Research Expert See Unprecedented Market Uncertainty
Auction.com's Peter Muoio recently discussed how he became head of research at the firm and what he is seeing in the market. He discussed with us the overall economic trends he sees in commercial real estate and how that is impacting the transaction market. He also told us about what he his seeing in different commercial real estate sectors. Auction.com is a GlobeSt.com Thought Leader. Learn more about them here.
GlobeSt.com: How did you get involved with Auction.com and in this sector of commercial real estate?
Peter Muoio: I started the real estate research group at Bankers Trust beginning in the 1980s and ran that until Deutsche Bank acquired that firm. At that point I became head of global real estate for Deutsche Bank. Myself and my team provided real estate analytics reports to all of the various real estate platforms at Deutsche. That included CMBS, the real estate investment banking business and real estate asset management globally. We spun off as an independent company in 2002 with Deutsche as a launch client and then grew our business as Maximus Advisors as an independent real estate research firm to an array of participants in the commercial and residential real estate markets. That ran the gamut from Wall Street institutions like Deutsche and others, to opportunity and core funds, insurance companies, hedge funds, home builders, foreign banks and asset managers. Anyone who was involved in residential and commercial real estate on the buy side, the sell side or the debt side became clients of ours. We provided two sorts of things, which were an outgrowth of the kind of work we were doing at Deutsche. First was ongoing research -- what we thought was happening in the world, in the economy and capital markets and what it meant for specific real estate segments in specific markets. We also did tailored research. So if you are underwriting a piece of debt or purchasing or selling a real estate asset, we would do reports of varying degrees of depth on the market, the submarket, the property, etc. We would work on peoples’ strategy pieces, portfolio analytics, investor letters and other things like that. We became part of CW Capital in 2008 and continued to grow our third-party business, but we also provided our research and analytics to various CW Capital platforms. It included the special servicer and the agency lender as well as the CDO manager business. When CW Capital was acquired by Fortress, we also provided our research into their platform, and when CW acquired Rockwood Real Estate Advisors, we took over providing the research for that business as well. CW sold Rockwood and Maximus to Auction.com and that transaction closed at the end of 2012, so we now formed the Auction.com research group.
We are continuing to provide research to third-party clients but are also now providing research for Auction.com to its clients in both the residential and commercial real estate spaces. We have recently launched a separate research tab on the Auction.com Web site that is providing research into certain markets and segments, both on the residential and commercial real estate side, as well as accessing other types of research that we are doing. We are in the process of developing various tools that will be rolled out over the next one or two years that will be additions to what the Auction.com Web site already offers to buyers and sellers in the commercial real estate and residential real estate space.
GlobeSt.com: Why is it important for Auction.com to have a research department, and why is the timing right now?
Muoio:The mission of Auction.com is really to become the real estate marketplace for buyers and sellers, the place to go where you will transact real estate. Part of that is to offer to clients as much information and support that you can in terms of making that process transparent and providing as much information as possible in order to maximize the people who are involved in the process and thereby providing better results for the buyers and the sellers.
GlobeSt.com: What is different about setting up a research division for Auction.com different than from a more traditional entity like Deutsche Bank?
Muoio: The nature of our business is unique. It provides two sets of things that will provide the kind of information that users will find useful in their decision making. First, we provide intelligence on what is happening, whether they are economic, market-specific, or capital-markets events and translating that to a specific property segment or market. The second pretty unique aspect really first came into being back in the 1990s in the RTC days when there was a need for people to be able to know the doings and dynamics and drivers of all sorts of markets very quickly. What we developed was the capability to do on-demand, tailored research. What we have been doing is offering the ability to very, very quickly provide very specific reports on markets and submarkets tied to those specific needs. That means that if I am a buyer and I am potentially interested in a property that is on the Auction.com calendar, it would be helpful to me in my due diligence to get an understanding of the economics of this market, the demographics, the property-sector specifics and maybe even down to the submarket where the property is located. We will be able to provide to clients on a very on-demand basis are those kinds of reports. If I am a seller why is that important to me? For example, we are talking to a seller right now about putting a potential property onto the Auction.com Web site. One of the things that we produced is a very in-depth report on that market, the economics, demographics and key economic drivers down to the demographics of the submarket. This is helpful for helping determine the appropriate value for this property and is also the kind of thing that can be offered to potential buyers of the property as research on this market that will enable them to understand it fully. Historically, in terms of our client base, have worked with buyers, sellers and lenders. What makes this very different from some other types of researchers out there is that we’re already geared toward being this honest broker of information and because for Auction.com it’s as important for the buyer and the seller to understand that this is a marketplace and this is information for everyone who is out there in the market place.
GlobeSt.com: Is this part of the firm’s goal of being as transparent as possible???
Muoio: The whole goal of our research initiatives is to provide tools that will increase transparency and maximize the information available to everyone. The better the information and the more transparent the information, you’ll maximize the number of users, and that’s positive for the process. The more people who are in the process, the better for everyone involved.
GlobeSt.com: How are you going to set yourselves apart from the research firms at the large commercial real estate services firms that are out there?
There is a degree to which, if you are a buy-side analyst or a sell-side analyst, there is a tendency of people on the other side to take the research with some degree of discount or perceive that there is a potential angle to it. We deal with the buy, sell and lending sides, so the research will be truly “warts and all” and less of a degree to which some of it can be considered an outgrowth of marketing. And our ability to do the on-demand research into a specific submarket is really very different. Other research shops put out tons of reports, but they tend to be a broad spectrum. This is more analytical in the sense of a market, a segment and a specific submarket of that segment.
GlobeSt.com: What are you going to be watching for in terms of indicators for commercial real estate?
Muoio: One of the things that we have been talking about a lot over the last several years is the degree to which uncertainty in the marketplace is having a major impact on economic growth, investment flows and capital markets. Uncertainty is hard to define. You know when you feel it, but it’s hard to measure. We have recently started using data from some academic researchers who have begun to measure uncertainty using “big-data” concepts. One of the things I will be watching is what happens with uncertainty. When I came upon this data, it really showed that when you look over the long term, going back into the 1980s, and you look at the level of uncertainty in the capital markets, you can discern crises: 9/11, the stock-market crash of 1987, the Persian Gulf War, the Lehman collapse. You see these spikes in uncertainty. But when you look beyond these spikes from individual events over a long-term period, the other striking fact is that the actual baseline level of uncertainty over the last four or five years has been unprecedented relative to the norm. That is hand in glove with why the economy has been so saw-toothed and why capital markets have had these upward movements and then disappointments with downward corrections. To me, uncertainty and how it proceeds over coming months and quarters is one key issue that we’re watching very closely.
Another key issue is what comes out of Washington, DC. The degree to which periodic issues arising in DC, whether it is the debt ceiling, the fiscal cliff, or the sequester, the degree to which activity emanating out of the capitol is supportive or not supportive of economic growth. These periodic bouts of crisis in DC are all tied to disagreements or arguments amongst various parties about the proper way to deal with some long-term fiscal imbalances and issues. The result of the fiscal cliff drama at the end of 2012 was a series of increases in taxes that has been estimated to increase taxes to three quarters of US taxpayers, so we’ll be watching very carefully how this plays out in terms of consumer behavior and also business behavior. One of the things that was really noteworthy in 2012 was that, in the latest outburst of uncertainty in the election and the fiscal cliff, and the lead-up to that, investment, production and plans for business travel dropped significantly. All of these things that are the drivers of the different property sectors sort of fell off the cliff. Subsequently, they have begun to re-emerge, but we’re going to be carefully watching the degree to which that re-emergence continues.
GlobeSt.com: Would more certainty in Washington fix a lot of this??
Muoio: That’s one source of the uncertainty. Europe is another source of the uncertainty. Tension in the Middle East is a source of uncertainty, and they all start building up. But we have shown a remarkable degree of shooting the economy in the foot just when it seems to be gaining some momentum through these outbursts of policy and regulatory issues coming out of DC.
GlobeSt.com: Multifamily is going to continue to remain hot by most accounts. Any projection for that sector or others?
Muoio: We have been throwing up a cautionary blinking yellow light on apartments. We’re beginning to see the single-family market beginning to re-emerge. Prices are up, sales are up, inventories are down, and a key factor in the incredible improvement in fundamentals in multifamily and a really strong increase in rents was the decline in home ownership, which fell from over 69% to the mid-65% range. That doesn’t sound like a lot, but every percentage-point change in the home ownership rate is worth about 1.1 to 1.2 million households that are shifting from ownership to rental. It’s a lot of groups of people who are moving into rental properties. How do we have a tepid economy, high unemployment, only moderate job growth, weak wages and generate this incredible apartment story? It was the shift from single family to multifamily. But we’re beginning to get closer to the end of the decline in single-family home ownership than we are to the beginning. That suggests a moderation of demand for apartments coming from that source. One of the things that’s happening for both single family and multifamily is that housing formations looked like they were starting to improve in late 2011 and early 2012, although they’ve eased back off in late 2012. An increase in household formations is good for both multifamily and single family. Looking at these two key drivers of multifamily demand, our vision is that there will continue to be healthy demand for multifamily but not necessarily at the same robust pace that we have seen in recent years. At the same time, we’ve seen increases in multifamily starts, as vacancies have become very low in many markets. Rents are at all-time highs and continuing to grow. Developers have gotten back into the game. As importantly, financing has become available because of the healthy condition of the multifamily market. We hasten to add that we are going from record low multifamily starts to closing in on what would be normalized levels. It’s not like we’re talking about a building boom yet but that trend of increasing development of multifamily properties looks to continue over coming years. So, as we gaze down the road over the next two to three years, we’re likely to see the ending of the vacancy portion of the recovery cycle for the multifamily market. By our estimation vacancies on a national level for multifamily properties will begin to bottom in 2014 and 2015 and then begin to edge up as supply begins to outpace demand. Vacancies will still be at healthy levels in 2016, but they will likely be starting to in the opposite direction, and the pace of rent growth may simmer down as a result. Multifamily will be competing more with a single-family market that has re-emerged. Investors have poured into the multifamily segment because it’s the hot sector and has been doing well, whereas the other segments have been much more laggard because demand is much more dependent on overall economics, not having a special situation like multifamily where the shift ot renting form owning spurred demand. If we envision the economy re-emerging and gaining momentum and generating faster recoveries in these other laggard segments, while at the same time the multifamily dynamics are beginning to shift and will have seen the best of their story for this cycle, the result wil be that investors are likely to begin to return to other segments because there is more return potential.
GlobeSt.com: Are investors going into secondary markets for higher returns???
Muoio: We definitely seem to be at the onset of that. There has been a bifurcation of trophy assets in primary markets and secondary and tertiary markets. The recovery of valuations in primary markets has been significantly faster and stronger than it has been in the non-primary markets. The recovery in deal volume in primary markets was much sooner and stronger, but more recently the increase in deal volume in secondary and tertiary markets has begun to become the stronger piece. It’s part of a global macro trend in the search for yield. This hunger for return inevitably draws investors for the next place to look for that return.
Since our founding in 1990, Auction.com has distinguished itself as the world leader in maximized asset disposition strategies, asset management and real estate sales. Our expertise lies in selling residential, commercial, luxury homes, multi-family and hospitality properties, land, as well as performing and non-performing notes and loan pools.
To date, Auction.com has sold over $12 billion of real estate assets for our clients.
Over 100 financial institutions currently utilize the Auction.com platform and marketing expertise to sell Commercial REO Properties and Notes. Over the past 18 months, our division has successfully auctioned over 1,500 Notes secured by Commercial Real Estate, totaling over $4.2 billion at an average recovery rate of 56%, and it has closed 336 Commercial REO Properties at an average recovery rate of 102% of reserve value.
For more information on selling commercial REO Properties and/or Notes, please contact: Ken Rivkin, Co-CEO, Auction.com Commercial, Ken.Rivkin@auction.com