Where the CRE Opportunities Are and the Risks That Await
“If anything is going to stop this train it will be government regulation.”
SAN DIEGO—Economic growth ramped up following the lockdown, but with it came inflation and risk. So said panelists at the recent MBA CREF Finance Conference and Expo here in San Diego.
“Uncertainties around the post pandemic commercial real estate sector remain front and center,” they said during a morning breakout session titled: What Comes Next/? Industry Future Perspective. Moderator Victor Calanog, head of commercial real estate economics at Moody’s Analytics, said that 2019 figures “have been broken” and we have had a busy year, but asked panelists if it will continue.
The answer, according to Angela Mago, president of Key Commercial Bank Real Estate Capital at KeyCorp, is yes. “I feel good about the economy and real estate in general.”
Although Mago believes the rate environment will cause a little bit of a headwind, and might “slow down a little bit of the exuberance companies had heading into the New Year,” she said that the economy is on solid footing and real estate has been resilient.
Multifamily and industrial, especially, she added, are still the favored asset classes. “You will see stability there.”
Charles Ostroff, SVP and multifamily chief credit officer at Fannie Mae, said that the biggest issue the industry will face is regulatory. “If anything is going to stop this train it will be government regulation.”
Panelist Jeffrey Erxleben, an EVP at Northmarq, said that there is still a ton of cash out there looking for a home but there are only so many multifamily and industrial deals to go around. “I think there are actually some good opportunities in both retail and office.”
He continued that “That wall of cash is looking for multifamily but there are other opportunities out there. I don’t see that slowing down.”
From the standpoint of construction, Erxleben continued, costs are going up. “It isn’t easier to build anything due to supply chain issues, so I think it will be like last year. From an affordability perspective, things aren’t getting any cheaper so rental can be a good path for folks.”
On the affordable front, Mago said that she believes there will be a push to make affordable work. “Things like credits and other regulations put in place to enable development will be prevalent… I am optimistic about it,” she said, but there are 7 million too few units.”
She continued that “There is a huge opportunity for us to refurbish and maintain the existing supply. I think there will be good constructive dialog around that,” she said. “Affordable also plays well into some of the ESG mandates that we are faced with and talking about publicly.”
Switching gears, the panel discussed hiring issues, and Erxleben noted that “we are going through a rapid growth cycle in our industry and in our company. It is hard to find high quality folks and retain the number that you have.”
One thing that helped his firm to hire hundreds of people last year were some of the initiatives on the DEI front, he said. For example, he pointed to the firm’s “life after ball program” which hires student athletes. “It was an untapped pool to hire folks from sources who we have not recruited from in the past,” he said.
When asked about responding to pressures out there for lenders these days, Mago said that she leans into those pressures and looks to partner with Fintech where there is a need to be solved. “It has probably been most pronounced in the commercial payment space. People want to create an experience for the customer. We are trying to lean in and partner.”
She explains that the company does have a tech vertical and are trying to work with software companies where they have an opportunity to be the banking rail. “Relative to workflow, we are also trying to help the real estate business. We have a really nice job in our servicing platform where we have been sophisticated keeping clients in an authenticated channel and portal etc. We have opened up APIs to our clients to be able to access data. We want to be sure we have a great experience for our clients and employees as well.”
But while automation is efficient, Ostroff said that real estate is still sticks and bricks. “You have to wrap your arms around it and still have a human even though there is room for automation. There is room for it in terms of efficiency but you need someone to look over it at the end still touching and making the decision.”
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