Geoff Maibohm, counsel in the Finance Group, highlights the biggest issue hanging over the CMBS market: risk retention.
Is risk retention the largest regulatory hurdle currently facing CMBS?
Yes—market participants are in the process of formulating responses to the regulations when they become effective in December 2016. Risk retention has spurred legislative efforts by industry associations (including CREFC). We expect risk retention to be the focus of sponsors and issuers for the rest of 2016.
Will risk retention result in fewer CMBS market participants?
While it is very early in the process, it is likely that some B-piece buyers and sponsors will exit the market as a result of the regulations. B-piece buyers may have difficulty financing their portfolios given the related sponsor will not be able to finance their portfolios, and they may have liquidity issues with restrictions on selling their investments for the first five years following purchase. For sponsors, risk retention presents great liabilities and since only one sponsor is allowed to be allocated that liability, it may limit those sponsors that are not well capitalized and/or are new to the market.
What will be the likely result of risk retention for 2016 and beyond?
For the rest of 2016, we are likely to see market participants trying to formulate strategies to deal with risk retention and may try to bring as many deals to market as possible in the second and third quarters prior to the regulations coming into effect. The fourth quarter may see a decline in issuance of CMBS as market participants will likely be waiting to see what other market participants are going to do. In 2017 and beyond, we will know the full fallout from risk retention. If the proposed legislation (the Preserving Access to CRE Capital Act) is enacted, and in particular single-asset transactions are exempted from risk retention, this will likely have a very positive impact on CMBS issuance. If no legislation is enacted and the status quo holds, it is likely (though not certain) that the costs of CMBS transactions will increase and that other forms of commercial real estate finance may become more attractive to the typical and/or traditional CMBS borrower base.