This past month, the Blooma team took to NYC to attend the CRE Finance Council’s (CREFC) Capital Markets conference on October 26th. In addition to a keynote address from Steve Forbes himself, the event featured four additional sessions covering everything from housing, stock markets, refinancing, servicing and more. Most notably was the focus on strategies and learnings to prepare for what is likely to be a ‘choppy’ few quarters ahead of us. “The commercial real estate finance industry is at a critical point in time as we face continued economic uncertainty, rising rates, the upcoming midterm elections, and an inflationary environment,” said Lisa Pendergast, Executive Director, CREFC.
Considering that the Fed raised interest rates for the fourth time just a week later puts much of what was said at the conference in a new light – most of it unsurprising, but certainly prophetic.
Here are a few takeaways, themes and insights from the event:
More than 500 people migrated to the Hilton at Midtown in NYC making this one of the most well attended CREFC events since the start of the pandemic.
Housing prices have risen by roughly 40%, severely impacting demand and affordability. As one panelist stated, the issue has reached ‘crisis levels’. Naturally, we’re seeing much higher rates of rentals compared to ownership making this a core component of real estate portfolios moving forward. Steep interest rate hikes have slowed down SFR acquisition putting pressure on demand (even if rents continue to decrease in the near term). What to do? Panelists were largely in agreement that creating new supply (low-income single family housing, multifamily, or SFR) is critical.
CMBS market issuance through labor day was similar to previous years but has slowed down as of Q3-Q4. As reported by Commercial Mortgage, there are less than a dozen remaining deals for Q4 and many CRE CLOs are being pushed to 2023. Additionally, a majority of warehouse loans will remain warehoused until 2023.
With Fed actions and looming uncertainty in the market, we’re left waiting for stability and visibility into future moves. CMBS Loans are being originated in a largely ambiguous environment. Given the time period needed from origination to securitization, this will mean that Q1 CMBS issuance will likely be slow.
Panelists in this session (all who are fund managers responsible for CRE loan origination) stated that they are still actively lending, however they’re seeing lower LTV’s, decreased pipeline, greater friction in closing deals. Most notably, are the challenges seen in acquiring financing on the debt due in large part to low cap rates and high values. All were in agreement that having multiple sources will be extremely important (CRE CLOs, bank warehouse facilities, nonbanks — including insurance companies, and so on).
The day’s event closed with insights and predictions for what lies ahead of us: a mild recession and barely positive GDP growth in 2023. Despite all of the turmoil in the markets, it’s important to note a major trend of the day was cautious optimism. Some even pointed out that this painful period is not only expected, but healthy and necessary for the CRE market after nearly a decade of low interest rates, cheap money, etc. All agreed that the path forward is stability in the rate environment (albeit higher) and a reset of expectations on the borrower side. Personal opinions aside, there’s some comfort in coming back to the immutable laws of physics to quell anxious fears.
You know what they say, “what goes up must come down”, and in this case, let’s hope not for long.