Missouri commercial real estate developers who have projects in development or need to refinance existing loans are likely aware that the Federal Reserve has been monitoring bank lending in this sector very carefully. After the 2008 recession, the nation’s central banking system introduced what has come to be known as a “stress test,” which was created to determine whether the country’s largest banks have sufficient capital to make it through another downturn. The procedure became codified when the Dodd-Frank Act was enacted in 2010.
On Feb. 3, the Federal Reserve announced the components of the 2017 test, and they include a larger emphasis on commercial real estate loan exposure. The test envisions a scenario where the unemployment rate in the U.S. hits 10 percent, resulting in a nationwide downturn. It also postulates a dramatic decline in CRE values.
The Federal Reserve’s concern is due in part to the fact that, because of low-interest rates, many banks have turned to long-term and higher-yield investments like office buildings and expensive apartment buildings. In addition to the Federal Reserve, other bank regulators including the Comptroller of the Currency are increasingly viewing commercial real estate loans as a risk. Some of the institutions that are required to take the stress test include Bank of America and Morgan Stanley. The lenders have to submit the results by April 5.
A tightening of loan underwriting standards may have an impact in a variety of ways. One immediate effect could be that commercial property developers will need to find alternative sources of financing. They might want to meet with their attorneys to discuss methods such as the real estate crowdfunding platforms that have become popular.