JackChat June, 2018

The old saying “I would rather be lucky than smart”; how would we ever really know which of the two drove our individual fate professionally? I posit that though we as an industry could never legislate against greed or stupidity; clearly the next few years should cull out the lucky from the smart. My  truth is I believe that we all have been overly rewarded by the capital markets.

I am a bullish on the CRE Industry and its property and capital markets. (I guess this is the part in the blog where I am supposed to say something like “these views contained herein are my views and opinions alone and not necessarily (the stated) opinions of any of my partners.”) The US and World economies seem to me to be growing, the real estate business feels stable, capital availability is growing, the CMBS world seems to be “stable” ($50B-$75B expected 2018 volume), coupons are going up to the borrower, however so too are LTVs! Values feel stable, as does Debt Yield. Yet everyone is trying to grow their transactional volume. HOW?

It feels like CMBS has grown up and is exuding discipline. Debt yields are at historical lows; however, we haven’t seen a huge run up (yet) in LTV, cash flow is being underwritten as “in place”, no “proforma income underwriting” has taken place, and debt service coverage ratio is REAL. Not withstanding all this, 50% of all new loans made in 2018 YTD in CMBS have been full term interest only. Yeah, we still are making better loans backed with more equity on more stable real estate. So? What’s the issue? What if there simply was no “issue”?

Rick Jones reminds us:

• Securitization is a critically important component of our economy.
• Relying upon the banking system alone to fuel our economy is an unhedged bet no one should be making today.
• Securitization is indeed the matching of liabilities and assets – borrowing and lending long.
• Durational matching of assets and liabilities is good; and, what we should strive for.
• There is a broad universe of investors that is much deeper than the balance sheets of all our prudently regulated banks.
• Structurally, one can argue securitization is a more stable financing structure than the basic banking model.

A mature industry offers its customers commoditized products. Capital is commoditizing, and it providers must find a way to compete. It feels as if we have never been this deep in a cycle while credit has remained this strong. Historically providers have competed on price (race to the bottom) then “structure” on the credit (acceleration of pending crash). So far, we have not seen credit and structure waver. Compare this to the auto loan market place where terms and amortization schedules seem to be lengthening – on a depreciating asset!!

Other musings:

• Disruption – To create a disruption, merely create never before conditions. Its not just technology, its not just politics; the possibilities (and opportunities) are everywhere. I think this is great!
• Think Niches! Real Estate investing is moving from “me too” to niche strategies.
• More folks are originating loans to create their own B-Piece and hold the equity in their receivable. I think this is good.
• There is volatility in the marketplace causing interest rates to gyrate. Italy? Euro-Skeptic parties gaining more control? US-China trade spat?
• Threats on the horizon – small banks and poorly conceived bridge lending plans for transitional assets.
• When you get the opportunity to work closely with Top Notch professionals – do it!
• Cash out refi is the new sale

Enjoy the summer! Back after Labor Day.