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CRE Finance World, Autumn 2013

borrowers, the GSEs and the government. In as much as there was a strong benefit to this segment of the market as rates declined, there’s also some sensitivity as rates go up. Combine that with some limited rebalancing of housing tenure. We can argue about how far that rebalancing will take us but at least on the margins, it does impact the rate at which we observe continued growth in demand for apartments. You’ve got that happening at the same time as you have a new supply coming online in some markets. Supply is generally in check, but there are certainly places where it’s not. We also face the potential for structural change in housing finance reform. That is impossible for anyone in our industry to make a determinative call on, even if we think a particular path is rational and the other irrational. On balance, there are some apartment loans we see being made today by smaller regional and community banks that are struggling to find their niche in commercial real estate. We are going to face challenges in refinancing some of those loans in a couple years’ time. Lisa Pendergast: Sam, the single-family housing sector has responded swiftly and harshly to the backup in rates, with home sales and refinance activity plunging. While I am concerned longer-term over the potential for overbuilding in multifamily, I take solace in the fact that a significant shift has taken place in the U.S. away from homeownership. Americans have a very different view about homeownership than they did 20 years ago. Add to that an aging baby boomer population and immigration trends, and the outlook for multifamily looks positive. Do you agree? Sam Chandan: I’d have to agree. I don’t think there is any chance that we’re going to return to the kind of housing market outcomes that we’ve observed historically. We are not going to see that level of policy intervention. We will inevitably see a change in how people think about housing and home-ownership as prices start to go up again, but we’ve got secular changes at work, as well. If we are getting married and having children later; that plays a role in driving when it is that we choose to become homeowners. We also have the potential for big changes in housing finance reform. As compared to what we’ve known, the balance between multifamily and single-family home ownership is different going forward. But what I would suggest that on the margins, not at the median, we do have some apartment loans that are being underwritten in a way that implies continued gains in fundamentals that look like what we had in the worst days of the housing crisis, when everything was working in apartments’ favor. There is a real challenge there, particularly in segments of the market where a smaller bank lender might be constrained and competing with a GSE partner. In many CRE Finance World Autumn 2013 18 of those cases, the basic math is being ignored. Are we going to be able to grow income enough over the next five years? When we may have one or two years of interest up front? Can we refinance this loan when we know that the exit environment will be quite different? Lisa Pendergast: What about other asset classes? Which loans will be the most challenging to refinance in the years ahead? Greg Michaud: For us, we always worry about office, especially suburban office. We worry about office because of the capitalintensive nature. So as rates are rising, we are going to be very cautious with office going forward. Not so much with multifamily or industrial, maybe a little bit with retail. Larry Brown: We are pretty much right with Greg there. If multi and retail are the two most persona-grata asset classes, office is the bronze medalist and in final place is hotels. Obviously there is a lot that we don’t even think about in capital markets like golf courses and casinos and healthcare. So I would say hotels is the collateral class that we are doing now and have the most concern about due to obvious reasons, like you have to rent them out every night kind of thing, to being the most volatile in a volatile economy compared to some of the other asset classes. Lisa Pendergast: Finally, on the regulatory front, what are your thoughts on the re-proposed risk retention rules? My view is that, while not perfect, they do help align interests far better than pre-crisis. And, even when finalized, hopefully early next year, the market still has another two years before the rules are implemented to figure it out. Feel free to weigh in on other regulatory issues that pertain specifically to your businesses. Greg Michaud: Well life companies are the most regulated group out there, so my comment is, jump on in, the water is warm. We are heavily regulated by the states and are watched over by the rating agencies. The close watch stems from the previous blow up in the late-80s, early-90s. As far as a buyer of bonds, as we buy CMBS bonds, we hope that what is coming out with risk retention is the best of all worlds. We like to see a little bit of risk retention but not so much that it drives people out of the business. We think that there might be a decent balance struck, in so much as they are making sure someone is at home and they are not re-REMICing the B-pieces. If we can make sure that doesn’t go on but still ensure that sufficient liquidity is provided to B-piece buyers, we should have a healthy and robust CMBS issuance market. CRE Finance World Roundtable: Macro Issues Facing CRE Finance


CRE Finance World, Autumn 2013
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