Guidelines issued by the U.S. government last Thursday to prevent imprudent commercial real estate lending are overly restrictive and could easily backfire, says the NATIONAL ASSOCIATION OF REALTORS®.

The rules may cause many banks — particularly smaller, regional banks — to reduce lending to the commercial real estate market.

“NAR recognizes the important role bank regulators play in protecting the soundness of the nation’s economy,” says NAR President Pat Vredevoogd Combs. “However, we are concerned that today’s actions may be more harmful to the commercial real estate industry than helpful.”

Commercial Market Remains Strong

In creating the new guidelines, regulators hope to protect against economic fallout if the commercial market significantluy slows. But Combs says the commercial real estate industry remains strong and vital.

During the first 10 months of 2006, a record transaction volume of $213.3 billion in commercial real estate transactions occurred on property valued at $5 million or more. Vacancy rates remained lower then previous years and in some cases are still dropping, and most importantly, investors continue to invest in the commercial market. NAR released its commercial outlook in September and all indicators reflect an ongoing, strong commercial real estate market.

“We hope the regulators will reevaluate these guidelines and also modify the Federal Reserve’s Basel 1A policies,” Combs says. The Basel Accords are internationally agreed upon regulatory principles in which the central banks of the 10 largest economies determine their regulatory capital reserves.

“These actions could result in slowing or even a decline in the commercial real estate sector,” she adds.

This isn’t the first time that NAR has addressed this issue. Last September, in testimony to the House Subcommittee on Financial Institutions and Consumer Credit, NAR said the proposals “may prompt banks either to avoid making loans for sound real estate ventures or will increase the cost of capital required for commercial real estate transactions.”

Not All Commercial Real Estate Is the Same

Different classes of commercial real estate lending have different performance characteristics, NAR says. Financial institutions should be able to effectively manage risk by creating commercial real estate portfolios that are diverse, NAR noted in its testimony earlier this year.

While the commercial real estate lending guidelines recognize that there are differences, the guidance remains so restrictive that banks may be dissuaded from making sound commercial real estate loans.

“We feel that the regulators have still not recognized distinctions in classes of commercial real estate — particularly as it pertains to Basel 1A,” Combs says. “This could have the unintended consequence of driving down property values in all classes of commercial real estate.

“NAR and our members remain concerned that the implementation of these regulatory initiatives will negatively impact the market, resulting in higher financing costs and declining property values. It is our hope that a closer look will be taken before any harm can be inflicted.”

— REALTOR® Magazine Online