With apologies to Mr. Marquez for repurposing the title of his haunting book, it’s conference season here in CRE and ABS securitization-land and therefore a time to reflect (more Marquez) on the risks that the world will become more disorderly, or whether we will progress gently from a perfectly fine 2019 to 2020. We attended CREFC in Miami, are currently attending MBA CREF in San Diego and SFA in Las Vegas (as mere vendors, we don’t get to go to Beaver Creek, more’s the pity). After having seen thousands of our best friends, we’ll have a pretty good sense of what the market thinks of 2020. We’ve already published our outlook for the year, but now we test it against the wisdom of the crowd (or perhaps herd is closer to the mark).
Let’s start with CREFC, as that conference is now done and dusted. The mood at the conference was, for the first time in years, as sunny and bright as the consistently pleasant Miami weather. During the conference, which took place January 13-15 at the Loews Miami Beach Hotel, this attendee heard only two utterances of “cautiously optimistic” but many more expressions of constructive conviction about the US economy and the commercial real estate markets in the next year or more. We all know that our esteemed editor in chief has always had his glass half full (finest wines for sure). However, to see this level of positivity expressed by the majority of attendees (even those drinking only water or DBRS’s “extremely high yield espresso” from the coffee cart), was refreshing to say the least.
Haven’t we all gotten a bit exhausted maintaining a faux mature, adult balanced views of risks and rewards, while really thinking, in our heart of hearts, that things were damn good. And now we’ve given it up and we’re all in on the “Morning in America” narrative. It’s good! No more twelfth inning baseball analogies. Maybe it’s a different game being played entirely?
Here at Dechert, we’ve been really busy across all of our products, CRE, CLO, ABS, large loan origination and, one of our personal favorites, the CRE CLO. After all that hard work in Q4, it was delightful to hear that the whole world was busy too and we weren’t the rear guard at Dunkirk, still busy but soon to be closing the door and turning off the lights. Maybe we’re the blind man feeling the elephant, but the part of the world we saw recently suggested that 2020 will indeed be another terrific year. So, it was delightful to hear validation at CREFC, where Mister Bluebird was sitting on CREFC’s proverbial shoulder and chirping away happily. The conference felt like an affirmation that the market’s open, that market participants haven’t done anything wrong, that we’re not driving the race car into the bridge abutment, and that we can just get work done in 2020.
Sure, we all talked about tail events, about black swans and orange swans. Things are okay makes for boring headlines and yawn-inducing presentations. So we talked about climate, we talked about recession fears, we talked about election consequences, we talked about Washington dysfunction, the growing alienation of part of the population from the joys of capitalism, but I don’t think our hearts were in it.
Obviously the election cycle hangs over everything. At least our segment of the business community seems pretty confident that the current occupant in the White House is going to go the distance and while I didn’t see many MAGA hats around, there was a resonance about the conversation stated, and sometimes unstated, that the status quo would be just fine for business.
Nowhere was the mood more exuberant than at Dechert’s annual soiree at the SLS Hotel on Monday night where we had the highest attendance yet with over 700 guests enjoying one (or more) of the florescent blue concoctions dubbed the “Dechert Dazzler” while nibbling on sushi served directly off a long, lean, and elaborately waxed, surfboard. While we had an incredible turnout, it still was less than half of the post-recession record breaking CREFC conference attendance generally. And, based solely upon my observations of the elbow to elbow khaki-panted and blue-collared-shirted crowds at the South Beach watering holes later that night, the number of registered CREFC attendees paled in comparison to the number of real estate and banking professionals who were in town to schmooze, wheel, deal and network with the conference-goers. Even the staunchest of economists will agree that there is no better indication of a positive real estate finance market than the size of the crowd at the Liquor Lounge on the Monday night of the conference. The large crowd at Tuesday morning’s Industry Leaders Roundtable, similar to the merry band of finance professionals that processed out of the Liquor Lounge after hearing the much feared words “last call,” is indicative of an industry that has the grit and motivation to make this economic cycle continue on without pause. And, although bleary eyed and coffee guzzling, I made it to the “closed to media” event along with hundreds of others, in our collective testament to the importance of the current market and commitment to working as hard as we may play.
So we’re fascinated to see if the CREFC buzz will be replicated at our other major conferences, but we’re fully expecting that to be the case. I will certainly report back if we find a discouraging word out there somewhere.
And finally, the perhaps “no-duh” cautionary note, just because we think it’s all wonderful doesn’t mean it is. The wisdom of the crowd is often right, but often spectacularly wrong. 2007 anyone?
Let’s simply agree, there is a recession out there with our name on it but for the moment, nothing consequential threatens. Then there’s the coronavirus to worry about and we heard talk about the rent stabilization. A horrible idea. But for the moment, nothing consequential threatens. Frankly, the economy periodically needs some pullback to restabilize. A recession is not the end of the world. But, as St. Augustine said, “Please Lord, make me chaste – but just not yet.” When it comes, there will be things to do. How about the election? All those regulators desperate to re-regulate are counting the days to the next election, and if there is a change in Washington, we’ll be fine, even as the regulatory state in full returns. As someone from the podium observed, New York has recently outlawed foie gras out of concern for the poor ducks, but frankly, how do we know the ducks don’t actually like it? We can live with a resurgent regulatory state in full, if need be.
Before anyone starts to argue that all this cheerleading does indeed sound like 2007, but, having been there, we don’t think it is. Subordination levels are relatively stable, rating agencies and issuers are operating under the more stringent Dodd-Frank regime, investors remain moderately optimistic, if more cautious and disciplined than bankers and lawyers, and…that’s how it should be. Cov-lite may be an infection of the private equity space, but not in the ABS space and there is a general sense of discipline all around, in our view, likely to extend the current amiable capital formation environments for quite a while.
But on balance, all remains quiet and we suspect after we have been fully conferenced out, it will reinforce our current base case view that 2020 is 2019 rinse and repeat.