"The combined effect of those two regulatory proposals may prompt banks either to avoid making loans for sound real estate ventures or to increase the cost of capital required for commercial real estate transaction," noted Thomas M. Stevens, president of NAR. NAR believes that the regulations appear to tighten capital requirements more than appropriate considering the risk profile of commercial loans.
"We are pleased that several senior members of the committee expressed concerns and that it appears they will undertake a thorough review before making any changes," said Stevens after learning that a number of prominent members of the committee voiced concerns similar to NAR during the hearing. "In a strong market with a strong forecast, the regulators need to rethink their approach and understand that 2006 is not the same environment as the late 1980's. Our members will attest that the commercial real estate market is fundamentally strong," Stevens said.
The goal of the regulators is to mitigate against potential economic fallout if the commercial real estate market significantly slows. The guidance recommends enhanced risk management practices that, if implemented, could potentially harm the flow of capital to the market. NAR, for the record, expressed concern that the "impact of overly restrictive risk management practices that do not fully recognize the unique character of commercial real estate lending could increase the cost of capital and dissuade financial institutions from making loans to sound commercial real estate ventures.
NAR stated in its testimony that different classes of commercial real estate lending have different performance characteristics since not all commercial real estate is the same, and that financial institutions should be able to effectively manage risk through creating commercial real estate portfolios that are diverse. NAR warns that failure to recognize distinctions in classes of commercial real estate could have unintended consequences of driving down property values in all classes of commercial real estate.
Last week, NAR released its latest "Commercial Real Estate Outlook," which noted that the commercial market is "fundamentally solid", and expects tightening vacancy rates and rising rents, and the continuation of large investors pouring funds into the commercial sector.
The Basel Accords are internationally agreed upon regulatory principles by which the central banks of the 10 largest economies determine their regulatory capital reserves.
The National Association of Realtors, "The Voice for Real Estate," is America's largest trade association, representing more than 1.3 million members involved in all aspects of the residential and commercial real estate industries.
