‘June Gloom’ has taken on a whole new meaning in New York City in the wake of the Canadian wildfires. Still yet, a blanket of smoke and concerning AQI readings didn’t stop more than 1300 CRE professionals from congregating at the Marriott Marquis for CREFC’s Annual Meeting. To shamelessly grab at the low hanging fruit: the sentiment inside the event center looked eerily similar to the apocalyptic backdrop outdoors. But it’s not all bad news – and probably more accurate to say that the energy was ‘anxious’ versus outright gloomy.
Here are a few key takeaways from the event:
1. Watching and Waiting: A Recipe for Anxiety
After what has proven to be a whirlwind first half of 2023, it’s fair to say that people are anxiously awaiting the fallout. Will there be a recession? According to Chief Economist of BentallGreenOak, Ryan Severino, ‘a recession is not inevitable’, but that’s certainly not stopping anyone from worrying about it. Will there continue to be more interest rate hikes after this brief pause? What will the future regulatory environment look like in the wake of the banking failures earlier this year? Needless to say, there are lots of big questions whose answers carry large implications – and are also largely uncertain for the time being.
2. Keeping Score: Who wins in a down market?
While market conditions are no doubt tough, it’s not a bad time to be a lender. When LTVs go up from 65% to 85%, lenders might be okay with that – so long as it stops there. It’s much tougher to be an investor right now, watching your equity get squashed. While reports show that originations have slowed to a crawl in the current environment, for many, deals are still happening (though a good portion of those are cash-in and mostly refi’s).
3. “Marcia, Marcia, Marcia”
Office. It’s all anyone can talk about. The sentiment at the event is that it “feels like Office…and everything else” right now. The Cliff Notes: Class A will likely succeed while the outcome for Class B and C is less certain. While some felt optimistic, many people are feeling that it’s going to be years before we truly understand how office space is going to be used in the future.
3a. A brief interlude on The Great Office Debate and WFH…
Martha Stewart has entered the chat. Adding fuel to the fire, the lifestyle icon has drawn a line in the sand, plainly stating that ‘you can’t possibly get everything done’ working remotely (even in a hybrid setting). Some CREFC attendees, on the other hand, shared opinions in stark contrast to this point of view. Not only is WFH not impeding productivity, the data is showing that we are MORE productive today (above trend) and that productivity trend has started to plummet with increased rates of return to office of late. Martha, Martha, Martha… 😉
4. Asset Classes and Liabilities
In contrast to the fraught conversation around office buildings, it appears that Industrial is CRE’s new favorite child, with eCommerce still showing as elevated. With respect to retail, consumers remain resilient – demonstrating a complementary relationship between the two asset classes. Where multifamily is concerned, the housing shortage may not be as drastic as it seems. It seems households are increasing at a slightly higher rate than supply is. The explanation for this disparity can be found in the number of people per household unit, which is going down putting a strain on the overall supply. It’s not increasing population vs. supply, but increasing households vs. supply.
Additionally, where there is rent growth, there is also expense growth. As cash flows have become more constrained, repairs and maintenance are falling off as priorities. Another factor to contribute to the already elevated lender anxieties.
5. Shifting Strategy to Address Market Concerns
There is a marked increase in focus on portfolio monitoring (hint hint: do I sense a need for Blooma?), and increasing analytical rigor in the deal screening process (resulting in a lengthier process overall). In addition to process-based changes, there was also talk of increased scrutiny on borrower quality and the impact that this can ultimately have on the outcome of a loan.
Suffice it to say that while the mood of the CREFC crowd was understandably apprehensive for what’s to come, there was no shortage of expertly placed optimism in seeking out the opportunity in the chaos. In the name of getting things done, it was fitting that featured speaker, Mel Robbins, took to the stage to share her simple, yet effective, 5 second rule (no, not the one for dropped food). If you’ve not heard of it, you can watch her TED Talk here, but the gist is: when you find yourself getting distracted from what needs to be done, or simply making excuses for why you can’t… count down from 5 and just do it. It sounds simple, but as Mel says, it’s not always easy.
As the smoke clears from NYC – and the dust settles on another incredibly eventful quarter – we have fresh air and sunshine to look forward to, if for no other reason than a salient reminder that ‘this too shall pass’.
Rachel Gammons started her career as an underwriting analyst at Greystone, eventually taking the lead as an Underwriter for their agency lending platform. Today, she is a Client Engagement Director at Blooma and helps users solve for business challenges in real time.