Where are we at in the market - Revisited

@WestCoastDeveloper" touched on it. Risk management is most important during this time. I.E don't look for land acquisitions for ultra luxury condos. SFR's? lol. As long as capital allocation remains discipline you should be able to play ball during all phases of the cycle. Investment horizon is important. If you are on borrowed time (fund money) make sure you're in a liquid markets. There will always be underserved assets, find them.

Personally, when we get to this point in the cycle I like investing mezz to own as long as the value relative to the stack makes sense. Hard to place equity in primary markets when we get this far, but invest in controlling debt piece and you don't have to. Need the platform to make these plays but they pay off handsomely if done properly and have the ability to carry the asset.

The one issue since the crisis is that everyone keeps calling tops (and referring to 07/08 when they do it) and also when calling a top expects a hard landing. In my opinion that's fine, you only get paid if you take a position -- but I always question when I see these expectations (people said the same thing about a double dip for years). If the landing is softer, you may just get hurt by missing out on yield differentials. If the landing is hard, you miss out by being in cash and not short. IMO its pretty hard to make money by cashing out.

My thoughts. We are near the end of an up cycle, but we are nowhere near a downturn. If you look at lenders, they are still ultra conservative on underwriting. Developments and acquisitions are stressed to show what would happen in worst case scenarios. LTV is still low compared to levels prior to the recession. Don't expect too much upside in some markets especially like NYC, but don't expect a crazy downturn either.

I think that part of the hesitance is that many for RE people (and likely most of the ones on this board), this last recession is the only one we have really worked through. Hard not to be overly conservative when you don't know what a "normal" market cycle looks like. That being said, I like the points made above. The market really isn't in a position anything like 2007 (or even 2005) as far as leverage. Prices have grown significantly, but this seems to be as a result of a flight to perceived safety, not over-leveraging. You are definitely seeing dollars start to flow to secondary markets, but not at a pace like last time. And these are still secondary markets, not the tertiary or below that was seeing investment previously.

While I tend to agree that real estate lending/underwriting has been much improved over the prior cycle, I do worry about the fixed income market and equities and a spillover effect. If losses continue to pile up in equities, the role that the denominator effect plays on real estate values will come back into play quickly. In fact, we have already had several clients (work at an investment management shop) that have had to pull back on their real estate allocation. At a time of this volatility in the equities and fixed income markets, I would argue that pensions should increase their core real estate allocation (but of course it doesn't tend to work that way), which would help maintain or lessen the blow to any value loss.

On a different note, one area that worries me is IG corporate bonds, specifically the BBB rated IG bonds. The BBB-rated IG issuance has almost tripled since 2007 to the tunes of something like $2.5 trillion (not exact but close), while the AA-rated IG issuance has fallen. I wonder if this is the extension of credit by instrument that investment bankers pushed past rating agencies this cycle.

I guess time will tell.

A lot of the loans created at the height of the CMBS market in 06/07 are coming due over the next 1-3 years. It will be interesting to see the re-fi scenarios for these large portfolios of properties, many of which are underwater due to deferred capital needs>Mostly in the office sector.

A good example is the largest office building in Atlanta which traded to Shorenstein. Saw this blurb on Trepp:

The loan with the largest loss amount in January ended up incurring one of the largest realized losses in quite some time. The $263 million Bank of America Plaza note was liquidated with a loss of $146.4 million following Shorenstein’s purchase of the property in January. Backed by the tallest building in Atlanta proper, the loan made up 12.4% of the balance behind JPMCC 2006-CB17. That deal incurred over $220 million in losses in January, with 11.34% of the deal’s original balance now cut due to liquidations.

I really think we have seen pricing peak for the cycle. At the same time I am seeing construction costs go up dramatically in markets all across the country. A lot of projects built 2- 4 years ago that are now selling for huge numbers are enticing people to reinvest at the wrong time. I don't think there is a huge risk of losing your capital, but the spread between the exit cap and yield to cost is significantly tighter than it was even one year ago. As OP said, managing risk at this point in the cycle is crucial. I also really favor mezz and pref equity investments. Several sponsors I work with have mentioned recently there has been a lack of pref equity in the market for the past several months. I think there is a great deal of opportunity there.

I know Pearlmark has just rolled out a mezz fund. I'll be interested to see how quickly they are able to place that capital.

I am not as concerned about the CMBS maturities. I think the risk here has been overstated. The performing properties will be refinanced without much trouble at all. There will be some non-performing assets that might cause a hiccup but firms who focus on distressed assets have not had much to choose from over the past several years and they should have plenty of dry powder to act on these opportunities. Back in 2012-2013 lots of people were worked up about the DUS loans from 2007 and 2008 that were coming due. That turned out to be a non-event.

Bear markets happen without recessions 40% of the time, so it's not certain that we will head into another recession. Although you can say some markets (Industrials) have been well in a recession for four quarters now. I get the sense that everyone is hunkering down for what may or may not be a harsh one, which is why we are seeing "slow growth" at best.

The main driver will be China. They will have a real estate collapse much greater than ours - the question is how the ripples to our markets, and when.

Personally I see China getting us into a recession, not one nearly as bad as 2008, at least from our end, but definitely a recession. However, I don't see it being a long one as I think oil recovery will lead us out of one late 2017 perhaps. But I'm not even close to an expert, so you're guess is as good as mine.

Those who are saying the coming downturn won't be as bad as 2008, are you serious? It is likely to just as bad at best. At worst? As bad as 2008 should have been had we just taken the medicine then. The problem is the FED has no bullets left in the big gun they are using to scare people into doing what they want.

Wait for the Case Shiller P/E to come back down to historical mean of 16-18 and get ready to load up. Things may go on sale this year for the first time since 08. Once S&P gets into the 1500's I will start looking to load up on my favorite companies for the next 7-10 yrs.

I made my first investment in UA in 08 when I was 19. Invested 20K I had saved while I was serving in the military. A year later I sold (huge mistake should have held for long term until around now) for a 100% gain. If I had sold around 90, the investment would have been worth 200K

Long story short, I will be ready to load the truck for the next 7-10 years when the opportunity presents itself again. I'm excited that the time will be here sooner than later. This may be the start of our first real bear market since 08. Have my laundry list ready. Looking for 20-25% correction by year end.