Cityscape at night

Since Trump’s election, the dollar has risen in value. Although it means our money will buy more overseas, it translates to inflation for Americans at home.

At the same time, defaults are on the rise in a key part of the commercial real estate debt market. In the midst of this, on Christmas Eve, a regulation takes effect that will tighten up the financial markets in a way that could kick off a disaster.

This nightmare before Christmas set of new rules is part of the Dodd-Frank regulatory overhaul. It will require institutions that issue commercial mortgage-backed securities to hold onto at least 5 percent of the securities that they create. Analysts are saying it will make borrowing on commercial real estate both more complicated and more expensive.

This is particularly bad timing because ten-year notes are coming due and it does not look pretty. In spite of rising property values, it is believed that borrowers will be unable to pay off roughly 40 percent of the loans coming due next year. This is especially bad news for suburban office buildings and shops.

Although Trump has vowed to repeal Dodd-Frank, he won’t be sworn in until nearly a month after the regulation takes effect. Even if he makes it a high priority, it is won’t be repealed the day he gets sworn in. With the way politics work, the reality is that the Trump administration is unlikely to repeal it entirely. A much more likely scenario is that bits and pieces of it will be blunted, but old rules seem never die. They usually just live on in a stunted form.

Some experts are predicting “runaway inflation and high interest rates.” At the same time, apartment vacancies are currently up as well, adding yet more pressure to an already bad picture. Higher interest rates promise to just make this piece of the puzzle worse as well.

There is a small silver lining. Insurance companies, banks and other financial firms have picked up some of the slack. In the past year or so, more than fifty percent of these ten year notes that came due were refinanced by these parties.

Over the past seven years, the commercial property market has steadily expanded. At best, the expansion will likely slow. A worst case scenario could involve a shrinking commercial market. Sudden and dramatic change is inevitably painful. The question is how painful?