Trigild 2012 Fall Lender Conference

Trigild Fall Lender Conference

San Diego, October 2012


This past October, the commercial real estate firm Trigild held their annual lender conference in San Diego.  For those not familiar, this conference is an opportunity for note buyers, lenders, and commercial real estate services firms to network and discuss the state of debt markets around the country.  More recently, it has shaped out to be one of the larger meetings predominantly focused on distressed real estate and loan opportunities. There were several insightful discussions about the state of Special Servicers, the burgeoning price spread between asset types, the importance of property management, and the outlook of capital markets.  We discuss a few important themes to take away from the conference below.

Not So Special Servicers

For the past three years, since the implosion of the CMBS markets, there has continued to be a great deal of focus on Special Servicing, their responsibilities to bond investors, and the many conflicts inherent in their operations. Investors and brokers initially saw Special Servicers as golden tickets to huge pipelines of deals, only to find these companies acquire brokerage shops, hold assets for fees, and choose as the vehicle to move loans and REO in bulk. The future will appear similar, as Special Servicers continue to find ways to keep fees internally and extract assets for their own benefit.  Investors who understand these servicers’ desires to build auxiliary business lines, and help them in that quest, are best positioned to see the favor returned through better than average looks at assets that come into special servicing shops.

Bargain Retail

One of the more thought provoking questions during the conference came from Kevin White of Spring Hill Capital partners, who posited that the real estate community is potentially creating a bubble in the apartment market.  His overarching question was simple:

“Is $1 spent on retail worth the same as $2 spent on apartments?”

It is true that Class A quality apartment complexes continue to trade for 5% cap rates, while many Class B retail centers are trading at rates twice that. There are certainly many issues with retail: tenant downsizing, internet shopping, and older construction (80% of retail buildings were built 15 or more years ago).  However, with the right management and fundamentals, the yields are attractive enough to act on.

Importance of Property Management

A focus on basic real estate fundamentals was continually stated as integral to ensuring investors can execute on their pro-formas.   Highly skilled property management teams are an important component of this ability to generate ongoing value in an asset.

Best in class property management will help retailers, retail, by focusing on the fundamentals:  head count, conversion, and marketing.

They can develop relationships with building inspectors to gain early insight for potential new leasing.  These inspectors issue certificates of occupancy, and thus know when tenants’ leases roll at competing centers in the market.

Finally, they understand the aesthetic importance in value. Well tended centers make for happy tenants.  Ultimately, property management = tenant retention = value creation.

Guarded Optimism

Despite skepticism over future health of CRE capital markets, the general sentiment was guardedly optimistic.

There were opposing views by various speakers as to the ongoing risk of interest rates.  Several participants noted that the latest round of quantitative easing (“QE3”) is helpful in the short run, but should be wound down as there is the potential for disaster through uncontrolled inflation. Conversely, other panelists believe interest rates will remain low through 2015 as the result of a weak labor market and low wage growth.

While capital markets have opened up compared to a few years ago, lenders are now much more discerning in their underwriting. A much higher focus is now placed on debt yield (net cash flow / loan amount), the story of the asset, and strength of the guarantor and/or sponsor.

One point all were in agreement on is the unlikelihood of greater clarity on these issues in the immediate future.  Between the election and the impending fiscal cliff, we’ll be waiting at least until 2013 for more certainty on the outcome.

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