That whole alternate universe thing, the conceit of so many sci-fi novels, is clearly not merely the product of fevered minds. It’s real. Or, at least it seemed awfully real after having been at the CREFC meeting in Miami and the MBA/CREF meeting in Orlando during the past month.
As you might remember from our post-CREFC blog, the CREFC world was more than a little down in the dumps. Yes, assuming that there was no recession, real estate fundamentals didn’t look all that bad, underwriting didn’t look all that bad, but there was a deep miasma of unease across the industry. Where are the investors? Will the assault on liquidity orchestrated by our duly-elected representatives and their regulatory apparatchiki continue unabated and will it lead to the seizing up of the industry? How are we going to make risk retention work, as it fundamentally conflicts with the moving company structure of our business? Will some mortgage sellers and B-piece buyers be kicked to the curb because they no longer fit in with the new reality? Will some bulge bracket banks just throw up their hands and give up and go home?
As one who makes his daily bread from the CRE structured finance market place, a disconcerting few days indeed.
Then off to the MBA/CREF conference with something like 3000 of my best mortgage banking friends. Blue blazers and khaki as far as the eye can see. The sun was shining in Orlando. (Actually, it was pretty dismal outside.) Much the same positive outlook as at CREFC as to underlying real estate markets, demographics, supply/demand, the overhang of the refi boom, etc., etc., but an entirely difference conclusion. Happy days are still here. It’s been a month since CREFC and perhaps the notion that the aggregate economy might have been on the edge of recession that seemed quite current early in January is now receded a bit, but the meeting had a remarkably different tenor.
Here’s just a little data point for you: I participated on a panel on risk retention and regulation at CREFC and the room was packed to overflowing. It was the fetching hour directly before cocktails, at a time when a free money giveaway couldn’t normally draw a crowd. Fast forward to MBA/CREF where I moderated a similar panel in the middle of the morning at prime time … 50 people, half-asleep within 20 minutes. Worrywart meets Alfred E. Neumann.
Indeed, from the MBA perspective, one can see the basis for a little more cheer. Fundamentals remain good, the GSEs have been unleashed to the tune of $100 billion of multifamily lending and even though the banks were chided in December by the regulators, they seem ready to do their part. The life companies see easy pickings. On the other hand, if you compare the likely demand for financing with the supply from life companies, banks and GSEs, there’s a solid $100 billion of supply that better darn well show up through the capital markets, otherwise we are going to have a credit crunch of pretty significant proportions. Perhaps through the MBA lens, CMBS lending is like black matter; we can’t see, we don’t understand it, but we know it has to be there otherwise we would all fly off the globe into the great nothing.
But such cheerfulness ignores the knock-on effect of a crisis in the bond market. Life companies invest at very material levels in CMBS, the bond market provides price discovery across all sectors of the real estate economy, and the new liquidity rules and the further regulatory assault on the banking sector go far beyond structured finance. The life companies are getting mighty full, by historical standards, and the market shouldn’t depend on them to continue to provide north of $60 billion of financing each year. The GSEs are wards of the state. What can be given, can be given away. It is fiat volume, largely unconnected to market forces and while I don’t see the current state of play changing anytime soon, I don’t see a lot of things.
Finally, everything that’s happening contributes meaningfully to a growing bias toward risk aversion. Such a risk-off mindset can mature into a sort of self-reinforcing vicious cycle that could cause all CRE financing markets to shrink, and to shrink meaningfully. Remember, in the Great Credit Crisis of 2007 no one really appreciated contagion. Ignoring the possibility of contagion was a mistake then, and it’s a mistake now.
In any event, I hope that the MBA/CREF was a more accurate alternate reality than the gloomy confines of CREFC, but I suspect that both are right in their way. It’s going to be a difficult year, there will be challenges but on the other hand, there will be opportunities. No one ever promised us easy.