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.