Commercial Real Estate News / Insight / Weekly CRE News Roundup: US Multifamily, Rising Insurance, & Tax Legislation

Weekly CRE News Roundup: US Multifamily, Rising Insurance, & Tax Legislation

Published: 09-29-23 Category: Insight

Specializes in providing actionable insights into the commercial real estate space for investors, brokers, lessors, and lessees. He covers quarterly market data reports, investment strategies, how-to guides, and top-down perspectives on market movements.

A complex of multifamily apartment buildings.

Happy Friday! Welcome to another weekly commercial real estate news roundup, your one-stop-shop for all of this week's most notable commercial real estate happenings.

In case you missed it, here's last week's edition, where we discussed rising household formations in Q2 2023, New York City's rebounding hotel industry, and the Federal Reserve's September 20th meeting.

Did you know? Minister's Treehouse, located in Crossville, Tennessee, was considered to be one of the largest (if not the largest) in the world before it burned down in 2019, with about 80 different rooms and standing at nearly 100 feet tall.

On today's agenda:

Cash-rich investors are betting on the US multifamily market to yield significant returns as falling apartment prices and housing shortages provide discounted investment opportunities.
Rising insurance rates are plaguing US landlords, forcing many to decide between foregoing coverage entirely or accepting inflated premiums.
The US House of Representatives is introducing a bill geared towards relieving tax burdens on those looking to restructure CRE debt.

Let's get started.

#1 – As Office Space Faulters, the Ultra-Rich Now Turn Towards the US Multifamily Market

Over the past decade, the ultra-rich have significantly increased their investments in the US multifamily housing sector. What's driving this transformation? It's partly due to the alluring returns and the promising prospects of rising rents, fueled by a continuous shortage of housing supply.

This shift represents a strategic departure from the focus of the pre-pandemic era when investments primarily centered around office properties, offering stable income through long-term leases.

The acquisition of the opulent 727 West Madison tower in Chicago is a prime example of this new trend. The tower now belongs to billionaire Amancio Ortega, the founder of Zara, who acquired the property for $232 million.

But Ortega isn't the only one: Israeli billionaire Eyal Ofer's purchase of a 57-unit building near Manhattan's Gramercy Park is yet another high-profile acquisition. Furthermore, affluent families from Latin America and investment firms backed by global tycoons, like David Rubenstein, are also actively exploring opportunities within the multifamily housing sector, aiming to capitalize on the current disruptions in the real estate market.

The shift towards remote work and a surge in office vacancies following the pandemic have prompted affluent investors to pivot away from office properties and towards rental housing. This transition has been expedited by a downturn in commercial real estate, as evidenced by a 57% year-over-year decrease in global investments to $142 billion in the second quarter.

The rise of remote work and office vacancies are largely to thank for this pivot away from office properties and towards rental housing.

Although some institutional investors remain cautious due to increased borrowing costs and falling property values, financially well-off investors with ample liquidity perceive a golden opportunity, particularly in light of sustained housing demand that has significantly driven up median rents in recent years.

#2 – Rising Insurance Costs Force Landlords Between a Rock and a Hard Place

Rising insurance expenses are forcing US landlords between a rock and a hard place thanks to diminishing property values and rental income. The choice? Forego coverage or risk financial strain in the wake of escalating natural disasters and surging premiums.

Insurance expenses have surged in recent years to an average annual rate of 7.6%, placing more of a financial burden on property owners. Certain markets in the nation are seeing even higher annual rates: Dallas saw a staggering 14.4% annual increase, Los Angeles saw 13%, and Houston saw 12.6%.

What's causing these significant rate increases? Rising vacancies, persistent inflation, intensifying natural disasters, and the increasing costs of reinsurance. Because insurance contracts typically renew annually, many landlords are faced with the decision to either forego coverage completely or absorb these inflated costs.

Certain property owners, like Three Pillars Capital Group, are exploring avenues to reduce their insurance coverage. While some banks may entertain this notion, others are still insisting on comprehensive coverage, even when escalated insurance costs render revenues insufficient to cover expenses and debt obligations.

All in all, landlords can decide to move forward in one of two ways: Pass these increased costs onto their tenants or integrate more substantial deductibles. In either case, the bottom line suffers as a result.

#3 – US House of Representatives Proposes New Tax Legislation for CRE Borrowers

The US House of Representatives is looking to pass a new piece of legislation (H.R. 5580) aimed at relieving tax burdens placed on those looking to restructure commercial real estate debt.

Representatives Claudia Tenney and Brian Higgins, with co-sponsorships from Mike Lawler and Pat Ryan, originally introduced the bill. The purpose of the legislation? To alleviate the tax burden placed on commercial real estate borrowers while undergoing loan modifications.

This proposed modification centers on Section 108(a)(1) of the tax code and is strategically designed to play a role in stabilizing the post-pandemic commercial real estate market. It achieves this through the provision of tax relief in scenarios involving debt restructuring.

Specifically, the legislation tackles the existing policy regarding the taxation of canceled debt (COD) income, effectively reclassifying debt forgiveness as taxable.

The impending maturity of nearly $1.5 trillion in commercial real estate debt looms eerily on the horizon, emphasizing the urgency of the Tenney-Higgins bill. While still in its early stages, this bill offers a potential solution to the expected wave of defaults by potentially reducing the tax burdens associated with debt resolutions.

The aim is to bring stability to the economy by creating mutually beneficial outcomes for both lenders and borrowers in anticipation of market disruptions. However, it's important to note that the bill's enactment hinges on subsequent approvals in the Senate and from the President.

Other Goings-On Around the Industry

Some other notable happenings in the industry for this week include:

California Trouble: San Francisco's iconic downtown properties are in hot water thanks to falling revenues and rising defaults.
Sustainable Leasing: Sustainability mandates are hitting landlords nationwide, forcing property owners to explore "green leasing" as a means of forwarding energy efficiency.
Poor Debt Management: Credit card losses continue to rise at a rate not seen since the 2008 financial crisis.
Going Green: The rising popularity of EVs is posing new challenges for commercial real estate developers.
Stimulus: According to the Fed, only the wealthiest 20% of Americans have remnants of pandemic-era savings.

Thanks for reading this week's commercial real estate news roundup! Until next week, do your research, stay diligent, and happy investing.