The recent CRE Finance Council Annual Conference in New York City brought together the biggest capital markets firms to trade information and get deals flowing. GRS Group was there, meeting with clients and surveying the state of commercial real estate’s finance picture. There was a lot of discussion at the conference about ramped up investment activity and how commercial real estate keeps getting hotter — maybe too hot for some. We spoke with Mark Halloran, business development director at the firm, during an event in New York for GRS Group clients, and he told us how he views the current capital markets situation.
What has changed in the last few months in the commercial real estate capital markets arena?
Since we last spoke, there have been additional entrants into CMBS space. It’s probably 40 or so firms now. We work with CMBS shops that are regulated as banks, and they do lament the fact that they have to compete against non-bank CMBS lenders and have different restrictions.
Can underwriting standards hold up during this period?
The amount of capital chasing deals certainly could impact underwriting standards as lenders fight for deals. People have to be creative and a little more aggressive for deals to gain market share. But we haven’t seen any real evidence of financial standards that have gone in the wrong direction.
There are a lot of life companies represented at the conference. What role do you see them playing in commercial real estate lending today?
They’re probably going to meet or exceed their allocations this year. I met with a large life company this week, and they had already exceeded what they put out all of last year within the first quarter of this year. The lifeco segment still seems focused on deals in major MSAs. Property focus still seems to be on garden-variety-type assets multifamily or senior living. One lifeco I spoke with is getting into construction lending. That seems to be an interesting route for a traditionally conservative life company.
Do you see rent levels being sustainable in view of the high values that properties are commanding right now?
Rent levels do seem to be sustainable for multifamily, that’s for sure. It’s still the favored asset class. In the primary cities, you have pretty stable office properties, and retail seems to be coming back as well. You wonder if they’re going to be underwriting based on increasing those rents. This is where we kind of got into in the mid 2000s, and that didn’t turn out all that well.
Do you see rising interest rates causing a correction in values?
I don’t know if things are overheated or inflated where a correction is needed. What would be worse is if we have spikes in interest rates. A slow increase is certainly better than things spiking up and down. The peaks and valleys are really what scares the market from doing deals.
There is some talk about alternative investments. Could you explain those types of deals?
We have seen a lot of clients that are running opportunity funds, looking at assets in situations where they can add some value. That might be doing some substantial rehab or even ground-up construction to get the kinds of returns what they want. They ultimately want to put it through a CMBS execution when it’s stabilized. We’ve been hearing about traditional lenders getting very much more involved in the ground-up construction business, which is especially encouraging. In the last 12 to 18 months it has been more common.
What are GRS Group’s capabilities in the commercial real estate finance space?
When we come to these conferences, it is mostly about reconnecting with clients and understanding what they’re doing to change and grow their businesses. It seems to be pretty nimble. You don’t see a lot of debt or equity capital sources that are bloated or have a lot of extra personnel.
One thing that we continue to notice is that everything is compressed, from turnaround times to spreads, to the time that an opportunistic fund needs to act on an asset. Nobody has the pleasure of four or five-week turnarounds. They have maybe 20-day due-diligence periods. Even on the CMBS side, these days, everything is about speed and accuracy, and that’s what we try to pride ourselves on.
As we look to get involved in servicing our clients through our multiple service lines, we’re finding that since we can offer a full suite of services, it becomes critical to clients because they want to be able to call one shop and make one phone call and execute a variety of services. It spares them from calling multiple single-service providers and having the delay of getting quotes and running into logistical complications.