was the culmination of the Trump administration’s two-and-a half-year effort to strike down WOTUS.
Moving forward, NAR will focus on securing a replacement rule for WOTUS as the administration continues its work to develop the new regulation. “As proposed, the WOTUS replacement rule will provide clarity on what waters are under federal jurisdiction and preserves state authority over waters in their respective states,” McQuilkin said. “Most importantly, the proposed rule offers a common-sense approach that allows for economic development while protecting water quality.
“NAR encourages the EPA and the Corps of Engineers to move forward quickly but carefully to finalize the replacement rule—one that will enable more housing to be built so that even more people in this country can have their piece of the American dream.”
By: Wes Shaw (NAR Realtor Magazine)
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Archives for September 2019
Lenders Won’t Cover Rising Construction Costs on Multifamily Projects
To make up for rising materials costs, apartment developers are being forced to put more equity into their projects.
Low interest rates are not enough to make up for the rising cost of construction on new apartment building projects.
“The drop in interest rates will not make a bad project look good,” says Matthew Swerdlow, director of capital services for Ariel Property Advisors, a real estate and advisory services firm based in New York City. “If it didn’t work with higher interest rates, it might not work with low.”
Apartment developers across the U.S. are struggling to pay for the rising cost of construction. Banks and debt funds are still eager to make construction loans at low interest rates, but these loans are not typically large enough to cover the higher cost of development. Many developers are now being forced to accept lower profits to make their deals work.
“There is still debt and equity capital available to develop apartment projects even though the rising cost of construction might make your deal—and your profit margins—a bit thinner,” says Bill Leffler, vice president in the multi-housing group based in the Atlanta office of real estate services firm CBRE.
“The drop in interest rates will not make a bad project look good,” says Matthew Swerdlow, director of capital services for Ariel Property Advisors, a real estate and advisory services firm based in New York City. “If it didn’t work with higher interest rates, it might not work with low.”
Apartment developers across the U.S. are struggling to pay for the rising cost of construction. Banks and debt funds are still eager to make construction loans at low interest rates, but these loans are not typically large enough to cover the higher cost of development. Many developers are now being forced to accept lower profits to make their deals work.
“There is still debt and equity capital available to develop apartment projects even though the rising cost of construction might make your deal—and your profit margins—a bit thinner,” says Bill Leffler, vice president in the multi-housing group based in the Atlanta office of real estate services firm CBRE.
Banks offer less money
Developers and lenders also have to worry about the possibility that the U.S. economy may slow down over the next year, cutting into demand for apartments. “People are starting to worry about how late in the real estate cycle it is. This is the longest cycle of growth that we have ever had,” says Leffler.
Many banks and debt funds are still willing to lend, but the loans are getting smaller compared to the cost of development. For example, two years ago, bank lenders often made construction loans that covered about 65 percent of the cost of development. A typical bank construction loan now often only covers 60 percent of the cost, experts say.
“It is late in the cycle for a lender to fund a full leverage loan,” says Leffler. “Lenders are not going to follow costs all the way up. Deals will get done, but developers may just need more equity.”
However, the number of lenders offering to finance apartment construction is about the same as it was a few years ago, despite economic worries and tough new banking regulations that came into effect a few years ago. These regulations, such as the international Basel III rules, limit the volume of risky real estate loans banks can hold on their balance sheets.
“Apartments outperformed so well in this cycle and the payoffs have been so consistent that we have not seen banks saying they have run out of their allocation for apartment lending in the last two years,” says Leffler. In addition, banks that hit their limit for construction lending tend to return eventually to making more loans as older loans are paid back. “The majority of retail banks and the majority of debt funds are still putting out construction debt.”
Bank lenders now often offer interest rates that float 225 to 250 basis points over LIBOR on recourse construction loans that cover up to 60 percent or, occasionally, 65 percent of the cost of the project. Debt funds typically charge higher interest rates, floating 500 basis points over LIBOR, for non-recourse loans that cover 70 to 75 percent of the cost of a project.
Interest rate spreads have not widened as LIBOR has shrunk in 2019, as lenders compete with each other to gain market share. “That 40-basis-point drop is a real tangible saving to developers,” says Swerdlow.
Construction costs are the biggest challenge
“Construction costs have been rising faster than rents have been rising,” says Leffler. “Overall, construction costs have been rising 10 percent to 12 percent a year.”
The costd of labor and materials like concrete and steel have risen the most steeply. That’s cutting into the profitability of new high-rise developments in the busiest markets. The price of lumber has spiked up in 2018 over worries of a trade war with Canada, but since then wood prices have moderated in 2019.
Rising costs make it less profitable—and riskier—to develop apartments. “Deals have been getting thinner and thinner in their profit margins,” says Leffler.
For a development deal to work, the total return on cost for the developer once the property has been leased up should be significantly higher than the cap rate that a similar, stabilized property would receive if sold.
“A typical return-on-cost used to be about 150 basis points above the cap rate. Now that spread is down to 125,” says Leffler. That means developers get less reward for the risk of development, and less space in their budget if costs rise unexpectedly.
Lower interest rates can help offset construction costs, but only to an extent. “The drop in interest rates will directly correlate with higher proceeds for the permanent take-out loan,” says Swerdlow. “Lower interest rates have not been enough to offset how much construction costs have been increasing.”
By: Bendix Anderson (NREI)
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How Long Will True Diversity Elude Commercial Real Estate?
Industry organizations, including IREM, are making strides, but more needs to be done.
Diversity and inclusion should be the fabric of every commercial real estate organization. So says the Deloitte “2019 Commercial Real Estate Industry Outlook.” We’ve quoted that work before in this space, and with good reason. As the above reference can tell you, there is much to be gained from it.
Here’s just one other example of how the Deloitte survey emphasizes our need to lead with diversity: Companies in this space, “should facilitate focused awareness-building sessions for majority-population members addressing the value of and mechanisms for creating inclusion and connection within the organization. Companies should also consider mentorship programs to help women and minorities prepare for leadership roles, and vice versa, to help senior leaders appreciate and value diverse up-and-coming talent.”
So let’s have it said: Diversity and inclusion are still lacking in this industry, and we need to catch up. This is why conferences, including our own upcoming Global Summit, still need to drive home the importance of diversity within and at the leading edge of our ranks.
Corporate diversity programs and initiatives among the various industry associations that represent them are also addressing that disparity. IREM is certainly doing its share, beyond the scope of the summit, through our diversity advisory board and the diversity and inclusion succession initiative. BOMA International, CREW Network and other associations are also spreading the gospel of diversity.
So let’s have it said: Diversity and inclusion are still lacking in this industry, and we need to catch up. This is why conferences, including our own upcoming Global Summit, still need to drive home the importance of diversity within and at the leading edge of our ranks.
Corporate diversity programs and initiatives among the various industry associations that represent them are also addressing that disparity. IREM is certainly doing its share, beyond the scope of the summit, through our diversity advisory board and the diversity and inclusion succession initiative. BOMA International, CREW Network and other associations are also spreading the gospel of diversity.
As I write this, I am about to hand the president’s gavel over to Cheryl Ann Gray, CPM. Happily, Cheryl is not the first woman to hold this position. But we have worked shoulder-to-shoulder on IREM’s executive committee for years now. I know of no one who could better serve, not only as an industry leader, but also as an example for women and others who feel underrepresented in our profession, including people of color and of varying races and ethnicities—someone to inspire them to take their rightful places.
There is good news in our ranks as well. In 2007, only 5.3 percent of our CPM candidates were black, and less than five percent were Asian or Latino. Today, black candidates account for 11.9 percent of membership, and Latinos come in a close second at 9.4 percent. Asians still lag at 4.1 percent. According to our latest poll numbers, 53.6 percent of CPMs and 63.7 percent of CPM candidates are female.
As promising as those numbers are, clearly more work needs to be done. We will know we have achieved true diversity when we are no longer talking about glass ceilings, when such programs as those mentioned above are no longer called for, when features such as Real Estate Forum’s long-standing Women of Influence are no longer needed, and when NREI no longer needs to ask the question “Is the CRE Industry Getting Any More Diverse?”
I truly believe that IREM is ahead of the diversity curve. The numbers I quoted above indicate progress, but there are still miles to go. We have written before in this space about the outreach, to colleges and primary schools, that the commercial real estate industry as a whole needs to accomplish to create a viable succession in this aging and still largely monolithic profession.
Other industries outside of commercial real estate are tackling the diversity issue head on. That means our constituents are becoming more diverse, which impacts directly on the quality of representation we as an industry can provide.
By: Donald B. Wilkerson (NREI)
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Program Can Boost NM’s ‘Opportunity Zones’
A state addendum to a federal economic development program could help some of New Mexico’s poorest areas compete with big cities in New York and California.
New Mexico Economic Development Cabinet Secretary Alicia Keyes recently announced a new program that offers an $1 million bonus to certain investments made in New Mexico’s 63 opportunity zones.
Johanna Nelson, finance development specialist for the department, said the program, which the department is calling the opportunity zone jobs bonus, is designed to better sync up state and local incentives by deploying funding through the Local Economic Development Act in areas with limited resources. Nelson added that this program can help New Mexico catch up with opportunity zones in larger cities.
“We don’t have a Chicago, or a New York City or an LA,” Nelson said.
The federal Tax Cuts and Jobs Act, which was signed into law in 2017, gave state governors the opportunity to nominate certain census tracks as opportunity zones, which come with specific tax advantages provided they meet federal standards for economic distress. Nelson said the program is designed to bring new capital into struggling communities.
However, not all opportunity zones are created equal.
Deb Burns, managing partner at investUS Opportunity Fund, an Albuquerque-based fund that helps investors with investments in opportunity zones, said investors are more comfortable with the risk-reward profile of investment opportunities in distressed parts of large cities.
Consequently, Burns said most of the investment in opportunity zones across the country has occurred in zones located in the top 72 high-growth counties, mostly in cities with more than one million residents. None of New Mexico’s 63 opportunity zones qualify.
“We’re competing with 5,400 other zones that are under the radar,” Burns said.
Burns said the state program, which uses LEDA funding to augment the tax incentives for qualifying projects in opportunity zones, can help level the playing field by incentivizing investors to look in markets they might not have considered, particularly in rural parts of the state.
“It’s another tool in the tool box that helps fund managers,” she said.
Because the money comes from LEDA, Nelson said projects must meet program benchmarks to qualify for state funding. Projects must fit into one of the nine industry sectors outlined by Gov. Michelle Lujan Grisham – aerospace, biosciences, cybersecurity, film and television, global trade, intelligent manufacturing, outdoor recreation, sustainable and green energy, and sustainable value-added agriculture – while creating a minimum of $2.5 million in annual payroll.
Only expansions and out-of-state relocations qualify and they must have a capital investment of $15 million or more.
For a full list of conditions, visit www.nmopportunity.com.
New Mexico Economic Development Cabinet Secretary Alicia Keyes
By: Stephen Hamway (ABQ Journal)
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