2024 Winter Issue of Urban Land - 142

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CLIFTON E. RODGERS, JR.
Finding Liquidity
Why agencies should exercise caution
to prevent a perfect storm of regulation
In meteorologIcal parlance, a
perfect storm is used to describe
a severe one resulting from a rare
combination of phenomena. Commercial
real estate already faces
many challenges because of an
unprecedented rise in interest rates,
tightening credit capacity, uncertainty
in the office market, a $2.6
trillion wave of maturing debt over
the next four years, and overall economic
anxiety.
Adding to this complexity, financial
regulators are pushing for a
significant increase in capital requirements-by
as much as 20 percent-
for the nation's largest banks via the
Basel III " endgame. " It will result in
material costs to real estate credit
and capital markets-as well as to
the broader economy-that will not
be outweighed by any marginal
financial stability benefits.
The agencies should exercise
caution with the imposition of procyclical
measures that might further
diminish credit capacity and weaken
economic conditions. The wave of
commercial real estate debt maturities
and demand for new construction-particularly
for multifamily
housing-is already testing capacity
levels.
It is important to maintain credit
capacity in the $5.5 trillion commercial
real estate credit markets,
some 50.3 percent of which is
held by commercial banks. Smaller
banks hold approximately $2.3 trillion
in commercial real estate debt.
Regulators should therefore carefully
weigh the costs and benefits
of these capital reforms to ensure
that they achieve an appropriate bal102
URBAN
LAND
WINTER 202 4
ance between financial stability and
broader economic growth.
The largest U.S. banks' capital and
liquidity levels have grown dramatically
since the original Basel III standards
were implemented, in 2013, as
a response to the 2008 Global Financial
Crisis. Since 2009, Tier 1 capital
has increased by 56 percent and
Common Equity Tier 1 capital has tripled.
As the Federal Reserve recently
observed, the United States' " banking
system is sound and resilient,
with strong capital and liquidity. "
Not only is the imposition of a
punitive capital charge unjustified at
this time, regulators failed to provide
justification for such an increase. So,
it is not clear what problem regulators
are trying to solve with this proposed
capital hike.
In addition to the proposed capital
increases for banks, the Securities
and Exchange Commission (SEC) has
a number of proposed and recently
adopted rulemaking measures that
could have a chilling effect on real
estate capital formation-which could
further impair liquidity and be a
" death by a thousand cuts " for commercial
real estate capital markets.
These proposed regulations come
at a significant economic cost and
without clear benefits to the resiliency
of the financial system. Capital
formation is vital when credit markets
tighten to restructure maturing
debt and fill the equity gap. So, there
is concern about the potential for
a perfect storm of regulations that
could stall credit markets and impair
capital formation.
As requested in The Real Estate
Roundtable's March 17, 2023 letter,
the June 30, 2023 Policy Statement
on Prudent Commercial Real Estate
Loan Accommodations and WorkClifton
E. Rodgers, Jr.
outs calls for " financial institutions to
work prudently and constructively
with creditworthy borrowers during
times of financial stress. " According
to a recent Trepp research report,
some $5.65 billion in commercial
real estate loans have already been
restructured this year.
To help rebalance these maturing
loans, it is important to advance
measures that will encourage additional
capital formation. To that end,
it is essential to bring more foreign
capital into U.S. real estate by lifting
legal barriers to investment, as well
as to repeal or reform the archaic
Foreign Investment in Real Property
Tax Act (FIRPTA). Importantly, policymakers
must not hike the tax rate
on capital gains, end carried interest,
or alter the 1031 like-kind exchange
provisions.
As former Federal Reserve Vice
Chair Randal Quarles said recently, " If
cool heads and expert analysis prevail
in Congress and at the banking
agencies, we can avoid the political
stampede to a destructive regulatory
response that would do much more
damage. " UL
CLIFTON E. RODGERS, JR. is senior vice
president of The Real Estate Roundtable, a nonprofit public
policy organization based in Washington, D.C.
2024 Winter Issue of Urban Land

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