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CapStack Partners’ CEO, David Blatt, Examines the Trump Administration’s Impact on Real Estate Debt Financing

President Trump’s ‘first 100 days’ in office have had a profound impact on a number of industries as well as the capital markets. This is due in large part to speculation about what policy and regulatory changes are forthcoming. As it relates to the real estate industry, this uncertainty has resulted in a ‘wait and see’ approach among the lending community. Accordingly, this cautionary posture has not materially impacted the ways banks conduct their business on a day-to-day basis.

Regulated banks are still keen to originate loans to repeat borrowers whose businesses and capabilities they know intimately well. In short, the risk appetite for regulated banks remains relatively low. That’s not to say that traditional banks would not be comfortable lending at higher LTV ratios. Most likely would, however the current banking regulations have restricted the flow of capital out of these institutions and into the hands of operators and developers.

Based on our conversations, the sentiment among regulated banks is cautiously optimistic that the new administration will loosen regulations on banks and other major financial companies. Hope is high that the recently introduced bipartisan bill will overhaul the High Volatility Commercial Real Estate, or HVCRE, rule making it easier for banks to provide construction financing. However, until change occurs resulting in less onerous—and ambiguous—financial restrictions, traditional banks will remain on the sidelines.

The void left in the market by traditional lenders has given rise to a growing number of non-bank lenders who will continue to fill the financing vacuum. These specialty finance vehicles, which include publicly traded REITs, private equity real estate funds and even developer-operators, continue to increase their dry powder and market share in the financing ecosystem. While loan pricing is generally higher with alternative lenders, borrowers are willing to pay a premium for certainty of execution from a lender that understands and gives weight to a rational business plan.

As it relates to CMBS, risk retention didn’t decimate the industry as some thought might be the case. In fact, the implementation of the risk retention rules resulted in new players entering the space—like Apollo Global Management’s Redding Ridge Asset Management—with investment strategies built around risk retention. Pension & Investments recently highlighted how private equity groups are directing capital into the space. As a result fresh capital is available to be loaned out, bond buyers arguably own more secure investments and borrowers continue to borrow from securitized lenders…capitalism prevails.

Beyond regulated banks, alternative lenders and CMBS, life companies and agency financing continue to actively lend primarily against stabilized assets on long-term, fixed rate terms. For investors holding cash flowing assets, these sources of capital present a compelling value proposition. While floating rate interest-only financing can juice cash-on-cash returns in the near term, the rising interest rate environment could have a negative long-term effect. With the economy continuing to strengthen, we believe it is prudent for borrowers with a sound strategy to lock in historically low debt costs for the long-term and grow NOI.