Take It From Someone Who's Been There: Don’t Overreact As Current Business Cycle Runs Its Course
In addition to pledging to eat better or exercise more in 2023, commercial real estate players might want to add another new year’s resolution: Learn to keep their cool in a volatile economy.
That is the advice from a New York City-based bridge lender that knows how to navigate times of great uncertainty. Emerald Creek Capital experienced one of its strongest years in 2022, a year that many others were glad to put behind them.
Part of the company’s success could be due to experience. Emerald Creek was born during another time of major economic turmoil: the Great Recession of 2008.
“The advice I would offer now is to stay calm,” Managing Director Jeff Seidler said. “Looking back, whether you were a lender assisting borrowers through difficult times or an owner with holding power, those who did not overreact during the previous crisis were market beneficiaries.”
It may be difficult, however, for an investor or project sponsor who has no memory of the Great Recession to remain calm. But Seidler said its experience taught Emerald Creek how to keep moving forward even when business news sites are full of troubling headlines.
“We learned to stay disciplined and build the right relationships through all business cycles,” he said.
That mindful approach has served Emerald Creek well. Since its inception, the firm has provided nearly 500 loans for projects in almost 30 states, with $2.7B of capital deployed.
As 2023 begins, Seidler acknowledged that rising interest rates continue to concern today’s borrowers.
“If there is any optimism among borrowers, it is the expectation that the interest rate hikes will ease a bit,” he said. “Once rate hikes settle down, some expect that transactional volume will pick up compared to Q4 2022. That is because volatility suffocates the sales market more than an interest rate being high or low.”
Seidler said Emerald Creek looks for deals whose properties feature strong market fundamentals.
Market rate, tax class-protected and mixed-use properties with a value-add play continue to be a preferred asset class, as do industrial outdoor storage spaces that can help ease supply chain disruptions, he said. Meanwhile, capital-intensive assets such as large office buildings or regional malls are less attractive right now.
He noted that the firm has continued to provide loans through every economic cycle since 2009, including during the early turbulent days of the pandemic.
“We focus on acquisitions with credible borrowers, and the borrower’s equity contribution is very important to us,” he said. “We have preferred asset classes and it’s imperative that the location is marketable for that use. Once we feel good about the borrower and the collateral, we underwrite and value the asset.”
Last year, Emerald Creek worked with a client that was having trouble finalizing financing for the acquisition of a 56-unit multifamily building on the Upper West Side of Manhattan. Its bank had cut loan proceeds and changed some terms in response to interest rate hikes.
“The borrower had lost confidence in the bank,” Seidler said. “But with an expedited due diligence and legal review, we were able to close within two weeks. Although we were not as competitive as the bank on loan proceeds or the rate, we did everything we said we would do. We provided the borrower with the certainty of execution they needed in a volatile market to complete their acquisition.”
Certainty is in short supply these days, but Seidler said his firm does what it can to help its borrowers meet their goals, something it learned during the Great Recession.
“Keeping loans on our balance sheet and using modest credit makes us nimble for our borrowers in servicing their portfolio,” he said. “Our in-house decision-making process has enabled us to quickly restructure release prices, lease approvals and third-party agreements to help borrowers during difficult times and maximize the property’s performance.”
As for his expectations for CRE in 2023, Seidler said he is “less pessimistic than the majority” of observers and anticipates a modest recession that brings “more of a soft landing than a crash.”
“If this were to occur, it would have a lagging effect on real estate, making it a bit easier to navigate,” he said. “Like in other cycles, there will be losses for the undercapitalized and overleveraged. For residential and industrial properties, I expect positive supply and demand fundamentals to counteract the tightening in money and credit.”
Overall, Seidler said the key to success in 2023 will be to maintain a cool head and be ready to take advantage of opportunities as they arise.
“If we do see the distress that many are predicting, I think we will look back on this cycle and say it was a pretty obvious opportunity from a risk-correlated return standpoint,” Seidler said. “For those who are stressed over the challenges of today, I advise that they don’t make any rash decisions because there will always be more opportunities in the future.”
This article was produced in collaboration between Emerald Creek Capital and Studio B. Bisnow news staff was not involved in the production of this content.
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