Page 4
— Office Properties Quarterly — October 2015
Regulatory
T
he Dodd-Frank Wall Street
Reform and Consumer Pro-
tection Act was passed in
July 2010 and “represents
the most comprehensive
financial regulatory reform mea-
sures taken since the Great Depres-
sion,” according to The Dodd-Frank
Act: A Cheat Sheet. This article
will explore three
effects the act has
had on commercial
real estate in Den-
ver as they relate
to the financial
services sector –
lending, employ-
ment and banking.
Downtown Den-
ver’s office market
has seen impres-
sive activity in
recent years, and
there is much
to suggest these
positive trends
will continue. With
25.8 million square
feet of existing
office space and
an additional 1.8
million sf of office
space under con-
struction, Denver
is experiencing
unprecedented
growth.
One of Denver’s
largest active tenant bases is the
financial services sector. Financial
services is a dynamic industry that
encompasses a range of businesses,
including but not limited to bank-
ing, mortgage, credit card, insurance
and investment funds. In fact, Den-
ver’s 17th Street is considered the
“Wall Street of the West,” due to the
high concentration of financial ser-
vices companies.
As demonstrated in the first fig-
ure, between second-quarter 2014
and second-quarter 2015, financial
services and institutional lender
tenants accounted for 14 percent of
the total space leased during this
time in Denver. This is equivalent
to more than 1.2 million sf and rep-
resents Denver’s largest sector for
office leasing activity in the past
year, according to CBRE research.
Specifically in the downtown sub-
market, financial services and insti-
tutional lending companies occupy
25 percent of Class A and AA office
space, second only to the energy
sector.
The financial services industry
largely is impacted by government
regulations and compliance. Since
the passing of the Dodd-Frank Act,
these regulations have increased.
Proponents of the Dodd-Frank Act
lauded it as “landmark legislation
that will reduce the likelihood and
magnitude of future financial pan-
ics, end taxpayer bailouts of Wall
Street and enhance consumer
protection,” according to Randall
Guynn in “The Financial Panic
of 2008 and Financial Regulatory
Reform.”
Critics predicted that the stricter
lending laws would reduce capital,
stifle employment and quicken
decline. Five years since the initial
passing, the Dodd-Frank regulations
have impacted Denver’s financial
services sector regarding lending,
employment and banking, each of
which has implications to a com-
pany’s real estate strategy.
First, the regulations implemented
impacted lending by imposing capi-
tal requirements on banks involved
in acquisition and development.
According to The Heritage Founda-
tion, the cornerstone of the Dodd-
Frank Act is a lender obligation to
determine that a borrower has the
ability to repay the loan.
This shift of accountability “pre-
sumes that consumers are incapa-
ble of acting in their own interests,”
said Diane Katz in “Dodd-Frank
Mortgage Rules Unleash Predatory
Regulators.”
Because of this, credit is much
less available to borrowers, even for
those with excellent credit scores.
What does this mean for commer-
cial real estate? Banks are making
fewer loans, thus doing less busi-
ness, which is impacting their bot-
tom line and has ramifications for
everything from hiring to office
space.
Second, with regard to employ-
ment, some speculated that the
newly imposed regulations would
have a positive impact on job cre-
ation due to increased compliance
requirements.
“These include costs of manda-
tory reporting under rules from the
new Office of Financial Research
and the Consumer Financial Protec-
tion Bureau; costs of creating and
retaining records to meet future
audit and compliance requirements;
costs of legal counsel, accountants,
and other experts for advice on
compliance and applicability of reg-
ulations; increased costs associated
with new rules for credit agency
reports and securitization require-
ments; and many others,” said Paul
Bent in “Dodd-Frank: What about
Leasing?”
In other words, more employees
would be needed to ensure finan-
cial institutions are complying with
new regulations.
Critics worried that the limited
lending as a result of restrictions
would lead to more job losses. This
is important for corporate real
estate strategy because if employ-
ment was significantly declining,
many organizations would be look-
ing to reduce their square footage
or move to less expensive areas.
Thankfully in Denver, CBRE’s
research reports the market has
seen an increase in financial servic-
es employment growth since Dodd-
Frank passed in 2010. As of June,
year-over-year growth in financial
services was 1.4 percent. Currently,
nearly 130,000 people work in the
industry and this is edging closer to
the prerecession peak of more than
135,000 financial services employ-
ees.
Finally, small banks with less
capital to fund the cost of compli-
ance may be particularly vulnerable
to the effects of this act. The risk
for small-bank failure is height-
ened due to costly implementa-
tion of new regulations, which also
restricts new bank formation and
expansion.
“Almost no new community banks
have been formed in the past few
years,” said Bill Floersch, former
CEO of ABN Amro Clearing Ameri-
cas. “This is in part due to stricter
requirements and reduced profit
potential.”
The claim that more banks failed
due to the passing of Dodd-Frank
is complicated because research
shows that the number of banks
has been steadily declining since
long before the Dodd-Frank Act,
according to a first-quarter 2015
FDIC report.
While traditional banks have
experienced a decline and this
affected their demand for office
space, new nontraditional lenders
are filling the void and pushing the
market toward surpassing prereces-
sion levels. The doors opened by
Dodd-Frank for these new lenders
may be helping financial services
absorb additional space and employ
more people in the wake of the
financial crisis.
In conclusion, a review of the
Dodd-Frank Act reveals both nega-
tive and positive implications for
commercial real estate as it relates
to the financial services industry,
and it is possible that the full effect
of the legislation will not be recog-
nized for several more years.
s
Hank Cox
Executive vice
president, CBRE,
Denver
Mark Floersch
Senior associate,
CBRE, Denver
The doors opened by
Dodd-Frank for these
new lenders may
be helping financial
services absorb
additional space and
employ more people
in the wake of the
financial crisis.
