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K.C. Conway

CHICAGO–CCIM Institute Chief Economist K.C. Conway is not optimistic that the commercial real estate finance markets will continue to operate smoothly in the mid term. Rather, he writes in a recently-released white paper, the probability of a CRE finance disruption in the next six to 18 months is as elevated as it was prior to 2007-2008.

The question, therefore, is not if or when, but how this disruption will occur. To be sure, it may seem hard to envision how the currently robust CRE capital markets could come to a halt, but Conway posits that a confluence of events are poised to do just that. These include the advance of technology in CRE finance and regulations that are not keeping up with these advances, rising interest rates and the concentration of the debt markets. In fact, he writes, “there’s no shortage of possible disruptors right now — the aftereffects of the midterm elections, tariffs on $200-plus billion of imported Chinese goods and the third interest rate hike in 2018 by the Federal Reserve, just to name a few.”

Rising Rates

Indeed from an interest rate perspective alone, CRE finance faces a headwind next year: simply put, the market is not prepared for the effects of a 3.5% 10-year Treasury on cap rates and commercial property valuations — let alone 4% or even 5%, according to Conway. “Properties purchased in the third quarter of 2018 assuming a 2.75% 10-year Treasury could justify a sub-6 percent cap rate but properties purchased in 2019 in a 3.5% to 4% 10-year Treasury rate environment cannot justify a price based on anything below a 7% cap rate,” he writes.

Technology Advances Into Finance

There is also the risk that technology may grow too advanced for regulators’ tastes, he also theorizes.

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Erika Morphy

Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.

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