Go West, Young Mortgage Banker: 2020 Western States CREF Conference Recap

Last Wednesday kicked off the California Mortgage Bankers Association’s 23rd Annual Western States CREF, this year the conference was delivered as a two-day virtual experience on September 9 and 10.

While most attendees were likely not staying at the Aria in Las Vegas nor gambling, there was plenty of speculation about the outlook for commercial real estate, transaction volumes and mortgage finance in the midst of uncertainty brought on by a recession, a pandemic and an election. 

The mood was best described as cautiously realistic. Industry veterans and experts are an optimistic bunch, but none are too quick to name a favorite downturn. However unprecedented current events may be, CRE finance is an industry with plenty of experience recovering from downturns. It is an industry that can take a licking and keep on ticking. Many property types are even proving resilient in the current environment so it’s truly a mixed bag. As the U.S. continues to experiment with a substantial work from home operational strategy, the future performance and trends in office market dominated conversation in the first panel. 

A few key takeaways:

Future of Office

• At the national level, leasing dropped 53% in the second quarter with negative absorption and large increases in sublease space reported. Clearly and as always, numbers and trends vary market by market. For one owner on the panel, collections rates have generally been above 90% to date and in the high 90s for most months since February.
• There are three categories of office tenants noted by panelist:

1) those that do not need to worry that much about—have been, continue to be strong performers

2) those that are not sure what the future is going to bring, still in the game, different negotiation here and the credit underwriting is much more important.

3) those that may find themselves in a situation that requires a workout, speakers expect a fair amount in this category coming but have not seen come yet.

• Large amount of construction across California markets noted. Minimal impact but new properties will have to make deals to win new tenants and that may impact rents at competitive sets of properties in these submarkets. 2001 Recession and the Great Financial Crisis both occurring during the 2000s were described as de facto governors of supply for office markets given the overnight shift in office demand during these recent downturns.

Below are a few takeaways from the Real Estate and Economic Updates

Real Estate Market Update, Mary Ludgin, PhD, Senior Managing Director, Head of Global Research with Heitman, LLC

Backdrop for performance trends is uncertainty. For capital markets, transaction volumes are down significantly while liquidity remains ample in certain sectors, i.e. medical office, industrial, apartments (value-add, suburban and lower density). What is trading much less are unfavored asset classes such as the retail and office sectors.

A clear trend in the current environment is the triumph of technology has played out and will impact the future of real estate. Examples, some with more success than others include zoom calls, entertainment, telemedicine, and virtual education. How much of what has change is going to be what we do once the pandemic ends is a key question for real estate community. The answers will appear over time but certainly what will change and what will not change will be nuanced across property types.

Negative house view on office outlook and impacts expected from COVID-19, sublease indicator up 11 million square feet during second quarter 2020…highest number since 2009. Negative net absorption in the third quarter first time since Great Financial Crisis. Lastly, rents are falling in some markets.

• Office and Hotel to Residential Conversions Expected in Many Markets
• Devastating impacts to retail tenants from COVID-19. Variation across types of retail properties. Power Centers are most viable of retail formats going forward. Return of grocery stores to regional malls. Co-working spaces, apartments and fulfillment center as uses that may return.
• Online and physical mix has been the most resilient retailer strategy with better ability to meet customer demand where customers want.
• Falling apartment rents. Most challenging in high-cost markets with work from anywhere dynamics. Affordability is a driving factor.
• Revenue drop by building heights chart shows the impact of density on pandemic performance
• Suburban outpacing Urban with flat to slightly positive vs. negative trends. Significantly higher construction in recent years vs. suburban is part of this trend.
• Expectations for re-pricing of senior housing; however, favorable conditions for continued demand growth going forward. Must have strong operators and be priced accordingly.
• Bullish on medical office and single-family rental which are both extremely liquid.

Economic Update, John Chang, Senior Vice President, National Director, Research with Marcus & Millichap

• Federal Reserve response to pandemic: 5x resources in 1/7^th of the time during this crisis vs. Great Financial Crisis response
• Fast moving and severe economic challenges are the backdrop for this response.
• $2.1 trillion contraction for second quarter, largest on record, a lot driven by complete shutdown of retail, hospitality and travel.
• Took a heavy toll particularly on the employment market. More than 22 million employees lost their jobs. Same amount created in ten-year recovery cycle.
• Unemployment impact not evenly distributed. Midwest less hard hit than some Northeast and West Coast markets.
• Many jobs recovered and increasing retail sales since shutdown. Social gathering caterers are the biggest casualties. Silver lining is increased savings which could provide a boost post-pandemic.
• Increasing new home sales and low mortgage rates are both boons for the economy that help create jobs. Low inventory of existing homes mixed with low rates is putting upward pressure on housing prices.
• This performance is in part driven by demographic trends and societal shifts as opposed to housing bubble pre-great financial crisis.
• Move from denser areas to less: Density, Lifestyle, Work-related (proximity to office less important), Demographics, millennials getting married, starting families and migration to the suburbs trend has been accelerated. Playing out in apartment markets already.
• Shape of the recovery is still unknown. What happens with the pandemic and stimulus are the big open questions.

The morning of Day 1 ended with some comic relief when conference chair, Gantry’s Adam Mekjavich interviewed keynote guest, Adam Carolla. In an entertaining and wide-ranging discussion, attendees got to hear about Carolla’s experiences on the way towards and into his current career and fame. He was even generous enough to openly and honestly share how he felt about appraisers.

Below is the agenda of panel sessions and speakers from day one:

Future of Office Space

Moderator:

David Smyle, Pacific Southwest Realty Services

Speakers:

Brad Zampa, Vice Chairman, CBRE

Jordan Angel, Managing Director, Capital Markets, JLL

Jon Dishell, Chief Capital Officer, Gemini Rosemont

Keynote Speaker: Adam Carolla

Moderator: Andrew Mekjavich, Principal, Gantry

CMBS Market Update

Moderator: Brad Wilmot, Executive Vice President, CBRE

Speakers:

James Abbee, Regional Director, Goldman Sachs

Matthew Anderson, Managing Director, Trepp

Jake Stahler, Managing Director, Originations, 3650 REIT

Update on CA November Ballot Initiatives (Split Tax Roll and Rent Control)

Moderator:

Jeff Burns, Senior Managing Director, Walker Dunlop

Speakers:

Tom Bannon, CEO, California Apartment Association

Rob Lapsley, President, California Business Roundtable

CREF Western States 2020 was a virtual success and the curated content and speakers timely and top notch. All eyes are on California and their ballot initiatives this November which are important and impactful to real estate finance businesses across the country. 

Day two topics included the future of retail, GSEs and multifamily agency financing, COVID-related forbearance, modifications, and defaults as well as rescue capital and bridge lending. The California MBA, representing hundreds of companies and tens of thousands of California employees, is the leading advocate for the industry in the largest mortgage/real estate market in the nation. The California MBA represents the residential and commercial real estate finance industry before all governing bodies and promotes sound business practices and honesty in marketing, origination, lending, and servicing of mortgage loans through educational and networking opportunities.