|
|
|
|
9/15/22
|
By Steve Bloom
Against the murky backdrop of rising interest rates and perhaps a recession, about 850 commercial mortgage bankers and brokers descended upon Aria Resort & Casino in Las Vegas Sept 7 through 9th for the 25th Annual Western States CREF Conference hosted by the California Mortgage Bankers Association (California MBA). It is always great at this event seeing contacts and clients I have known for a long time, as well as meeting new people that become friends and clients. Also, California MBA, led by Susan Milazzo, CEO of California MBA, puts on a highly-informative, fun, premier networking event each year that is always worth attending.
“Celebrating 25 years, the California MBA is extremely proud of our annual Western States CREF Conference and the valuable information and networking opportunities that the event brings to the industry each year,” noted Milazzo, commenting about the event. “Support for conferences such as this help fund our association’s advocacy efforts so we can continue our strong representation of the vital role the real estate industry plays in our state’s overall economy.”
While the attendance was up from about 600 last year when the pandemic was still an attendance factor, I thought the mood about today's lending climate was down a bit. From the many conversations I had at the event, I heard repeatedly about deals going sideways because of the rising cost of debt that led many to die entirely while others are being reworked in an attempt to save them. Of course, this would be expected with the recent rise in interest rates and other issues such as inflation and a recession (depending on your definition) all thrown in the mix.
But while the mood was more somber than last year, that is not to say it was not overall still upbeat, because it was. There is so much capital out there looking for real estate and the industry is so fragmented with so many owners having financing needs at any given time, that I also heard many stories about deals just closed, hence all the free meals and drinks I was treated to. Thank you very much. That also goes for all the party hosts including Axos Bank, Slatt Capital, Archway Capital, Sabal's at TopGolf and of course the Partner Engineering & Science party at Omnia. Much appreciated!!
Now to the program. There were panels covering: Marketing Strategies; Structured Finance; Technology; and Permanent Debt with Gary Bechtel from Red Oak, who served at this year's Conference Chair, directing much of the program.
Much of these panel discussions, not surprisingly, involved reactions to and changes caused by rising interest rates, but there was also a ton of other valuable information shared by the panelists. The Marketing Strategies panel was composed of: Tony Kaufmann, Director, Gantry; Jack Alvarez, Associate Director, Lument; Dale Holzer, Managing Director, Greystone; and Pasha Johnson, Principal, PSRS. All of these panelists are loan originators and they chatted about marketing, sales, branding and the technology they use to differentiate themselves from the competition.
The Structured Finance Panel was made up of five private capital providers: Gary Bechtel, CEO, Red Oak Capital Holdings; Bobby Khorshidi, President & CEO, Archway Capital; Carrie Nikols, CEO, Nikols Mortgage Fund, LLC; Brent Truscott, Partner, Bloomfield Capital; and Cade VanderBroek, Managing Director – West Coast Originations, Money360. The focus of this conversation was on: reviewing capital allocations for the year; unique loan closings; and year-over-year programmatic changes in an environment where there is an abundance of capital chasing yield.
The Technology in the Commercial Real Estate Finance Industry panel was made up of: Jason Berry, COO, Slatt Capital; Stephen Butler, CEO, GoDocs; Mark Prior, CEO, Qualtik; Marc Rutzen, Chief Product Officer, Walker & Dunlop; and John Vecchione, VP of Risk Analytics, CoStar.
The Permanent Debt Panel consisted of providers of long-term capital from a bank, a credit union, a life company and a conduit lender. They discussed the state of the market today, including changes to underwriting standards, rate locks and target deal profiles, as well as the effects of an increasing rate environment. The panel consisted of: Tom Dao, Principal, Gantry; Ellen Comeaux, SVP, Commercial Division Leader, TIAA Bank; David Moehring, VP, Commercial Mortgage Division, Union Bank; and Eric Smith, Managing Director, Wells Fargo.
In addition to the panels, there were a couple of key individual presentations. One was the rather interesting keynote speech and discussion by Nolan Bushnell, the founder of Atari, which got us thinking about many high-level techie things and the way the world has changed so much in a few decades.
Mary Ludgin Ph.D., Managing Director, Head of Global Research for Heitman |
 |
|
A highlight of the program was the extremely informative annual presentation by Mary Ludgin Ph.D., Managing Director, Head of Global Research for Heitman, the huge international real estate firm out of Chicago. Her fast-paced discussion went through Heitman's global overview and as far as economic outlook goes, she said it is tilted to the downside with a likely, though not certain, recession on the horizon, if we aren't in one already.
Dr. Ludgin then went through a property sector overview, first touching on the two out- of-favor sectors - retail and office. Regarding the office sector, Ludgin noted the issue of growing vacancies caused by people not wanting to commute as much anymore and how most companies are realizing people won't be coming back to the office five days a week anymore. Within the office sector, she said suburbs have been doing better than the downtowns, but new class A trophy buildings are doing the best. This led into her comments about the trend to look at converting obsolete offices to other uses such as residential or lab space or completely leveling an office building to use the raw land for multifamily or newfangled industrial.
Next, Ludgin discussed the retail sector, where she noted that retail is in better shape than just before the pandemic. The thing that is really dragging the sector down are older centers, mainly the C Class malls, which she said "take a long time to die." But she pointed out that physical stores have become an integral part of the e-commerce value chain as many orders are picked up at stores which then often lead to additional in-store purchases and traffic to other stores at the center.
While industrial is still strong, she said the market is softening, most notably with Amazon announcing a pullback in space leasing. And as Amazon goes, so goes the market, with an estimated 90% of recent industrial leasing by tenants involved with ecommerce. The fear she noted is overestimating leasing demand given that in the next recession or slowdown there probably won't be the same level of consumer activity as we now have, given all of the government money that has been shelled out.
As for the Apartment sector, Dr. Ludgin noted that the huge rent growth we saw recently has been easing, but it has led to seven states looking at enacting very harmful rent control laws. Other property sectors she touched on as compelling investments are storage and medical offices, while real estate geared towards the needs of seniors has been surprisingly disappointing and they are hoping for a repricing in the sector.
(L - R): Hessam Nadji, CEO of Marcus & Millichap; Gary Bechtel, CEO, Red Oak Capital Holdings |
|
|
Another annual highlight of the conference is the presentation by Hessam Nadji, CEO of Marcus & Millichap, followed by his discussion with Gary Bechtel, CEO of Red Oak Financial. This year's presentation did not disappoint.
Perhaps the most pointed slide of the entire conference was Hessam's image that contained pics of toilet paper and hand sanitizer, while he noted that after the past two years, there are some things that we will never look at in the same way as before. That in many cases, the world has changed permanently.
Other key points Hessam made on his own and then in the discussion with Gary were:
The unemployment rate in the US is beyond full employment, which used to be thought of as 5%, but now we are at just 3.7%. Interest rates, despite the recent sharp rise that is causing a bunch of turmoil, are still below the long-term average and quite a bit below highs we have seen in the past. Also, highlighting the positive, they reminded us that the returns and the scale attainable in commercial real estate still give it advantages as an investment.
For most property types except office, vacancy rates are decreasing and prices are increasing, though with recent interest rate hikes, they may have flattened. Even hotels, which they noted are mostly owned by small investors, have bounced back from the pandemic lows.
On the downside, they discussed the challenge of keeping rent up with inflation and how the rising operating costs could hurt values. This makes the "story behind the asset" as Hessam called it, of utmost importance when selling or financing a property. Perhaps as a result of that, they did say they have seen more 1031 exchanges from apartments to other less management intensive sectors like storage.
When I caught up with Hessam afterwards, I asked him about Marcus & Millihcap's hiring needs and what they are doing about it. He told me it has been an issue and that the company would like to hire more, but it has been a challenge. They have had to look at the traditional draw and commission model to see how it could be changed to better compete in today's labor climate. He pointed out that they are experiencing this across the US evenly, no matter which region.
To wrap up my thoughts on the event, I think that while it seems the issues and challenges to closing deals may have increased somewhat since of late, I came away from the conference confident that there is an abundance of opportunities for deals, capital and employment in the commercial real estate lending world.
Steven Bloom
|
|
 Return to the Archive page
|
|
|
|
|
|
Printer-friendly Version
Email an Associate