ATLANTA—Aim higher. Go farther. That was the theme of the CCIM Thrive Conference in Atlanta Oct. 24-25.
At this stage in the current cycle, a key topic of discussion among commercial real estate professionals in all verticals is funding. With that in mind, Rachel Scott, a business partner for the Americas at Deutsche Bank, moderated a panel called “Funding for Modern Markets.”
The panel included Art Rendak, president of Inland Mortgage Capital; Gregory Michaud, managing director of Voya Investment Management; Yashkin Israel, vice president of Fifth Third Bank’s Southeast region; and Chuck Taylor, managing director at RealtyMogul.com.
Scott didn’t waste any time asking the tough questions. Her lead: With the fear of a market correction, what kind of deals are you looking to do?
“Fear is an interesting word,” said Israel. “If I was a banker for the last decade, I could easily say that next year I am going to be looking for new loans …or I could easily say I will be looking for a job. My lesson is more preparation. There’s a lot of uncertainty… we continue to watch the way the wind blows in the market. You want to make sure you are not only abiding by the regulations, but also self-regulating.”
Michaud picked up on Israel’s regulation comments, noting over the next couple of years his firm will pay close attention to the regulatory arc. He’s looking to capitalize on voids in the market, including opportunities to ink bridge, mezzanine and construction loans.
“Historically we’ve had no losses,” Michaud said. “We believe we were overweight in industrial and that’s what got us through the crisis. We are swinging back into heavy industrial exposure. We are limiting hotel. We are very concerned about retail in certain markets. We are careful about multifamily. We are staying out of primary markets right now, and are focused on secondary and tertiary markets. That’s where the safe bets are going forward.”
As Rendak sees it, regulations are already restricting capital—especially with banks. He’s convinced his firm is poised to take advantage of this reality. Still, he knows he cannot fill the entire void banks and the CMBS market leave if lending capacity from those sources dramatically shrinks.
“We are a bridge lender,” Rendak says. “We need capital markets to function properly. A smooth running capital market system is essential to all of us buying and trading assets and doing what we all do every day.”
Taylor chimed in, noting his firm has focused on value-add opportunities for the better part of its short history. A lot of those returns were at least somewhat correlated to the cost of capital on the debt side.
“Watching some of the pullback from banks and even CMBS does cause you to reach a little bit to hit the same return,” Taylor said. “As a competitor that has not been around very long, we don’t want to put investor capital into deals that don’t make sense because there is no longer debt available. We’re looking at exits and what things look like three, five and seven years from now.”
Israel and Michaud both pointed to more geographic opportunities. Investors that were once almost solely focused on the core are moving into secondary and tertiary markets. Charleston, SC is a good example with the growth of its port. The Southeast, in general, is in a good position on the non-core markets front due to population growth. Markets that were overlooked five years ago may see more capital as the demand for multifamily housing rises there.
How are the capital markets preparing for the regulatory pinch? That depends on whom you ask. The CMBS side is shrinking, dwindling from about 41 conduit lenders to less than 30. Panelists agreed we may wind up with as few as 20 because the small players can’t win with risk regulation. Still, it’s not doom and gloom.
“CMBS is a very resilient market,” Rendak says. “Someone will figure something out. It’s going to take a while. But I think by ‘18 you will see prices tighten. I’m not doomsday on it but I think it is going to be disruptive. I think the banks are little more troubling. It’s difficult to get a construction loan right now.”
Indeed, it’s becoming increasingly challenging to originate construction loans. Some of that is because of Dodd-Frank regulations mandate developers put more cash into deals throughout the construction process. That has driven down loan proceeds in the current stage of the cycle compared to five years ago. There is demand, though, on the equity side.
Rendak said, “Our borrowers have to determine if the higher leverage debt that we offer with a little higher yield is more favorable than the cost of the equity that they have to raise with lower leverage.”