Lenders already beset by several issues, including economic and political uncertainty and regulatory pressure to pull back from the commercial real estate market, will be required to retain at least 5% of the credit risk under new rules to take effect Dec. 24. “A lot of the industry feels the regulators have overshot,” said Christina Zausner, vice president of the Commercial Real Estate Finance Council. “The combined effects of the regulations have made the markets much thinner.”
Buyers of commercial properties can still get a loan from a bank, “but it is really hard for the investment banks to hold CMBS inventory for market-making reasons, even if it is a highly rated bond,” Zausner added. “What that means is there is not a lot of liquidity, pricing or discovery. People feel less sure about the market.”
Industry representatives said they are concerned. The “final rule does have some problematic components, which I think could have a significant impact on the CMBS market,” said Tom Kim, senior vice president at the Mortgage Bankers Association. “And it could go into effect at a time when there is a lot of volatility in the capital markets.”
Industry estimates commercial mortgage back securities issuance will total $50 billion to $60 billion this year — less than the $97 billion in issuance last year. Economists at Wells Fargo Securities recently reported that issuance in the market has fallen to the lowest levels since 2009.
The quality of CMBS deals that are getting done currently is high. “Deals getting through are vastly improved from deals issued last year,” Zausner said. However, the biggest concern is that risk retention deals will drive up borrowing costs for commercial property owners.
Well Fargo Securities economists argue the rule could increase the cost of capital for securitized products and increase the strain on banks. “These regulations also come at a time when refinancing activity is picking up, with about $40 billion of CMBS loans maturing this year and $85 billion in 2017,” according to a May 23 report.
Zausner said that “in general, there is still capital available to fund commercial real estate loans, but it is coming from different sources and seeking higher returns.”