JackChat January, 2019

2018 was a productive year. I hope that your 2018 was a good one; one full of health, happiness and prosperity. My format from October, though brief and written more in the form of “Soundbites” rather than “deep content”, seemed to go over well. As the feedback (thank you) was generally positive (easier and faster to read) I will follow the same format with this update.

I have already found in 2019 most of the “Cabinet of Experts” I am fortunate enough to be talking to are “net neutral/slightly positive” in their 2019 forecast. As perspective matters, I encourage you to answer for yourselves:

• Do you feel we are in inflationary or deflationary times?
• Are you feeling guarded or optimistic?
• Are you feeling skeptical or accepting of easy solutions?
• Are you insisting on safety or afraid of missing out?
• Are you prudent or imprudent?
• Are you risk adverse or risk tolerant?
• If too much money is chasing too few deals – are you emphasizing caution or aggressiveness?
• Are you chasing yield, or do you seek excess return on a risk adjusted basis?

A collection of great soundbites I have heard over the last few months to share:

• “Failure has taught me what I am good at!”
• “The number one indicator of team success is that everyone on the team knows the vision and the purpose of the mission.”
• “Know the purpose; everything else are details.
• “Wish and hope is not an investment strategy – stress your underwriting.
• The antidote to fear is found intaking action.”

What am I focused on and concerned about?

• There seems to be a sea change in the way society uses real estate. Traditional office, not retail, could be the next distressed problem asset.
• ESG and Diversity Initiatives are the next real opportunity set.
• Pressure to compete is coming from ALL sides for the investors – 1) the opportunities are packaged unusually optimistically and priced to perfection; 2) their capital sources are fragile and come with their own esoteric and episodic unintended consequences (CDO market, Warehouse lines, promises made to deliver yield…); 3) there are more than enough investors – new and established – competing to take that investment opportunity from their grasp.
• Credit versus Liquidity issues in the market – distinction with a difference.
• 2/3 of Portfolio lenders offered full or partial I/O in 2018.
• More sources of exits for capital investment is good for everyone.

What I would like you to join me in thinking about:

• The Banking system has never been this well capitalized and “clean” going into a recession. They have successfully shifted risk to dispersed private capital participants. Systemic Risk in the system is far more dispersed today than it was in 2007.
• The new normal – volatility – is OK.
• With all the noise around “all the new entrants” providing capital to CRE, lets recognize that the sum total of all their capacity to invest pales in comparison (much less) to the balance sheets that Wachovia, Bear Stearns, Lehman amassed prior to the GFC.
• The “Lending Market” is a lot of different markets rather than one.
• The mass of Debt Funds is merely akin to CMBS decades ago – capital providers created to meet the needs of the borrowers to capitalize on market opportunities.
• Sponsorship REALLY matters. For Users AND Providers of CRE Capital.
• Liquidity is there until it is not; lack of capital might merely be because of the current yields being offered in that moment are insufficient.

Here is to a new year of optimism, trust in the future, faith in investments and their

managers; low level of skepticism, and risk tolerance rather than risk aversion.

Be safe out there.