Takeaways From Early Conference Season
February 7, 2023
By Brennen Degner
As we make our way through the beginning weeks of the real estate industry’s “conference season” I thought it would be interesting to share some of the key takeaways from the litany of 30 minute “catch up” conversations that represent a majority of the schedule at each event. The three characteristics of the broader market that immediately come to mind are 1) stagnation in transaction volume 2) office is a four letter word and finally 3) the limited number of deals trying to get done are getting re-traded as though it were the new industry standard.
As far as it relates to transaction volume, we take the position (as did a majority of the individuals that I had the pleasure of connecting/reconnecting with) that the first quarter will be slow as all eyes are on the Feb/March moves the Fed makes. The consensus seems to be that we will see a couple additional modest 25bps (modest in relation to what we saw through he second half of 2022) rate increases and then we will settle in for some stability at that pricing while the Fed monitors the impact that is now making its way into the market from their 2022 activity. Once that leveling off occurs we feel that transaction volume will increase rather quickly as there is significant idle capital that needs to be put to work along with sellers sitting on the sideline waiting for capital market stability.
As far as the office comment, I am the last person to give any reliable guidance on anything office related. I have been involved in one office transaction in my entire career. However, it doesn’t take an office expert to understand the position that, unlike other asset classes, office is in the middle of not only facing the general macro headwinds the rest of us see, but more importantly because of the fact it is now a four letter word it will also experience a lack of liquidity in the capital markets. This confluence of factors leads me to believe the pain will continue until you have enough contrarian investors jump in once the basis becomes attractive enough and turn it into what we saw in retail a few years ago. Strong locations and business plans will survive, the rest will get eaten alive.
The first two points did not necessarily take a conference of like minded professionals talking in 30 minute increments to generate consensus, at least to me this was pretty obvious just watching the general pipeline and understanding differing asset fundamentals.
What I really enjoyed (I say enjoyed facetiously – we were in the midst of being re-traded as I was talking to people at IMN) was hearing different stories of pricing re-trades as we saw unprecedented volatility over 2022, especially the second half. We were not immune to the need to adjust prices while trying to close deals between July and October. This period saw the underwriting goal post for both debt and equity move on an hourly basis. I like to think we approached each in a way where we were attempting to partner to get a deal done that would result in a positive outcome for both sides. Primarily focused on transparency and communication. During this time it was not uncommon to see groups walking away from seven figure deposits. I get that these moves were necessary for transactions that might have gone under contract in Q1/Q2 of 2022 but ended up closing in Q3/Q4, as we know now those were two separate worlds. Some we found a meeting of the minds, some we didn’t, but regardless of that outcome we closed deals.
What surprised me the most is the number of people I spoke to that continued to experience this trend on live deals transacting between the second half of 2022 and over the first few weeks of 2023. It seems like because pricing adjustments were necessary during peak volatility, the strategy made its way into the way some groups do business. In our recent example the buyer of an asset we were selling in Provo, Utah priced the deal in October and officially put the deal under contract in early December. As a reminder over this period of time the 10 Yr Treasury dropped ~70bps. On a deal that was being financed with an agency loan this represented a major win in the capital stack. With 15 minutes to go in DD we got a letter that either acted as an amendment adjusting the price if we signed or a cancellation if we didn’t. Of course they made claims to justify their position but none of us were born yesterday. Now USC didn’t offer any classes on deal re-trading during my time as an MRED there, but I imagine this fits right in-line with what that class would look like.
I tell this story because it was such a common theme and it brings me to my key takeaway from catching up with so many peers I admire in our industry. Now more than ever it is vital to vet and truly understand the business plan, capital structure, decision makers and closing track record of who is sitting on the other side of the table. We had heard of the buyer before but didn’t do nearly a good enough job of lifting the hood on how they were going to execute. When the market is going up like a hockey stick you have hard money day one, back up buyers nipping at the heels of their competitor to step into their position, and the infamous broker threat of blacklisting a group that does not perform on your side. When that isn’t the case, knowing the relationship you are about to partner with to expend time and resources on consummating a transaction is exponentially more important.
Thanks for the read and happy deal hunting!