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California CRE market could face significant changes

Some financial experts believe that developing conditions in the commercial real estate market might also prompt an evolution in lending practices. Small banks, which had played a major role in CRE financing, could soon face increased regulatory scrutiny amidst demands to make their underwriting standards more stringent.

Morgan Stanley has reported that the Office of the Comptroller of the Currency has become increasingly wary of banks that maintain heightened levels of exposure to CRE lending. To respond to such concerns, some financial institutions may cut back such lending practices. Others might be forced to focus more heavily on areas like mergers and acquisitions.

The Morgan Stanley analysts say the situation is most concerning for smaller banks, or those whose assets are valued between $1 billion and $10 billion. Smaller markets could also see changes as valuations decrease after small banks limit their lending practices. As of June 2016, banks were responsible for about 52 percent of commercial real estate loan originations. This standsin contrast to the fact that CRE prices seem to have plateaued.

Changing market conditions can transform investor outlooks and opinions. In some cases, they may even prompt real estate litigation over deals that were formerly satisfactory. Because circumstances like regulatory action and financial climates are impossible to control, investors and developers who want to participate in these types of transactions need to protect themselves with agreements that help them reach their goals safely. This may become more possible with the assistance of a real estate attorney who has substantial experience counseling clients on such matters.

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