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CREFW-Fall2014 10.15.14

Sam Chandan: If less accommodative Fed policy and higher long-term rates both coincide with a stronger economy, we should see the demand side of fundamentals improving in a way that will offset at least some of the capital drag on values. But apart from the market’s cyclical features, the fundamentals equation is also in flux, albeit in ways that are more subtle. In the way we use office space, for example. Kim Diamond: I think there are shifts that will impact the office sector: how we use and configure office space and what that implies for office space demand. There are so many people with alternative work arrangements now, so much consolidation. Sam Chandan: Kim, that’s really interesting. One of the things I’ve seen in the recent research is that for professionals, its not so much that the availability of technologies and alternative work arrangements are allowing us to forgo a desk at the office altogether. It’s more that the technologies are allowing us to continue working every evening and weekend, after we leave the office. But to your point, there are significant changes in the relationship between office-using employment and the number of square feet that we are absorbing in the market. Are you seeing some of these broader changes show up in underwriting? Kim Diamond: I think there are hints of these changes that we are seeing. For example, there are many office properties with tenants that have historically occupied large blocks of space and are now subleasing portions of it. We are also seeing changes in the way retail space is being used such as the reconfiguration of space that used to be occupied by traditional anchor stores into more inline space. So there are definitely trends. I mean look, we went through this a decade ago when everybody was concerned that catalog shopping would replace in-person shopping. Now people are saying Internet shopping will replace in-person shopping. I don’t think that it’s that black and white but that could be a reason, for example, why a lot of malls have added entertainment components — both to draw people there in the first place and keep them there longer. Sam Chandan: When you listen in on some of the REIT investor calls, they are talking about the mall as a lifestyle venue, above and beyond a place to shop. Does that reflect the repositioning that you are describing? Kim Diamond: Keep in mind that there are a lot of non-major metropolitan areas in this country where the local mall serves as the center or focal point of the community. CRE Finance World Autumn 2014 14 Sam Chandan: One more question about property fundamentals before we move to lending and risk taking and where we are in that risk tolerance cycle. David, some of the data that I’ve seen over the last couple of months points to stronger multifamily fundamentals than I would have anticipated at this point, particularly with new inventory coming online. Are your numbers showing something similar? Is the apartment sector continuing to outperform? David Brickman: It is. It is doing that as completions and supply are increasing. Indeed, we continue to be very bullish on the outlook in part because of the strong demand drivers that continue to fuel rental demand. In fact the historical notion that 300,000 or so units of multifamily is the steady-state is perhaps an obsolete notion post-crisis, given various changes in both demographics, credit tightness, single family market, shifting preferences, and last but certainly not least, new urbanism. Indeed the market performance coincides with some of the same developments you’ve touched on in terms of retail and office work that are all driving multifamily and we’re likely to see continued elevated levels of new demand that will more than match the level of supply that we see in the near term. Rent increases do have to moderate. There is a friction with overall income levels and to return to where we started the conversation in terms of the macroeconomics, income growth has not been sufficient to support the level of rent increases we’re seeing so that’s going to create a little bit more tension going forward but we continue to see strong growth in the apartment sector and indeed strong capital flows broadly in the multifamily space. Sam Chandan: Regarding those capital flows, how do you feel about where we are in the pricing cycle right now? Some market participants are clearly concerned about the kind of cap rates and debt yields that we’re seeing in the apartment sector at this point. Are you comfortable that we are going to see gains in income over the next couple of years that are consistent with today’s pricing? David Brickman: My guess is that most of the complaints about pricing are coming from people who are looking to buy. laughter CRE Finance Roundtable: The Risk Cycle “I don’t think there is any evidence of a bubble so we can rule that out. The question then is do the prices fairly represent supply and demand fundamentals? I think so.”


CREFW-Fall2014 10.15.14
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