CRE Finance World Roundtable Discussion: 2014 Outlook Moderator: Brian P. Lancaster President The Minot Group, LLC Adjunct Professor of Finance NYU Stern School of Business Participants: Dan Bober Executive Vice President Wells Fargo Bank Ed Glickman Executive Director of the Center for Real Estate Finance NYU Stern School of Business John Mulligan Managing Director White Mountains Advisors LLC Josh Seiff Director – Multifamily Capital Markets Fannie Mae Jon Strain Managing Director JP Morgan Richard Walsh Managing Director NY Life Real Estate Investors Randy Wolpert Principal Eightfold Real Estate Capital CRE Finance World Winter 2014 12 Brian Lancaster: Thank you all for participating in the Commercial Real Estate Finance Council 2014 Outlook Roundtable. The purpose of the Roundtable is to get the views and insights for the year ahead from the leading professionals in commercial real estate finance. Joining me in the discussion are Ed Glickman, Executive Director of the Center for Real Estate Finance, the New York University Stern School of Business; Jon Strain, Managing Director, JP Morgan; John Mulligan, Managing Director, White Mountains Advisors LLC; Randy Wolpert, Principal, Eightfold Real Estate Capital; Dan Bober, Executive Vice President, Wells Fargo Bank; Richard Walsh, Managing Director, NY Life Real Estate Investors; and last, but not least, Josh Seiff, Director, Capital Markets, Fannie Mae. Ed, let’s start with you. For the last several years now we have enjoyed near record-low borrowing rates. How are these low borrowing rates impacting commercial real estate and cap rates? Ed Glickman: Well interest rates are a key factor in the real estate market. The Fed’s policies have been instrumental in the markets’ recovery post-crash. The Fed’s dual mandate is to maintain employment and to manage inflation. Currently that translates into an unemployment target at a frictional rate of 6.5% and inflation below the policy rate of 2%. At present we are at 7.3% unemployment with a caveat that labor force participation is quite reduced from where it was before the crash. Last month we created 204,000 jobs, only slightly more than 180,000 jobs, the amount required to maintain that 7.3% unemployment rate. GDP is currently at 2.8% and next year is looking lower. Inflation is currently running at less than 1%, and then some predictions show it declining next year. Other than the common wisdom that we can’t simulate it forever, the metrics say, the recovery is there but not robust. This provides the Fed with a good rational to continue stimulus if it chooses. While things are stable enough to start the weaning process, they’re not good enough to pull the plug. The implication of the tepid recovery is that interest rates are going to move up slowly and that we’re unlikely to see a rapid rise in rates. However when the rise does comes it will have a gradual but significant effect on real estate valuation. Currently the spread between cap rates and the U.S. treasury rate is fairly high, and so the first thing that will happen is the spread will compress before we actually see cap rates moving up. But once we narrow the spread, cap rates will climb and that will have a significant impact on valuation especially in the core markets where prices have become overheated. Roundtable conducted on November 21st, 2013.
CRE Finance World, Winter 2014
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