What does this year hold for Commercial Real Estate? Let’s take a look at the five trends to look out for in 2017.
1. Non-bank lendingExpect private lenders to be very busy this coming year and possibly for years to come. These lenders are willing to provide funding for transactions that banks don’t want to handle due to some involving more risk.
Another reason we are seeing lenders slowdown is because they are gearing up for the part of the Dodd-Frank Act that requires sponsors of commercial mortgage-backed securities to hold on to 5% of every new deal or assign the risk to a B-piece buyer.
Already, in the third quarter of 2016, we saw non-bank lenders make up 13% of New York City’s commercial real estate lending.
2. Interest RatesInterest rates were just raised by a quarter of a percentage point. This is the Federal Reserve’s first increase since 2006. What does this mean for commercial real estate? This rate hike was a small one, however, it is said that subsequent hikes are predicted for this year. For CRE, this means that property deals could be constrained by making real estate less affordable.
Higher interest rates usually signal a strong economy, which typically tends to be associated with a strong real estate market.
3. Financial legislationNow that we have a new president, one who does not believe in what our last president put into action, we could see some changes. It looks like Trump’s team “will be working to dismantle” the Dodd-Frank Act that Obama put into place during his term as President. Experts have said it’s highly unlikely that the law will be totally erased. However, under our new administration, we will likely see fewer effects by this new law.
We could look at it two ways: fewer regulations are easier for banks in the short term and over-the-top requirements are apt to stifle lending. On the other hand, if lending practices are too relaxed, our environment could potentially see another financial crisis.
4. White House and Wall StreetBy the looks of it, commercial real estate and financial lending will be well represented in the White House. Our new secretary of the treasury is former Goldman Sachs banker, Steven Mnuchin and director of the National Economic Council is former Goldman Sachs president, Gary Cohn. Mnuchin has said his number one priority is to “strip back parts of Dodd-Frank that prevent banks from lending”. The new transportation secretary is former member of the Wells Fargo board of directors, Elaine Chao.
5. Foreign InvestmentFrom recent news, Chinese real estate deals and other investments may be on the downward slope. Chinese investments were up more than 50% last year, and now the financial press reported they are ready to clamp down on those investments.
Let’s keep in mind that last year’s foreign capital investment in commercial real estate was concentrated in just five markets: New York City, Los Angeles, Atlanta, Chicago and Dallas. Although the foreign investments may be slowing this year, they will still be significant. Foreign investors look at commercial real estate as one of the smartest places for their dollars and properties here in the United States offer overseas investors a safe place for their capital.