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A publication of
Winter issue 2016 sponsored by
CRE Finance World Winter 2016
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very year brings its own set of challenges to an industry
as complex as commercial mortgage financing, as market
players juggle factors related to the economy, mortgage
pricing and the challenges of running a competitive business.
This year is no different, but there is an added layer of
complexity, as lending institutions of all stripes are trying to figure
out how to deal with the rapidly changing regulatory landscape.
In some instances, the challenges involve dealing with changes
that have already taken effect. Included in that category are the
increased capital changes against “High Volatility CRE” loans such
as construction and development loans. The HVCRE regulations
make banks less competitive and pave the way for increased
involvement in the segment by unregulated specialty lenders.
Other instances involve regulations yet to take effect, such as
the Dodd-Frank risk-retention provisions that require issuers or
qualified B-piece buyers to retain a 5% strip of CMBS pools.
A study commissioned by CREFC — authored by The Wharton
School and Chandan Economists’ Sameer Chandan and CREFC’s
Christina Zausner and published last month — estimates that the
sum of the new regulations will add between 10 and 100 basis
points to the cost of mortgages. That will make it more difficult to
refinance the highly leveraged loans that were originated during
the height of the last bubble and are coming due over the next
year or two. How much more difficult will depend on whether the
added costs are closer to the low or high end of the estimated
additional costs.
Despite the regulatory challenges, there is a lot to be optimistic about
in the commercial real estate capital markets. Market fundamentals
range from robust in the multifamily and industrial sectors to moderate
improvement for office and retail, but the trend is almost all good,
and capital continues to flow from all corners of the world.
The Wharton School and Chandan Economists summarizes the
market as such: “both small and large banks are growing their
positions in commercial real estate and construction; the lending
market is increasingly crowded and many banks are losing market
share; to stave off that competition, the risk profile of recently
originated loans is often markedly higher than for loans made just
a few years ago; and, in contrast with CMBS, drags from banks’
legacy debt are now a de minimis consideration.”
So while there are challenges, there are just as many opportunities
and plenty of capital sources that want to throw their hat in the ring
to compete.
We’re also very excited to have for our readers an exclusive
interview with DoubleLine Capital’s Chief Executive Officer Jeffrey
Gundlach, who provides a very perceptive take on a number of
issues in a wide-ranging interview with CREFC’s Steve Renna. You
will want to read Gundlach’s distinctive thoughts on monetary and
fiscal policy, inflation, regulation, liquidity and more.
Take his take on liquidity, for example: “I have a whole soapbox
about liquidity. It’s really a false term. It’s one and the same as
volatility. Is Tesla stock liquid? If you say ‘yes’, I would point out
that that stock changes 10% in price on a daily basis with some
frequency. Anything that changes 10% in price over the course
of a day, by definition, to me is illiquid because you have no ability
to predict what price you’re going to get. Bonds trading, okay, I
thought I was going to get 98 but I ended up getting a bid of 97.
It’s being termed as illiquidity... .”
With that, welcome to our Winter 2016 issue, which as usual
is packed with great analysis and useful information on a range
of topics.
Enjoy and have a great year,
Paul
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Editor’s Page
Letter from the Editor
Paul Fiorilla
Co-Managing Editor
Associate Director of Research
Yardi Systems