Raj Aidasani
Senior Vice President, Capital Markets
Lee McPheters, Director of the Economic Outlook Center of the W.P. Carey School of Business at Arizona State University, started off one of the council sessions today at ULI. He began by asking a simple but important question: why has there not been a great recovery after the great recession? The recession officially ended in December 2009 and yet GDP growth has been 2.8% over the last 7 quarters, compared to a quarterly average of 3.3% over the last 50 years. The biggest reason for this, according to Professor McPheters, is the consumer. While there are a number of factors that drive the growth of the US economy, 70% of GDP is made up by consumer spending. And more than ever, the public is skeptical of the economy and, according to poll after poll, feels that the country is heading in the wrong direction.
Why is this if there are so many positive data points? We have had 7 straight months of job growth and are on pace to add 2 million jobs in 2011! It appears that job growth finally has firm footing and we should regain all the jobs that were lost during this past recession by 2013. While not as strong as some had hoped, we are in a definite recovery and fears of a double dip recession have been drastically reduced. Nonetheless, a cloud remains over the public’s perception of this recovery.
Professor McPheters feels that consumers still haven’t regained confidence to go out and spend and this is primarily because of a handful of reasons: oil, housing and a still-high unemployment rate:
- Consumers are constantly reminded of how high has prices are because everywhere they drive they see gas prices posted and every week when they fill up their tanks, they see the meter going up and up. This constant reminder has a huge psychological impact on consumers, even if the differential in what it costs in higher gas prices isn’t that much on the margin in their monthly budget. Especially given that prices in other products have remained relatively constant and in some cases, have gone down!
- Housing prices continue to drop in many markets and should finally stabilize this year. For most Americans, their homes comprise a large component of their wealth and when they see values continue to decline, they become more cautious with their wallets.
- Unemployment remains high overall but especially in certain industries and geographies. For example, in healthcare, unemployment rates are extremely low but in construction, they remain extraordinarily high.
This all leads to consumers going at “half speed” and being more disciplined with their money. This is the “paradox of thrift” – we want people to have less debt and save more, but this actually hurts the overall economy. He said that a 6% savings rate pulls $660 billion from the spending stream – effectively wiping out the effect of the stimulus program! In the end, we can continue to have positive data points coming out every month, but the cloud hovering over the public’s perception has to shift for us to get back to where we want to be.
-Raj
Categories: ULI Spring 2011 Meeting
Dennis Desmond
Life companies are definitely back!
May 20, 2011
Raj Aidasani
Senior Vice President, Capital Markets
A panel on the real estate capital markets brought together some of the biggest names in the industry including Mark Wilsmann, head of real estate portfolio management at MetLife, Dennis Schuh, head of CMBS for JPMorgan, Peter Sotoloff, Managing Director of Blackstone Real Estate Debt Strategies and Ira Schulman, Managing Director and Co-Founder of Walton Street Capital.
Most of the conversation focused on the return of capital to the commercial real estate market. Mr. Wilsmann from MetLife said that they plan on hitting the $6 billion mark in originations by July 1st, and could potentially double that amount for all of 2011. As a point of comparison, MetLife originated $6.7 billion of debt in all of 2010. Mr. Schuh said that JPMorgan alone could hit $10 billion in new CMBS originations in 2011 – almost equal to the entire CMBS market for all of 2010. Mr. Schulman said that Walton Street has already invested $900 million in commercial property in 2011 with a significant amount going to office, hotel and retail properties.
The moderator of the panel, David Sonnenblick, asked how life companies have become so competitive given that they haven’t really changed their risk profile. Mr. Wilsmann pointed to a number of interesting factors reshaping the dynamic of the lending market. First among them is that the market downturn has created smarter borrowers. Borrowers he said want relationships again and don’t want to deal with the complexity of highly structured deals and servicers that treat them like numbers. In addition, life companies can be flexible on structure and can work with borrowers on things like prepayment fees – which are basically set in stone for CMBS loans. Mr. Wilsmann said that life companies now don’t see mezzanine financing behind their senior as a bad thing – depending on the mezz provider. He said that if Blackstone provided the mezzanine financing behind one of his loans for example, he would have more comfort and view it as having two strong sponsors and an “equity cushion.” Lastly, life companies he said can easily do very large loans without jumping through a lot of hoops or worrying about the exit and this gives them a big advantage over CMBS, mortgage REITs and private equity.
The conversation then moved to leverage and pricing. Life companies will still be in the 60 – 65% range and CMBS will go up to 70 – 75%, with pricing for both ranging from 4 – 6%. Blackstone is providing subordinate debt in the 70 – 80% range at yields of 10 – 11%. On the equity side, Walton Street is still targeting yields in the teens but will go sub-10% in some cases. Overall the panelists were very positive on the market and were excited about the opportunities available despite the increasingly competitive environment.
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Categories: General comments, ULI Spring 2011 Meeting