What’s the Value of a Conference Today?
Notes from the 2014 CREFC Conference - As featured in The Registry: The Registry SF
I try to take
time to frequently attend commercial real estate conferences and events. Early
in my career, in the world before the internet, I looked at these conferences
as a way to gather concrete takeaways.
I would take furious notes of the overhead slide presentations and grab stacks
of industry handouts and market updates. Commercial real estate is an imperfect
market; oversized profits can flow to those with the better market knowledge.
When I came back
from these conferences without any new take-homes, I reassured myself that the
event was valuable anyway simply for the confirmation that I am still on top of
my game.
Now as an active
market participant with access to the internet and the plethora of industry
blogs and publications, takeaways don’t matter. Information is readily
available and these facts, tools and buzzwords wash over us all day long.
Absent the old concrete takeaways, real estate conferences and events can seem
like a waste of time and money.
Here’s my advice
on how to get value from commercial real estate conferences and events: Focus on the intangibles. Recognize that
you are part of a market, and markets are subject to moods, momentum and mass
manias. Go to the conference with the goal of divining these intangibles and
take notes to ponder and research afterward.
· Mood.
Warren Buffet has become wealthy and famous by assessing markets’ moods
and betting accordingly. He has shown that the most money can be made in times
of a market’s euphoria or a market’s panic. TAKE NOTES: Group the market
participants at your conference into classes; lenders, tenants, developers, etc.
Write down your opinion of their mood. You might want to keep these notes to
compare to your notes from next year’s conference.
· Momentum. Where
is the herd headed? What are the current fad investments? You may choose to run
elsewhere or join the herd. “Me too” investing can make money, if you can
control greed and get out before the bulk of the herd. TAKE NOTES: Collect the
names of active market participants and note how they are funded (I pay the
most attention if they are investing their own vs. OPM—other people’s money),
if they seem profitable and the breadth of their competition.
· Mass Manias. Divining the collective “groupthink” is
something best picked up at actual conferences where you can hear panel
interchanges and conversations before and after the sessions. Try to spot
anyone saying things like “new paradigm” or other examples of wishful thinking
and market blindness. Also notice if
major market players are getting distracted by “fighting the last war”; a
common mistake. TAKE NOTES: Write down
the questions that are on the industry’s collective mind. Questions are more
important than the answers. Your industry is asking these questions because
investors need to assume answers in order to make decisions and place bets. Spot
the consensus opinion to these topical questions. But, also try to spot the
important questions the industry is trying to ignore.
After the
conference, look at your notes, find the cited research to the facts that
interested you, and take time to come up with your own best answer to your
industries burning questions. Only by having your own take on the burning
issues of the time will you avoid falling into the groupthink that hurts many
investors.
Here are my
notes from the June 2014 Commercial Real Estate Finance Council’s annual conference
in New York. CREFC is a CMBS/Wall
Street dominated trade group that is making sincere outreaches to the portfolio
lending world. (We will see if the wolfs can dwell with the lambs).
· Mood. Cautiously
optimistic. CREFC’s world crashed, went to the ICU and is not long off of crutches.
Yet, I could spot certain patients positively skipping down the hospital
corridor.
· Momentum. A liquidity crisis
of too little debt capital has turned into a crisis of too much capital. CMBS,
banks, insurance companies, private/hedge funds lenders are all crying for
deals.
· Mass Manias. The commercial
real estate finance industry wants to believe these incredible good times of
low rates and increasing property values will last forever, but nagging
questions cloud this exuberance. These were:
1.
How
long will these artificially low interest rates continue?
2.
Is
commercial real estate in an asset bubble?
3.
Why
aren’t we seeing inflation as a result of the Central Banks’ massive increase
in money supply?
4.
Is
CMBS lending any different this time around? Will we make the same mistakes?
I took some time
to write down my take to these burning questions:
How long will
these artificially low interest rates continue?
Much longer than we think and much longer than is
good for our economy. We watch the Fed as if we live on an isolated
island. The Fed’s dropping of interest rates led to a devaluation of the dollar,
which in turn stimulated US exports and started a global currency war. Wars
always last longer than anyone would like. Over the last few months as the Fed
slowed down its QE bond buying, Asian Central Banks increased buying
dollars/T-Bills to cheapen their currencies and keep their export advantages. Thus
long-term rates stayed low when we all expected them to rise. Central Banks
collectively keeping the risk-free rate below real inflation is a hidden tax on
investors that has gone on too long. This is an unprecedented experiment, a
global distortion of financial markets. When governments distort a free market,
the market tends to break and become dependent on government interference.
Is commercial
real estate in an asset-bubble?
We are not in an asset-bubble; we are in a currency
dive.
The symptoms are the same but the
prognosis will be different. A classic asset bubble is caused by excess
investor exuberance directed towards a particular asset class. The bubble
bursts when investor capital moves elsewhere. This time around the central banks
are competitively printing money by buying bonds to devalue their currencies. The
result is across the board inflation of investment values. If you are just
watching the values of commercial real estate it feels the same as the last
boom. But cap rate-compression 10 years ago was caused by a very high velocity
of money. This time around the inflation of investment values is being caused
by a very high quantity of money. A flooding river valley may have the same symptom
as a rising sea level, but waiting for the sea to recede may be foolish. The
sea level has risen.
Why aren’t we
seeing inflation as a result of the Central Banks’ massive increase in money
supply?
We do have inflation; the CPI just measures the
wrong things. We
all know that inflation is too much money chasing too few goods. But we have to
recognize there are two kinds of money, investor dollars and consumer dollars. Quantitative
easing, QE, by the Central Banks pumped money into the pockets of only the
first group—investors. By buying bonds at inflated prices, the Fed keeps
interest rates low, raises the value of yield-producing assets and floods the
investor word with liquidity. We are seeing huge inflation as the result of too
many investor dollars chasing a limited supply of yield-producing investments. The
stock market has roughly doubled in value since the crash, so has the value of a
San Francisco apartment and Iowa farm land. Consumer dollars come from wages. Do
we have a scarcity of workers? Quite the opposite, due to globalization,
robotization and virtualization. The CPI largely measures a basket of consumer
goods and services. Do we have too many consumer dollars chasing that package
of tube socks at Walmart? No, we have too many tube socks chasing that scarce
consumer dollar.
Is CMBS lending
any different this time around?
Maybe not: But the participants, especially the
borrowers, are “once-burned” and not as stupid as last time. At the 2014 CREFC
conference there were many market participants placing the current CMBS marketplace
on the trajectory of the last cycle. The consensus: We are around the 2004
level of exuberance and underwriting practices. Competitive pressures are lowering
underwriting standards and forcing B-Piece buyers to forgo kick-outs in bidding
on mortgage pools. Profit margins are thin. There are twice as many conduits as
are likely to survive long-term.
CREFC’s
Borrowers-Panel was made up of mega borrowers, Shorenstein, Kushner, SL Green
and Morgan Stanley Real Estate. These borrower’s biggest complaint is still
CMBS loan servicing. CMBS servicing is sold during securitization after the
loans are closed and pooled. Borrowers pick their CMBS originator but must take
the servicer who is the lowest bidder for the pool containing their loan. The
consensus of the borrowers’ panel was that there is nothing a borrower can do
about it.
This is not
true! This time around, some local sub-servicers, working with the largest
master servicers, have created a better business model to help solve some of
the most important post-closing CMBS servicing problems such as new tenant
lease approvals, loan assumptions and reserve releases. Selected companies such
as Newmark Realty Capital now have Primary Servicing Agreements with the five
primary master servicers who make up over 90 percent of total CMBS Primary
Servicing market share. To achieve these agreements, Newmark annually obtains
an S&P Primary Servicer Rating by demonstrating its performance and procedures
in servicing +$7 billion in commercial loan servicing. CMBS borrowers do not
have to be subject to the non-response of the master and special servicers when
many of the decisions are delegated to the local primary servicer like Newmark.
If your deal
needs a CMBS execution, Newmark can now take your deal to enough conduits to
create true competition, achieve the best rate and terms for your loan and yet
retain the primary servicing role before and after securitization. For example,
as both the broker and primary servicer of your CMBS loan, if you need a lease
approval or loan assumption, you call me, and Newmark’s servicing team will make
the recommendation to the Master and/or Special Servicer and push for a
resolution of your servicing request in a timely fashion. Yes, most borrowers
prefer a life company execution, but if you need a CMBS loan, there are
alternatives to the horror stories put forth by the CREFC Borrower’s Panel.
