Jamie Woodwell, Vice President of Research and Economics at Mortgage Bankers Association (MBA), joined us on the podcast to discuss the current state of the economy and what to look for as we head into 2019.
Jamie Woodwell is Vice President in the Research and Economics group at the Mortgage Bankers Association (MBA), where he oversees MBA’s research on the commercial and multifamily real estate markets. Jamie’s work covers the macro-economy, commercial and multifamily property markets, real estate finance, servicing, mortgage banking benchmarking and more.
Jamie is an expert on the commercial real estate finance markets and he and his work are regularly cited in the media, on Capitol Hill and in regulatory settings. He is a regular speaker at industry and corporate events; has appeared on CNBC, Bloomberg and in other popular and trade press; and testified before the Congressional Oversight Panel for TARP.
Jamie also oversees MBA’s commercial peer business roundtables including CFOs, CTOs, HR and marketing heads, and leads special MBA projects, including its CREF Careers, Council to Shape Change and the Council on Ensuring Mortgage Liquidity.
Jamie joined MBA in 2004 from Fannie Mae’s multifamily group, where he was responsible for multifamily data initiatives. He has also served as senior director of business development at CapitalThinking in New York, research director at the WMF Group in Virginia, and research manager at the National League of Cities in Washington, D.C.
Jamie is a member of the Urban Land Institute, American Real Estate and Urban Economics Association, the Housing Statistics Users Group and the Real Estate Associations Research Directors. He is the past president of the ELH Management Corp. which oversees the financing of charter school buildings in Washington DC.
Jamie Woodwell’s Links
MBA’s Research and Economics – Covers the economy, commercial real estate fundamentals, and the finance markets.
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Tyler Stewart – Hey listeners, Tyler here, before we start today’s episode I wanted to quickly remind you to head to RealCrowdUniversity.com to enroll into our free six-week course on the fundamentals behind commercial real estate investing. That’s RealCrowdUniversity.com, thanks.
Adam Hooper – Hey Tyler.
Tyler Stewart – Hey Adam, how are you today?
Adam Hooper – Tyler, I’m doing well, I’m doing really well. A little interesting look on the podcast today.
Tyler Stewart – Why is that?
Adam Hooper – Well we switched things up. We have a lot of equity investors, a lot of sponsors come on the podcast. We thought we’d switch it up get a perspective from the debt side again.
Tyler Stewart – We had Jamie Woodwell Vice President of Research and Economics over at MBA.
Adam Hooper – Which is the Mortgage Bankers Association. They’re the industry group that services everything that touches the commercial real estate and finance world. Everything from, single family resi(dential), all product types, all different players in the space. Kind of broke it down. We started at high-level economic. Again, we got some good insights on what’s going on there, how that effects the real estate space. Talked about some fundamentals, some constructions, some sales volume activity, originations, and then we wrapped it up with kind of the look forward.
Tyler Stewart – It was interesting to hear the take on the economy from the other side of what we normally hear it on. We hear, as you said, from the equity side, in today’s episode we hear it from the debt side and Jamie gave us a list of the metrics he really focuses on, where to find those metrics and how often to look at those metrics to determine the health of the economy. It was a lot of good information on this one.
Adam Hooper – Definitely check the show notes we have some links to the MBA, some of their research pieces and where you guys can get some access to the information that we talked about today. Again, what was interesting to me was again, we have a conversation a little bit later on about the total volume of originations and commercial debt outstanding. How that’s grown and what some of those factors are, and what’s driven this growth of commercial real estate value over the last handful of years, and you know, kind of where we see that going. Very good insights in there. Hopefully you’ll have your pen and paper as always. It’s a good episode. That’s enough of us, we should probably get going.
Tyler Stewart – Let’s do this.
Adam Hooper – Before that though, as always, if you have any comments or questions if you want to hear different perspectives the only way we can know what to do on the show is if you let us know what you guys want to hear. Please send us a note to podcast at realcrowd.com. With that, let’s get to it.
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Adam Hooper – Jamie, thank you for joining us here this morning. We’re excited to have you on the show. Why don’t we get started? Tell us a little bit about what the Mortgage Bankers Association is and some of the different groups that you work with within the commercial real estate world.
Jamie Woodwell – Will do, and thanks for having me. MBA’s the National Association representing the entire real estate finance industry. We’ve got about 2300 member companies representing banks and thrifts, life insurance companies, Wall Street conduits, REITs, independent mortgage bankers, and others representing all the different property types. From single family owner occupied properties, to multi-family rental, office, retail, industrial, hotel, and others. Then we provide a range of services and activities to our members. We put on conferences, we offer education through coursework, professional designations. We perform and present research. We have newsletters, analysis. We develop policy and then we advocate on behave of the industry. Really neat place to be to get to work with people throughout commercial real estate and commercial real estate finance.
Adam Hooper – You guys run the full spectrum so you’ve, and again, running the research side that you do, I’m sure you got a lot that we’re going to cover today. You get to see all different sides of it. Tells us a little bit about kind of how you got into that. How did you get into the real estate space and what led you to your role within the research side at MBA?
Jamie Woodwell – Sure, it’s kind of fun. We’re doing an effort right now actually where we’re recruiting students into the commercial real estate industry. We call it our Commercial Real Estate Finance Careers Forums and it’s fun talking to them. One of the takeaways always seems to be that so many people came into this industry not knowing that they would be going into this industry. The same is sort of true for me. I had done undergrad in economics and American Studies. Came out worked in a economic consulting firm and then got a master’s in urban and regional planning. Then was doing work more on sort of urban planning, municipal governments, but even there started to dip my toes into commercial real estate. Tracking construction trends, local economic trends, that sort of thing. Then, ended up working for a mortgage banking firm back probably 20, 25 years ago and have just loved the industry and been a part of it ever since.
Adam Hooper – Good, and then, how has your role changed from what you were doing, I guess again, more in kind of urban planning? Did that set you up in kind of this more data approach with the research and everything that you’re doing with MBA now? Where did that kind of start to weave its way into the career path there?
Jamie Woodwell – That’s interesting. I had come at it, come at even the urban planning with a bit of a numbers bent and always had an interest in how cities worked, how they grew, that sort of thing. Commercial real estate being such a big piece of that it just seemed to be a natural connection. Still love just tracking the different property types, how they’re developing, and how they’re shaping for every place we live work and play.
Adam Hooper – Good. Hopefully we’ll get a chance to dig in on some, you know, more kind of product type specific conversation today. But why don’t we take a step back and start big picture just with overall economy where we’re at right now. We’ve done a couple shoes. We just recorded a show with Mitch Roschelle at PWC and, you know, kind of talked about overall economy and the tax act and where we’re at right now. We’re recording this just after we had sell off in the stock market. Kind of tumultuous. It’s good, there’s good parts, there’s bad parts. But, maybe kind of give us your big picture snapshot. Where are we at? Just kind of overall economy and maybe some of the metrics that you’re looking at or watching as it progresses.
Jamie Woodwell – Right, it’s an amazing time. If you look at the economic fundamentals it’s really, it’s hard to imagine them coming in much better. The GDP growth, in the second quarter with 4.2%. You look at the unemployment rate it’s at levels we haven’t seen in decades. In terms of how low it is. We’re seeing wage growth. We added a million and a half households over the last year. Just on benchmark after benchmark, you look at the economy and it’s showing just extreme, extremely strong conditions. Certainly, the tax cut’s a key contributor to that. Then, also continued growth coming out of the recession. We had for a long time economic growth that was sort of filling in the hole that had been caused by the recession. But we’re well beyond that now. To a place where, we’ve got a bit of a virtues cycle now. Where, the growth has been continuing in the momentum that we got in those years coming out of the recession has helped maintain continued growth going forward.
Adam Hooper – What are some of the metrics that, as we continue this growth, or maybe start to see signs of some slowing down or other metrics. What are some of the areas that as commercial real estate investors that are listening to this program what are some of the metrics that we should maybe keep an eye on that might be some leading indicators for how 2019 might start to shape up?
Jamie Woodwell – Looking at the economy writ large as opposed to, we can delve into some of the commercial real estate specifics too. For the broader economy you can think of GDP, the growth domestic product, as the overall speedometer for the economy. Again, the second quarter number came in extremely strong at 4.2%. I think a lot of economists had initially expected that number to bounce right back down, to sort of the two-ish percent that we’ve been running at prior, now I think you’re seeing more expectations that there is that virtues cycle and that third quarter numbers going to come in maybe stronger than people had initially thought and again, that tailing off of that very strong Q2 growth is going to be slower than folks had expected. Meaning that we’ll have stronger growth going forward for the next number of quarters, than maybe folks had expected. Do expect that to tail off a bit. Some of the key pieces of that to keep an eye on, people often cite the fact that the consumer is really the heart and soul of the American economy. Looking at consumer expenditures at retail sales, the confidence of consumers absolutely critical going forward. So far, those signs continue to be pretty strong. We do look an awful lot at household growth. That ends up spawning a whole, whole series of purchases and economic activity when people move into a new home, create a new household. That had been sort of depressed for a while. Again, seeing some pretty strong numbers over the last quarter too there. So that would be another key piece to keep an eye on.
Jamie Woodwell – An awful lot of attention of course to interest rates and where those are going to be going and some of the implications of that. It’s kind of interesting that the concern about higher interest rates is driven by the fact that rates would be raising in response to a strong economy and continued growth in the economy. That ends up in a lot ways, mitigating maybe some of the concerns about interest rates. If they are being driven by fundamental economic growth.
Tyler Stewart – Hey Jamie, where do you find these metrics? Then, how often are you checking in on these metrics?
Jamie Woodwell – Great question. One of the challenges about being in the sort of the economist role is that they change the numbers every month. How are you supposed to keep up with that. But, there are a lot of great sources. We at MBA, one of the things we do is each quarter we produce or quarterly data book which brings a lot of this information into one place, from the economy, to commercial real estate fundamentals, to the finance markets. You can come up onto the MBA website and download that if you go to www.mba.org/crefresearch That’ll that get you straight there. Or, you can just go to MBA.org and take a look through our other materials as well. But, we’re tracking it all the time. Trying to make sure that we’re feeding our members the latest information and what some of that might mean.
Adam Hooper – Perfect, and we’ll put a link in the show notes to that as well, a great resource for all the listeners out there that want to go get nerdy on some numbers. It’s always good to have those resources. As you mentioned, this, we’re recording this on, what it say, October 25th. Jst yesterday we had a big stock selloff. If we start see some more volatility in the equity markets which have been on a really good, you know, an extended run. If we start to see some more volatility there what, if any, impact do think that will have on either interest rate markets for commercial mortgages or just overall investment activity in the commercial real estate space?
Jamie Woodwell – The last think I would want to do is try and do some predictions on where the stock market may or may not be going.
Adam Hooper – But, we tried…
Jamie Woodwell – Yeah, in some ways I might do an economist trick and switch from causation to correlation.
Adam Hooper – There you go.
Jamie Woodwell – If we see certain things affecting the stock market then the question might me, how those things might also be affecting commercial real estate markets. If the concern is sort of rising interest rates it’s kind of interesting back to an earlier comment. If the rising interest rates are coming as a result of the strong economy then that tends to mean that commercial real estate is both the fundamentals of income growth would be continuing and that investor demand would remain strong. That may not be too much cause for concern. If you’re seeing the stock market valuation shift because of changing investor yield demands so that overall investors have been willing to except some pretty low returns, historically, you can look at that on the equity market as the PE ratio in commercial real estate. We’d look at the cap rate. If we see some fundamental shift in that you can see the same factors effecting both the stock market and commercial real estate values. But if it’s a change in expectations of earning going forward, sort of the base income of a business or a property and that multiple stays same. But if there’s a change in outlook for the economy that’s a place where you can have very different outlooks for say, the tech sector, or for manufacturing. That might be very different than your economic outlook for office properties or multi-family. There are some things that might stitch them together. But also, an awful lot of places where there isn’t that stitching between them.
Adam Hooper – What you mentioned in that first part, if we start to see rising interest rates it’s just not necessarily that a rising interest rate will mean one thing or the other, it’s more so the why behind that those rates are going up. That we need to dig into maybe. That will maybe have more of an impact I guess, which way it affects the real estate space. It’s not just the fact that we might me going into a rising interest rate environment but more so what’s actually, what’s driving that change in those interest rates. Whether it’s, again, continued growth of the economy or maybe a shift in investor demand. Or, like you said, the kind of earnings, desired earnings that drives that shift.
Jamie Woodwell – That’s exactly right.
Adam Hooper – Perfect. Good, well then let’s kind of switch into then talking about some of the fundamentals of commercial real estate, right. Some of the things that start impacting or seeing the effects of those shifts. Given that we have, you know again, a much higher employment right now, lower unemployment. We’re starting to see, like you said, starting to see some wage growth. More households coming. What is that doing to the fundamentals for investors looking at this asset class vacancy rates, absorption, rental rates, how are these shifts kind or effecting the overall supply of commercial real estate right now?
Jamie Woodwell – It’s interesting, the economy has been growing very strong and so that is a net benefit in terms of demand for commercial real estate space. I think for a number of quarters, years, we had, coming out of the recession, sort of the rising tide lifting all commercial property types. It’s interesting, we’re now starting to see some differentiation between different property types and some different drivers for each one of them. If you look at apartments right now, it’s an extremely tight market. A year or so ago, we had vacancy rates that were the lowest since the mid-80s. Just a very tight apartment markets. The vacancy rates have ticked up a little bit from then but still an overall tight market. At the same time when we’ve got an awful lot of construction activity. We’ve got levels of multi-family units under construction now that we haven’t seen since the mid-70s. You got an awful lot of demand in multi-family and you got supply coming to meet that demand. We’re seeing, again, some ticking up of the vacancy rates there, but we continue to see some growth in underlying rents and NOIs there. If you shift to office properties, mention the employment growth. We’ve seen strong employment growth going now back years and years. All of that to the good for office demand. You do then have increased efficiency in terms of the use of space. More hoteling maybe of work as flexible offices continue to grow. A little bit of a push and a pull there. An awful lot of attention has been paid to retail lately. Lots of headlines on that
Jamie Woodwell – and what the future of retail overall may be. We’re seeing eCommerce increase. It’s in the second quarter of this year we were up to about 9.6% of retail sales coming through eCommerce. Up from about 8.8% a year earlier. A growing share of eCommerce. But, at the same time you still have more than 90% of retail sales going through bricks and mortar. Again, some changes there but overall that consumer demand continuing to drive increases in retail sales. And then industrial has been a real darling of investors and lenders of late. Sort of the flip side of some of that eCommerce as we’ve seen lots of demand, lots of absorption of industrial space and some changes in the types of industrial space. Folks looking to get their space into last mile or the first mile. Some changes in construction techniques. Actually getting second floor industrial. Some really interesting changes there. Just a lot going on with different property types and that’s not even getting into individual markets that might be seeing very different trends. A really interesting time to be looking at different properties and what their futures might hold.
Adam Hooper – Maybe we can kind of pick those apart just a little bit on product type by product type. Apartments you said we were in the tightest vacancy that we’ve seen since the 80s but now we’re starting to see that tick up. Is that primarily a function of new supply coming online through the construction activity? Or, are there other factors that are effecting that vacancy rate? Is that home buying, is it getting out of the rental market? Or, is more from new supply coming online?
Jamie Woodwell – It’s predominately the new supplies. Again, a fair amount of construction, the sort of, the story on that is that it tends to be more urban and perhaps higher-end that doesn’t mean that there’s not a whole lot of other types of multi-family apartment construction going on as well. But, we did see multi-family as really the first property type to come out of the recession. And, we saw then development follow suit. We did see a good supply there. At the same time you continue to hear and the numbers continue to show some real challenges in terms of affordability. That’s supply is really needed to try and bring some additional options out there for renters.
Adam Hooper – And then, now on the office side you said we’re seeing some of this hoteling. We talked a lot about just the changing nature of the use of the space, right, with that we work kind of deal with, you now, again, we talked with Mitch about maybe seeing a revitalization of suburban office. What are some of the drives that you are seeing again, beyond just kind of base employment that might impact vacancies or rent growth in the office space, here going forward?
Jamie Woodwell – You’ve got the overall demand. That again continued growth going on in terms of the number of people employed in the US and those folks need to work someplace. But then you do have these really interesting changes in the nature of the space. Some of that’s urban-suburban. You start to hear of people talking about office space as a service and the amenities that are coming along with office space that employers in this really tight job market want to be able to offer employees. Again, changing a little bit of the nature of what some of that office space is looking like and what’s being offered in it.
Adam Hooper – Switching a little bit to retail, you said, so, we’re at 9.6% of retail sales are coming from eCommerce. If we’ve had as much doom and gloom, and end of the retail as we know it, with losing less than 10% of all sales to eCommerce is that the floor, or what if that goes to 20%, 25%? That’s going to be if we’re getting this concerned over a relatively small shift in sales going towards eCommerce out of the brick and mortar. Again, it’s a pretty far out there question but how much more of this shift towards internet base eCommerce can retail survive?
Jamie Woodwell – I can’t imagine that we are done seeing the increase in share of retail sales going to eCommerce. But, at the same time, we just recently had Amazon announcing the opening of more bricks and mortar stores.
Adam Hooper – Right, I love walking through a mall and seeing an Amazon bookstore in a mall. Which just feels kind of bringing it full circle I guess.
Jamie Woodwell – We’re seeing more and more that it’s not an either or, it’s an and. The companies that are doing best are those that are combining a non-store presents with a physical presence. And so, that’s going to continue to work through but at the end of the day there’s the old adage real estate is location, location, location. And if you’ve got concentrations of population in certain places then that’s where the commerce is going to be taking place. And some of it through eCommerce, some of it through physical stores, but either way you need to be close to those people.
Adam Hooper – Which then also again transitions into that last mile conversation and what’s going on in the industrial space. Do you foresee any change in increasing demand for industrial here going forward?
Jamie Woodwell – The thing that strikes me about industrial is both the growth there as well as some of the transition. The same way we talked about office property sort of turning to a service. It’ll be really interesting to see to what degree industrial sort of fits the traditional mold and to what degree we really start to see some new uses of that space, some new demands for that space, and the integration with retail and other. It has attracted the most attention over the last year or two. And with just cause.
Adam Hooper – Do you see these drivers that we’re talking about, overall, it paints a fairly healthy picture for just the kind of organic growth of the fundamentals of investing in this asset class. Do we get to a point where it becomes over heated or, do we still feel like there’s plenty of growth left to go? What’s your temperature on the overall health of some of these drivers that we’ve been talking about?
Jamie Woodwell – It comes down in some ways to expectations. That for a number of years coming out of the recession the last number of years in particular, the commercial real estate market has pretty much had all tailwinds. That we had both the growing economy and we still were making up ground that we lost during the recession. We’ve seen, we see a number of those tailwinds continuing forward. We are starting to see some headwinds as well. Whether that be some of the rising interest rates, maybe a little bit of a slow down in property price appreciation as we see maybe some cap rates not compressing the way they have. What we’ve noticed in the last year or two is maybe a downshifting in some of the growth of commercials real estate metrics. We’re still seeing NOI growth it’s not quite at the pace that it was a year or two years ago. Expecting a similar story on property values. Not necessarily a reversal but again, we’ve been just in this extraordinary period these last few years. Some moderation most likely in the time ahead.
Adam Hooper – That’s consistent with most of the folks that we’re talking with is again, not necessarily any sign of a clear correction coming back but maybe a tempering or, you know, moderation of that growth that we’ve been enjoying. It’s been a really good run. But maybe again, seeing a little bit of a slowdown to growth but still seeing some overall growth but just at a maybe slightly slower pace than what we’ve been used to last five, six years.
Jamie Woodwell – Makes sense.
Adam Hooper – Okay, and then switching to the supply side now. We talked a little bit about construction. As you mentioned, a lot of what we hear about in the multi-family space is just based off the economics of the land, the construction costs, everything is skewing more towards kind of high-end, class A, top of the rental market construction. Is that consistent with what you’re seeing in the multi-family space? And then, maybe we can kind of dig in again on office, retail, industrial as well.
Jamie Woodwell – Sure. In multi-family what you have is a really interesting story of, of demand driving supply. That with the, an awful lot of interest in being downtown in urban amenity rich environments we saw more development taking place there. You’re starting of with higher land costs and you’re going to build more densely, which adds some additional costs. Once you’re at that point, then adding the additional amenities to make it a, higher-end property isn’t that much marginal cost. The product that’s been being put into the ground in a lot of places is, it’s extremely nice. That really to me is, is a function of the economics of if you’re going to be building in the locations and environments where a lot of the demand has been. That has been the last phase of multi-family that continues as well. But, to an earlier comment you made about maybe some suburban office starting to come back. Seeing that spreading as well, that people are going to be making decisions about commuting times versus property, versus rental cost and other things. And, it’s short of, it’s all part of trade offs. And, that the market then responds to it by by producing product in those places.
Adam Hooper – Have we seen much new construction in the office or retail sides? I mean, industrial again, I know we’ve seen plenty of new construction there. But how have the office and retail markets looked for new construction starts?
Jamie Woodwell – Right, so we tend to look at the Census Bureau’s value of construction put in place series. What you see there is construction zeroing out during the great recession. Then, climbing back up. For the last year or so we’ve seen a bit of a plateauing of that construction activity. At a pretty good pace. Roughly in line in many cases with where we were pre recession levels. But, but again sort of hitting a plateau and holding there. We see that matched with the Census New Residential Construction numbers for multi-family where we’ve had about 600 thousand units under construction, now going back for a year or so. Again, office retail, some of the other property types we see the same sorts of trends coming through in the value of construction put in place numbers.
Adam Hooper – Do you see a shift in the nature of that product from a new construction perspective?
Jamie Woodwell – We don’t really get into that in the numbers we’re tracking. I don’t really have any insights on that.
Adam Hooper – Okay. Then one thing, again, we’ve talked about a few times on the show is just, again, the rise of all those components that go into that value of construction put in place. Maybe you can kind of define for the listeners out there value of construction put in place and then we can peel back some of the components that go into that and where those are going too.
Jamie Woodwell – Yeah, good point. The numbers that census tracks is really looking at the construction components. So that would include labor and materials that sort of thing. It would not include land, which of course has been a hot commodity and rising lands values contributing on the single family construction side to some of the cost, but also on the commercial and multi-family side as well.
Adam Hooper – There are other metrics out there I’m sure to track the cost of the labor and hard costs that go into that. How has that looked over the last couple of years?
Jamie Woodwell – Right, if you think about, we’ll start with labor if you think about where we’ve been in the labor market. During the, coming out of the recession there was relatively, relatively accessible labor. That has switched and is no longer the case. If you look across the economy as a whole we’ve got more open positions than we have unemployed people. That’s been driving up the labor cost. You see that on the construction side without a doubt. That would be a contributor to some rising cost of construction. You can add to that as well the materials cost and then interest rates. Particularly in long term financing we’ll tend to look at the ten year treasure rate which has been going up. But for construction you’d tend to look at shorter term and there we’ve really been seeing a steeping of rates. All those factors coming together do put a little bit of a hurdle for new construction activity. At the same time, property values are extremely strong right now. Capitalization rates for many property types are at the lowest they’ve been. That’s the opposite. That’s making construction maybe more attractive than it’s been in many, many other environments.
Adam Hooper – Do you foresee anything on the horizon that would indicate a softening of that increase in costs? Either both on the labor side, or material side? Or do you see that as continuing to grow pending, again, other macro-economic issues?
Jamie Woodwell – The labor side we anticipate to continue. The tight labor markets going forward. On the material side, I’m probably not the best person to get into some of the questions about tariffs and the impact that might be having on commercial construction components there. It’s a little bit, again, more and probably a little bit more challenging going forward than it’s been in that past from that cost perspective.
Adam Hooper – Are the factors that go into that relatively consistent across product types, or do apartments face a different set of challenges, again with the value of construction put in place, do apartments have a different challenge than industrial or retail might, or office or is it pretty consistent across the product types?
Jamie Woodwell – It might vary in some by property type and then some by sort of tied to that but you can also have the variances within the property type by construction technique. If you’re doing wood-frame construction that might lead you in different way than if you’re doing steel or something else. Definitely would have the materials shifting there and a different work force as well.
Adam Hooper – Okay, good. Now, getting into a little bit of just the kind of overall sales volume in the market and then hopefully we can kind of wrap things up and your take on the debt markets. Sales activity, we just had another episode with Paul Casbergue, they’re very active in the market and his comment was that the first half was kind of slow. Prices started to get high and then once pricing hit a certain point everybody thought oh gosh I should probably sell right now. Then kind of middle part of the year and as we round out the fourth quarter here he felt like the transaction volume was kind of ramping up again. How have you seen just the overall sales volume in the market? And is it at a healthy level, is it historically high, low, somewhere in between?
Jamie Woodwell – In both terms of sales transactions and mortgage origination’s another thing. We’re generally at a pretty strong clip that we’re seeing a lot of transactions taking place. We might have some ups or downs one year to another but overall we’re at a relatively high level overall of what we’re seeing. That generally fits with that. It’s interesting we track sales transactions activity and often compare it to our mortgage origination’s numbers. Generally, we see them working right in line with one another. That, the years where you have high sales transactions you also see high originations. A lot of reasons to expect that. Last year in 2017, we saw them diverge a bit. We saw a drop off in sales transactions activity overall but we saw a pickup in originations. I think as some sellers were saying, this might not be the, or a potential buyer might not be seeing the value that I see in this property is continuing to give me great great cashflow I’m going to hold on to it. Maybe go to the refinance market. Lock in rates and maybe take some equity out. This year, we’re seeing them more in line compared to last year’s activity. Which sort of makes me follow up on your point that maybe we’re seeing a little bit of that bid-ask between the buyers and sellers narrowing some.
Adam Hooper – You see that generally across all property types? Or, is there one area that you’re maybe seeing more of an imbalance there across the product types?
Jamie Woodwell – Overall the story we have seen is that multi-family is sort of the energizer bunny, it just keeps going and going, and going. That investor demand there, lender demand, remains extremely strong. We’ve had record originations on the on the multi-family side the last number of years. This year, we’re up in the double digits again, first half of this year versus the first half of last year. That multi-family investor and interest in that property type just continues to go strong. We saw, we’ve seen again in industrial really being favored by a number of investors. Strong activity there. Retail fell off a fair amount last year. And I think then this is sort of holding at that level but a little bit lower activity there than we’ve seen in previous years. Then office sort of right between the others I’d say.
Adam Hooper – Fairly stable on the office side then?
Jamie Woodwell – Yeah, I think that’s right.
Adam Hooper – Okay. Anything that’s going to be impacting that? Again, generally it seems like there’s a relatively, again, god we’ve been saying it for like five years now, this cautiously optimistic outlook for this continuation. Then you start talking about this recovery this cycle, you know, is real estate truly a ten year cycle, is it a 18 or 19 year cycle with a little dip in the middle? Hard to prognosticate, but are there any signs or think of any kind of indicators that you guys are watching that would start to signal or trigger concerns that this might not continue or it might slow a little bit quicker? You know, how are you guys thinking about what to look at going forward? Or, if there’s anything on your radar that might be starting to cause some concern?
Jamie Woodwell – I don’t think it’s a cause for concern but just in thinking about the market if you look over the last decade, plus, commercial real estate values have been driven equally by rising property incomes, and by sort of compressing cap rates. So investors valuing each dollar of income more and more, more. I think there’s an expectation going forward that that cap rate compression may not continue, certainly the way it has been going. Doesn’t mean that there going to pop up but maybe you don’t have them compressing as much which means that there’s much more focus on income. Property incomes as a driver for property value going forward. That’s what we’d be keeping our eye on is is those fundamentals and the growing economy and how that’s sort of flowing through to commercial real estate.
Adam Hooper – One of the things that we’ve seen too is there’s, obviously, there’s a lot a capital. Commercial real estate is becoming a more generally excepted asset class to invest in. Certainly with everything that we’re doing at RealCrowd in making this asset class much more accessible. It’s been getting a lot of attention from institutions from foreign capital, from players that historically might not have been as active in the space, which would tend to drive up that pricing. Do you guys see any slow down, or just an increasing pace of capital coming on the equity side at least that’s going to continue to kind drive the sell transaction and push that pricing?
Jamie Woodwell – It’s exactly right. You look at the run commercial real estate has had and people who have been in the industry for a long time and people who haven’t then look at that and say, what a great asset class to be a part of. So I don’t see anything sort of pulling back on that. I also do think that the investment vehicles are really interesting transitions there and some growth in different forms of people getting their capital into commercial real estate. Making it more accessible, to your point, that helps boost the values as more people have the opportunity to invest.
Adam Hooper – What you also mentioned too… The growth in value has been driven, I mean, the two factors are either you increase your income or, you sell to somebody that’s excepting a lower return. That’s what’s going to create that value. As we’ve seen, these different sources of capital they might have a lower return expectation, especially when you start looking at foreign capital. Your US commercial real estate is still considered one of the safest investments if there’s any tumult in a home country trying to get that capital out and into a more safe asset. Do you see that continuing or are we kind of at peek flight to safety for capital here parking in US real estate or is that something that you think will continue?
Jamie Woodwell – That might be another and as opposed to an or. Where you’ve got a lot of folks looking at the safety and liquidity and such of a dollar denominated commercial real estate asset. Love that, and are willing to maybe take a lower yield on that. You also have a whole group of people who are looking at growth opportunities that they may have been traditionally focused on primary markets. They might be looking at secondary tertiary. They may have been looking at stabilized properties now.
RealCrowd – Maybe they’re looking at some value add. A lot of different ways that people can invest in commercial real estate. All those options being made more accessible.
Adam Hooper – Good. To kind of wrap things up with your space specifically switching over to the debt and origination side. You said, 2018 I think we’re up to double digits in multi-family orginations. Industrials up a little bit, retail’s kind of flat with 2017, and office is fairly stable. How do you guys see the originations market continuing, both as relative to sales volume and just overall trend in terms of originations.
Jamie Woodwell – Yeah, 2017 was a record year for commercial and multi-family mortgage originations. $530 billion. We’re on track for a similar year this year overall. A lot of interest iff you look at different capital sources a lot of the traditional capital sources if you look at banks, life insurance companies, the GSEs, Fannie Mae and Freddie Mac, FHA, CMBS, really every capital source has money that they are looking to put to work in commercial mortgage debt. An awful strength there. Then to our earlier point there is new money coming in as well. That you’ve got debt funds and others who are vehicles to let investors who haven’t traditionally had a way to put their money to work in commercial mortgages they now do. And so, we’re seeing some new money coming in there that’s then finding the best risk-return profile for what they’re looking for. An awful lot of capital out there. The interest rates, the longer term rates have been ticking up a bit over the last year or so but are still relatively low by historical standards. On the supply side, a lot of debt capital out there. And then, on the demand side, again strong transaction activity, property values have been going up. An awful lot of demand for that debt. It’s a really vibrant market right now that we’re seeing in the commercial real estate finance space.
Adam Hooper – As you were talking about the supply of capital on the debt side now. I know it was even late 2016, most through 17, we saw a lot of the traditional equity players starting to launch debt funds, right? Because pricing was starting to get fairly top heavy if they couldn’t make their equity capital returns they started to switch to more of a debt strategy where they can get in, make a whole loan at, 80, 85% higher leverage, get an acceptable return on a debt instrument and then, worst case, assets at a 15, 20% discount to then market values. Have you seen that continue? How much has that impacted the overall space or is that just a small portion of the overall originations market?
Jamie Woodwell – If you look at the total market so there’s $3.2 trillion of commercial and multi-family mortgage debt out standing. If you look at that debt fund space it’s still a small but growing overall percentage, but growing. We look in one of our surveys at originations activity and if you look at intermediaries who are arranging loans that will then be closed by someone else, in 2016, intermediaries originated about $32 billion of loans for debt funds for mortgage rates in similar, for non-traditional commercial mortgage lenders. That number grew from 32 billion in 2016 to 52 billion in 2017. And the first half of this year it’s up another 12% from there. So, we’re absolutely seeing a lot of interest in that space. And again, for some of that capital figuring out where it wants to be in terms of whether to be in new construction, in bridge, in more permanent loans. Just where the risk return profile best fits with the investors and what they’re looking for.
Adam Hooper – How are delinquencies look, I’m going to guess, a couple numbers to compare, right. You say we have 530 billion of originations in 2017 as a portion of a 3.2 trillion total commercial mortgage debt out standing. Is that additive. How much of that debt is retiring of that 3.2 trillion. Are we adding additional proceeds to this, or additional debt to the system? Or, is that mostly the net even, right? Is that 3.2 trillion growing or shrinking, or staying relatively flat?
Jamie Woodwell – Remarkable good. Remarkably good. The balance, if you look at the balance of loans multi-family loans guaranteed by Freddie Mac .01% of those loans are delinquent. For life companies it’s .03, so three 100th of 1% of the balance is delinquent. If you look at bank loan portfolios those loans are performing better than they ever have in the past. So, it’s really, it’s hard to imagine mortgage performance being any stronger than it is right now. Which again, that is one of the reasons investors continue to look at this space and say, it’s a place where they’re wanting to deploy their money.
Adam Hooper – Is there, is there a ceiling to how high that number can go? Assuming healthy fundamentals, and assuming, you know, quasi organic growth to that $3.2 trillion number. If loans are performing, if delinquencies are staying you know, exceptionally low historically, is there any concern about the growth of the overall debt in the industry or is that seen as a necessary healthy thing for overall commercial real estate to grow?
Jamie Woodwell – It’s seen as part and partial of the overall market. So, just like in your multi-family property values they increase by 12% over the last year. With a growing base in terms of the number of properties with the new construction activity and then the value of those properties increasing just maintaining the same leverage level you’re going to be seeing some very strong growth.
Adam Hooper – Pretty significant.
Jamie Woodwell – And that growth in the overall balance has to come through new mortgage orginations as loans are paying off and paying down. So, I think it, in some ways, it’s all a puzzle. And they tend to fit together pretty well.
Adam Hooper – It feels healthy though, right? Are there any concerns that you’re seeing in terms of the rate of that growth or what’s comprising that growth. Or do you guys, you feel relatively comfortable with how it’s playing out?
Jamie Woodwell – Again, I think it all fits together pretty nicely.
Adam Hooper – Good. Okay, well I think that’s the bulk of what we were hoping to get through today. If we can kind of wrap up, and again, rounding out Q4 of 2018 here. You know, earlier we mentioned some of those main metics that you guys track in terms of just overall health of the economy. Anything else that we didn’t talk about that maybe listeners should keep an eye on as we round corner here into 2019?
Jamie Woodwell – Our expectations are that the momentum that we’ve been seeing bringing us into 2018 we’re going to continue to see that running through the remainder of the year. A good strong pace of activity and with a strong economy continue to see strong performance of loans going forward. So, a pretty positive out look.
Adam Hooper – Great, well if listeners out there want to learn anything more about the MBA. Again, we’ll have links in the show notes here. Jamie, is there anyway that, any resources or anyway to get in contact with the MBA if the want to learn more?
Jamie Woodwell – Sure, if folks want to keep track of what we’re tracking if you go to our website, MBA.org or specifically to the research page MBA.org slash CREF research, we’ve got our reports up there that you can take a look at, download. We’ve got a blog up there where we sort of put out points of interest that we’re tracking. Would love to hear from folks.
Adam Hooper – Perfect, well, you’ll have links down there. We really appreciate your time on the show today Jamie thank you for coming on and talking to us about all that we got through.
Jamie Woodwell – Oh, my pleasure, thanks so much for having me.
Adam Hooper – Perfect, well listeners as always we appreciate your feedback, rating, everywhere you listen to us. If you have any comments if you want to hear more about the debt markets, or if you have any further questions that we can send along to Jamie, please send us a note to podcast at realCrowd.com. With that we’ll catch you on the next one.
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