How do you feel about the current state of CRE?
Through the past few months after deciding I wanted to start my career in CRE, I've spoken with people in the industry and read a lot of insight on this forum, and it seems like every one loves what they do and have a positive outlook on the CRE business. However, yesterday my dad ran into someone he knows at lunch that is in the business, I believe an Executive VP at one of the Big 3, southern state in a large city. From what my dad told me, it seemed like he didn't have much good to say and said something among the lines of "it isn't what it used to be." I plan on reaching out to this guy to network with eventually so I might bring it up then (unless that's a bad idea), but what is yalls take on the current state of CRE? Is it not what it used to be or headed in a bad place?
Bump
Not even sure what, “it used to be.” The industry used to be more localized, more fragmented, and more inefficient. Because of that, there were large returns for individuals with information asymmetries. Now, the industry is more global and more efficient. The internet allows people to have access to larger amounts of information and globalization allows more global capital to move into risk assets such as real estate. However, while it’s different, the industry is growing and becoming more institutionalized. Additionally, it’s still a great industry to make a boat load of money if your entrepreneurial, can raise capital, and can source good deals.
This was pretty much my thoughts as well. I've talked to older guys in the industry that talked about the days before the use of the internet when they would have to walk and drive around the city when they could do all of their research online now. Thanks for the insight
Also, I wouldn't let a single person with a negatively skewed perception of the industry change your personal opinion. At the same time, your view of the industry based on conversations with WSO members presents a bit of survivorship bias. The people who hate(d) the industry likely do not post on here and quit as well. Definitely speak with him to gather another data point.
Here's one thought. The 10 year has been on a constant decline since the early 80s. Real estate tracks bond yields and so one theoretically could buy assets and simply hold, while experiencing cap rate compression while the 10Y continued to trickle downwards. Mediocre investments may have proved to be strong as a result--cap rate compression is any developers dream. The reality is the 10 year today is already so low, that many believe it has to go up. This means deals that move forward have to have legs without assuming cap rate compression, not to mention rising rates have people spooked as well.
Being that cap rate = NOI / Value, does "cap rate compression" simply mean appreciation?
No. It means Present Cap Rate is lower than Initial Cap Rate. This can mean appreciate depending on what has happened to NOI. Appreciation occurs due to: (1) Cap Rate Compression or (2) Increased NOI.
"It isn't what it used to be" could be said about pretty much any field in high-finance. It's a classic line from old guys in finance. There's never going to come a time when people stop needing real estate, and for that reason the field of RE Finance will never be obsolete. It's not like HFT or certain Prop Trading schemes where your entire operation can get killed overnight if new technology, regulations or evolving market participants render them ineffective
This is true, though the period of easy money is over with IMO.
I disagree. You'll find there is "easy" money to be made in any growth cycle. I think the point in this cycle where one can make easy money is over. There isn't anything like 2004-08 or 2010-15 where there was easy money floating around and you could take enormous leverage and play roulette with the market right now, but it will come back. Tons of guys made bank in the early 2010s by taking advantage of hot condo markets, lots of international liquidity, and extremely cheap financing. And folks were saying the same thing you are now in 2008/09. I'm sure they were saying it after the S&L crisis.
With no disrespect or insult intended to you, folks are always saying that the era of easy money is over, much as people in most industries are always bemoaning how much better things were. Usually, the market bounces back. Lenders have such short memories.
Refresh my memory, what firms are the "big three" in CRE?
I believe CB/JLL/CW
Recently, I've seen people on WSO refer to "the big 3" or "the big 4", which I believe is attempting to reference CBRE / JLL / CW / Newmark(?). I wouldn't refrain from doing this and instead just list the firm(s) themselves. The reason being, "The Big 3" ignores two of the best and most prestigious firms, Eastdil and HFF.
It is whatever you make of it.
The industry is a pyramid. There are a ton of jobs available (at least right now) at the lower end of the spectrum. As your experience level rises, the amount of jobs available that pay you what you think you're worth for your skill set and experience level dwindles drastically. Most people will not be able to find anything other than shitty, life-sucking jobs in their 30s and 40s and beyond in this industry; the other tiny few will obtain the few senior level jobs or they will become an entrepreneur. From what I've observed, most of the people who obtain the few senior level jobs have truly sick resumes (in terms of the prestige of their school, names on their resumes). But my guess is that it's not their resumes so much as it's their intellectual horsepower (MIT grads are smart; smart people excel in their chosen career paths).
In other words, this is not an industry with a safe, steady career path where you're assured senior analyst, associate, senior associate, VP, MD, etc. simply by throwing your resume and years of experience around.
This is great. If nothing else cold observations like this make me motivated as hell to get stuff done and stay hungry. Had lunch with my big boss a few weeks back and he was almost sentimental about being my age and running around the country in the 80's and then onto the RTC days. He went on about how many guys just disappear or tail off over the years for whatever reason and it just gets thinner and thinner as you move up, lonely to a degree. Made me really grateful and strangely optimistic.
I see where assets are transacting right now and I think wow there's going to be a lot of guys losing their shirts in the next down cycle.
Buying at historical peaks and underwriting a sale at even higher peaks is not a recipe for success.
Nothing new under the sun.
That's fair, but people have been saying what you just said since 2014 and those people left a lot of dollars on the table (myself included).
Agreed. If any of us knew when a market was peaking, that person would be a billionaire several times over within a couple decades.
Eventually the music will stop playing and someone will be left without a seat.
If I had 7, 8, 9 figures lying around I'd prefer to keep it liquid.
Unfortunately for us peons, we need to get the money out the door regardless of where we perceive the roller coaster ride is at the moment.
Tough to lose your shirt if you are using very little leverage and hoping for a nice coupon.
The dude that's been saying this is probably upset that things have gotten a lot more 'sophisticated'/'technical' in the last 10+ years. It used to be that you could be a local-yokle type person at a firm and eke out a good living just pounding the pavement/phones and digging up off-market deals from meeting some random dude in a bar. The days of that are largely gone especially in Office, Industrial and Retail. It happens still to a certain extent in all of these and to a greater extent in multifamily, but for the most part, the business is trending more towards a structure like IB/PE where you have a substantial share of the available product owned by an ever shrinking handful of institutions/firms due to aggregation, buyouts, globalization, etc. So my guess is that guys like the one you mentioned get cranky with this because in order to keep up they'd have to significantly step up their game on the technical side of things, which is very difficult to do.
I think you're spot on with that assumption. I left out that my Dad also said the guy mentioned that the industry has "gotten a lot more technical."
I don't know what the guy the OP was speaking of does, but I was talking to a partner at the biggest developer in my city and he was complaining about things too, but for a different reason. He said he got into the business because he saw guys building office buildings at 100+% leverage, and now you have to put up 20-40%. He was acting like he used to be a stockbroker before E-Trade became a thing lol
It's crazy. Generally, in a capitalist society you are rewarded for risk-taking (that's essentially what interest is, at its very essence); however, things got so unbalanced for awhile in real estate that you could get rich with virtually no financial risk to yourself.
The guy works in debt and structured finance
I know a small local MF developer her in San Diego. His prized piece is a 60 unit he built 25 years ago and still owns. His words are similar in that development did not require so much cash way back when. If you could build, you could enter the market with 10-15 down on costs. Now, like you've said, it takes much more equity.
To put it in perspective, I am looking at five deals right now, four of which the seller is going to either sell at breakeven or a 5%-10% haircut. They overpaid in 2013-2014 and thought cap rates would decrease further. So there is no way anybody buying in 2018 can underwrite a decrease in cap rates. On another note, I always look to see what the smartest players in the industry are doing. Anyone notice the massive amount of liquidations that Blackstone is doing. Almost half the portfolio sales are coming from them. They obviously see something happening.
Which portfolios teddythebear? I haven't tracked their portfolio sales closely recently, but I know they've acquired some large (mostly industrial) ones as well...?
Also, didn't they purchase Equity Office immediately before the financial crisis?
Can't speak for industrials, but I've seen about 6 hotel portfolios and 4 multifamily portfolios listed through HFF, CBRE, etc. This was all within the course of a few weeks. Now its possible they are just reallocating proceeds or have a fund closing. Its hard to tell, but just thought it was weird with the number of liquidations, but your right I am sure they are buying too. I am not sure if they have been a net seller or buyer though.
Blackstone is actually an active buyer in the market today, according to this document.
https://d16yj43vx3i1f6.cloudfront.net/uploads/2018/05/pere-50-presentat…
They have been net buyers if anything. Buying every public company that they see undervalued and taking them private.
The industry as a whole is still currently strong, and there is still a ton of money coming off the sidelines that had been pent up since the recession of 08, but there’s no doubt that with the rising interest rates and the slight raise in cap rates across the board, that there will be a pullback. Most industry heads are predicting 15 to 18 months (Q4 2019). But that’s just the standard 10-year dip. We are overdue. I have noticed that 2018 has been the year of investors going back to the fundamentals of real estate. Deals are trading less on bond-like characteristics ( cap rate, lease term ,and tenant , like they were the past few years) and more emphasis on location/market specific).
I’m also mainly referring to the net lease sector and the private investor sector, since those were the deals I’ve mostly done over the years.
To the extent that rising rates effect real estate, does no one contemplate the effects that rising rates will have on all other risk-assets? We forget to consider the relative aspects of rates on different asset classes...
One would assume since both RE and the stock market are so closely tied together that it would be one and the same. But it’s a strange real estate market right now....interest rates creeping up, but investor appetite still relatively strong.....but supply is coming out quick, but lenders still tight (conservative). I can’t quite get a read on it.
My thoughts on multifamily below -
Too much capital chasing too few quality deals in multifamily. Class B is way too hot - everyone is underwriting $100-200 per unit rent increases through interior renovations without giving a damn about demographics/tenant's ability to pay. Stabilized properties are selling at mid-4% cap-rates. Fannie/Freddie are shitting out cash everywhere because who cares, its backed by the taxpayers right?
Dramatic construction cost inflation is killing projects, and the trend doesn't seem to be reversing. There is a huge skilled labor deficit in most markets, and the Trump's immigration stance further exacerbates the issue. I don't see many millennials lining up to bend rebar or frame for $12-15 per hour. Most of our clients are mentioning 20-30% cost overruns as the norm.
Several deals have come across my desk for multifamily product bought in 12/13/14 in tertiary/suburban markets bordering major metros that saw limited (if any) NOI growth although these investors share original underwriting models where they were just assuming rents would climb @ 4% per annum. It's truly amazing how naive certain capital can be in regards to class B multifamily.
Margin of safety is great (obviously) but in addition to lack of rent growth, repairs & maintenance is becoming a huge issue due to the same labor pricing problem.
I think the active adult space and upscale RV parks have loads of potential. Also saw some cool master-planned townhome community ideas where you could have lease/sale optionality. As a general rule, 3br/2ba units and any units with a garage are fully occupied in the markets I cover. Developers have way overbuilt 1br units for millennials while neglecting middle class families that are becoming renters by necessity as home prices continue to surge.
I wonder about deals from 15/16 that had full term IO on 7/10 year debt in the mid/low 3s. What happens when the rent growth that was underwritten isn't there and the capital markets aren't in nearly the same place when these mature? Rates don't need to increase much for debt service to double if IO isn't available when you need to refi.
Ad voluptate quae et voluptatibus voluptas. Sed est voluptas repellat est aut.
Modi sequi in odio aut fugiat. Ut quae veniam animi eveniet animi aliquid omnis ut. Nihil quia dolorem aut vel ut autem. Veniam eum expedita quo suscipit quaerat cupiditate excepturi. Porro qui ea molestias illo aut neque. Tenetur doloremque similique quia voluptates aut.
Qui harum mollitia voluptatem eum eos molestiae voluptas. Deserunt eos id impedit et. Ipsam illo provident qui et atque dolores reprehenderit exercitationem.
Blanditiis praesentium consequatur et non. Ut eius occaecati dolor optio omnis. Deserunt dolores ipsam odio labore quibusdam. Autem dignissimos magnam esse. A beatae aut minima expedita ex sunt repellat.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...
Consequatur qui nemo est mollitia quo libero. Quam ipsum repudiandae distinctio et debitis. Consectetur et aut in est voluptas sequi veniam. Vero assumenda eaque fugit. Distinctio voluptas commodi facilis et enim illum. Id ea reprehenderit illum.
Magnam voluptatem ratione voluptatibus iusto eos aliquam. Autem repellat qui fugiat fugiat dolore voluptatem ab ipsam. Quisquam voluptas corporis sed. Et est exercitationem beatae eos magnam eum. Ut id rem vel esse voluptates illo atque est.
Iusto non incidunt quidem animi sapiente perferendis aut. Nesciunt accusantium ea voluptatem explicabo. Reiciendis et perferendis et eum ea veniam.
Aut placeat adipisci et ut maxime nesciunt. Sit itaque laborum delectus dignissimos. Qui eveniet adipisci error consectetur cupiditate voluptas.
Libero sit et et est necessitatibus omnis. Dolores a nulla labore aut consequatur aut molestiae. Voluptatem sed magni cum molestiae sequi ut. Sint qui consequuntur facere quam.
Quae accusantium rerum sed molestiae incidunt. Reprehenderit pariatur eligendi voluptate eius facere dolor. Laborum ab optio autem sequi qui.
Dolores molestiae molestiae ullam est cum sint nostrum. Aut maxime veritatis quasi ut accusantium iusto.