https://www.globest.com/2018/12/03/the-next-downturn-its-not-a-matter-of-when-but-how/

It starts off talking about the forecasted downturn. Then moves on..

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High on that list is CRE concentration risk. The contraction in the number of financial institutions over the past three decades, coupled with exponential growth in debt capital, has created a concentration we have never seen in history. Banks continue to garner the largest share of the growth and total debt, despite the Federal Reserve's enhanced supervisory authority or bank stress tests, Dodd-Frank legislation and the real estate lending market modifying behavior after 500 bank failures (2009 to 2017). Combine that with assets being priced for perfection at record-low average cap rates of below 6%, and you have an environment with simply no margin for error.

Been saying this for a while. Low cap rates and rising debt.. equity investors until very recently have been begging to jump in. There's not a lot of upside. Conditions have to stay favorable and markets have to grow just to hit basic benchmarks. Most of the pie in the sky growth built into underwriting models is going to never materialize.

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We all know that rising interest rates never bode well for the industry, and the Federal Reserve has raised them three times already in 2018. To further complicate the situation is the shift away from quantitative easing. The one-two punch of the Fed's rate hikes and recent efforts to move away from quantitative easing is a particularly powerful one. All the securities purchased during the quantitative easing period following the latest financial crisis are now being sold back into the market. And by doing so, the Fed is re-injecting risk premiums into the system: precisely what is not needed at this time.

The fed, as usual, is not helping.

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Smart Finance is considered the next big thing in CREF. By incorporating artificial intelligence to automate the underwriting and credit scoring processes, approvals and closings happen much quickerand it simultaneously documents regulatory records and preloads all required information for annual Dodd-Frank-mandated stress testing.

Adding layers in blockchain technology and you have Secured Automated Lending Technology. SALT allows cryptocurrency asset holders to use their digital assets as collateral for cash loans. By eliminating the need to liquidate holdings, you have a digital-asset-backed lending market on the rise. SALT is already in use in commercial real estate.

Blockchain is going to be a huge deal in CRE going in to the future. To ignore it is pretty ignorant at this point in time.

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While the industry is aware of all these factors, the actual impact of each is still a question. Libor is a great example. There currently is no definitive replacement for Libor once it sunsets on December 2021. Let that sink in. A benchmark rate that a total of $350 trillion in debt instruments rely on, including interest rate swaps and all adjustable rate financial products. So far Secured Overnight Financing Rate/SOFR is the front runner. Fannie Mae successfully issued several SOFR securities in 2018 but who knows? I think we'll all rest easier once the new Libor is identified and adopted.

Replacement for libor? Who knows.

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With CECL, financial institutions will be required to estimate the expected loss over the entire life of the loanrepresenting a substantial change in data analytics and financial methodologies. The real fear here is that banks will reduce real estate lending volumes as they build up additional capital reserves in 2020 to 2022 to comply with this standard.

And just around the corner is the new lease accounting in effect next year. The new FASB accounting standard for leases, ASC 842, mandates that both lease assets and liabilities are recorded on a company's balance sheet without any grandfather provisions. I don't think I can overstate the impact of this one, especially on long-term lease structures critical to the triple-net lease market and permanent debt investors, i.e. REITS and life companies that rely on matching their longer-term liabilities to assets with long duration cash-flow assets. According to Moody's, this new FASB lease accounting standard will add as much as $1 trillion in liabilities to corporate balance sheets. Adding insult to injury are the right-of-use asset calculation methodologies issued, in which the corresponding asset value is not determined or based on market values. We're going to see net values and credit ratings of companies take a nose dive. It's a legitimate threat to the future of longer-term leases, leaving the NNN lease market particularly vulnerable. This disruption should be on everyone's radar.

New accounting standards for banks are going to hurt.