Article : CommercialFREE SIGNUP

Fed Putting More emphasis on Commercial Real Estate in 2017 Stress Test

The real estate industry is affected by the significant demographic trends and the technological advancements. The growing urbanization, lifestyle patterns and the permanency of baby boomers also influence the real estate market. Moreover, the regulatory developments in the country with the macroeconomic condition will impact the profitability. Companies will gain competitive advantage and will be able to drive top or bottom line. 2016 proves to be a resilient year for the real estate commercial markets. The forecast may burst the bubble because the recent elections have directly influenced the real estate markets. The industry is facing possible changes in tax structures and regulations, which will lead to volatility and uncertainty by paving the way for new opportunities.

How the growth of the real estate market is possible?

According to the real estate patterns, the US market landscape will continue to get strong. It is due to the increased investors and the high transactions. The US economy continues to grow broader, there will be more availability of jobs, and the employment gains will become strong. Most of the people are surprised that economy of US is not growing, so it needs recovery. However, US Federal Reserve clears that US real estate market is stable and the rate of federal fund will get higher.


Commercial real estate Stress test

Recently, you might have noticed that Federal Reserve is focusing more on the commercial real estate stress test. The stress test will be able to determine that how well US banks are performing and facing the financial crisis. This Friday, Federal has released publically a broad description that gave lenders time limit until April 5 and asked them to submit the results accordingly. The results or the report will be published in June. The scenarios explained and in the test were presented on the same day when President Donald Trump issued the executive order to review all the banking law. This will help to recover the crisis faced by the US in 2008, which means that this process requires stress test for the tough financial regulations. The examination of year 2017shows a sudden unemployment rate which soars with stocks plunging. The global economies are facing sharp declines in the real estate prices because of the US downturn. Fed told that the low-interest rates had pushed various banks for the long-term investment, which will yield higher. The long-term investment includes real estate and multi-housing planning.



Stay concerned about the industry exposure

Bank regulators are progressing and stay concerned about industry exposure to the loans.It is best to remain worried about banks which have untied underwriting standards. CRE identified the risk and informed the office of the controller of currency. The commercial real estate exposure which lies with regional and community banks will not be reviewed with the stress test.

Stress test

Banks need to prove that they can withstand the hypothetical downturn otherwise Fed will freeze the payouts to investors, or it might halt the business investment plans until the capital boosts. Fed performed the first stress test when the financial crisis occurred in 2008. The test ensures that banks own enough capital and can bear the expenses shortly. The generated report gave investors confidence about the financial state of the bank. Later on, the test was again implemented in 2010 which also prevented a financial meltdown and ensures the taxpayer bailouts. The Republicans in Congress and the President Donald Trump wants to change the rule. However this year only 13 banks were listed for the full stress test. The test helps to keep the controls and planning. Stress test proves to be burdensome and too expensive for the smaller banks.

Banks qualified for full exam

Following are the biggest banks that quality for the full are: 

  • JPMorgan Chase and Co 
  •  Bank of America 
  •  Citi Group Inc. 
  • Wells Fargo
  • Goldman Sachs Group 
  •  Morgan Stanley 
  •  US Bancorp 
  •  Capital One 
  • Financial Corp 
  • PNC Financial Services 
  • Bank of New York Mellon 
  • State Street Corp 
  •  US divisions of HSBC Holding 
  • Toronto-Dominion Bank 
  •  Expectations of investors

Investors have high expectations and desiring to have a big move in a Fed`s next meeting. The Federal Reserve plans will inevitably raise the interest rates, and the suggestions are entertained by the bank officials to tighten the monetary policy. This will help the property values to reach the levels when it was in 2008. The renewed feeling of confidence is helping investors for the strategic planning. The stress test will lower the tax rates and lifts the regulatory barriers by triggering the CRE growth in the long-term investment solution. The interest rates will rise, and the industry will absorb the adverse impact soon. However, Fed will indeed influence the rates throughout economy including credit cards, mortgages and business loans. Raising rates will slow and stave off high inflation. As a result, 2017 will be news making year in the real estate market.

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