Quarterly Newsletter

High interest rates and the fear of recession continue to weigh on asset values and the fundamentals for the U.S. commercial real estate market in 2023. According to CBRE Research, the higher cost of capital and weakening fundamentals generally lower asset values by an average of 10%. Commercial real estate investment four-quarter volume ending Q1 2023 decreased by 33% to $594 billion. Still, that is 15% above the 2015-2019 pre-pandemic average of $517 billion. Institutional and cross-border investors were net buyers, while REITs and private investors were net sellers. Multifamily remained the favorite by investors with $25 billion in transaction volume in Q1, followed by industrial and logistics with $18 billion. (Fig 1, 2 & 4)

Greater Los Angeles continued to be the preferred market for real estate investment in Q1 2023, with a total investment volume of $51 billion, followed by New York with $42 billion and Dallas/Ft. Worth $31 billion. Nashville had the lowest drop in transaction volume at 13% of the top 20 markets in Q1. (Fig 3)

Source: CBRE Research, MSCI Real Assets, Q1 2023.

To view larger images and dive deeper into the data, click on the images above.

On June 3, President Biden signed into law the Fiscal Responsibility Act of 2023 (FRA), which, in addition to suspending the public debt limit until 2025, significantly amends the National Environmental Policy Act (NEPA), resulting in the most substantive changes since the law’s passage over 50 years ago. NEPA requires federal agencies to assess potential environmental impacts when determining whether to approve or deny a federal permit for activities such as construction or land development projects. The amendments aim to streamline environmental reviews, making it easier to obtain federal permits.

Under NEPA, agencies conduct environmental assessments (EA) to determine whether a particular action warrants a more detailed environmental review. If the action is deemed a “major federal action,” the agency must prepare an environmental impact statement (EIS).

The amendments, for the first time, defined under the statute a “major federal action” as “an action that the agency carrying out such action determines is subject to substantial Federal control and responsibility.” Previously, the “major federal action” threshold was if an action was potentially subject to federal control and responsibility. This narrower definition might mean fewer actions trigger NEPA review.

Also, a reasonableness standard has been codified, limiting the scope of environmental reviews. The amendments establish page limits and enforceable deadlines for agencies to complete EAs and EISs. The EA deadline is one year and 75 pages; the EIS deadline is two years and 150 pages.

While the NEPA amendments should make the permit application process easier, the new language will likely be subject to future judicial review. More analysis is available here and here.

The question of when a body of water is subject to federal regulation under the Clean Water Act (CWA) has been uncertain for years. While water bodies regulated by EPA include lakes, rivers, and streams, the CWA notably omits the term “wetlands," which has been the subject of legal controversy for decades.

The statute prohibits discharging pollutants into “the waters of the United States" (WOTUS) without a permit, implicating activities such as fill for development, water resource projects (such as dams and levees), infrastructure development (such as highways and airports), and mining projects. Several Supreme Court decisions on the issue, and shifting definitions, have left stakeholders, including developers, unsure about their CWA legal obligations.

The Supreme Court's most recent decision addressing WOTUS and wetland requirements is Sackett v. Environmental Protection Agency. In Sackett, EPA told the landowners that the backfilling of their property with dirt for home construction violated the CWA because it contained jurisdictional wetlands. While the lower courts held that the wetlands in question were subject to CWA regulation based on the significant nexus standard, all nine Supreme Court justices disagreed.

The Sackett ruling prohibits EPA from regulating wetlands that don't have a continuous surface connection with a navigable body of water. Consequently, the federal government only has jurisdiction over a wetland if it is “difficult to determine where" a permanent body of water (like a lake or river) ends “and the 'wetland' begins."

Despite the 9-0 ruling, there wasn't consensus on what a regulable body of water is; the five-justice majority opinion relied on a prior plurality decision in Rapanos v. U.S. to adopt the current standard. As such, the decision rejects a Biden administration rule based on the broader “significant nexus" standard, which gave EPA jurisdiction when a wetland significantly affected “the chemical, physical, or biological integrity of traditional navigable waters, the territorial seas, or interstate waters."

Ultimately, Sackett narrows CWA jurisdiction, removes some federal regulatory hurdles for landowners seeking development permits, and sets a much clearer standard for when the CWA applies. However, EPA quickly announced plans to issue a new final rule by September 1.

Look for ERIS' interview with Holland & Knight attorney Rafe Petersen in an upcoming podcast on the WOTUS rule and decision.

During a recent webinar produced by STP ComplianceEHS, industry experts provided valuable insights on the key factors that drive the establishment of ESG (Environmental, Social, and Governance) programs within organizations. The experts Craig Roberts (Glacier Media Group), Teresa Sabol Spezio (Specialty Technical Consultants) and Frank Skiba (STP ComplianceEHS), delved into global trends, stakeholder expectations, investor sentiment, and regulatory requirements. They explored the challenges and opportunities of ESG compliance and discussed strategies for aligning ESG programs, engaging middle management, and demonstrating business benefits of embracing ESG principles, such as cost savings, competitiveness, and reputation enhancement.

Key Takeaways

1. Reliable and relevant data is crucial for measuring and reporting on ESG performance.
2. Establish a diverse cross-functional team to develop and implement your ESG program.
3. Conduct a materiality assessment to identify the most relevant ESG issues for your business and stakeholders.
4. Foster an ESG-driven culture to build enthusiasm and willingness to take on ESG work.
5. Continuously review and refine your ESG program based on new regulations, emerging trends, and stakeholder feedback.

Learn more about best strategies for staying informed on the latest ESG regulatory changes.

New Jersey’s new inland flood protection rule is intended to mitigate the effects of extreme weather events precipitated by climate change. The rule sets standards and requirements for new construction projects and the modification of existing buildings in flood-prone areas. Specifically, the rule:

The Connecticut Department of Energy & Environmental Protection recently added a section to its Environmental Condition Assessment Form (ECAF) that requires disclosure of historical activities indicating the potential presence of PFAS or other emerging contaminants, including 1,4–Dioxane. Anyone who enters a site into a voluntary remediation program must use this new form. It must also be used with any real estate or business transaction subject to the Connecticut Transfer Act, which requires the disclosure of environmental conditions when certain properties and businesses are transferred. The updated ECAF took effect May 31, 2023. Connecticut property owners will need to change the way they conduct environmental assessments to meet this requirement.

A new Alabama law incentivizes the redevelopment of brownfield sites by limiting buyers’ liability for existing environmental damage. Specifically, owners can voluntarily work with the Alabama Department of Environmental Management to have their property assessed for pollution. The cost is $500 per acre, which goes toward remediation expenses (capped at $4 million per property). The benefit of having a property assessed is that buyers will only be held liable for damage done to the property from the time they take ownership. The new law will also make it easier for owners to sell assessed properties, giving prospective buyers peace of mind about the extent of their environmental liability.

ASTM International is in the final stages of developing a certification process designed for environmental professionals (EPs), which is expected to be finalized by the end of 2023. This certification process will comprise three components: individuals must meet the education, training, and experience criteria outlined in 40 CFR 312.10, complete a training course, and successfully pass an examination to attain the certified EP status.

ASTM International's Subcommittee E50.02 on Real Estate Assessment and Management is developing a new standard that “will create standardized baseline guidance and terminology for the capture, evaluation, and delivery of drone flight imagery" to support commercial real estate assessment and management objectives.

The standard is in the early stages of development. The committee is gathering information via a survey to better understand the use cases and current practices in the industry before further assessing the scope/content of the standard(s).The rough timeline for finalizing WK86230 is by the end of 2024. Michael Sowinski (Terradex) and Jim Bartlett (Bureau Veritas) are the work group committee co-chairs.

This new ESG disclosure standard, which falls under the jurisdiction of ASTM’s Subcommittee on Climate and Community (E50.07), is currently in the balloting process. The committee is addressing comments, and the next (third) concurrent subcommittee and main committee balloting is slated for August 2023.

The standard aims to improve the users’ understanding of ESG disclosure frameworks and outline federal, state, tribal, local, and global regulatory requirements and guidelines for disclosures. According to the draft scope, the guide can also be used when there may not be a regulatory requirement or framework for disclosure, for voluntary disclosures, and to help organizations standardize their efforts when various disclosure requirements apply.

The work group committee chair is Eileen Schneider (Alpha Analytical Inc).