Stevens: Keep CRE Strength and Stability Going

ORLANDO–The $3 trillion U.S. commercial/multifamily real estate industry has emerged as a major investment asset class–not just domestically, but globally.

“Whether you look at the Chinese economy, or how low oil prices have gone, or questions about the government debt of many foreign countries, the strength and stability of the U.S. commercial real estate market looks very attractive right now,” said Mortgage Bankers Association President and CEO David Stevens, CMB.

Speaking here this morning at the MBA Commercial Real Estate Finance/Multifamily Housing Convention & Expo, Stevens said the U.S. commercial real estate industry is attracting the right kind of attention.

“Rents are up; vacancy rates are down. Prices are up; cap rates are down. Lending volumes are up; delinquency rates are down. And, for the coming year, the outlook remains solid,” Stevens said. “Lenders’ appetites for new loans remain strong, and with strong market fundamentals and the 10 year loans made during 2006 and 2007 maturing this year and next, lenders also anticipate strong demand from borrowers. Loans for all major investor groups are expected to increase in 2016.”

Additionally, Stevens noted the U.S. economy is also gaining ground, which directly impacts the commercial real estate business. “When businesses do well, they hire more employees which drives up demand for office space,” he said. “When hiring and wage growth increases, it means more disposable income, leading to additional shopping and demand for retail space. So naturally, we should see an increase in office properties, industrial properties and possibly shopping malls.”

With these successes, Stevens said, comes additional challenges, noting that regulators have increasingly expanded their scrutiny of commercial/multifamily real estate finance. He emphasized MBA’s strong relationships with federal regulators in ensuring that such scrutiny remains balanced.

“MBA has continuously stated that commercial and multifamily businesses should not be collateral damage on the way to real estate finance reform,” Stevens said. “I’ve cautioned that nobody is immune to regulatory or legislative oversight.”

Stevens cited a recent successful MBA meeting with Federal Reserve Board leadership. “We went right to the top, taking MBA member executives to meet with Federal Reserve Chairman Janet Yellen and the Board of Governors to brief them on the state of mortgage finance, with a focus on commercial/multifamily real estate lending,” he said. “The commercial/multifamily executives in attendance were able to engage in discussion at the highest levels of monetary policy making. This gave Fed decision-makers an on-the-ground view of the real economy, improved their understanding of commercial real estate lending, and further solidified MBA as a go-to resource for all things real estate finance.”

Stevens noted the Fed isn’t the only market regulator whose attention is attracted to your business; in early December the Fed was joined by the Federal Deposit Insurance Corp., and Office of the Comptroller of the Currency in a joint statement in which they acknowledged growth and competitive pressures in the commercial real estate market and reinforced prudent risk management practices regarding CRE.

“Federal regulators are right to be engaged, but more importantly, right to be engaged with us,” Stevens said.

Globally, the Basel III final rule poses potentially significant implications for banks with a significant concentration of commercial real estate construction loans. “We’ll continue to work with regulators as they consider new Basel Committee proposals that could impact capital charges for commercial mortgage-backed securities trading book and the overall bank holdings of commercial real estate mortgages,” Stevens said. “The final CMBS Risk Retention rule was highly responsive to most of MBA’s concerns and provided for additional risk retention flexibility. As with other major rules, however, implementation issues emerge–some that require clarity from regulators. We’re engaged in active dialogue with these regulators, particularly the Securities and Exchange Commission, to address areas of uncertainty or unintended consequences. And we continue to believe that there should be more flexibility in the rule for single-asset structures, single borrower CMBS, horizontal risk retention holders, and underwriting standards for zero risk retention.”

Other challenges remain. Stevens noted many life companies would benefit from greater flexibility in the equity risk-based capital rules. “We’re working with the National Association of Insurance Commissioners and their working groups on that,” he said. “We’re making progress, but our continued advocacy is necessary. And [Home Mortgage Disclosure Act] reporting has become an issue for commercial/multifamily firms. The Consumer Financial Protection Bureau’s final rule scopes in more multifamily lending, despite the fact that it’s non-consumer, business lending. We’re helping members on both clarifying the rule’s scope, as well as implementation strategies and best practices.”

Stevens said because of MBA’s strong relationship with the Federal Housing Finance Agency and FHA, MBA continues to represent its multifamily members on GSE issues, FHA programs and protecting multifamily liquidity from all capital sources. “We recognize the importance of competition in the market, while making sure that our members who work with the agencies have clear rules in supporting workforce and affordable rental housing,” he said.

Stevens also emphasized MBA has a “proven record” of overcoming challenges. “For years we bargained with Congress for a long-term extension of the Terrorism Risk Insurance Act,” he said. “Because of our collective efforts, early last year we locked in a six-year extension of TRIA. Just last month, MBA testified before the House Financial Services Subcommittee on Insurance and Housing on the National Flood Insurance Program, which affects both commercial and residential lenders. We urged the subcommittee to approve the Flood Insurance Market Parity and Modernization Act, which would stimulate a market for private flood insurance and maintain liquidity in the marketplace. I’m also pleased to report the Financial Industry Regulatory Authority has amended its proposed margining requirements in direct response to advocacy by MBA and our members. Under the amended proposal, multifamily and project loan securities would be exempt from mandatory margin requirements, and each broker-dealer would make its own risk limit determination. This is a significant victory for MBA and our members.”

Given the attractive, growing market and increased attention from regulators, Stevens said now is not the time to be complacent. He said MBA will continue to advocate or commercial/multifamily real estate finance on the following:

–Advocate for a policy and regulatory environment that allows for the steady delivery of liquidity among all the major capital sources in commercial and multifamily real estate;
–Promote the role of mortgage bankers as intermediaries, including independent mortgage bankers, facilitating their ability to do business and strengthening a level playing field that supports competition;
–Educate opinion leaders and policymakers on commercial real estate, both as an engine of our economy and in the formation of our communities; and
–Increase industry engagement across business models in our membership, particularly among young professionals who represent the future of MBA and CRE finance

“Engagement is the key to sustainable success,” Stevens said. “Overcoming challenges and achieving these goals to maintain a strong commercial/multifamily marketplace only occurs when we work together.”