How do you feel about the current state of CRE?

scshtx's picture
Rank: Gorilla | 562

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?

Comments (63)

Jul 21, 2018

Bump

Most Helpful
Jul 21, 2018

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.

    • 5
Jul 23, 2018

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

Jul 23, 2018

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.

    • 1
Jul 21, 2018

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.

Learn More

Side-by-side comparison of top modeling training courses + exclusive discount through WSO here.

Jul 24, 2018

Being that cap rate = NOI / Value, does "cap rate compression" simply mean appreciation?

Jul 24, 2018

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.

    • 1
Jul 21, 2018

"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

    • 1
Jul 21, 2018

This is true, though the period of easy money is over with IMO.

Jul 23, 2018
cpgame:

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.

Jul 21, 2018

Multifamily is better than ever, making 2% gain on sale and doing 70B business a year, I honestly don't know any other business that can make such easy billion every year

Jul 23, 2018

That's good to hear. Multifamily investment sales is what I'm leaning towards starting in atm.

Jul 23, 2018

Refresh my memory, what firms are the "big three" in CRE?

    • 1
Jul 23, 2018

I believe CB/JLL/CW

Jul 23, 2018

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.

    • 1
Jul 23, 2018

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.

Jul 24, 2018

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.

Jul 23, 2018

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.

Jul 23, 2018

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).

    • 1
Jul 23, 2018
The Duke of Wall Street:

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.

Jul 23, 2018
The Duke of Wall Street:

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).

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.

Jul 26, 2018

Tough to lose your shirt if you are using very little leverage and hoping for a nice coupon.

Jul 23, 2018

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.

    • 3
Jul 23, 2018

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."

Jul 23, 2018

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

    • 1
Jul 23, 2018
Red banana Wagon:

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.

Jul 23, 2018

The guy works in debt and structured finance

Jul 26, 2018

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.

Jul 23, 2018

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.

    • 2
Jul 24, 2018

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?

Jul 24, 2018

They've also bought out and taken private two multi-billion dollar industrial REITs recently, paying a premium for each.

Jul 24, 2018

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.

Jul 24, 2018

Blackstone is actually an active buyer in the market today, according to this document.

https://d16yj43vx3i1f6.cloudfront.net/uploads/2018...

Jul 25, 2018

They have been net buyers if anything. Buying every public company that they see undervalued and taking them private.

Jul 23, 2018

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.

Jul 24, 2018

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...

Jul 25, 2018

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.

    • 1
Jul 24, 2018

Just look st the CMBS market, volume is on par with last year, spread is at the tightest level since 2015, and with risk retention rule Wall Street is not underwriting junks anymore, also 80% of this year's cmbs is horizontal retention, those guys are holding onto the b-piece for 10 years and they are all confident doing so

    • 1
Jul 25, 2018

I wouldn't say volume being on par with last year is necessarily a good thing because last year i) Spreads widened out like crazy for a few months and CMBS lenders weren't doing much in those months and ii) Risk Retention added a lot of uncertainty to the market as well. This year didnt have those characteristics so its actually not a good sign that were not doing way more than last year.

Despite risk retention, there is a ton of junk out there. Don't believe me? Do these two things i) Look at the non-top 15 loans in a non-bank CMBS pool and ii) look at a term sheet of a CRE CLO issued by a smaller shop. You'll see what I mean.

    • 2
Jul 25, 2018

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.

    • 2
Jul 25, 2018

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.

    • 1
Jul 25, 2018

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.

    • 2
Jul 26, 2018

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.

    • 1
Jul 26, 2018

FYI, there's a housing shortage going on right now, let alone the fact that multifamily has always been the safest assets in CRE, so of course money are flowing into multifamily

And Freddie Mac lay off 100% credit risk to investors through K-deal program, so your tax money is not at risk. As for Fannie Mae, they have loss sharing structure with sellers, so you tax money is minimally at risk on Fannie Mae loans

    • 1
Jul 26, 2018

No idea what the K-Deal program is. Could you explain?

Jul 26, 2018
Funniest
Jul 26, 2018
Comment
    • 2
Jul 26, 2018