All the signs of a recession are present. Unemployment is below the natural rate, the VIX is historically low while price levels are historically high, and central banks are beginning to simultaneously unload massive balance sheets while inflation still remains below target levels.
Here's an article from Seeking Alpha showing their take on the coming storm: https://seekingalpha.com/article/4085445-recessio…
I won't be arrogant enough to assume that I can predict when the market will turn, but we all know that it will inevitably come at some point. From what I've heard from people who graduated into the last recession, the job seeking process was incredibly difficult. Now granted, this was the second worst crisis in the last century, but I think there are some lessons that can be applied to the next slowdown.
So my question is this; for those that graduated into a recession, what's your story? How did you go about breaking in?
Also, how can prospective monkeys prepare for a recession? More networking with those in boutiques/non-IB careers? Learn more technicals? Pick up another degree/major?
face down ass up
I'm 39. Got in to lending in 1995 (real estate stunk in the 90's), started selling real estate in 1999. Opened my own CRE brokerage in San Diego in 2001.
The big dogs at CoStar who have their hands on all the data you could ever dream of are saying what everyone else is saying. The end is near. Yes, 1 to 1.5yrs...regardless of asset class.
Signs to look for are increasing prices yet low overall transaction volume. Also, in early 2008 my pipeline was stacked. All seemed well, but by spring deals were falling out left and right. Talked to everyone I knew and the same was happening from March to the Summer.
There are many other things to look for but high prices and low volume to me is one of the last things to happen before the correction. San Diego for sale housing volume in 2016 is predicted to be down 2% from 2015...prices up about 10%.
Construction lending is on its last leg. There's almost no construction money out there right now. Only for the very best deals and sponsors. All the lenders want cash flowing deals.
Equity is still there for all kinds of deals. New funds are being closed and folks are still aggressively searching for deals. It's clear however that the sentiment is that it's tough to find deals that pencil at this point since prices (mainly land and hard costs) are so high.
In terms of slowing transaction volume, this is definitely noticeable. Everyone I talk to is not as busy as they were last year around this time. It's almost as if the summer lull came and never left in a way.
This is my first cycle so I can't say that I know what it means for the big picture, but that is what I am seeing.
One thing I am struggling to understand is that in the event of a turning point and correction period, why do so many acquisitions folks get laid off? I would think that once a correction occurs and prices start dropping, this is the point at which most (or the smart?) equity and developers would want to swoop in and tie up deals at a good basis and potentially time the completion of their project on the upswing. Especially if they are sitting on a new fund with tons of dry powder. Clock is ticking on the fund, money still has to be put to work no?
How long does a typical correction period last? Are we talking 1 year? 2 years? More?
Nice post.
The correction periods are short in terms of deals starting to close again. Prices may be down but it's about deals getting done. Volume wasn't bad in 2010. I don't know much about the institutional sides hiring/firing principles. It would make sense to me to keep a $150k seasoned Acq manager through a 2yr lull if they are making contacts and planting seeds that in a very short period of time could produce a few deals that each make millions for the firm.
I was too young to understand all the dynamics in 1998 but man, what a terrible year for real estate. It was our last foreclosure peak. I did really well in 1997 for a 21 year old. By late 1999, even with the .com bomb, I made 30% more than 1997. Then rode the wave to all the way to 2008.
Keep in mind guys that in the 90's MF was weak. I knew guys that got out after recouping in the early 2000's. There were several years in the 90's that they fed their buildings personally because they didn't cash flow. MF may have a different course moving forward given our low home ownership rate, but there is always something new happening all the time.
Interesting question, read it a couple days ago and have been mulling over a response. I started my career coming out of the early 1990s recession so I’ve been through a couple cycles now. The 2008-2009 recession was a confluence of too much credit and leverage in the overall economy so I’m not sure we’ll see a repeat of the size, scale and breadth of that this time around. I don’t know if I can craft a comprehensive narrative to address your question but here are some observations I’ve made that might be informative. There are so many related issues that contribute to this such as Fed policies, the political environment, cap rate compression, etc. but here is what’s off the top of my head. Just one man’s opinion so don’t throw any monkey shit, okay?
• To the extent the US enters a recessionary cycle, real estate will not be THE contributing factor although we will undoubtedly be impacted by it. Consumer credit, auto loans and student loans look to be major problems this go-round. • We won’t see the volume of REO or non-performing loan deals come to market like we did in 2010-2012 so don’t bother raising an “opportunity fund” or anything like that. The reality is that most of the problem deals this time will be primarily in 2006-2007 vintage CMBS and all the major special servicers are owned by PE so they’ll likely keep those deals in house.
• Debt underwriting, while certainly more aggressive the past couple years, is still backstopped by plenty of equity, whether sponsor cash, pref equity or mezz. Lenders are a lot more sensitive to proceeds coming out of deals so leverage remains reasonable. • MF may feel overbuilt but the vast majority of new construction has been limited to the top 10-12 MSAs and overall vacancy is still historically low at ~5%. Fannie MF delinquencies are something like 7bhps on a $200B+ portfolio. Homeownership is still at a low of ~63% so there will be continued rental demand. There still looks to be opportunity in Class B and suburban product. • There are been little spec office built this cycle and projects that have gotten done are Class A+ core market deals and there is a still an appetite for those kind of deals, particularly from foreign investors. Interesting stat I recently heard is that office growth is 50bhps slower than employment growth. Of course, there is a huge dichotomy between CBD and suburban office which continues to struggle. • Retail, much like office, has seen limited construction outside of higher profile mixed-use development in top MSAs. There is still a huge problem with secondary and tertiary market retail (JCPenny, Sears, Macys anchored deals) which will cause a lot of CMBS losses and keep the special servicers busy. Don’t know what the answer is there but any developers that can come up with creative reuse for 70s-80s vintage malls will absolutely kill it.
• Hospitality has also seen limited new supply (outside of NYC) because construction financing for hotels has been VERY tough to come by. • Construction financing is available for good deals with good sponsors but it’s getting expensive and your choices are getting more limited. Many traditional sources of construction capital, namely national and regional banks, are exiting the business or severely limiting their exposure mainly because it’s not profitable for them. Making construction loans used to be the way these groups got permanent financing deals. Now, not so much. I spoke with a senior guy at a major national bank the other day about construction loans the other day and he had an interesting perspective which was why would he want take the risk of loaning construction money for only 2-3 years when he knew a life company or Agency was going to take him out when the deal was built? Without a high degree of certainty that he would get the perm financing, it wasn’t worth it to him to make the construction loan. • So, how do you survive a downturn? Two words – FEE WORK. This is what got a lot of guys through the last recession. Services like property management, asset management, BPOs, construction management, etc. kept some amount of cash flowing when the credit markets were frozen and transactions weren’t getting done. I was a developer for 15 years before the recession and then became a workout guy since I understood how development deals were structured, could help complete them, etc. and have stayed on that side of table once the markets came back. Ask yourself whether your firm has a secondary service or cash flow source you can rely on when your primary business slows down? Do you personally have additional skills that can be deployed if your main gig slows down or goes away? • Interesting to note that a lot of money came into the market in 2009 and early 2010 looking for deals and got crushed because they were too early by a year. Not sure how that applies this time around since there are so many firms and funds with war chests ready to deploy capital at a moment’s notice.
The final takeaway is that very few saw the 2008-9 recession coming. Some of the capital markets guys saw it (like here: http://www.wallstreetoasis.com/forums/just-so-you-guys-know) but most of us didn’t. This time, EVERYBODY is aware of where we are and hypersensitive to not having a chair to sit in when the music stops. Which leads me to believe it won’t be too bad. Mildly uncomfortable perhaps but not the industry-wide bloodbath we saw just a few short years ago. Good luck.
People/companies get shifty when the shit hits the fan. Commissions don't get paid, deals get stolen...office politics increase. Divorces happen...
I had a very strong relationship with a bond fund that lent private money. In 2007, even with a pretty strong fee agreement with my client, this lender circumvented me for two reasons. One, out of spite cause they were sort of forced to lend the borrower the money very late in the cycle on a risky development deal, and two, to keep the loan amount as small as possible by not having to add broker fees. This resulted in a lawsuit and a lost relationship. The bond fund no longer lends money cause they made a ton of terrible business decisions. Redemptions killed them.
A client of mine on another deal had over $400k in an interest reserve for his completed, now leasing up storage facility in a great market. TARP just got approved. This Chinese bank wanted to buy several banks and needed to improve it's balance sheet. So, they pulled the $400k left in the reserve, put the borrower into default and sold the note on freaking craigslist.
Currently these CMBS deals are getting refinanced or just selling. Life is good right now. Whatever CMBS deals are ballooning over a year from now will struggle to new financing for one reason or another. It may not be the bloodbath that was predicted but there will be some fallout for sure.
The lead up to a correction is stressful. It's very messy in the middle of it trying to get balloon notes extended and keep things alive. I hope we never see 2009/2010/2011 ever again.