JackChat November 2024

There is a TON of capital looking for good sponsors, good assets, and good execution plans to invest in. Some of that capital is in the hands of some of the most creative folks in the business. Look for investors to team up with other investors in order to take advantage of varying Platform Expertise. More collaboration than competition is GREAT for our industry. Additionally, look for more thick preferred equity looking for opportunities to earn a kicker as they help (good) sponsors reset poorly conceived capital stacks (on good well-conceived assets).

Commercial Mortgage Alert recently stated that there are 223 Bridge lenders out there looking to place capital. IMHO its miss placed, miss focused, capital. Consider the possibility that ONE of the reasons sponsors are hurting is that they borrowed short term (2-3 years as they greedily sought the lowest interest rates) – too short IMHO – and found that there was not enough time to execute properly on their business plans. Oh yea, and rates spiked on them severely causing their floating rate cost of capital to rise. Value creation takes time. And long-term asset plays warrant long term fixed rate capital structures (remember the lessons Long Term Capital Management learned and taught us all 30 years ago?)

You will agree that investing in a market with falling interest/cap rates is a lot easier than investing in a market of rising interest/cap rates.

Banks? Are they in or out? Over regulated? Coming back? Fair competition for Private Credit? Will a Trump Administration ease regulations for Financial Institutions? I just don’t know.

What about good old-fashioned underwriting? How on earth are folks addressing the topic of Insurance? Can you get insurance with the coverage you need? Is it affordable? As its costs have risen, is there any more cash flow left from the property? Can your rents increase at a rate that exceeds expense growth? Let’s be honest here, has anyone actually created or reviewed an excel spread sheet that had expenses growing at a higher rate than Gross Potential Revenue? NEVER! But that in fact is what the owners of CRE have been experiencing.

Knowing what you know now, in 2024, as you look back to 2019, there were deals that didn’t work out for you as planned. Further, there were deals that you passed on that apparently turned out better than you believed possible. What can you learn from that internal review? What lessons did you learn from over the last five years that you will apply in your investment thesis over for the next five years? The only REAL competitive advantage any of us have is how well/fast we recognize a mistake, fix it, learn from it, and course correct as we move forward.

As your year comes to an end, before you enjoy family and friends over the holiday, take time to audit your recent experience and ensure your platform possesses a virtuous cycle where your asset managers dealing with your CRE issues can give feedback to your originators/investment professionals about what they want the platform to continue, stop, or start doing.

Enjoy the holidays; I toast to an exciting and opportunistic 2025.