The presidential election has unleashed a frenzy of speculation as to what exactly a Trump administration might mean for the commercial real estate industry. Although detailed plans and key appointments are still emerging, Trump has been crystal clear on his intent to ease banking regulations and financial industry reforms.
Although both the Dodd-Frank Act and Basel III international banking standards will be targets, it appears as though Dodd-Frank is the bigger priority. “I think it’s pretty clear that Trump is going to roll back on Dodd-Frank, which is probably going to allow the banks to be a little bit more aggressive going forward,” says Warren Higgins, executive vice president and head of mortgage banking with mortgage banking and servicing firm Berkadia.
President Elect Trump’s website called the Dodd-Frank Act a “sprawling and complex piece of legislation that has unleashed hundreds of new rules and several new bureaucratic agencies.” The website also stated that Trump’s financial services policy implementation team will be working to “dismantle” the Dodd-Frank Act and replace it with new policies to encourage economic growth and job creation.
“Its goal was to safeguard and regulate risky banking practices and what it really has done is it has made the process for maintaining compliance and the timelines required to complete compliance very difficult, particularly on the smaller local community banks,” says Michael Cisternino, senior vice president and director of investment sales at real estate services firm Transwestern in Walnut Creek, Calif.
The House Financial Services Committee and the Senate Banking Committee have both introduced proposals in the past to roll back part, or even all, of Dodd-Frank. However, there has not been enough support to move those reforms forward in the past. That may be a different story with Trump in the White House and a Republican majority in both the House and Senate. “What (Trump) can do with his pen and what he can get through Congress is a little bit unknown, but clearly the market is anticipating that there will be some regulatory loosening,” says Higgins.
Two of the big issues for commercial real estate lending will be potential forms related to CMBS risk retention rules that were introduced as part of Dodd-Frank and High Volatility Commercial Real Estate (HVCRE) rules as part of Basel III. The CMBS risk retention rules that go into effect on December 24 have been blamed for at least part of the slowdown in CMBS issuance this year. The risk retention rules require originators to keep some skin in the game by holding a piece of the deal that they helped put together.
Yet with the Trump administration widely expected to modify or even repeal that provision, risk retention rules may have a very limited shelf life. Industry groups such as the Real Estate Roundtable have supported the bipartisan “Preserving Access to CRE Capital Act” (H.R. 4620) bill that would clarify the risk retention rules and also create certain modifications that would ease the new requirements on the CMBS market.
It is also possible that a Trump administration could amend some of the the harsher capital requirements related to qualifying HVCRE loans. The high volatility loans can affect certain commercial real estate acquisition, development and construction loans. However, they have been criticized for a pullback in bank construction lending due to the higher capital reserves that banks are required to hold against those loans.
The election may be good news in terms of improving liquidity in the debt markets and improving the outlook for commercial real estate in 2017. “We have been seeing over the last 90 days the debt markets tightening,” says Byron Carlock, national partner and real estate practice leader at consulting firm PwC. Specifically, capital has been more constrained in CMBS and bank construction lending. In addition, there was more caution creeping into the market due to views about a maturing real estate cycle.
According to the 2017 Emerging Trends in Real Estate report released by PwC and the Urban Land Institute, 46.4 percent of survey respondents said they expect more rigorous underwriting standards in 2017 compared to 12.9 percent who held that same view last year. In addition, respondents were slightly more pessimistic on availability of capital from debt sources compared to the 2016 survey. However, if Trump is successful in easing regulations, it will likely change the tone of those report findings, notes Carlock.
Trump’s plan to increase infrastructure spending could provide added stimulus to the economy and prolong the current growth phase of the real estate cycle. Infrastructure investment can have a multiplier effect on the economy of 1.7 to 1.8x, depending on the type of project, notes Carlock. Business headlines and an increase in the stock market to new record highs is already pointing to a brighter mood and more confidence in the economic outlook.
The commercial real estate industry will have more insight into the Trump administration’s strategy once details of his 100-day plan are revealed. Trump appointments to key cabinet positions in the coming weeks, including Treasury Secretary, will also offer more signs about what might be ahead for policy related to capital markets. “I am a bit encouraged right now as I see us move towards a more pro-business environment, which I think will be good for our nation,” says Carlock.