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CRE debt may increase risk for some banks

Commercial real estate investors in states like California may soon have to reconsider their financing strategies. According to one Morgan Stanley analyst team, a future characterized by increased regulatory scrutiny could force some financial institutions to cut back on the amount of lending they engage in. Such problems would be most notable in small markets.

Writing in a June 2015 report, the analysts claimed that small banks might take steps like devoting increased efforts to mortgages and acquisitions. They could also begin hiking up equity. Commercial mortgage-backed securities, or CMBS, could be more likely to default if banks decide not to keep originating CRE loans at their current rates.

Some banks may simply lack the resources to satisfy CRE financing demand. The analysts say that entities possessing between $1 and $10 billion worth of assets are the most vulnerable. These institutions may not have sufficiently stringent underwriting standards, and this could interact with the fact that in the first quarter of 2016, they originated a large share of loans. One notable disparity is that bank-originated CRE lending has peaked at a new high of 52 percent; however, CRE pricing is not rising.

Market conditions have a big impact on the viability of commercial real estate investment strategies. In addition to ensuring that they avoid construction litigation, title disputes and other issues, CRE investors should also keep an eye on how evolving market conditions might affect them in the future. Although these trends are independent of other factors and often difficult to predict, it's important to structure deals that account for this as much as possible. A lawyer could help an investor address such issues.

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