Jamie Woodwell of Mortgage Bankers Association joined us on the podcast to discuss the current state of the market in the lending world.
Jamie Woodwell is Vice President in the Research and Economics group at the Mortgage Bankers Association (MBA), where he oversees MBA’s research and related activities covering the commercial and multifamily real estate markets.
Jamie 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 initiated many of MBA’s research activities, and created MBA’s Peer Business Roundtables and the CREF Careers program.
Jamie Woodwell’s Links
Learn more about the research Jamie and his team over Mortgage Bankers Association do by heading to: mba.org/crefintel
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Jamie Woodwell (00:22):
The thing I’m focused on most is recency and the more recent the data is, the more telling I think it is about where we are right now in the market.
Adam Hooper (00:44):
Hey, listeners. Adam here with another update on the state of the market today with Jamie Woodwell, vice president of research and economics with the Mortgage Bankers Association. Today, he gives us his take on the current state of the market in the lending world, some of the key data points and trends that they’re watching, and also a comparison of how the current state of the crisis may compare to prior events like the ’01 recession and the global financial crisis. Our goal during this time is to bring you as up-to-the-minute information as we can in a quicker shorter format like you’ll hear today. Let us know how we can be the most helpful as we all do our best to try to make sense of these current uncertainties. Look to the show notes for links to the resources that we discussed today and please send us a note to firstname.lastname@example.org with any feedback or questions and let us know what topics you would like us to explore in these ever-changing times. As a point of note, this show was recorded on Wednesday, April 8th, 2020. With that, we’ll get to Jamie.
Adam Hooper (01:49):
Well, Jamie, thank you so much for joining us today. I know it’s a crazy time and we really appreciate your coming on the show to talk about the state of the market right now and where we’re at in the real estate space, so thank you for coming today.
Jamie Woodwell (02:01):
Yeah, absolute pleasure. Thanks for having me.
Adam Hooper (02:04):
Well, I guess we should probably just start with where is the collective mindset in the lending environment right now? Very volatile time. We’ve seen a fair share of deals that have been either paused indefinitely or just blown up. From loan quotes coming back and lowering proceeds or rate increases, what are you seeing just generally in the lending environment right now?
Jamie Woodwell (02:29):
Yeah, I think what you said sounds right on. What we’ve been seeing and hearing is an awful lot of this isn’t just week-to-week, this is day-to-day and hour-by-hour changes, that what you’re seeing in the market is a fair amount of uncertainty and a fair amount of volatility, everything from where the stock markets are, to treasuries, to what the expectations are for the virus and/or our responses to it, and so all of that makes it a little bit tougher for folks to transact and know where they need to be, and that’s particularly the case. If you’ve got a process where you might be starting a deal now and it might not be funded for a month or two months or more, so that’s been one piece.
Jamie Woodwell (03:21):
I think another piece that we’ve really seen is is a real change just over the last week or so in folks looking at new deals and new business opportunities to looking at their existing book of business and really a little bit of hunkering down there, but making sure that whether it be the properties you own or the loans you’ve made, making sure that you know what’s going on with those, you have your arms around them, and you’re preparing for what might come to those properties or those loans, et cetera, over the next few months.
Adam Hooper (04:00):
Now, you mentioned there depending on where we’re at in the process if you’re starting a deal now. Do you have any sense for where volume is currently comparatively or what are you seeing in terms of the amount of new business, new loan requests that are going through or being processed right now?
Jamie Woodwell (04:17):
Yeah. One of the challenges of being an economist-researcher is you walk through the world backwards and you’re looking at things that happened in the past and trying to gauge from them where we might be headed. Normally, that works because we generally are walking in a straight line. Here, what we’re seeing is that the situation is changing so quickly that as most numbers are coming out, they’re really not very indicative of what’s going on in the market at any given time. We saw that with the jobs numbers that came out last Friday, that they just gave us a little glimpse of what was happening in March and right now, we’re in a very different situation, so we actually started working with some of our members to try and get more real-time view of what’s happening in the markets and some flash surveys.
Jamie Woodwell (05:13):
What we see is back to that hour-to-hour, minute-to-minute type of a change, we’ve seen two things. On the one hand, we’ve seen lenders quoting less, so if you look by capital source and by property type, you’ve got a number of different lenders who have moved to the sidelines, either because of uncertainty about the collateral itself or because of the funding markets, they’re just not really in a position to quote loans. We do have other lenders who are continuing to go ahead and quote loans in this environment and bringing in new business. You do see that vary by capital source, so for instance, CMBS, which is the closest to the capital markets, is a market where really, there’s not a whole lot of new deal activity taking place, just because it’s so hard to try and figure out what market you would be making that loan into.
Jamie Woodwell (06:16):
Other capital sources like banks and life companies, some lenders have pulled back, but others are still working along. Fannie Mae, Freddie Mac, FHA on the GSE side, still actively quoting the way they approach underwriting a deal and processing that loan today may be different than the way they would have a couple or three weeks ago. You see the same thing by property type, that those property types that have been the most impacted by the downturn, places like lodging and retail, you’re probably going to see less quoting activity, and then those that are maybe a little bit more remote from the most direct impacts, you’d see more quoting activity. The flip side of that, let me throw one more idea out there-
Adam Hooper (07:07):
Jamie Woodwell (07:07):
… is that at the same time you’re seeing that on the lending side, you’re seeing that being matched one for one by far fewer requests for new loan activity on the borrower side, that given some of the uncertainty, given a drop in transaction volume, we’re not saying as much new loan demand coming in the front door.
Adam Hooper (07:31):
Quoting less in terms of just numbers that they’re processing a function of some point of the sidelines lower request volume, where have you seen either proceeds or rates go? Again, obviously, this is very much day-to-day at best, right, but is there a trend that you’ve been seeing? Are we seeing 5%, 20% lower proceeds? Are we seeing 25 basis points, 150 basis points, higher rates? Where’s that shaking out?
Jamie Woodwell (08:01):
Yeah, it’s a good question. I don’t have any insights into that. I think that’s probably, again, changing day-to-day. The one thing I’d throw out is that each property and each loan is different, so on the one hand, if one is looking for financing, there are a number of mortgage bankers, lenders out there who are looking to do business, and in some ways, a great time to go talk to them. I think also that if one starts to hear about certain trends in the market over the coming weeks, that may not be indicative of one’s own property or the market as a whole. If you think that maybe different types of deals will be transacting now, then that’ll influence what we might see in of the regular price indices that come out, or other measures, so I would take some of the numbers that we start to see in the coming weeks and months with some grains of salt if it comes to things like valuation or other things.
Adam Hooper (09:12):
So, the stock real estate answer of it depends. It feels like it’s even more it depends right now based on, again, like you said, property type, type of lender you’re going after, the specifics of that deal. It’s even more granular, less of an ability to make a general assumption about it right now, given how quickly everything is continuing to flow.
Jamie Woodwell (09:36):
I think that’s exactly right. Commercial real estate is always a very heterogeneous industry, right?
Adam Hooper (09:43):
Jamie Woodwell (09:44):
You got a lot of differences and I think times like this accentuate that.
Adam Hooper (09:48):
Yeah. You mentioned the jobs numbers. Are there other major factors that you guys are following or looking at or that listeners can maybe pay a little bit more attention to in terms of what you guys are using to make sense of where we’re at or the health of the overall economy or commercial real estate as an asset class?
Jamie Woodwell (10:09):
Sure, yeah. To me, the thing I’m focused on most is recency and the more recent the data is, the more telling I think it is about where we are right now in the market. There’s a lot of discussion amongst economists about what shape this downturn is going to be. Is this going to be a V with a sharp decline, but then a very sharp bounceback? Is it going to be more of a U where we’ll see a decline and then we might have a little bit of time down at the bottom before starting to retrace? W, you can imagine. Pretty much any description of shape, you could have someone thinking that’s the way this might shake out. If you think about it as being a V potentially, then if you’re trying to figure out where we are on that V, even if data is three weeks old, a month old, it probably isn’t going to tell you a whole lot, just given, again, how dramatic this is.
Jamie Woodwell (11:12):
The two examples we’ve got of that are the claims for unemployment insurance that came out last week and the week before, which were by far the largest increases that we’ve ever seen. Then we got the regular monthly jobs numbers from March that showed declines in the number of employed Americans, but not nearly the severity that we saw in the unemployment claims, so I think that that recency is going to be really important.
Jamie Woodwell (11:51):
Then I think there are so many different ways that in this current climate that the virus and our responses to it, and the economic responses to it are working its way through the economy and they’re going to be varied. As we already talked about, the impact on, say, the lodging industry was very quick and very dramatic. One would expect that the bounceback there would also be among the quicker and more dramatic, and so I think thinking about the ways that different measures are tracking different parts of the economy and a measure tracking one part of the economy may not be telling you a whole lot about what’s going on in another part.
Adam Hooper (12:41):
Mm-hmm (affirmative). What you mentioned there about the spread, the viral side of this, right, this is such an acute temporal, external force that’s causing all of this. It’s not a normal market cycle correction, so to me, and we’ve talked about this before on the show and some of the webinars that we’ve done, it feels like there’s going to be continued uncertainty until we get a sense for are we at the peak, are we nearing the peak of flattening this curve from the epidemiological side of this. Until we get some comfort around what the spread looks like and what that, that total impact is going to be, it seems like there’s going to be continued uncertainty, right? Because we don’t know if that’s another month or two months or six months, hopefully on the shorter side of that, if we can try to get it somewhat under control. Are you seeing anything differently there? Or what are you looking at? From the cause of this being the COVID-19, what are you looking at there in terms of any indicators or markers are still too soon to tell how that impact is going to be on the overall economy?
Jamie Woodwell (13:50):
Yeah, I think you’re spot-on. It’s interesting. If you think about other downturns, previous recessions, there’s generally a sense that maybe there was one part of the economy or one set of things that was more central to causing or leading to the downturn, and then it spreads from there. Here, I think all eyes are rightfully on the virus as what is causing this downturn.
Jamie Woodwell (14:18):
I think similarly, expectation that when we’re past the virus, knock on wood, that then we’re in a place where the economy can sort of come back, and thus, the idea of the V recovery, and so with that, I think you’re exactly right. There’s more focus on that one tell-tale of the virus and where are we in terms of the process of getting through it, the models that you might have at the University of Washington for when we might be on the other side of this, I think a lot of focus on that, rightfully so, so that we can see some light at the end of the tunnel and say, okay, if we get to this point, then we can see a bit of a return to normalcy after that point.
Adam Hooper (15:13):
Are there other indicators or anything within our asset class, data points, data sets, different resources that we and listeners can pay attention to or watch to see, beyond just maybe total counts or spread of new cases of the virus? Anything that would indicate some stability or understanding of what normalcy will look like within the capital markets or the real estate as an asset class?
Jamie Woodwell (15:43):
Yeah. I mean, I think we’ve talked about some of them, those very short-term. If you’re tracking the hotel industry, for example, the fact that it resets nightly, right, that we’ll be able to see that coming out pretty well through the numbers there. I think for multifamily, they’re starting to be some more regular data sets coming out. The National Multifamily Housing Council is one, others, to try and give a more real time view into where things stand. I think those will be helpful.
Jamie Woodwell (16:23):
I do think that for a lot of things like pricing and such, the backwards look of it is going to make it less helpful in the moment for this downturn. We’ve started to do a little looking at the previous downturns, say the 2001 recession and the global financial crisis, and looking at what those downturns look like and how commercial real estate worked through them. If you look at those periods, for example, we saw the unemployment rate rise over a three-year period and what we’re expecting here is that we’re going to see the unemployment rate jump probably to those levels, maybe above in a two-quarter period and then starting to decline.
Adam Hooper (17:14):
In such a huge amount of time, yeah. Yeah.
Jamie Woodwell (17:16):
So, it’s hard to equate some of that previous experience to what we’re seeing now.
Adam Hooper (17:22):
Yeah, and with the recency comment you made, too, we’re 60 days, 60 to 90 days before we start to see any reflection of what the impact to evaluations have been in this space, right? If a deal is signed today, right, that deal’s not going to close for another probably 60 days in a normal cycle. Who knows how long closing cycles are going to be right now? So, I think it will be some time. I think our general perception is probably two to three months before we start to see into these impacts to the total evaluation of assets start to shake through just due to the long nature of the real estate cycle on the transaction side. Are you guys looking to REITs as a proxy? Is there much that we can gain from the private markets in activity that we’ve seen maybe in the publicly traded space as a proxy for where evaluations might go, or is that too disconnected, uncertain in this time with how that’ll impact?
Jamie Woodwell (18:23):
I think it’s a factor. There’ve been a lot of great papers out there looking at the relationships between public market and private market, pricing, and other things. Without a doubt, they are not mirrors of one another, so I wouldn’t take what you see in the public markets and assume that’s going to happen in the private markets. Getting a little bit out there, but if we do see a sharp V here, I think this may be even more the case, so to the degree the private market lags a bit and also averages out a bit what you might see in the private markets, then the fact that if come fall, this is all largely behind us, then one could imagine the private markets getting through this without as nearly as much of an impact as what we’ve seen over the last month or so in the public markets.
Adam Hooper (19:28):
Maybe more of a lateral move, then, skipping the very bottom portion of that V because of its illiquid nature, maybe.
Jamie Woodwell (19:35):
Yeah, that makes a lot of sense.
Adam Hooper (19:38):
Yep. Where do you, and again, apologies for making you crystal ball or forecast here, but where do you think commercial real estate will be on the other side? I know obviously, sector by sector will have a different impact, but real estate went into this in a pretty healthy spot, right? We had pretty low historical vacancy rates. We had pretty high compared to historical rent growth. Supply/demand was in a pretty good shape, right? I don’t know that this fundamentally changes a lot of those supply/demand dynamics when you’re talking about class B/multi-family, for instance. Given where real estate was entering this crisis, any thoughts on where it might come out?
Jamie Woodwell (20:28):
It’s a great question. It’s one that we’re scratching at at this point. I think others are as well. We actually just this last Friday put up a blog post and chart of the week on that looking at cap rates and where they’ve been in the last two recessions, and so I think that for me, long-term, it’s really two questions. It’s what’s the impact of this on cash flows. We know the cash flows are going to have a very significant hit over the next couple of months for particular property types and maybe less so for other property types, but after that, where are cash flows? Then the other is where are cap rates, so how are investors valuing those?
Jamie Woodwell (21:17):
Again, this is very different. I think the lessons from the last couple of downturns may make one, I won’t say less concerned, but bring a little bit of solace to one looking at the lessons we can take away from them for this downturn, that if you look at the 2001 recession and the global financial crisis, when unemployment started to decline, NOIs started to rise for apartments and for retail, and then they were lagged a little bit for office and industrial.
Jamie Woodwell (21:58):
Again, a lot of our thoughts are that we’re going to hit peak unemployment in another quarter or two, and then we’ll start to see it coming down at that point. That’s on the NOI side. Cap rates, it’s sort of curious. If you think about it as the cap rate spreads, so where cap rates are today versus risk-free treasuries, we actually entered this period at a relatively high rate, and if you take what’s happened to the 10-year treasury over the last month, we’re at a very high rate for those cap rates spreads. If you look at that versus what happened the last two recessions, we’re pretty much already at those cap rates spreads that we were at through the heart of 2001 and global financial crisis, which, again, could give some solace that maybe the cap rates aren’t going to rise a whole lot and putting downward pressure on property values.
Jamie Woodwell (23:04):
Those are two things we’re looking at. Again, a lot of questions about how the virus plays out, how the response to it plays out, and how the tail end, so as we’re coming out, the degree to which we get back to normal activity, that’ll all play a part in it. I think those are two good things to take a look at.
Adam Hooper (23:29):
Great. Then as most of the listeners of the show are investors in this space, do you have any idea at this stage where some interesting opportunities might present themselves or things that they can maybe gear up for or be ready for once we start to see some signs of coming out the other end of this recovery?
Jamie Woodwell (23:48):
Sure. I think there’s always the question of will there be distress, and if there is distress, what capital has already been lined up to go and bid for it? I think you do see a fair amount of capital lined up for either equity or debt that might run into trouble. That was being lined up well before the coronavirus came along. I think one thought is that that might create a floor for some of the distress, that again, if we look to where we might be at year-end in terms of property incomes and property values, if that’s looking like a place that’s not too distant from where we were in February going into this, then that capital might be looking to get a bit of a discount, but I’m not sure how much of a discount there would be.
Jamie Woodwell (24:48):
I think the other places that that people will be looking is to the degree this downturn is changing some of the ways we do things. You see that with, if you look at the stock for Zoom video conferencing and what’s happened there, I think that’s an expectation from a lot of investors that we might be changing the way we do some things based on this. You can imagine that also in the commercial real estate sector and people bringing that perspective to say what property types are, what markets, or what particular types of assets might be more sought after, less sought after on the other end of this.
Adam Hooper (25:29):
Yeah, it’s going to be really interesting to see what behavioral changes stick from this period, however long or short it might be. If we get really used to this remote thing, is this maybe the catalyst that gets remote working mainstream? Who knows?
Jamie Woodwell (25:47):
Yeah, it’s funny. I was on a conference call with two of my colleagues just last weekend. I was saying how much I love teleworking and being at home and being able to run down to the fridge for my lunch and they were talking about how much they couldn’t wait to get back in the office and they never want to telework again, so we’ll see what personalities it brings out.
Adam Hooper (26:07):
Perfect. Well, Jamie, that’s all we’ve got for today. We know you’ve got to run. Anything we didn’t touch on, or maybe let listeners know where they can learn more about what you guys are doing within MBA?
Jamie Woodwell (26:18):
Sure. If folks want to track some of our research, if you go to mba.org/crefintel, C-R-E-F-I-N-T-E-L, that’s our blog where we’re trying to keep things up to date on what we’re tracking through this. Always love talking to folks if anyone wants to reach out directly. There’s a lot of great information coming out right now and so I think there are a lot of opportunities for folks to track the markets and what is and isn’t happening in them.
Adam Hooper (26:48):
Very good. Well, Jamie, again, really, really appreciate your time. Thank you so much for coming on today. Stay safe out there and stay healthy.
Adam Hooper (26:56):
All right, listeners, that’s all we’ve got for today. Let us know what you think about these shorter hot takes. Very fluid time in the market, as we just discussed. Send us a note to email@example.com with any feedback. With that, we’ll catch you on the next one.