Top commercial real estate executives gathered at the Marriott Marquis hotel in Washington, D.C. to discuss how the current real estate cycle differs from the late stages of the last cycle just before the global financial crisis.
The panelists at the Commercial Real Estate Finance Council’s annual conference on Tuesday were David Durning, president and CEO of PGIM Real Estate Finance; Reid Liffmann, managing director of Angelo, Gordon & Co.; Dennis Schuh, chief originations officer at Starwood Property Trust; Real Capital Analytics’ Robert White; and Annaly Capital Management’s Michael Quinn. Eastdil Secured’s Nicholas Seidenberg led the discussion.
Because of CREFC’s restrictive media policy, the quotes and statements cannot be attributed to the panelists, who are treated as off-the-record anonymous sources.
According to one panelist, there are key differences between the current cycle and the prior one, notably that there’s less volatility and less opportunistic investing this time around. In this cycle, there is still some room for expansion, the panelist said.
Another panelist said that, as with the last cycle, whatever finally signals the end of the road is not likely to be obvious or expected. The probability of making mistakes is now higher in the current part of the cycle, he said, citing overambitious price expectations in Class B multifamily properties, one of the same mistakes he said he saw in 2007.
All of the panelists said that the current cycle would be over within five years, with one speaker expressing optimism that there were still a few strong years left. He said there’s been too much pessimism that belies the reality that pricing is still strong. And despite capital controls on wealth fleeing China, there’s been no notable drop in Asian investment in U.S. real estate so far, he said.
Another sign that the current cycle is different than the last is the crowding in the debt market, panelists said. Mezzanine lending, for example, is an increasingly stocked field, as more equity investors move into doing debt deals.
Perhaps the biggest difference between the two cycles, panelists said, is how the real estate finance industry has adjusted to what happened last time. Today, banks are less leveraged and newer regulations — like those restricting high volatility commercial real estate — make for more conservative lending practices.
The last cycle was marked by cheap and easy credit and that’s not how things work this time around, one panelist noted.
As for how close we are to the end of this cycle, only one panelist said it was basically already over. Like many a financier before him, the speaker opted for a baseball metaphor: The cycle is in extra innings, and a single run could end the game.