The White House last week announced several initiatives to encourage more office-to-residential conversions across the country. Here are some of the highlights from the announcement:

• The Department of Transportation (DOT) is releasing new guidance for $35 billion in available lending capacity for transit-oriented development projects.
• HUD is releasing an updated notice on how the Community Development Block Grant fund, $10 billion of which has been allocated during this Administration, can be used to boost housing supply.
• The White House is releasing a Commercial to Residential Federal Resources Guidebook with over 20 federal programs across six federal agencies that can be used to support conversions. 
• Through the Inflation Reduction Act, several tax incentives may support eligible builders of multifamily housing to lower the investment costs associated with energy efficiency upgrades, clean electricity generation projects, or even new or substantial reconstruction and rehabilitation.

Bob Broeksmit, President and CEO of the Mortgage Bankers Association (MBA), released a statement on the Biden administration’s guidance:   

“MBA shares the Biden administration’s commitment to increasing housing supply and appreciates its willingness to engage with us and the industry on ways to incentivize lenders and borrowers to rehab, repurpose, and convert more obsolete commercial properties into affordable rental housing and other usable spaces. Housing providers are grappling with higher interest rates and rising labor and construction costs at a time when our nation’s housing supply remains inadequate. The initiatives announced today should help facilitate more commercial-to-residential projects. We encourage state and local governments to ensure zoning laws, tax credits, and subsidies are aligned to take full advantage of these programs.”

Kriston Capps of Bloomberg comments on the news, highlighting that the announcement comes amidst a 30-year high for office vacancy rates. Further, the largest office landlord in Los Angeles recently defaulted on $1.1 billion of loans, and New York City has warned that the city’s vacancy rate won’t drop below 19% until at least 2026. Finally, Capps notes that for the first time ever, in 2023, the country will lose more office space than it has built.

Ashraf Khalil of the Associated Press reports that this program will be heavily weighted toward transportation hubs. “Several of the new measures will be designed to specifically encourage the creation of new affordable housing units near transportation hubs like bus terminals and subway stations. Secretary of Transportation Pete Buttigieg said his department will issue new guidance to states and municipalities on how to access funding through a pair of federal programs — the Transportation Infrastructure Finance and Innovation Act and Railroad Rehabilitation & Improvement Financing.”

New home construction

Rose Quinte of the National Association of Home Builders (NAHB) reported on new home construction, which saw demand rise significantly over Q3 2023. Despite record-high borrowing costs, 27% of prospective buyers were looking for new construction, up for a third consecutive quarter from 20% in Q4 2022.

Source: NAHB (October 2023)

In addition, Nicole Bachaud of Zillow reports that there were 759,000 new single-family home sales in September, up 12.3% month-over-month and up 33.9% year-over-year. Despite sales up over a third from 2022, homebuilder confidence is slowly decreasing amidst increased labor and debt costs.

“As mortgage rates remain high, driving up the cost of a mortgage beyond what many households are able to afford, new construction is remaining a fan favorite among buyers. This is likely due in large to the incentives many builders are able to offer. While the cost of a new construction home typically reaches above the cost of an existing home for sale, the ability of builders to offer things like rate buydowns and closing cost credits can really tip the scales of affordability in favor of buyers.”

Lily Katz of Redfin continues the conversation, highlighting their own data showing that 30.6% of U.S. single-family homes for sale in Q3 were new construction, up from 28.9% in Q3 2022 and 25% in Q3 2021. This is the highest share of any Q3 on record. That said, Katz notes that the run-up of interest rates will likely slow new home construction heading into 2024.

Source: Redfin (October 2023)

“High mortgage rates have pushed a lot of buyers to the sidelines, but many of the buyers who are in the market are opting for new construction homes because builders are handing out concessions like mortgage rate buydowns in order to attract bidders and offload inventory. Purchases of new single-family homes jumped 12.3% last month—the fastest pace since early 2022.”

Federal Reserve

Today, the Federal Reserve announced a rate pause, as predicted by many experts and markets. The CME FedWatch Tool earlier in the week showed a 97.1% chance of a rate pause, a 2.9% chance of a rate cut, and a 0% chance of a rate increase.

Source: CME FedWatch (October 2023)

Earlier in the week, Ayelet Sheffey and Madison Hoff of Business Insider reported that a rate cut was unlikely and that the Fed pause made sense to most experts. Reportedly, the Fed no longer believes that the labor market needs to deteriorate to put downward pressure on inflation.

Phil Rosen, also of Business Insider, quotes several key stakeholders that provide insight into the current thinking around target rates.

• Philadelphia Fed President, Patrick Harker: “Absent a stark turn in what I see in the data and hear from contacts…I believe that we are at the point where we can hold rates where they are.”
• Federal Reserve chairman, Jerome Powell: “Financial conditions have tightened significantly in recent months, and longer-term bond yields have been an important driving factor in this tightening. We remain attentive to these developments because persistent changes in financial conditions can have implications for the path of monetary policy.”
• Minneapolis Fed President, Neel Kashkari: “It’s certainly possible that higher long-term yields may do some of the work for us in terms of bringing inflation back down. But if those higher long-term yields are higher because their expectations about what we’re going to do has changed, then we might actually need to follow through in their expectations in order to maintain those yields.”
• Dallas Fed President, Lorie Logan, October 9: “If long-term interest rates remain elevated because of higher term premiums, there may be less need to raise the fed funds rate. However, to the extent that strength in the economy is behind the increase in long-term interest rates, the FOMC may need to do more.”

Finally, an analysis by Simon Moore of Forbes gives further insight into the Fed rate pause decision:

“The Fed likely plans to hold rates at their current 5.25% to 5.5% range for a few reasons. First, the 10-year U.S. Treasury Bond yield has risen sharply over recent weeks. At the Fed’s September 2023 meeting the yield stood at 4.5% and it’s now closer to 4.9%. That’s a big jump in a closely watched fixed income benchmark and the Fed argues that that increase in longer term rates has done a lot of work in tightening monetary policy. In fact, Fed officials have described this move in rates as broadly equivalent to another interest rate hike.”