the cycle is starting its ipward move
“It’s not that we are in a more uncertain world, it’s that our perception of the future has changed,” said investment banker Anthony Jaffe of CDC Mortgage Capital, Inc., who was among the panelists at the National Association of Industrial and Office Properties (NAIOP) 2002 Capital Markets Conference last month in Reston, Va.
The two-day conference was an opportunity for commercial real estate industry professionals to get together with their peers to discuss and share their experiences. The general consensus on the state of the future for commercial real estate capital is that the current slowdown is nothing to be panicked about — it is just part of the natural economic cycle.
“It’s the uncertainty that’s killing this business today, not the operating statistics,” said Randall Zisler, Principal of Colliers Apogee International LLP, and keynote speaker at the conference.
“When information is hard to come by, people penalize it with wide spreads.” Regardless of that tendency, conference attendees and panelists were fairly optimistic about 2002, and noted that the news of troubles is perhaps one more hastened by perception rather than reality. “People are slowly returning to normalcy,” said Pike Aloian, an investment banker with Rothschild Realty Inc.
Jaffe agreed. “People are becoming a little more comfortable now, and there is beginning to be a little more stabilization. By the end of the year, things should be back in full swing.”
“At present the real estate sector is the most profitable for banks,” said Douglas Lyons, managing director of Transwestern Investment Company. “Though people have certainly become a bit more cautious, the core philosophy of the business has not changed. It still is not our position to predict the future, as if we had a crystal ball, but to make the most educated decision depending upon type of investment, and lease term.”
In fact, the one thing that most professionals agreed has most hurt the real estate sector isn’t Sept. 11 or even the waning economy; rather, it is the mass consolidation of banks.
“There is a lack of competition, and every bank is in each other’s business due to the syndication process,” said Thomas Melody, executive director of L. J. Melody & Company. “The people who are running the syndication banks are becoming a leading voice on dictating terms of lending and this has hurt the ease in securing funding.”
Mark Gibson, president of Holliday Fenoglio Fowler, L.P., anticipates that people will begin responding to that challenge by simply turning to other options.
“For example, German merchant banks (are now) allowed to operate in the U.S. and they don’t have a ‘best efforts’ clause,” pointed out Gibson. “This will bring competitive pressure on U.S. banks.”
One of the most predominant themes of the conference was the idea that there really are no stronger vs. weaker markets. Instead, there is more consciousness about product types. For example, office and retail is generally out of favor because the debt market is not clearing the equity market.
“It isn’t that there isn’t plenty of capital for office markets, but that it’s underwritten much differently,” notes Gibson. “People are being much more conservative. However, there is as much money as you can find product for.” Meanwhile, multi-family — where there is a lot of funding available — and the industrial sectors are still holding strong.
In addition to discussion about the future of the industry as it relates to the economy, sessions also discussed the differences in equity and mezzanine funding, the logistics of securing construction loans, and case studies on specific projects types and the lessons learned.
The bottom line: “Things just ain’t what they used to be, and that is a good thing,” said Lyons. “This is not the marketplace of the 90s. The capital side turned mass funding off soon enough, in anticipation that too many approved projects in a slower market would create another glut. And, the developers themselves have been more cautious about branching out on uncertain projects. We are in a much more positive situation than we were 10 years ago, and that is fueling our optimism.”