The Impact of Regulation on Commercial Real Estate Finance

Regulatory Design, Real Outcomes

 

Written by:
Sameer Chandan
Christina Zausner

Abstract
Now eight years since the beginning of the global financial crisis, the regulators are finishing up the bank agenda and are rolling out a slate of nonbank rules. The CRE Finance Council analyzed the holistic impact of regulations across the commercial real estate (CRE) sector through quantitative and qualitative methods, studying the impact on fund flows, market behavior and structure. Starting with the regulators’ own hypotheses, CREFC constructed a set of analyses to estimate the costs of new regulation. Assuming the regulators adopt final rules that remain close to the requirements discussed in public to date and assuming that a normal market environment prevails, the median ten-year impact on the real economy is estimated to be $209 billion. CREFC analysis also suggests that smaller borrowers, lenders and markets will bear a disproportionate percentage of the costs. Looking at the impact from the bottom up, the addition of a single data point into the reporting framework of a small-to-medium sized firm can exceed $1 million, which is the salary equivalent of 27 bank tellers. As a tool, regulation appears to be relatively more successful at forcing broad change, but it also appears to be a fairly blunt instrument that is difficult to control. Because the regulatory agenda extends out into the next decade, it is too early to fully assess the impact at this time. However, there is emerging evidence that, as vast as this agenda is, it may have transformed risk, instead of reducing it as planned.

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