With all this talk about being “late in the cycle”; are you protecting your downside? IF you are protecting your downside, are you also taking measured growth bets in some structured relative sized manner?
It’s competitive out there for business. We all are experiencing it. Are we falling to the temptation to reach for a deal? Are we competing by taking more risk (and not getting properly paid for it) when we should be doing just the opposite – protecting our downside? OR, are we competing on price?
On the flip side, is this the time in the cycle to chase yield? Are we trying to get money out now because of a fear that credit opportunities will dry up and there simply will not be enough opportunities to lend on in the future?
I remain bullish. I still think it’s a great time to be in the CRE space. We are experiencing an unprecedented river of capital flow – that’s what’s driving the competition for business. It is also true that this unprecedented level of liquidity drives opportunity AND makes innovation worthwhile to consider.
I am excited about the opportunity for innovation in our space. For this blog, let us leave out of the discussion technology. I think there are product and service innovations happening all around us. It makes me wonder what more each of us can be doing in our businesses to make the experience for our clients better, faster, more efficient and effective? Can we add products and services, at the margins of our offerings, that somehow fuel further growth, revenue, profits, and expansion?
There seems to be examples of additional revenue model enhancements all around us – the applications that relate to a hospitality context applied to multi-family product is just one example. I hear WeWork, in a few locations, is testing out first floor “coffee shop” spaces to use as a portal into their “above second floor space”, where you can get “Business Center Services” as well as rent a desk or an office or a conference room by the minute. What a clever idea! As brick and mortar products innovate and evolve so too must capital products.
IF the millennials and their love for a sharing economy are what is driving, in part, the shared office space concept, my bet is that lease terms will shorten from the traditional 10, 7, and 5-year durations, all across the industry. IF that is the case, how will that alter the rating agency cash flow modeling that drives CMBS execution? Will the real estate lending business go back to “what is my basis on a loan per square foot?” – type underwriting?
Innovation is what created the CMBS world. A collection of industry vets (today), 25 years ago, applied bond ‘technology’, and used the existence of the RTC, to securitize the income streams created by the pooling of commercial mortgages. Decades later, CLOs and CDOs were applied to CRE Lending as well. As everyone continues to whine about the “typical borrower experience” in the CMBS world, some are finally innovating action. PSAs are being rewritten to change the relationship between DCH, Special Servicers and Master Servicers specifically to enhance the borrower experience in terms of turnaround times, decision making, and proactive interactive attention to addressing CRE issues that surface during the life of a loan.
My conclusion is that most will pick their spots, stick to what they know, and protect their downside.