CRE Finance World Roundtable: Macro Issues Facing CRE Finance A publication of Autumn issue 2013 sponsored by CRE Finance World Autumn 2013 9 Moderator: Lisa Pendergast Managing Director Jefferies LLC Participants: Larry Brown President Starwood Capital Group Sam Chandan PhD FRICS President & Chief Economist Chandan Economics Professor in the Associated Faculty of Real Estate The Wharton School Samir Lakhani Director, Senior CMBS Trader and Portfolio Manager BlackRock Greg Michaud Senior Vice President & Head of Real Estate Finance ING Investment Management Mitchell Resnick Vice President, Multifamily Loan Pricing & Securitization Freddie Mac Roundtable conducted September 16, 2013 Lisa Pendergast: Thank you all for joining our panel discussion on the macro issues facing commercial real estate finance. The macro-economic and geopolitical issues faced by the market today affect our industry more than ever before. For example, clarity on a likely appointee as Chair of the Federal Reserve and the Fed’s decision not to begin tapering in September triggered a ‘risk-on’ mentality in all financial markets, with CMBS being no exception. Whether one is originating commercial or multifamily mortgages, buying commercial real estate-related bonds, or investing in hard assets, the outlook for the direction of rates going forward is vital. Given today’s historically low rates and the understanding the Fed’s quantitative easing will eventually come to an end, the question isn’t will rates rise, but how fast will it happen and how aggressive will the increase be? Sam, I would like to make you the central point in the beginning of this discussion. Then, everyone weigh in. Sam, where do rates go from here now that they’ve already backed up 100 basis points? Do we see another 100 basis point gain before the year is out? Or will the Fed hold steady to see what the economy does? And, what are your thoughts if they do begin to taper, what will that mean for rates? Sam Chandan: The initial adjustment in rates that we saw earlier this summer was certainly abrupt. It speaks to the Fed’s limited influence over the long end of the yield curve. It also caught many commercial real estate investors and lenders by surprise. Not in as much as they did not understand or anticipate that there would be an adjustment in rates at some point; I think the suddenness of it was unexpected for participants in the market that incorrectly perceived the Fed as setting long-term rates when it only influences them. That is clearly the most immediate issue for participants in the market today and with good reason. Very low costs of capital, very low interest rates, and very low borrowing costs have been among the defining features of the commercial real estate recovery. It has impacted capital flows into a variety of assets. It has also been defining in terms of how balance sheet lenders and CMBS market participants have dealt with distress and challenging maturities. After an initial disruption, the first shift in the rate environment has been largely absorbed into lending and cap rate spreads. We risk overconfidence in drawing conclusions from that. The next 100 basis points will not be so easy.
CRE Finance World, Autumn 2013
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