The cheery mood of the CRE Finance Council’s annual conference in Miami Beach carried over last night into a two-hour cocktail reception followed by a variety of late night industry parties.
The sentiment is that the US real estate markets are strong, but inevitably some have begun to vocalize concerns about troubling trends in the industry, avoiding painting a picture that has at times seemed a bit too rosy.
“I see no difference between the behavior now and five years ago,” one delegate said. “We’ve learned nothing.”
Though generally being viewed as a “net win” by conference delegates, the freakish dip in oil prices this week served as just one reminder that markets can change both quickly and unexpectedly.
The concerns rippling through the real estate markets, albeit more gradual, include increasing leverage on deals; the increased bifurcation of loans; the deterioration of credit standards; inflated property values; generally riskier behavior from lenders reaching for yield amid increased competition; and potential interest rate spikes.
“Will we forget how to survive in an interest rate environment that’s more normal?” asked one attendee. “We forget to live in a world where Libor equals six.”
Delegates and panelists echoed some of the sentiments from a pre-conference CREFC survey of 77 CRE organizations. About three-quarters of the organizations predicted that underwriting standards would be more aggressive in 2015; 68% said “yes” to having concerns about credit quality for multifamily loans; and more than 80% believed leverage will increase across deals.
Most attendees said that CMBS issuance in 2015 will break the triple-digit mark (in line with the 70% of survey participants who said the total will be between $100 and $125bn). Some believe issuance will go well beyond that, but others voiced concerns about the quality of the loans, with one panelist even calling CMBS “a good place to put your junk.” With the number of CMBS originators hovering in the 40 range, another panelist called the market “over-banked.”
In addition to the long list of concerns playing out in the market, some delegates were just as concerned about an unforeseen catastrophe — probably one that no one can predict.
“Is there something out there lurking?” one attendee asked. But, he did add, “People are being more reflective now. There’s a healthy sense of anxiety.”
Potential doom and gloom scenarios were raised and delegates were well aware that the real estate markets are both cyclical and unpredictable. But on the whole the consensus held that the US real estate market is in a great place — at least for now.
“The US economy has recovered and has made itself into real estate fundamentals,” said Mark Zytko, co-founder of portfolio lender Mesa West Capital. “Right now it feels good.”
Zytko acknowledged that the CMBS market has become increasingly competitive, but argued that in the non-CMBS arena increased competition is in check because there are more deals. He also said borrowers are behaving more responsibly, in many cases refusing the extreme high leverage that was sought pre-recession.
In a world that more than one conference-goer referred to as “a mess,” some non-US natives respectfully balked at the credit quality and underwriting concerns attendees alluded to during the conference.
“We’d love to have some of the quality issues you have,” quipped Andrew Petersen, a London-based finance partner with law firm K&L Gates.