Fed raise rate 75 bps. Industry wide layoffs incoming?
I work for a global debt brokerage on the capital markets team and as you know the fed raised rates again. Do you guys foresee industry wide layoffs now or has there been some already?
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"Redfin and Compass are letting employees go, citing a drop in home sales and rising mortgage rates."
"Glenn Kelman, Redfin’s chief executive, announced a cut of about 8 percent of the company’s work force in an email to employees on Tuesday, citing sinking demand, which was 17 percent lower than expected last month."
These companies are residential tho. How about commercial?
Probably will see layoffs. Loan side will get hit because all you can bank on is originations and no refis. MF is going to be super interesting though given that the majority of buyers bought at cap rates below what the 10 year is going to be at soon.
Well my team primarily does MF. What do you mean by interesting?
The bulk of the IRR being touted by recent buyers (less than 3 years) has been pretty much based on cap rate compression. Yes rents went up, but cap rates of 3% are no longer going to happen because the 10 yr treasury which is considered risk free rate is now higher than this. In short, smaller MF shops with tougher equity partners will likely not find the same success they previously did. Previously you could buy anything and then sell it as cap rates compress. That no longer applies.
Again this is my two cents.
Can someone make a meme for me that shows Mel Gibson in Brave Heart (labeled Rent Growth) at the battle of Falkirk and his allies (labeled, fed rate hikes, inflation, etc.) leave him stranded. Cause that's what's happening in MF right now.
I don’t understand thjs
Everyone in the MF world who is still buying is pointing to rent growth. Things that have driven returns in the MF sector for the last decade (low inflation, very low and stable interest rates) are all gone now, leaving rent growth as the last man standing, and just like Mel, it's going to lose the battle, be tortured for a long time, and refuse to die until they plunge a sword through its heart.
Can we get a Memer to do this please, I think it would help explain the current scenario to people a bit better
What the fuck is cap rate suppression
No refis? That's going to be the core of the loan markets, no one is forcing anyone to build, but everyone's current debt comes due at some point.
Yes. Its unfortunate but unless your being forced to refi due to a nearby maturity, nobody is going out of their way to refi their 3% debt with 5% debt. So yes originators focused on refis will get hit and hit badly. New acquisition/development financing likely to be on hold for awhile until market settles. Get ready for a rough ride boys.
If anything, I think the capital markets teams will be better off than the equity sales teams. Debt/equity capital raising plays off volatility in the market. You can do a refi or recap with debt and equity. The investment sales people just do dispositions. That may slow down (or it may speed up if people need to sell). Frankly, based on all the above, the smartest thing I’ve ever learned is I don’t know. So to answer the question here - I have no idea and unfortunately neither does anyone else.
In debt/equity space at a major shop/market. There were two lay offs just in the past 3 weeks, which were said to be from performance. These were both analysts and they were strong analysts from my POV. We did grow our analyst pool rather quickly in the past year and a half.
I wasnt around for 07/08, but i keep hearing from folks (at my company and otherwise) who have that the expectation this time around isnt a recession as deep and long as during the GFC.
We are definitely in line for a reset, particularly in MF, and ive heard a bunch of shops (equity and debt) talk about a painful summer, but that there will be volume and deals to do again after the market adjusts. Fingers crossed for everyone!
Not really. 2020 felt infinitely worse… if that didn't bother you… this shouldn't be on ur radar. Disagree w some of the below… debt should fair better than equity (evaporating daily at this pt). Sure maybe not conduit originations but those guys get laid off ever other year. Deals will still occur, disruption creates opp etc etc. and debt (include mezz/pref) will make the decision now. Debt has become more selective but bc deals don't pencil. Dumb money will be wiped (we're on a decade + bull mkt…. decade old funds that have crushed honestly haven't been tested ..that much.. and may actually be revealed rn.. all assets not just RE) but guys will need to refi/recap and seek mezz/pref in these times. Larger debt fund, bridge, special sit enviro. Also note many mreit/ similar lenders will crush in these enviros… if their corp debt is fixed (unsecured bonds) and they lend lending floaters (ie rates rise and they get the juice given their debt obligation is fixed but originate floaters). Many will do less biz/vol than 2021 and make more…. Also the simple increase in coupons today (albeit credit spreads are out hitting their execution anyway… repo/lines/clo etc). While spooky sure… these are fairly interesting (if not exciting) times. And for larger funds, just clipping fees. Status quo.
2020 felt a lot worse because it happened so quickly (entire economy shut down within a month). In my personal opinion, this is just the beginning, and it's going to get a lot worse.
Agree with the rest of your points though.
Agree. RE was just left holding their dick w covid/restrictions/closures and negative gov support vs. other industries (shutdowns, rent moratorium, lack of non agency mbs buying)... on top of generally layoffs/economic impacts overall. Decent layoffs then... don't really foresee it today.
Agree completely with the sentiment dumb money will get wiped off the system, basically, people were getting a free ride and are going to face the piper now. If your firm in MF has large known PM and RE firms as borrowers, you'll have a slow down, but they will pounce once some companies need to offload and acquisitions take place.
Generally agree with your thoughts.
What space are you in, and how are you UW moving forward given changes in debt market?
At the end of the day asset backed equity investment follows debt's interest rate and the risk curve... if looking to purchase a standard MF asset, unless prices move to 5% cap, you arguably cannot transact right now and assume you will receive your UW returns ... what do you think?
Im in debt (as you can probably tell from my responses lol)... larger/MF REPE debt team. But have worked at cmbs/large loan bank team, and we have buckets in my forms in current role. All assets, all locations.
Hearing same thing internally and friends elsewhere, just more selective, the "flight to quality" everyone keeps saying. In many case debt groups will perform very strongly rn. Same w equity groups, but I think its some of the midsize/regional investor/GPs that will hurt. Foolish deals from a year ago / today.. weak returns/biz plan misses shortly..
I literally don't think many equity deals pencil rn. Passing on so many that come across my desk... even from major groups (and this is across the board / from chatting with major brokers in NYC). I understand they need to park $$ but shit doesn't work. Lucky to breakeven in many cases. Even in the past 12 -24 months, many investors failed their biz plan, but saved via cap compression / even dumber equity coming in.. that ship has sailed or will very shortly.
We'll see.
Right.. Out of curiosity, how many yrs exp or what level are you? Just want to understand your perspective when assessing opportunities.
In your opinion, what are the 1 - 3 drivers you're looking at rn to pull the trigger on a loan?
~8; principal debt fund. Mostly bridge deals (so focused on execution), but perm also. Hard to answer.. its the total picture. What is the thesis? Do you believe in it?
To be clear, many deals are obviously still compelling. Multi can be especially in our inflationary enviro given the 1yr leases and ability to pop rents. I do believe rent growth will remain high in near term (multi reits reported 15% across the board, national rents up 10% in past 12 months). But no one is just going to trend rents 15% YoY for 3 years. Equity feels very tough; deals are slowing down; you're not hitting those IRRs. At a conference very recently, all the reits / all assets saw caps widen a little 10-50bps and markets slow down recently.... this is a lagger too, so by YE... it'll be wider.
How is everyone justifying development projects right now? To all the developers out there, how is your firm tackling this issue with projects early in the development cycle with these rising construction loan costs? Any strategy on this and with development in the pipeline? Seems like too much uncertainty. Are you still building?
buying land at below market rates, have seen a few offers on the table from smaller developers that need the liquidity so they're selling zoned land at attractive prices
The answer to this is, "we bought the land a while ago"
Land at low cost basis, but theyre hoping that rent growth is significant to the point their YOC is solid.
Mathematically
They still pencil.
If what ever product it is you are developing, in whatever market/sub-market it is located, is not oversupplied or at real risk of such...... you are likely to win with development in the long/medium term (and even short term still in many cases). This assumes your deal isn't "priced to perfection".
That said... who this will hurt is the developers most reliant on high levels of leverage (whether in senior debt, mezz, and/or JV-equity form). The cost squeeze will delay projects not yet financed, probably kill some. If you can execute and build, you probably will do better as a result (pray for construction cost improvements.....).
Development is a long-term business, and really its all about localized supply/demand... right now, many markets are legit undersupplied or in-balance, back before 08.... oversupply was very common.
I think some of the larger shops that have huge staffs may see minor shifts due to fee volatility
I'm on the lending side and we are gearing up for the next cycle. Hiring a ton on the credit side. Existing clients are keeping us busy and having balance sheet and other non agency options for shorter (2-5 year) term product has been a godsend
We're going to enter a recession if we aren't already in one, so I expect to see layoffs across many industries. I personally am hearing more about tech layoffs than anything else. This cycle is definitely not CRE/RE related though, and we have a major supply problem so that will be a tailwind for some time. MF starts are way down. Cost of lumber is coming down. Housing affordability will continue to get worse in at least the near term. Debt will continue to be more expensive than COVID era.. With that said I do think newer product coming online from established shops will do fine
This will be the first real downturn (I don't count COVID) for many of us in CRE that frequent this site, I personally am kind of excited. Economic malaise is obviously not to be celebrated but seeing a new environment will be interesting against the backdrop that was the rollercoaster of 2019-2021
Biopharma space here in Southern California (SD/Irvine/LA) - industry is roughly down at 70-80% right now. Many companies are pausing/downsizing, others are restructuring. The company's stock is down by 65%, and continuously dropping. Tech sector is not fairing well - many companies are on a hiring freeze/layoffs looming.
the rate is still only 1.5%. it's nothing.
What do you mean
Fed interest rate now is 1.5%, which is still low.
https://tradingeconomics.com/united-states/interest-rate
it was above 5% in not so distant past and nobody was complaining. but now it's 1.5% and people are calling apocalypse.
LevFin / M&A People how are we feeling? Quite a few deals hung in HY recently .... but I presume underwritten pre-Ukraine. I get the sense it's going to be slow across HY this summer but could see a rush in Q4 as markets stabilize.
Are people still actively looking at Underwrites? Surprised there isn't more take private activity by PE but that may be waiting in the wings. I get the sense credit risk tightening quite a bit across the market... anyone still reaching for non down the fairway deals?
All we do is non fairway deals. I just closed a loan at S+325 for spec hotel redevelopment.
Mind sharing what leverage point, term, guarantees, etc?
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