Real estate won’t be the cause of the next economic downtown, but there are surely forces impacting the commercial real estate market and contributing to the shifting economic winds. That’s just one of the topics that a standing room crowd of commercial real estate professionals discussed at the John B. Levy & Company Investors Conference held recently in Richmond.
Held at The Jefferson Hotel, the conference was hosted by John B. Levy & Company, a firm uniquely positioned in commercial real estate nationally with its quarterly market research and activity in debt and equity.
“We’re nearing the top of the cycle,” said Principal Andrew “Andy” Little, who kicked off the event.
Investors and lenders are very disciplined compared to previous cycles, he said, adding, “we don’t think real estate is going to cause the next downturn.”
On the flip side, Little stressed that “there is sideline capital galore for commercial real estate.”
Little highlighted recent deals the firm has closed and “super aggressive” cap rates as signs the real estate market is reaching a cyclical peak.
After Andy Little’s opening remarks, the conference moved to a panel discussion moderated by company president John Levy, who Bloomberg’s Tom Keene refers to as “brilliant on the pulse of American commercial real estate.”
“With all of the money chasing older value-added apartment deals, it makes it harder for us to hit our equity target, particularly after stressing the assumptions,” said Little. “We’re just not buying into the high teens returns in the lower growth markets like Richmond.”
According to Levy, one of the reasons that multifamily is so hot is the super activity levels of the government sponsored-entities, Fannie Mae and Freddie Mac. Each of them is currently putting out more than $1 billion a week in new mortgages, according to Levy.
Little suggested that an abundance of externally imposed discipline, such as risk retention rules specified in the Dodd-Frank Act, along with self-imposed discipline would likely prevent real estate from becoming the cause of the next economic downturn.
He noted findings from the firm’s Giliberto-Levy Commercial Mortgage Performance Index (G-L Index), describing it as “the S&P 500 for commercial mortgages,” and its newly launched G-L II index focused on high-yield commercial real estate debt.
“The level of interest received in the new Index informs us that more investors are interested in taking less risk,” said Little. “The discipline is having an impact.”
Panelists discussed the kinds of lending opportunities that their companies look for and the resulting pitfalls.
“We tend to think the have not’s of the capital market world are very exciting, because they never got the spotlight on the run up to the crisis,” said Dan Zwirn, CEO of Arena Investors LP. “We see a lot of opportunity with people who have something that from a numbers matter is viable, but as a transactional matter, couldn’t get done.”
Members of the audience were asked to submit questions via live email, and the results were a staggering number of responses. One attendee asked the panel about creative ways to achieve value-add in multi-family units, given that it was difficult to find opportunities where physical improvements would accomplish that.
“We do see opportunities, as both Fannie and Freddie are getting very creative in starting green programs,” said Adam Randall, Director at Berkeley Point Capital. “For Fannie Mae, you can do a savings of 20 percent in either water or energy, or 15 percent for Freddie Mac. So you’re getting a break of 25-30 basis points on your financing.”
Panelists were also asked if there was any particular segment or area they did not like.
“We don’t look at it that way. Each individual asset class and each individual deal has to be looked at,” said Michael Cotler, Head of Commercial Mortgage Lending at Loews Corporation. “You can’t look at it and draw a line through a state, or a property type or anything like that. Each deal has to have the proper metrics, the proper return goals and proper risk adjusted return. “
“We look at every deal, no matter what asset class and wherever it’s located,” Cotler said.
The impact of a possible repeal of the tax-advantageous 1031 exchange rule was discussed, although panelists agreed the chances of repeal are slim.
“I don’t think it goes away,” said Cotler. “You’d have a huge impact on the economy if that goes away. And there’s so much money and lobbying going on, I don’t think we’ll have that extent of tax reform.”
Sandler Passman, who runs John B. Levy & Company’s equity book, provided closing remarks and key takeaways from the conference, encouraging investor participants to reflect on where the market stands at the top of cycle, and to look for opportunities in areas such as interest rates, which have been lower longer than most experts would have anticipated.
“We’re at the top of the cycle,” said Passman. “As investors, it’s time to think about where we are and where we go from here.”
The Investors Conference is the latest in a series of educational services provided by John B. Levy & Company, building on other services such as the quarterly Giliberto-Levy Commercial Mortgage Performance Index.
To see a video recording of the conference visit jblevyco.com/investors-conference/.