Magazine article Mortgage Banking

Deloitte: ERM Approach Cuts CRE Risks

Magazine article Mortgage Banking

Deloitte: ERM Approach Cuts CRE Risks

Article excerpt

The commercial real estate (CRE) market contains risks that require an enterprisewide approach toward risk management, according to Deloitte & Touche LLP, New York.

"Risks associated with capital markets, liquidity, development and real estate demand have shown how closely linked they are," said Bob O'Brien, partner at Deloitte & Touche, in a recent webcast. "Diversification among geography, property types and customer tenant mix really did not help much. The speed of onset, looking back over the past two years--the decline of real estate from its peak to where it stood eight or nine months ago--was incredibly fast [and] difficult for management boards and investors to react."

"There are those who are charged with risk management through periodic risk assessments--internal audits, compliance--but there is not a lot of coordination between the two," said Glenn Yauch, principal at Deloitte & Touche.

O'Brien said a commercial real estate organization faces uncertainties associated with capital markets, real estate demand, development prospects, inflation and interest rates in the current environment. He said the ability to manage those risks affects businesses and the cost of business.

"It's not only public companies," O'Brien said. "Throughout the industry, investors are asking about disclosure not only of risk, but disclosure with respect to management of those risks."

Carl Groth, director of regulatory capital and capital markets consulting at Deloitte & Touche, said an enterprise risk management (ERM) model consists of risk oversight--a risk-governance structure from top to bottom--with the board of directors and chief executive officer (CEO) driving the process and a chief risk officer (CRO) apprising the CEO of current procedures.

"The most important part of the structure is the engagement of the board in its risk-oversight role," Groth said. "The second layer is the CRO or, in many cases the equivalent, and the management-risk committee provides the management oversight and drives ERM."

O'Brien said conversations with industry participants generally showed that real estate "is relatively immature and less sophisticated in designing and implementing an integrated enterprisewide risk-management system."

He added, however, that ratings agencies--which have an impact on capital market access and cost of capital through their ratings--incorporated an assessment of ERM into their ratings process.

"Generally, the individual risks are recognized and understood, and savvy real estate players know how to offload, mitigate or manage many of those risks--but they do so in silos," O'Brien said. …

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