The Commercial Real Estate Finance Council (“CREFC”), the trade association for the $3.9 trillion commercial real estate finance industry, started 2018 off with a bang in setting an attendance record of over 1,800 people at its annual conference on January 8-10 in Miami.
Optimism among the attendees was extremely high, as demonstrated by many of the comments made during the various panel presentations. One panel that caught my attention was a discussion concerning where we are in the real estate cycle. While many acknowledge that we “should be” approaching what would generally be the end of a ten-year real estate cycle, there is a lot of support for the view that there is no end in sight for the current cycle, and that it might actually go on for another five-plus years, unless some extracurricular event takes place that could throw the cycle out of whack. Most people base their view of an extended cycle on the fact that interest rates remain at historically low rates and that there is incredible liquidity in the marketplace. From an intrinsic standpoint, two factors which could prevent the “extension” of the cycle are interest rates rising faster than expected and regulatory volatility.
There were two other issues that were discussed that I thought were of particular interest. First, there was general consensus that borrowers are putting much more equity into deals than they did in prior cycles, with many deals having at least 40% equity in them at the outset, as borrowers/investors have learned that the higher leveraged deals were much more difficult to save in the last downturn. Additionally, alternative lenders are putting substantial pressure on traditional lenders due to the lack of regulatory constraints, while community banks are once again becoming a real force in what appears to be a very aggressive, competitive financing marketplace.
All in all, the mood at the first major real estate conference of the year was of high energy, enthusiasm and optimism – I guess we shall see how this all turns out!