Michael P. Jakubiec Investment Real Estate, Inc.

This will be catastrophic for the housing industry!

Opinion | Biden Proposes Nationwide Rent Control He wants to cap rent increases at 5% a year, if you can believe it.

Biden will destroy the multi family and housing industry with this!

From the National Multi Housing Council:

Dear NMHC Members,

As you all likely know, President Joe Biden used the first 2024 presidential debate and his recent NATO summit press conference to make apparent announcements and campaign promises on his plans to cap rents. And just today there is reporting by the Washington Post that President Biden will announce a plan to cap rents nationwide tomorrow in Nevada as the Republican National Convention is underway. The plan would strip a tax benefit from landlords who increase rent by more than 5% and the measure would apply to all landlords who own more than 50 units.

During the recent debate President Biden said, "We're going to make sure we reduce the price of housing. We're going to build 2 million new units. We're going to cap rents so corporate greed can't take over."

At President Biden’s press conference following the NATO summit, he stated, “If I’m reelected, we’re going to make sure that rents are kept at 5% increase… corporate rents for apartments and the like and homes are limited to 5%.” Only Congress, not the Administration, has the legal authority to change the tax code. Thus this proposal raises a number of questions.

The Housing Solutions Coalition, was quick to reply to these statements from Biden, pointing out that, “Decades of academic research from across the United States and around the world clearly show that rent caps – more commonly known as rent control – reduce the supply of available housing and fail to target those renters who need help the most while simultaneously harming other residents and the communities they reside in. Despite President Biden's mention of rent caps during the debate, he and his policy experts know that the real reason so many Americans struggle with housing costs is because we need to build more housing. There is no debate. Rent caps hurt renters and communities."

The Housing Solutions Coalition is a collaborative effort of professionals and experts from different but related corners of the real estate industry. Through this coalition, we aim to promote workable solutions to the current housing crisis, guided by the belief that every American should have fair access to quality housing that they can afford.

Moving towards rent control!

Biden to Require Tenant Protections for Federally Backed Mortgages Landlords with mortages backed by Fannie Mae or Freddie Mac would be required to give notice on lease changes. But advocates are asking for more.

https://therealdeal.com/national/2024/07/12/multifamily-cmbs-distress-nearly-triples-in-6-months/

Multifamily CMBS Distress Nearly Triples in 6 Months Distress hitting multifamily CMBS loans nearly tripled in 6 months, according to CRED iQ, signaling value-add problems are spreading.

https://therealdeal.com/chicago/2024/07/09/ca-ventures-delinquent-on-75m-loan-backed-by-senior-housing/?tpcc=sprout_general&utm_campaign=sprout_general&utm_content=1720562411&utm_medium=The+Real+Deal&utm_source=linkedin

CA Ventures Delinquent on $75M Loan Backed by Senior Housing CA Ventures is delinquent on a $75M CMBS loan backed by senior housing assets in Chicago and Kansas City.

I’ve seen horrendous underwriting by brokers and have taught classes on how to do it correctly!

https://www.wsj.com/real-estate/property-fraud-allegations-snowball-as-commercial-real-estate-values-fall-492d964c?fbclid=IwZXh0bgNhZW0CMTEAAR06k_jn8saqI3ECTWUbz_3vPS7d7Q7CrJ5Sxk2QjGfXLRU2fMY2Io0oWYQ_aem_hB63NcLCCVs-eFFHRLDgOQ

Property Fraud Allegations Snowball as Commercial Real-Estate Values Fall A drop in values caused by higher interest rates and a rise in defaults exposes more schemes.

https://www.facebook.com/share/qX1FqNK6s3HLDCA3/?mibextid=WC7FNe

BREAKING NEWS: Wisconsin landlord had to return all rents for entire tenancy. Learn how to protect yourself and your business in a statewide LIVE Zoom this Thursday! Attorney Tristan Pettit is Wisconsin's #1 expert on landlord-tenant law.

Free to attend, registration required: https://rpawi.org/event-5767587

https://1031capitalsolutions.com/2024/06/04/white-house-seeks-higher-taxes-from-landlords/

White House Seeks Higher Taxes from Landlords - 1031 Capital Solutions White House Seeks Higher Taxes from Landlords In a significant move aimed ostensibly at addressing income “inequality” and generating additional revenue for government spending initiatives, President Biden recently proposed an increase in the capital gains tax as well as the Net Investment Incom...

https://thehill.com/opinion/finance/4689279-the-commercial-real-estate-crisis-hiding-in-plain-sight/

A commercial real estate crisis is hiding in plain sight Should the widely anticipated wave of bank commercial real estate loan defaults materialize, it could easily overwhelm the federal deposit insurance safety net.

https://www.facebook.com/100070336132573/posts/483911970630003/?

HB4768, the Landlord Retaliation Act, will attack ordinary functions of property management and unfairly put housing providers in the position of having to defend every rent increase and every eviction.

The liabilities it imposes on housing providers are so great that a consequence of the bill will effectively be rent control.

Are you going to allow legislators to sneak rent control into law?

This bill has momentum! Please visit our Call to Action page NOW to learn more and submit a Witness Slip.

https://irpoa.org/content.aspx?page_id=22&club_id=633958&module_id=295032

House Bill 5371 passed the House, but state. Rep Brad Halbrook, R-Shelbyville, voted "no," saying the legislation would force landlords to enter into lease agreements with illegal immigrants, which would jeopardize their source of income should that person end up being deported.

“I voted no because I do not want to put landlords in a position where they are financially compromised because of state policies and state initiatives. Someone who is here illegally should not automatically have legal protections to enter into rental agreements given the fact that their ability to commit to the full term of a lease is in doubt. It is time for Illinois to prioritize our own citizens and put the needs of our own citizens first,” said Halbrook.

Fellow Republican state Rep. Jeff Keicher, R-Sycamore, voted "yes" for the bill.

"I want to thank you for working with both the bankers and the realtors to clear up some of the issues they had,” said Keicher.

A sponsor of the bill, state Rep. Ann Williams, D-Chicago, said the measure was an initiative of the Illinois Attorney General’s Office. Williams said her bill changes the definition of "real estate transactions" in the Illinois Human Rights Act to align the term with federal standards.

"We strengthened the relief the state can obtain in discriminatory pattern and practice claims. We [under the introduced measure] provide for additional opportunities for aggrieved parties to take action to collect judgments when there’s found to be discrimination,” said Williams.

The Illinois Realtors and the Illinois Bankers Association moved to a neutral position on the bill. The bill awaits action in the Senate.

From Diane Swonk, Chief Economist KPMG:

Houston, we have a problem

Today’s inflation data were ugly. Overall and core measures (ex food and energy) of the consumer price (CPI) index both rose 0.4% in March from February, hotter than expectations. The overall index rose 3.5% from a year ago in March, up from 3.2% in February. The core index rose 3.8% from a year ago, the same as February.

Shelter costs have cooled from the sizzling pace earlier in the cycle but remain extremely elevated. Real-time rent and housing price data regained momentum in recent months, which has lowered hopes of a more pronounced slowdown in shelter costs.

Another major concern is what is known as the supper core, or service inflation outside of shelter. That measure surged 0.7% in March after jumping 0.5% in February. It jumped 4.8% from a year ago, up from 4.4% in February. The three-month moving average, which better tracks momentum, surged 8,3%, the hottest pace since the peak in inflation in June 2022.

Secular and cyclical trends are colliding. Demographics, long COVID and lower quit rates are pushing up demand for medical services, including mental health, while supply remains constrained. (Try getting into your doctor anytime soon or nurse practitioner anytime soon.

Insurance costs are rising across the board. A surge in the number of extreme climate disasters, with damage to property, are boosting claims. The size and cost of homes and vehicles soared, which hit up against supply chain problems and boosted repair costs.

Dining out remains expensive and rising, even as food at grocery stores have slowed their upward March. Wages in leisure and hospitality pricked up again in the fourth quarter of 2023, after cooling earlier in the cycle. A portion of those costs are being passed onto consumers.

Worse yet, many of those costs have room to run. Goods prices were weaker in March except for the price of gasoline, but the fear is that the low hanging fruit of the drop in prices due to supply chain healing has been plucked. That means more heavy living on the part of the Federal Reserve to cool what appears to be a sicker inflation.

The Fed had already edged closer to two than three cuts in 2024. Today’s data drops that figure to one. We need to see a lot of improvement in inflation or weakness in the economy to get the Fed to cut aggressively. Powell underscored that the Fed didn’t want to risk a recession to chill the economy. That thesis is still in place but the risk of an over tightening have risen.

Note: The boost to growth we got from decelerating prices in 2023 has stalled.

Rates aren’t going down anytime soon!

Fed Prepares Slower Pace of Runoff for $7.4 Trillion Portfolio ‘Fairly Soon’ Officials have been allowing $60 billion in Treasurys to mature every month, but could lower that amount.

I’ve been saying this since the Fed started raising rates, don’t expect any rate cuts anytime soon!

Inflation keeps coming in hot, likely delaying interest rate cuts — The Washington Post Federal Reserve officials are trying to figure out whether their fight to control prices is slowing.

https://wolfstreet.com/2024/04/05/10-year-yield-hits-4-40-as-bond-market-begins-to-adjust-to-higher-forever-higher-rates-and-higher-inflation/

10-Year Yield Hits 4.40% as Bond Market Begins to Adjust to Higher Forever: Higher Rates and Higher Inflation | Wolf Street Banks California Canada CRE Credit Bubble Cryptos Debtor Nation Drunken Sailors Europe Federal Reserve Housing Bubble 2 Inflation & Devaluation Japan Jobs Markets & Companies Oil, Gas, Power Retail Trucks & Cars Trade & Transportation

https://www.globest.com/2024/04/04/interest-rate-drops-will-not-solve-cre-problems/?fbclid=IwAR0DPyIWcl3P3eIiQ124Los1GKtbuJ3sQRem03pI3yO6d8B-1o9QMLvVSGo_aem_ATaDuf--WZzuzOdqRpAehiCCcQWhl-Cu8Cs3JX42fDqnlWYiVWwKWncMPZZCKQQZWvU

Interest Rate Drops Will Not Solve CRE Problems | GlobeSt Slight rate drops are coming. But that may not necessarily lower mortgage rates.

The commercial real estate industry will be significantly negatively impacted by a Biden re-election!

Real Property and Housing Provisions
While the budget only contains two provisions specific to real property, both would be significant changes. The budget proposals would:

Cap the deferral amount for IRC Sec. 1031 like-kind exchanges to $500,000 per year ($1 million if married filed jointly), and
Require 100% recapture of depreciation deductions for noncorporate taxpayers, which is taxed as ordinary income.

Biden’s Budget Proposal Gives Glimpse into Potential Second Term Tax Legislation This article offers a brief overview of several tax-related provisions in President Biden’s proposed budget for FY 2025.

This is why you don’t have the government run your business!

Opinion | How to Kill New York’s Rental Housing Market Albany’s Good Cause Eviction proposal is universal rent control.

Biden continues to attack property owners!

The War on Prices Continues: Biden's Misguided Rent Control Cap Policymakers should heed the lessons from economic theory and real‐​world evidence. Rent control, even in its more moderate forms, is a flawed tool that creates more problems than it solves.

Illinois needs this law!

In late March, Florida Governor Ron DeSantis signed legislation that makes it easier to remove squatters - which, as we have seen, is a growing problem across the nation. According to WPTV, under the new law, a property owner can request law enforcement to immediately remove a squatter if the person has unlawfully entered, has refused to leave after being told by the homeowner to do so and is not a current or former tenant in a legal dispute. Boom...

"We are putting an end to the squatters scam in Florida," DeSantis said. "While other states are siding with the squatters, we are protecting property owners and punishing criminals looking to game the system."
Martin County's sheriff made national headlines this week after warning of a viral video teaching squatters how to circumvent the laws. "Crime is a lot like cancer," Synder said. "It spreads and if you see it somewhere else, let's be on guard. Let's get ahead of it."

https://www.mba.org/news-and-research/newsroom/news/2024/03/29/mba-opposes-biden-administration-s-rent-control-on-lihtc-financed-multifamily-properties

MBA Opposes Biden Administration’s Rent Control on LIHTC-Financed Multifamily Properties MBA President and CEO Bob Broeksmit, CMB, released the following statement on the Biden administration’s planned announcement to impose a 10 percent limit on annual rent hikes at properties supported by the Low-Income Housing Tax Credit (LIHTC).

https://product.costar.com/home/news/shared/312262456?utm_source=newsletter&utm_medium=email&utm_campaign=personalized&utm_content=p6&t=eyJhbGciOiJIUzI1NiIsInR5cCI6IkpXVCJ9.eyJjb250YWN0SWQiOiIxODg4MjEwIiwiY3VsdHVyZUNvZGUiOiJlbi1VUyIsImlhdCI6MTcxMTcxNDQ1MX0.K24S488qjdv4wuWgTRrbn17sO3ZISvszPHOIEiytOKc

CoStar News - Chicago’s Retail Market Posts Record High Occupancy Rates for Six Straight Quarters Chicago’s retail market is once again posting its tightest conditions on record, marking six consecutive quarters of high occupancy rates.

https://www.wsj.com/real-estate/fortune-favors-early-movers-in-americas-property-crunch-15c47671

Fortune Favors Early Movers in America’s Property Crunch Investors who are willing to buy buildings when everyone else is running scared typically get the biggest rewards.

https://product.costar.com/home/news/shared/918158990?utm_source=newsletter&utm_medium=email&utm_campaign=personalized&utm_content=p6&t=eyJhbGciOiJIUzI1NiIsInR5cCI6IkpXVCJ9.eyJjb250YWN0SWQiOiIxODg4MjEwIiwiY3VsdHVyZUNvZGUiOiJlbi1VUyIsImlhdCI6MTcxMTYyNzM4M30.9Py0DAHipYr7m6J2DyrjfPygbemtdRdmbQc-8UldCy8

CoStar News - Chicago’s Strong Retail Move-Ins Tied to Tight Demand, Corporate Expansions Despite lower retail leasing velocity since the pandemic’s onset, Chicago is still posting one of its most robust 12-month demand formations ever.

The economy is simply too strong to start cutting rates!

Why Treasury Yields Are Rising Despite Rate-Cut Expectations The yield on the government’s 10-year note has climbed since the start of the year, propping up mortgage rates.

https://nypost.com/2024/03/21/us-news/tiktokker-tells-illegal-immigrants-how-to-invade-american-homes/

TikToker tells illegal immigrants how to ‘invade’ American homes and invoke squatter’s rights A migrant TikToker with a 500,000-strong online following is offering his comrades tips on how to “invade” unoccupied homes and invoke squatter’s rights in the United States. Venezuelan…

https://www.wsj.com/real-estate/commercial/the-office-market-is-in-turmoil-so-why-are-rents-more-expensive-d096f961

The Office Market Is in Turmoil. So Why Are Rents More Expensive? U.S. office rents are holding steady—or even climbing—despite soaring vacancy rates, a record amount of available sublease space, and rising defaults.

Put yourself in Blackstone's shoes: Do you "extend and pretend," give back the keys, or come up with $800M to salvage your investment?

Blackstone's $1.3B loan on Willis Tower matured a few weeks ago. The firm has done a masterful job of renovating the property, substantially increasing NOI via a big remodel and driving sky deck operations (20%+ of NOI). But it might not be enough.

---- Kicking the can ----

The loan originally matured in March 2020, when the COVID earthquake started shaking the office market. Blackstone responded by exercising the first of its five, one-year extension options.

Those extensions started getting really expensive with the 2023 extension, which required a new $10M+ cap, pushing the maturity to March 2024. The office market and cap rates haven't improved over the last 12 months. However, the credit markets are a bit more active, and we have a fresh benchmark for how much BX would need to come up with to keep its investment alive at a final maturity...

---- Debt availability ----

Blackstone closed on a high-profile office loan last week on a Park Ave building in NYC. The 48% LTV loan ($464M in proceeds) is floating with a current coupon of 8.65%.

Back to Willis Tower, DBRS (rating agency) estimated that the existing $1.3B loan represented 110% LTV as of last year at a 7.3% cap rate. We think a 9% cap rate is likely more realistic, which would put the outstanding loan amount at 136% of the current property value.

---- Dilemma ----

Put yourself in Blackstone's shoes. This property sits in BREP VII, which is at the end of its life. It wouldn't be great to walk away from this property, but you cashed $240M out of the property when you launched this SASB issuance in 2018 and walking away likely won't move the needle for that fund.

If last week's SASB ex*****on (re: the Park Ave building) is indicative, you'd need to come up with about $860M to stay in this deal. Blackstone has reportedly notified the servicer that it intends to exercise its final extension, which would push the final maturity to March 2025.

---- Two questions ----

This real estate train wreck (a $1.3B loan headed toward a $1B building) brings up two questions...

-- Will Blackstone's position be materially different in a year? What's the best the office market would be in a year? Will NOI increase by a few million dollars AND cap rates settle around 7% by March 2025?

-- Is this a decent example of what people are calling "extend and pretend" at work? We think very few servicers/lenders are "pretending" (they're requiring new caps and/or paydowns), but regardless of what you call it, this situation promises to give us a fresh read on the office market.

---- Your call ----

What would you do if you were Blackstone?

(A) Kick the can for a year by renewing your cap.

(B) Come up with $860M to refinance the loan.

(C) Walk away from the deal.

https://www.wsj.com/finance/the-new-normal-for-mortgage-rates-will-be-higher-than-many-hope-40a10162?st=eok63t9ohpiq3iv&reflink=desktopwebshare_permalink

The New Normal for Mortgage Rates Will Be Higher Than Many Hope Changes across the market for mortgage-backed bonds mean rates can stay elevated even once the Federal Reserve starts cutting.

https://www.aier.org/article/stabilization-is-just-rent-control/

“Stabilization” Is Just Bad Old Rent Control "Just about the worst way to 'help' renters is by punishing property owners for providing rental housing, which is just what rent caps do." ~Jason Sorens