For those of us living in the northeastern U.S., last week’s Commercial Real Estate Finance Council (CREFC) January Conference could not have been better timed to escape the brutal cold for the tropical beaches of Miami. We were joined at Miami Beach by a record number of attendees at this year’s conference. The mood of the attendees was overwhelmingly positive, which translated into a number of lively sessions, and even livelier social gatherings. 2014 was a great year for the commercial real estate finance industry, and most industry insiders expect 2015 to be even better. Our industry continues to grow like a rolling snowball, with no end in sight for 2015.
This year’s January conference kicked-off on Wednesday with a slate of CREFC forum meetings, where a broad range of industry constituencies discussed issues and topics. Hot topics of discussion in all of the forums were the lapse of TRIA and risk retention (both discussed in more detail below). After Wednesday afternoon’s enlightening and entertaining Industry Leader’s Roundtable Discussion (which included Crunched Credit’s own Rick Jones), over 300 friends and colleagues joined us at the SLS Hotel for cocktails and hors d’oeuvres to celebrate a great 2014, and hopefully an even better 2015.
Thursday began with a presentation by the Weekly Standard’s Bill Kristol on the outlook for the new Congress (while we believe little change is likely until after 2016 Presidential elections, we’ll leave it to the judgment of the reader whether a more unified Congress will be better or worse for the CRE industry in 2015). The keynote speaker for the conference was former New York Police Commissioner Ray Kelly, who provided a sobering outlook on world events (more on that below), as well as the recent issues between Mayor de Blasio and the New York Police Department. New to the conference this year were fascinating panels discussing crowdfunding, EB-5 and Canadian CMBS.
Unlike many recent years, speakers during the forum meetings and Thursday’s meetings generally agreed on the outlook for 2015. While many have concerns about the impact of excess liquidity in the market, world events, and the looming maturity wall, the mood at the conference was optimistic, and many expressed the view that the market is healthy and thriving. What does the industry believe 2015 will look like? There were several themes repeated throughout the conference that Crunched Credit will be keeping an eye on this year:
- The recovery is fully back, but there is still plenty of room to grow in 2015, especially in tertiary and secondary markets, as well as in transitional assets.
- Prognostications that interest rates would rise as the Federal Reserve eased off of QE have not come to fruition, and many expect that rates will not rise (and may even dip lower) in 2015. Treasuries are likely to stay low for the foreseeable future.
- The bulk of growth in 2015 will likely fall to CMBS. Portfolio lenders expect 2015 to be level or slightly above 2014.
- A loosening of underwriting standards and loan structures has made the market more difficult for balance sheet lenders to compete. The trend of lower debt yields and IO loans will continue in 2015.
- Although TRIA was fast-tracked through the House and Senate this week, the bill will not be retroactive to January 1, meaning that there will be a gap in coverage from January 1 through signing. Nobody is certain how this gap will affect commercial real estate loans and securitizations, if at all.
- Risk retention remains an enormously important issue to issuers and investors, which will likely have a significant impact on our industry before the regulations come into effect on December 24, 2016. Many have speculated that risk retention will limit liquidity, but only time will tell.
- For banks, the implementation of Basel III may have a detrimental impact on the cost of capital, and banks’ ability to make CRE loans.
- Many investors are nervous about the looming maturity wall in 2016 and 2017. The ability of borrowers to refinance 2005 through 2007 vintage CMBS will start being tested this year.
- Many speakers at the conference were concerned about the possibility that world events may create volatility and dislocation in the market:
- Most believe that oil prices will remain in the $50 range through 2015. While low oil prices are generally believed to be a benefit to the economy, commercial real estate values in locations such as Houston, Texas and North Dakota may decrease during 2015.
- Many economies throughout Europe and Asia, along with Russia, have trended back towards recession.
- The risk of a major sovereign default is more real now than at any time since 2011.
- Continued instability through Eastern Europe and the Middle East, and the threat of extremist attacks such as those this past week in Paris, remain high.
The growing snowball of 2014 has rolled into 2015. Will the snowball continue to roll? Will the hidden rocks and trees knock it off course? Will we be able to jump out of the way before it runs us over? Based on last week’s conference, we remain very optimistic that the snowball will keep rolling uninhibited through 2015 – with a minor bump here or there.