A publication of Autumn issue 2014 sponsored by CRE Finance World Autumn 2014 7 But there seems to be a more fundamental change in real estate finance being driven by the global economy. The sheer amount of investment capital in the world is vastly larger than it used to be, shortening the downturn because capital has to find a home. The world, as Bain & Co. puts it, is dealing with an “environment of capital superabundance.” According to Bain research, by 2010, global capital had grown to roughly $600 trillion, tripling over the past two decades; by 2020, it’s estimated to be about $900 trillion.1 The movement of capital on a global basis has significantly contributed to the lightning-quick speed at which investors are looking for investment opportunities and deploying large amounts of capital. What Shortening Lending Cycles Mean for Real Estate Investors If real estate lending cycles are in fact shorter, what does the compression mean for borrowers and investors? There are two sides to every coin; both recoveries and slumps come faster. Here are some implications to investors that will help navigate the compressed cycles: • Rapid decision making. The old adage “he who hesitates is lost” could not be more true than now. With the rapid disposition of problem loans and assets in the most recent downturn, those buyers who felt that they had plenty of time to shop for properties found that the train had left the station. Furthermore, lenders that were in a strong position to negotiate loan terms in 2011 and 2012 suddenly found themselves in a borrower market by 2013. The last few years have seen a quick and substantial movement in the real estate market in many ways that have certainly created substantial value for those who moved decisively. • Increased choice, decreased track record. One of the features of the recovery and especially the boom part of the cycle is a proliferation of lending products and the rapid change in their relevance. In a shorter cycle, it can be harder to keep up with the proliferation of new products. Many times new products as well as lenders do not yet have a demonstrable track record — and by the time they do, an investor may have missed the window in which the product is irrelevant or the product may not be the best execution from one moment to the next. This is true for both borrowers and for investors. In 2009 and 2010 a substantial amount of capital was raised for high yield lending/investing opportunities coming out of the downturn. Much of that capital could not be deployed as the mid-teen yields that were expected quickly evaporated as capital flowed back into real estate at much lower rates of return to the investors and lower interest rates to the borrowers. • Recoveries are never too far away. It used to be that if you were stuck in a lending slump with an expiring loan, workouts were complicated because it would be a long time before the market returned. With compressed lending cycles, there may be more options for borrowers who need a bridge loan to get them through a refinance or access mezzanine debt and even equity. • Will it be better tomorrow? With capital flowing into the real estate space the rates, terms and overall availability of capital can sometimes tempt borrowers to wait. The same can be said of sellers — can I get a lower cap rate if I just wait? One thing is certain: if you hesitated on the buy side, you were probably left on the sidelines. Are We Creating a Bubble or Will We Simply Slow the Pace for a Soft Landing? Most people would define a bubble as an unsustainable rate of growth and value that is ripe for a significant and potential decline. Oftentimes the bubble is created by an imbalance in investment opportunities — is real estate better than stocks or bonds or other investment alternatives. There is too much money chasing too few deals. In a market that is one way only — new money and players in the market but no one exiting the market — it is easy to get overheated and chase the deal. Will the bubble burst? If we continue on the same aggressive path we will soon see speculative lending and buying which will ultimately lead to another bubble bursting. Conversely, small market corrections bring a reminder of risk management to lenders, investors and buyers as they are “slapped” back to reality. I would argue that shorter cycles are a good thing because they create small waves in the market as opposed to the tsunami we experienced in the last cycle. An extended boom has a propensity to end badly with a significant and painful adjustment as opposed to more frequent and manageable corrections. As cycles become more compressed, there is an increasing need to stay current with the rapidly changing financing market. Information is moving more rapidly than ever, and with this information flow comes an unprecedented need to distill the data into a form that can allow for confident decision making. We continually need to answer the question, “What does this mean and what do I do Are Capital Market Cycles Shortening — And So What If They Are?
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