JackChat January 2020

Some quick notes as we kick off 2020, as I recently had the privilege of leading an Industry Leaders Roundtable session, AND, a separate Roundtable populated by CRE “Young Professionals” at the January CREFC Conference in South Beach.

• Opportunities abound as we begin and look forward to the 2020 year. It seems however, they may be traveling incognito.
• Folks continue to be confident in the continued momentum in our industry. No cries heard that “the sky is falling!”
• Folks spoke about the ‘new normal’. Huh? Maybe we should all consider giving up our own “mental memories of the future.” It is what it is; lets stop waiting for something we recognize from the past to show up. Maybe this is why there is such a failure to innovate in our industry.
• Pressure continues to exist on lenders to ‘placate’ borrowers’ asks. Consider the obvious: smart structure matters; but, good sponsors matter more. Not all requests should be considered equal.
• Interest rates and cap rates in our business are driven by supply and demand dynamics. Perceived political volatility in 2020 could cause lenders to go ‘risk off’; and/or, cause owners of real estate to sell now.
• Is it me or is the industry populated by a universe of folks who have never refinanced a loan into a higher interest rate market? This ‘lower for longer’ ignores the real underwriting risk mitigant – per square foot basis of ownership and the primary debt position.
• Speaking of go forward underwriting, odds are that in this next cycle of origination of 10 year fixed rate loans, 1-2 recessions are likely to occur. Timing really matters. But basis might matter more.
• With many harboring a long-term view of a recession, and others carrying a short-term belief in a continued bull market, transition loans seem to be the right defensive move. That said, “bridge to bridge to bridge” exits sounds to me like the “dumber fool theory.”
• Speaking of ‘transition’, I heard the Young Professionals (28-40 years old, so we gotta change that moniker to something like ‘Next Generation’ or ‘Emerging Leaders’) refer to themselves as the “transition generation”. And what are they saying about the world we all live in?
  • Investment decisions are data driven. In an uncertain world (not enough data to make perfect decisions) short duration is better.
  • They will likely rent as a tenant, AND see themselves owning assets, for shorter durations. Duration as a risk mitigant (instead of a risk), clever stand.
  • Valuation, they believe, is all about timing.
  • They would rather travel and stay in an AirBnB than in a hotel. They have zero loyalty to a hotel brand, they seek an experience, and inexpensive costs of housing that experience. (Sounds to me like the hotel industry has a storm on the horizon; unless of course you are Bookings.com or Hotel Tonight.)
• Last comment is a shout out to Barry Sternlich who in one of the CREFC Keynotes commented that Malls were created for a different type of tenant – largely the ones created prior to brand recognition. His point was that the younger generation of shopper has a relationship with the likes of Warby Parker or Away, etc. As such, its their brand, their customer relationship experiences, that tenants of today and tomorrow will use to drive traffic to their brick and mortar sites. Makes me wonder how the next generation of CRE underwriters and originators will exercise their personal preference pocket veto in their Investment Committees of the future.

On a personal note, many of you are aware of my interest in innovation and as an entrepreneurial change agent. In this context I have been given the opportunity to test my business thesis that the commercial real estate business does not have to be led and managed as if it were merely a random collection of transactions. Rather, if the C-Suite can see business as a game played over with infinite timeline and with infinite rules of engagement, then solid CRE transactions could be the exhaust of an exceptionally well-run business enterprise.

In addition to remaining as the Vice-Chairman of 3650 REIT (one amongst a half dozen of board positions I hold in various private enterprises), I have taken on the role of President and Chief Innovation Officer at Stronghill Capital. Stronghill is an opinionated small balance commercial real estate lender.

Among other things, our plans at Stronghill include using Fintech and innovation to technologically enable all our delivery systems and processes in support of the outcomes sought by our Capital Partners and Channel Partners.

More to share next month after the MBA Conference in San Diego!