New Nonbank Regs and What They Might Mean for CRE Lending

In commercial real estate, financing has been tough as banks pull back from lending. Too many institutions have serious worries about what is happening in CRE. Property values keep dropping, transactions have plummeted with the lack of price discovery, and owners face hurdles in getting loans.

Regulators have put a lot of attention on banks given the number of high-profile failures earlier this year. That’s helped put more of a chill on that route of lending.

Nonbanks like asset managers and hedge funds have helped pick up some of the lending volume that had fallen. But now the Financial Stability Oversight Council — which includes the Treasury, Federal Reserve, Comptroller of the Currency, Security and Exchange Commission, Federal Deposit Insurance Corporation, Commodity Futures Trading Commission, Federal Housing Finance Agency, and the National Credit Union Administration Board — decided to create an “analytic framework” for nonbank financial security risks.

The regulators have been concerned with the amount of financial activity taking in place at nonbanks that often lack the amount of transparency mandated for banks.

“The Analytic Framework details the vulnerabilities and transmission channels that most commonly contribute to risks to financial stability, and it explains the range of authorities the Council may use to address any particular risk – including interagency coordination, recommendations to regulators, or the designation of certain entities,” the group wrote.

But some CRE professionals think the move is bad, at least for the industry.

“This move by the Treasury department, while misguided, is not surprising given the proliferation of the private lending and credit markets that are increasingly replacing the role as lender from the more traditional, and more regulated, banking industry,” Spencer Gray, CEO of Gray Capital, tells GlobeSt.com. “Nonbank lenders have increasingly been filling the role of where banks have been falling short, providing the necessary liquidity to maintain a functioning economy. If it were not for these non-bank lenders, CRE, and other credit markets, would have already suffered more losses than what we are seeing today. Our hope is that this move is more virtue signaling and no actual action is taken.”

Paul Vosper, executive vice president of business strategy at Monday Properties, thinks the practical impact might not be that large. “The FSOC’s oversight will not materially hurt the incredibly tight credit markets,” he tells GlobeSt.com. “The banking sector has already pulled back from lending, particularly in the office sector. The main issue is that the lending markets are obstructed.”

Vosper argues that perhaps the extra attention should be on the banks. “Like the S&L crisis, there needs to be a cleansing of the system or we will end up in a stagnation where bank balance sheets are bloated with legacy loans at inflated values,” he says.