If the wisdom of crowds has any validity (and there’s no real evidence that it’s any worse than the pontifical huffings of the chattering class), then there’s hope for 2023. Optimism did itself proud at CREFC. We’ll see if that optimism is recapitulated at SFVegas and at the MBA CREF meeting coming up in the next few weeks. It has been said that we’re capable of talking ourselves into a recession. Are we capable of talking ourselves out of one?
Anecdotally, early signs are…not bad. We’ve got a handful of prints across SASB, CRE CLO and conduit that are directionally upbeat. Maybe total crap compared to Q1 2022, but given the last eight months…fantastic! I’ve seen a pretty good uptick in warehouse and debt fund term sheets over the past several weeks. That means that some players in our market, on both the buy and sell side, seem to think there may be a reason to put fresh capital to work. Refreshing capital is not an inexpensive exercise so, is engagement an augury of reconciliation and capitulation by the borrower community and a presentiment of conviction by the lenders? One can hope.
To reflate our business, we need a number of things to happen. Critically amongst them, we need investors to buy our bonds and provide equity for our debt platforms. That is, we need more investors than we’ve got right now.
Let’s make the positive case for investors. Relative value in our securities is supportive when compared to investments in other asset classes. Information, which is important to investors, is pretty good in our space, notwithstanding some cavils about gaps and limitations (we’re working on those and kudos to CREFC, its Executive Director Lisa Pendergast and the rest of the staff, and our members for the work on our debt fund index which is getting close to completion. That will help.). Investor reporting should be a net positive for CRE. SASBs are relatively easy to underwrite and remain attractive across both capital markets and the portfolio market. The CRE CLO structure has fabulous alignment between investors and sponsors and should be attractive. The conduit business, for all its flaws, has a long history of resilience. Generally, there’s decent fundamental performance across all commercial real estate categories (perhaps shockingly so). Legacy office might be a hot mess, but not the office that’s getting financed on a go-forward basis. There are good office assets out there. The same is certainly true for multi-family, industrial and retail (and SFR). Come on, man, as our President (perhaps sometimes unwisely) often says, buy our bonds!
I remain worried that even if the borrower community embraces the new reality of higher coupons and higher cap rates and returns to the capital markets’ borrowing window, and even if fundamentals continue to hold up, our sector will underperform because of the lack of investors and a lack of a passion to invest.
Not enough investors are educated about our market, not enough investors understand our relative value proposition, and not enough investors are excited about the opportunities presented in the CRE securitization space. Our industry, writ large, could and should do a better job of making the case.
CREFC does a great job of bringing all elements of our industry together and having frank, productive and open conversations which, indeed, continuously makes our industry better. CREFC has an Investor Forum which is a place where investors can be educated and convey concerns, discuss issues and embrace changes that improve our industry. All the major banks have research departments which publish stuff for the investor marketplace on a regular basis. Apparently, that’s not enough.
What we don’t do is advertise. What we don’t do is make a full-throated case to get into the game and buy CRE-securitized product.
Ford Motor advertises, Procter & Gamble advertises, plumbers advertise, drug companies advertise and even the big four accounting firms spend a fortune on advertising. Advertising is simply advocacy writ large, unburdened by the need to make a balanced case. It’s not a Solomonic exercise. It’s not a forum to debate the pros and cons of a product or service, it’s a full-throated peroration of the case.
Advertising, by its very nature, is unbound from an obsessive fascination with facts. Don’t laugh, it’s true. By definition, it’s not balanced. Do you think Ricardo Montalban’s crooning about fine Corinthian leather (a made-up handle, like Chilean Sea Bass) for Chrysler cars was mediated by a need for factual precision (is that too obscure an historical cultural reference?) How about the GOAT and his late lamented passion for Crypto? Do you really think all those ads for High “T” are really about science? Does “Made in America” really make car floormats better? Advertisement has more than a whiff of puffery. I don’t remember Ford including in their advertisement the possibility that my Ford Pinto might explode. I’m pretty sure it didn’t. Advertising is not about flaws. It’s about making the case that a product is good, valuable and attractive.
Why do folks advertise and pay a huge amount of money to do it? Because it works…even if it’s often annoying. (Super Bowl advertisements aside.) Some of this crystalized for me the other night while watching PBS and being exasperated by yet another interruption by the local station’s fundraising campaign, full of chirpy, cheerful people telling me how wonderful the station is and how important and fun it would be to contribute. They do it all the time. It’s mind-numbing but they do it because it works. If advertising works across every other sector of the American economy, it probably would work for us. Oh, perhaps we think investors are way too sophisticated to be influenced by shameless advertisement, but I’m pretty sure that’s not true.
We understand that there are issues and complexities and concerns around investing in any CRE debt product. We often highlight these issues when the industry meets because we are all working together to make the business better. That’s what a good trade organization will do. Is investor hesitancy attributable to other asset classes making better competing relative value claims better than we do? Is it that investors don’t like the concentration of risk in CRE loan pools? Is there not enough diversity? Is CRE debt too dependent upon manager competence? Is it really a problem with insufficient liquidity in our market? Is it that the model industry portfolios by which investment managers allocate investments is suppressing CRE bond purchases, particularly as the denominator effect bites? Is it that investors think they need particular expertise in our space in order to invest and don’t want the headcount? The problem can’t be the macroeconomic risks of recession, shape of the yield curve and fun with the Fed, which apply to all asset categories.
I don’t know. These may all be real concerns, but all products have…issues, have flaws. Advertising is ballyhooing the positive about a product and suppressing attention to its flaws. Our products are not fundamentally different than anything else for sale in the sense that all products and services have good bits and bad.
Advertising would do two things for us. First, it helps create an environment in which decisionmakers are more positively disposed to the asset class before an opportunity is even encountered. The evidence is overwhelming that the creation of such a positive narrative turbocharges expanded purchasing behavior.
Second, advertising would also help us reach two audiences that we just don’t touch within the confines of our trade organizations and banking relationships that are important to investment decisions. First, there are investors who invest in fixed income, but simply don’t participate in the CRE space. We need to at least talk to them. Moreover, we need to communicate with senior management who don’t come to CRE events, yet who have significant control of the allocation of dollars at a meta level above those who invest in our products. We need to encourage the leadership of major investors to be supportive…or at least not be hostile.
This may just be a thought exercise; it is surely far from a proposal. But the type of B to B advertising we see on TV every time we watch a tennis match or a golf tournament, creates an environment in which the actual decisions to buy a product or a service are simply easier and more likely to be successful. It softens up the beach for the landing. It’s not wrong, it’s not unseemly.
Certainly, there are significant legal and practical issues associated with embracing such advocacy and building out a platform, but that doesn’t mean it’s not a legitimate undertaking.
We need more demand for our product. At some fundamental level, bonds aren’t any different than bananas.
 Apologies to the late, great Ella Fitzgerald for appropriating, or perhaps misappropriating, her lyrics.