This year held some surprises that could have an impact on commercial real estate, and the economy as a whole, in 2017. Here’s a glance at five commercial real estate trends to keep an eye on in the coming year.
- Non-bank lending
CMBS lending has eased down this year, even as 10-year CMBS loans from the pre-recession boom continue to push through 2017. And non-bank lenders like Blackstone are picking up some of the slack. One assumption for the slowdown is that lenders are gearing up for the Dec. 24 implementation of the risk-retention requirement, the so-called “skin-in-the-game regulations” that are part of the Dodd-Frank Act and require sponsors of commercial mortgage-backed securities to hold on to 5% of every new deal or assign the risk to a B-piece buyer. - Interest rates
The Federal Reserve gave notice that it is raising interest rates by a quarter of a percentage point. In addition, the Treasury yield moved up more than 50 basis points since the Nov. 8 presidential election, and was hovering around 2.5% ahead of the rate hike. Some analysts are citing an expectation of growth based on economic stimulus, deregulation and a planned infrastructure program, as well as a bigger deficit, which can set off inflation and higher interest rates. - Financial legislation
President-elect Donald Trump has called the Dodd-Frank Act a “disaster” and a “disgrace,” and his transition team says it “will be working to dismantle” it. Experts have mentioned that while it seems doubtful that the law will be completely repealed, its effect could well be reduced under a Trump administration.
Less regulation is easier for financial institutions in the short term, and deregulation supporters argue that excess requirements stifle lending. Yet, if overly relaxed standards result in looser lending practices, a high-risk environment could ultimately lead to another financial crisis, and that won’t be good for banks, commercial real estate or the economy in the long term. - White House and Wall Street
The amount of changes to financial legislation depend fully on who is in charge. Trump’s pick of former Goldman Sachs banker Steven Mnuchin as the next secretary of the treasury and Goldman president Gary Cohn as director of the National Economic Council is a signal that regulatory changes are planned, not least because Mnuchin has explicitly said his No. 1 regulatory priority is to “strip back parts of Dodd-Frank that prevent banks from lending.” There is a clear indication that the interests of financial and commercial real estate industries will be recognized in the White House. - Foreign investment
Recent news from China illustrates that real estate deals and other forms of Chinese investment may be trickling down. The financial press mentioned in late November that China was planning to clamp down on overseas investment, which rose more than 50% in the first nine months of the year. And, of course, there’s the continued Brexit fallout. As we’ve discussed before, if the euro and pound are volatile or weak, European banks will have to weigh the relative stability of the U.S. commercial real estate market against the increased cost of capital, which puts non-U.S. lenders at a disadvantage.
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