How Risk Retention Could Give CMBS a Leg Up

Richard Flohr is managing director, capital markets with PGIM Real Estate Finance.

CHICAGO—It’s been said that the risk-retention piece of CMBS securitizations going forward will stymie the market for a debt instrument that already is struggling to cross the $100-billion barrier. The argument is that the new rule, requiring a CMBS sponsor or qualified third party to retain 5% of a deal’s value on the books, “will restrict capital, drive up borrowing costs, increase execution uncertainty around new loan originations and push smaller financial institutions out of the market.”

That’s how a new white paper from PGIM Real Estate Finance summarizes the pessimistic view of risk retention, which took effect this past December as part of the Dodd-Frank regulatory regime. However, the white paper then makes the case that not only is CMBS poised for a new bloom of popularity, but that the risk-retention requirement will help the cause, as well.