Keynote speaker Peter Sotoloff, co-founder of Mack Real Estate Credit Strategies, and other panelists examine where we are in the commercial real estate cycle — and when it will come to an end
At the kickoff to the Real Estate Capital Forum 2015, Sotoloff noted some similarities between the present day and the peak of the last commercial real estate cycle: Prices are high. There is abundant equity and debt capital flow into commercial real estate.
“And this guy is one of those selling it,” Sotoloff said, a picture of Equity Residential’s Sam Zell filling a slide behind him.
Zell’s recent sale of a $5.4 billion portfolio of multifamily properties to Starwood Property Trust has led some to wonder when some market “hiccup” — or worse — may be coming.
But, Sotoloff noted, fundamentals remain solid compared to the peak of the least cycle, “and there is nothing on the horizon that looks like it could be the facilitator of the next downturn.”
Zell may just be thinking, “If people want to buy things, I’ll take the money and save it for a rainy day,” Sotoloff said.
Like Sotoloff, panelists during the first discussion of the day indicated that there is nothing occurring in the CRE lending world that is cause for any grave concern. Yes, leverage is creeping up, there are more requests for IO (Interest Only) loans, and lenders are feeling more pressure on pricing.
“We are seeing more requests for IO and also seeing a push on most of the underwriting parameters,” said Gary Dinka, a director with MetLife’s debt strategies group.
But, he added, “It’s nothing that is not manageable on senior positions.” He and other panelists noted that the heavier regulation on the banks — and the inability of CMBS to fully bounce back — have created a void that is not yet filled.
“There’s plenty of deals and business out there for everybody,” he said.
The gap has in part been filled by the mortgage REITs and private debt funds — a topic that will be examined more closely throughout the day — and a seemingly self-imposed sense of discipline, absent during the last crash and now allegedly at play.
“The regulatory impact has had a huge impact on the banks and their ability to make loans, so deal flow has never been better,” said Robert Hellman, managing director with Pembrook Capital Management. “But that makes it much more difficult because we have to sift through a lot more deals — and a lot out there that just doesn’t qualify.”
It will be “interesting to see what happens” as private sources of capital come in and scoop up that business, he noted. Will this bring the end of the current cycle? One panelist noted that we are on year six of of what could be a seven-year cycle.
Sotoloff would go on to ask about the “wildcard,” aka the re-normalization of interest rates: “What stresses does that put on borrowers looking to hit return targets when, maybe, the economy isn’t quite so rosy?”
Ted Norman, head of mortgage originations with TIAA-CREF, had other worries: “Interest rates moving up against the backdrop of an improving economy is not bad thing… history shows that.
“What keeps us up is the unknown geopolitical event; there are a lot of planes flying around Syria, for instance, and that is unrelated to our business… something like that is probably what will cause the [end] of this market.”