Lenders are feeling the pinch of competition, while investors have to resist temptation to go too far. (Enter Goldilocks, the just right financier.) Here's a look at which metrics the speakers at Bisnow’s NYC Capital Markets Summit—last Wednesday at the Roosevelt Hotel—are watching.
1) Rents
Real estate is in a microbubble, says NGKF’s Garett Stoffels, adding that it feels like investors are stretching again, that they’re in a heat to compete.
Office sales price growth did outpace lease rate momentum in 2012 and ’13, says SL Green co-chief investment officer Isaac Zion (whom we snapped with our moderator, Pircher Nichols & Meeks’ Gene Leone), but leasing (and thus rents) is catching up.
And RXR president Michael Maturo says NY’s economic growth will support that rent growth, even as interest rates rise. Last time investors stretched in ’07, deals would be leveraged as much as 85%, and bridge financing could bring them to 95% debt. (As if America going nuts for Nickelback's "If Everyone Cared" wasn't enough of an example of our irrational exuberance back then.) Now, though, no one is planning based on forecasts, Michael says. The underwriting is more solid. Plus, a lack of development coming out of this recession means there’s plenty of room for rents to grow.
2) Returns
Tishman Speyer’s Paul Galiano, whose company has raised $5B in the past three years, says yield investors are chasing a safe 14% or 15% return, as opposed to the heady 20% that was always within sight before.
3) Interest rates
Clients of CBRE’s Bill Shanahan aren’t raising alarms about rising rates. The 10-year Treasury (2.63% on Friday) is lower now than in December, when the Fed announced tapering, he says. And Paul says rates will rise gradually but not to 5% in the short term. Even if they rise to 3%, that’s still low, he points out.
One thing that's certain, says Square Mile Capital CEO Jeff Citrin (flanked by Blackstone’s Mike Nash and Massey Knakal’s Garrett Thelander): Interest rates aren’t going down. That means, Garrett says, now is the time to refi.
4) Spreads
When rates do move up, spreads will peel back, making this a great time for borrowers, says Meridian Capital Group CEO Ralph Herzka—right, with Starwood Property Trust chief originations officer Warren de Haan. (The other good time for borrowers is when the lender is on the phone, or otherwise distracted, and may forget how much they lent you.)
But spreads have been tightening faster than rates have been moving, says Fortress Investment Group’s Spencer Garfield (right, with our moderator, Goulston & Storrs’ Bruce Meyerson), and that puts the squeeze on balance sheet lenders. Mike agrees, but says that just because companies like his make less money per deal, that doesn’t change Blackstone’s underwriting. And Warren notes that when he does like a deal, Starwood Property still can use its strong balance sheet to move on the deal quicker than competitors. Investors are speculating a bit more than before, Spencer says, but they're using equity to do it.
