From blockchain to Dodd-Frank, the Commercial Real Estate Finance Council’s annual conference this week focused on how the commercial real estate debt market continues to evolve.
Here, PERE details five key points from the New York event:
- Dodd-Frank reforms may lead to more risky lending: If pieces of the legislation are rolled back, particularly restrictions on lending, the group most likely to return to risky lending, such as construction financing, is medium-sized banks, one lender said. Large banks no longer have the corporate appetite for risky CRE debt, while smaller groups have either consolidated or do not have the capital to do a significant amount of additional lending.
- Technology may create refinancing challenges: Most lenders do not consider how much technology is changing space needs, particularly in the office sector. If a borrower attempts to refinance in a decade, the firm may find tenants need much less space than they did at the beginning of their leases, leading to difficulties in refinancing the building because of the lower anticipated rental revenue, said one panelist.
- Community banks may take on more risk: A servicer highlighted that community banks are financing more transitional assets, with a higher volume expected in the next 18 months. One lender cautioned that some community banks suffer from lack of discipline and little memory of the last cycle, which may lead them to lend on riskier deals.
- Blockchain-run lending raises fraud concerns: The diligence process for real estate lenders is typically very lengthy, but the greater efficiency of having a transaction that is permanently recorded and validated by a consensus of blockchain participants, rather than a single party for non-blockchain transactions, could allow real estate debt transactions to be underwritten and executed more quickly, one lawyer said on a panel. However, the fact that the loans, but not the borrowers, are made transparent on blockchain creates the potential for fraudulent deals. One advisory firm said that a mechanism needs to be created to prevent fraud on blockchain, but that has yet to happen.
- CMBS activity is rebounding, but much has changed: During Wednesday’s CMBS session, delegates learned that single asset single borrower issuance is recovering, increasing 87 percent between 2016 and 2018, according to CREFC data presented during the panel. CMBS activity overall has picked up since the global financial crisis, with annual issuance reaching $229 billion in 2017, just short of 2007’s $239 billion. Comparing the CMBS lender base between those two years, the panel highlighted that banks have largely exited the market as a result of stricter capital requirements; while they comprised about a quarter of the market pre-crisis, their presence in the CMBS market had diminished to 6 percent last year. In response, asset managers, insurance companies and pension funds have expanded their shares of the market, seeking long-term assets to match their liabilities and investment preferences.
– Lisa Fu and Evelyn Lee contributed to this report.