A period with ample sources of capital, very low cap rates and high valuations has set the stage for commercial real estate in 2016, but the impact of coming regulations is yet to be factored in. Nonetheless, as long as there are only gradual increases in interest rates and continued modest increases in employment, the commercial real estate market should operate smoothly.
Collateralized Mortgage Backed Securities - one major source of capital - are now bracing for two new regulations that take effect in the fourth quarter. The market is struggling to interpret the specifics of these regulations. Alternatively, on a positive note, employment growth has been smooth and steady, which is a great thing for real estate.
Some of the other commercial real estate trends we're seeing include:
Market Prepares for New Regulations: Collateralized Mortgage Backed Securities (CMBS) face two new regulations in Q4. One is called Risk Retention, where underwriters are required to retain part of the risk as they sell CMBS bonds into the secondary market. The second new regulation requires senior individuals to sign off on the quality of the CMBS loan product.
Uncertainty Could Impact Liquidity: As a result of a largely unknowable fourth quarter, many CMBS originators are clearing inventory in order to help divert any potential risk they may be exposed to by these new regulations. That could siphon off liquidity needed to refinance loans.
Opportunities in Secondary and Tertiary Markets: There have been differences in yields across major cities, such as New York and Los Angeles, versus smaller urban areas. Once interest rates begin to climb, the return of a deal will take a notable dip. With real estate opportunities found in a secondary or tertiary market, often the asset can be acquired at more favorable terms, mitigating interest rate risk. The right assets in secondary markets can be a very attractive place to invest. In any event, these deals and the banks involved need a liquid CMBS market to be repaid.
U.S. Real Estate Especially Attractive for International Investors: Even amid uncertainty, the U.S. real estate market remains one of the most attractive sectors for many internationally sourced funds. The tone of the market is shifting, but opportunities remain.
Overall, the outlook for the commercial real estate market remains stable as regulatory changes approach.
To learn more, watch the video,
"Regulatory Uncertainty Impacts Commercial Real Estate," on the
Knowledge Center on CIT.com.
Matt Galligan is President of
CIT Real Estate Finance. His group provides stabilized, value-add and construction loans between $20 million and $50 million to highly experienced and well-capitalized developers in the office, retail, industrial and multi family rental sectors.