Developers may have issues securing financing soon

Owners of some types of commercial real estate in Illinois may face difficulty in 2017 with securing financing when their loans mature. Increased scrutiny by regulators on banks may pressure smaller banks to cut back on lending for multi-family properties and for malls that are of a lower quality.

According to an analyst with Morgan Stanley, commercial real estate brings higher risks when it is located in smaller markets. He also indicates that the risk extends to real estate investment trusts and commercial mortgage-backed securities. Multi-family properties and strip malls are largely ineligible for government-sponsored enterprise financing. People who own these types of properties have long relied on small banks to secure financing, leaving the small banks to fill the gap.

The commercial real estate market has a large number of loans that are scheduled to mature in the next couple of years. Morgan Stanley predicts a refinancing rate for 2017 of 50 percent. At the same time, the prices for commercial real estate in secondary and tertiary marketplaces have flattened while small banks have a share of loan originations that has risen to a historically high 52 percent. Because of this exposure, banks may be faced with increased regulatory pressure and be unable to help some property owners with their financing needs.

Commercial real estate development can be lucrative, but it is not free from risk. It is subject not just to the ebbs and flows of the economy but to a high degree of government regulation of traditional sources of financing. Attorneys for developers can often suggest alternative methods of securing the needed debt and equity funding.

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