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Home Commercial Lending

Counting Down Top 10 Challenges for CRE in 2016

December 8, 2015
Reading Time: 3 mins read

By Ashley Gunn

With an upcoming presidential election, uncertainty surrounding the Fed’s timing of rate increases and volatility in the global economy, 2016 will bring major changes to banking, especially to commercial real estate lending. These changes will be influenced by both government and non-government entities, factors outside of the banking business and internal industry challenges. Bankers identified ten key challenges they anticipate could transform the CRE market in 2016 and beyond, outlined below in ascending order of importance.

10. Influx of international money. Over the last few years, the U.S. has seen an influx of foreign capital as many foreigner investors feel their assets are better protected in America than in their home countries. Though initially this trend was most prevalent in “gateway” cities like New York and Miami, other cities have started to see an increase in foreign investment. Will this trend will be sustainable in the long term? If so, what impact will it have on the industry?

9. Appraisal matters. The appraisal industry is currently trying to combat the impending shortfall of qualified appraisers as the industry’s workforce rapidly ages—posing a major near-term challenge for CRE lenders, especially in rural areas with fewer appraisers.

8. Another real estate bubble. Market experts have opined that the CRE market is particularly frothy. When coupled with declining capitalization rates—which are back to pre-recession levels—bankers are concerned that another bubble could lead to disastrous value declines.

7. Changing demographic landscape. With baby boomers retiring and millennials gradually replacing them in the workforce are strong indicators that significant changes in the housing market are likely. The decisions boomers make about where to retire, such as assisted living or planned communities, as well as the uncertainty around many millennials’ housing and work choices, will directly affect the CRE sector.

6. Urban versus rural areas. Metropolitan regions have seen an increase in CRE lending while rural areas remain steady or more stagnate. This has a direct impact on economic growth and some are concerned about the long term effects of this disconnect.

5. Increased competition. The market has seen trends of eased underwriting standards for CRE loans as borrowers’ access to alternative lending sources—such as credit unions, marketplace lenders, insurance companies, government agencies, REITs and others—has increased. Additionally, the low-rate environment adds more pressure to the competitive landscape.

4. Talent recruitment and retention. A surprising internal challenge voiced by those in the industry is the difficult banks are having recruiting and retaining younger staff. As boomers retire, having well-trained young professionals already in place will be vital to the stability of the banking industry.

3. Interest rate risk. Many are concerned about how the market will absorb the long-anticipated rise in interest rates. Bankers are particularly apprehensive about the impact of changing interest rates with regards to runoff risk, credit spreads and borrowing costs.

2. Regulatory exams. Examinations continue to be extensive, time-consuming and cumbersome processes for banks. The inconsistencies in analysis and interpretation that currently plague the process will only intensify as more rules are implemented.

1. Regulatory burden. This number-one concern from bankers could completely reshape the banking industry and CRE. The regulatory environment will make commercial lending activities increasingly challenging as additional rules—such as those pertaining to high-volatility CRE within the Basel III capital framework, the mortgage risk retention rule and impairment accounting—are finalized and implemented.

ABA will continue to monitor these challenges as they develop and serve as a resource as needed. ABA’s CRE Lending Committee is particularly engaged in this area. If you are interested in participating in the committee and would like more information, please contact me at [email protected].

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