Analysis: COVID-19 Relief Signals New CRE Policy Regime

Paul Fiorilla, Director of Research, Yardi Matrix

The newly enacted $1.9 trillion COVID-19 relief package should provide a short-term boost to the commercial real estate industry segments most affected by the pandemic. More broadly, however, it signals the new wave of federal policies that are in store over the next several years.

Signed into law by President Biden on March 11, the American Rescue Plan funds a wish list of programs sought by the industry, including nearly $40 billion of aid for rental housing, $25 billion to prop up the restaurant industry, and nearly $200 billion for state and local governments to assist small businesses, tourism and hospitality. That’s in addition to the elements of the bill—including stimulus payments to individuals and extended unemployment aid—that will help families pay rent and spend on consumer goods, providing an economic shot in the arm.

“Of the three (relief bills passed by Congress since the start of the pandemic), this is the most helpful to the industry,” said Mike Flood, a senior vice president of commercial and multifamily policy at the Mortgage Bankers Association. “We’re hopeful that, combined with the last bill, that will be enough to keep people in their houses and apartments and keep their refrigerators full until we get to the new normal.”

The bill also ushers in the change in governance. Now that the relief package has been passed, Congress is likely to move on to immigration, climate change, and infrastructure, areas where legislation may find bipartisan support. Given political realities and the scope of Biden’s agenda, big-ticket spending items such as infrastructure, aid for affordable housing and tax reform may have to wait until the fall. The stakes for the industry will become more complicated then. Handing out COVID-19 relief is popular, but there is less agreement about changing the tax code or implementing new environmental regulations.

The commercial real estate industry has a wish list of legislative priorities that includes a mix of program funding and regulatory relief. As new outlays have been scarce in recent years, the industry’s success in Washington has mostly come via tax and regulatory issues. However, COVID-19 has transformed the policy dynamics. With the economy down more than 9 million jobs from its peak, and relief for struggling families in high demand, concerns about the deficit have taken a back seat for now; the priorities are getting the economy back on track and making whole closed businesses and laid-off workers.

Who Benefits

Photo by Louis Velazquez via Unsplash

The American Rescue Plan has a mix of indirect and targeted measures that should prove beneficial to the real estate industry. The indirectly impactful provisions include $1,400 payments to individuals earning less than $75,000 and couples earning less than $150,000; $300 a week in extra unemployment assistance through Sept. 6; and an enhanced child tax credit that should “put money in consumers’ pockets and help pay rent,” said Justin Ailes, managing director of government relations for the CRE Finance Council.

The bill also contains provisions that will have a more direct impact. In particular, the bill funds a range of programs sought by the multifamily industry. Those include $21.6 billion in rental assistance payments to be disbursed through the Treasury Department’s Emergency Rental Assistance Program (ERAP), $5 billion in housing vouchers that can be used for rental assistance, $5 billion for homelessness assistance, $750 million for rental assistance for tribal, native, and Hawaiian populations, $100 million for rural rental assistance. Other housing-related provisions include $4.5 billion for utility payment assistance and $120 million for counseling and fair housing.

All that funding comes on top of the $25 billion in rental aid passed in in December in the Consolidated Appropriations Act. While not covering every item on the multifamily industry’s wish list, industry advocates are “excited” at the amount of money targeting housing, said Cindy Chetti, senior vice president for government affairs at the National Multifamily Housing Council. “For the federal government to commit this kind of money to housing issues is unprecedented,” Chetti said.

The federal aid should go a long way to making apartment owners whole. Tenants are behind on rent payments by as much as $70 billion, but they have largely been able to stay in place because of eviction moratoriums in various federal, state, and local jurisdictions. The rental assistance will enable property owners to collect unpaid rents and help pay mortgages and other bills. It remains to be seen how efficient the distribution of funds will be—the funds will be distributed to states and cities to be disbursed—but the infusion of cash will be a shot in the arm for the multifamily industry.

Retail property owners will be helped by the $25 billion in grants targeted at restaurants that have been forced to close or scale back operations due to COVID-19. As of February, food service employment remained down by 2 million, or 16.3% less than it was at before the pandemic, according to the Bureau of Labor Statistics (BLS). The aid will help restaurants to pay rent and retain workers.

The allocation of $350 billion for state and local governments—whose workforces have shrunk by 1.4 million (7.0 percent) year-over-year through February, per the BLS—is another area that will help boost commercial real estate. In addition to helping governments to avoid more layoffs, the relief package earmarks $195 billion toward helping governments assist households and small businesses, improve water and broadband infrastructure, and help mitigate the impact of lost travel and hospitality spending.

Big Goals Ahead

Beyond the immediate impact on the economy, the American Rescue Plan signals more broadly that Congress intends to go big on policy goals, and some of those goals have far-reaching implications for commercial real estate. Issues that are likely to be addressed include immigration, climate change, infrastructure, and taxes. The decline in immigration in recent years has been a factor in the declining populations of coastal Gateway metros, where immigrants tend to settle. Biden is expected to loosen immigration restrictions enacted by his predecessor.

Commercial properties also have much at stake in infrastructure investment and efforts to mitigate climate change. The industry has been implementing energy-saving systems and using smart building technology, but Biden will accelerate efforts to reduce energy consumption through regulation and building code mandates.

Another significant area, taxes, probably won’t come up until this fall; by then, the 2021-2022 fiscal year will be in progress and economy could be on the way to recovery. Nevertheless, the next wave of tax legislation is likely to create some pain for commercial real estate. At some point the bill for the exploding federal deficit must be paid for. “People on both sides of the aisle know that (spending trillions of dollars and not paying for it) is not sustainable,” Ailes noted.

Biden has floated several proposals that would result in tax increases for real estate. Among them are the elimination of 1031 exchanges, reduction of carried interest, a higher corporate tax rate, financial transactions taxes and higher taxes on limited liability corporations.

“We spent $5 trillion on stimulus (over the last year),” Flood said. “Congress will be looking to raise revenue.  As an industry, we need to think long and hard about which pieces of the tax code, such as 1031 exchanges, are crucial to liquidity in the marketplace, and which provisions could be modified as policymakers look to pay for the deficit the country has run up as a result of the crisis.”