CRE’s Coming Orwellian Abnormality

The CRE market is anything but “normal” in the traditional sense. Lenders are more demanding than ever and there is less capital on the table than in recent memory.

CAP rate pricing strategies are increasingly difficult to pencil-out these days. After we doing the math we are often left shaking our heads. Owners are facing note calls and having some sleepless nights wondering how to score lending. Lenders are insecure and uncertain about what the Feds might do next.

Welcome to “ABNORMAL” where normalcy, whatever it is or was, exists no more. Welcome to normal defined by abnormality. Our CRE world is fast becoming a frenzied marathon that owners discover takes them nowhere, slowly. Yikes!

Enter Legislative Reform and No Risk Lending

President Barack Obama has signed into law a 2,300 page legislative act known as the “Dodd-Frank Wall Street Reform and Consumer Protection Act” (HR 4173).

Download the Davis Polk Summary of HR4173

Although the bloated document’s proponents claim the new law will right the financial wrongs that created the current abnormal state of affairs in lending, others think it may create more uncertainty in the lending market.

Proponents of the legislation claim it will reduce systematic risk in lending and thus protect the banks and the lenders.

My question is fundamental to CRE investment. Can there be such a thing as “no risk” lending? And it such a creature can be created in Washington’s legislative laboratories, will it be just another Frankenstein that further wreaks havoc on the CRE investment world.

The legislation translates into a myriad of government studies (such studies typically create abnormality) designed to formulate the regulations designed to provide the framework that will enforce all of the rules that will serve as the engine that will run the new lending vehicles.

New Bureaucracy to Protect Us from Them

Obama’s legislation is essentially an outgrowth of the notion that we all need protection. It’s designed to protect “us” from “them” with the “them” being predatory lenders.

Our new “abnormal normal” will create an army of regulators, perhaps thousands of them, who report to work each day in the Financial Stability Oversight Council (risk monitors), a Federal Insurance Office (risk regulators) and a Consumer Financial Protection Bureau, a group of guys and gals who will actually write the specific laws that they say will protect us all from risks associated with unfair lending.

Download the Davis Polk Summary of HR4173

My personal take is that we are entering an Orwellian Abnormality masquerading as the new normal that will in the end, create more uncertainty than ever before. And we all know what uncertainty produces…more uncertainty and subsequently hesitation and reluctance with respect to commercial underwriting.

People who know more than I predict it will take at least a couple of years just to create the formulas and rules necessary to enact the law’s theories into a set of understandable regulations and universal standards for our new normal.

What is the predictable response from lenders going to be while the bureaucracy is assembled and the rules for the new lending environment are penned and codified? Let me see if I can guess what the response of lenders will be…hmmm, how about wait, slow down and resist? Uncertainty always creates this response from lenders.

The Orwellian abnormality in lending is simply that a cadre of government soothsayers can formulate safe, no risk lending. My contention is that the theory of such a safe environment is in-and-of-itself, the ultimate uncertainty and therefore, the ultimate abnormality.

Download the Davis Polk Summary of HR4173

Donald Teel is a Senior Associate and Principal with Arizona Commercial, an Arizona commercial real estate brokerage and property management firm, headquartered in Prescott, Arizona. Need more information? Please call 1-877-777-9100 or, if you prefer, you may email Donald Teel

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