The Roaring 2020s: The Next Decade in Real Estate Finance

In these portraits, seven executives share what they’re seeing in the tea leaves

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Real estate has always drawn positive thinkers.

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“If you’re not an optimist in our business, you might as well just stay in bed,” says Elliot Eichner, a co-founder of Los Angeles-based debt brokerage Sonnenblick-Eichner.

But even as they pop Champagne corks to ring in the New Year, real estate finance executives are grappling with a mixed picture of how the 2020s might unfold. 

With banks still handcuffed by regulation following the Great Recession, debt funds have all the momentum and have seized a growing share of the market for the transitional deals that define the outer limits of what lenders are willing to finance. From his New Jersey office, a longtime banker who has remade himself as a debt-fund maven is pondering what it means to make smart loans as an influx of capital swells the ranks of his competitors. 

Multifamily lenders face another set of challenges over the next 10 years. Business has charged ahead as more Americans set aside the notion that owning a home is the easiest way to build a nest egg — either because they no longer believe it or because they can’t afford it. In the suburbs of Washington, D.C., a top apartment lender who made a smart bet 10 years ago is doing his best to read the tea leaves of federal housing policy. 

Meanwhile, as America’s wealthiest-ever generation ages out of the traditional housing market, baby boomers are demanding new standards of care and quality of life in the seniors’ residences where many will spend their twilight years. A Los Angeles investor who has gone all-in on those facilities faces down the beginning of a make-or-break decade for a still-immature industry that will soon see millions of new customers.

Each executive we interviewed hopes that the roaring 2020s live up to that optimistic sobriquet, mindful that the original Roaring Twenties — the 1920s — ended in catastrophe. That’s why — though this year’s economy is drastically changed since even 10 years ago — the smart money is nonetheless poring exhaustively over the risks and uncertainties.

The alternative lending vet

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Josh Zegen. Photo: MRC

As the head of a thriving debt fund, Josh Zegen has found himself in the middle of a larger crowd of peers than he ever would have expected heading into the 2020s. His firm, Madison Realty Capital, established itself in the late 2000s, does private-capital lending — a novel idea in commercial real estate finance, a space long dominated by banks.

Not anymore.

Specialty lenders that flooded the market as banks withdrew after the financial crisis are here to stay, Zegen avers. They may have been taking advantage of a one-time pause as banks regrouped during the downturn, but their work during that period of tight credit offered borrowers an opportunity to get comfortable signing up for loans from small boutique shops, Zegen said.

Even now that banks have made a comeback, Zegen said, relationships between borrowers and debt funds that began of necessity 10 years ago will sustain long into the 2020s because newfangled debt lenders have proven their tenacity and grit.

“You have borrowers that would have been bank borrowers, but now they’re more likely to call a debt fund,” Zegen said. “The market has adapted to debt funds and the flexibility they offer.”

That’s good news for borrowers that look set to hold up in the decade to come. But the market might also be adapting to the complacency fostered by a 10-year-old business cycle that’s come to feel invincible. Even an upstart lender celebrating its 10th anniversary this year wouldn’t benefit from any experience steering the ship through a credit crunch, because the economy has been so stable over that period.

“You look at the amount of debt funds and specialty lenders out there: Not all of them can be good lenders and investors,” Zegen said. “From afar, it looks a little too easy. A lot of guys are taking equity risk. A lot [of credit growth] is driven by leverage.”

A downturn in the years to come might quickly reveal whether newcomers toed the line on underwriting. When that happens — with early signs of consolidation already in evidence — Zegen would be surprised to learn that none of his colleagues had pushed leverage too far.

“When you’re learning it for the first time, like anything else, you make mistakes,” he said. “But more and more [lenders] are stretching the last dollar.”

The ex-banker

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Jonathan Lewis. Photo: JLJ

During his 30-year career, Jonathan Lewis held leadership roles at Customers Bank and Atlantic Coast Bank, but he’s ringing in the new decade wearing a different hat. Since 2017, Lewis has been the CEO of JLJ Capital, a private, middle-market lending firm he founded with two partners.

Why the shift? He’s come to feel that debt funds were in some ways better positioned to meet the tide of demand from borrowers.

“There’s been a need, and there will continue to be, to have access to capital in quicker time frames than banks have been willing to pull the trigger on,” Lewis explained. 

To an extent, that means serving a different clientele than in his former life. It also requires making the kind of fine-grained risk assessments that separates savvy higher-yield lending from credit that’s overly credulous.

“[Ours] are not bad borrowers, but their properties are usually somewhat impaired, or there’s a real discount they can obtain by pulling the trigger quicker,” Lewis said. “We sift through those and figure out which ones we’re comfortable with the risk on. It’s about risk mitigation.”

Of course, how Lewis’ career move looks in retrospect will have a lot to do not only with how debt funds fare this decade, but, he says, with how well banks defend their turf against the upstarts. And, he says, that, in turn, could depend mightily on electoral politics. (Yikes.)

“Depending on what happens in the next election, it could get a lot worse for banks,” Lewis said.

Towards the end of his tenure at Customers, “it became really apparent that banks couldn’t lend” due to regulatory constraints, he recalled. That could become more formidable if a progressive candidate takes the oval office in November and starts off the decade with a crusade against the financial industry.

“I don’t think the banking system has a problem now, but I think, to the political arena, bankers are just another person to blame.”

Yes, it’s a borrowers’ market. But though he’s not gung-ho about rapid expansion — JLJ employs 11 people, and Lewis is “not planning to staff up” — he’s glad to be starting out the new decade originating loans under his own shingle.

“I’m happy about having my own company,” Lewis said. “Did I like banking before regulation? Of course. It was a much better place to be then. But 2008: You still can’t undo the damage done. Bad loans were made, and the banks were the big bad people they tried to point at.”

The borrower

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Terrell Gates. Photo: Virtus

As CEO of Virtus Real Estate Capital, Terrell Gates has a front-row seat to the CRE capital markets, which his company has tapped to fund everything from student-housing projects in New Jersey and Illinois to medical office buildings in Phoenix and Los Angeles. From his desk at Virtus’ headquarters in Austin, Texas, rabidly competitive lenders look poised to fuel the 2020s to a strong start.

Elbow room has grown so scarce that Gates has noticed upstart debt funds grapple for the low-margin loans that were recently the bread-and-butter of banks and life insurance companies.

“We’re starting to see debt funds become competitive [on those deals],” Gates said. “They’re offering up pricing that [competes] with banks’. They’ve always had more lax covenants in general, and at the same time they’re willing to go higher leverage if that’s important to you. We’ve seen quotes lately from debt funds that are really competitive [with banks and lifecos].”

Indeed, the ranks of lenders are as crowded as they come. But it also couldn’t hurt that Virtus’ strategy, which focuses on alternative asset classes, has zeroed in on property types that Davis believes are demographically destined to rise with the tide as the 2020s unspool.

“That’s always what we’ve invested around: demographic trends. The three big ones for us right now are the boomers, the millennials and the Latino demographic,” Gates said.

Those growing — and increasingly empowered — populations have guided Virtus’ focus. But making conservative financing decisions to fund its development pipeline is another important component of Virtus’ plan in an economy that Gates sees as increasingly risky as a new decade dawns.

“If you polled across the globe, [you’d hear that] the next 10 years are not going to be as good as the last 10,” Gates said. “We always have and will continue to emphasize optionality.”

In the late stages of a business cycle, an insistence on flexibility is paramount, he added, even when it might mean leaving money on the table.

“That’s why we focus on agency debt, even though we definitely would have made more money had we put in place shorter-term, floating-rate debt. In this current environment, a lot of the hot money is willing to pay up for assets where they can put free and clear debt and get maximum term. We like interest-only too, but not at the cost of giving up optionality. That’s why we tend to really favor longer term debt,” Gates said.

The multifamily CEO

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Willy Walker. Photo: Walker & Dunlop

During the financial crisis 10 years ago, Willy Walker faced what felt like a simple but weighty binary choice.

After the housing collapse, it was clear that Congress would take action to reform Fannie Mae and Freddie Mac, the government-backed providers of residential and multifamily mortgage debt. But would Congress sideline the twin agencies entirely? Making the right prediction was crucial to the fortunes of Walker & Dunlop, the multifamily lender that Walker leads as chairman and CEO. 

“We made some pretty significant bets that Fannie and Freddie weren’t going away,” Walker recalled last week. “But there was plenty of questions in 2010 whether Congress was going to do away with them.”

That call led to a strategy, including some major corporate acquisitions, that positioned W&D to be a dominant agency lender in the 2010s, a decade when it persistently placed as one of the leading originators of Fannie Mae and Freddie Mac multifamily loans. But at the dawn of the 2020s, although demographic trends have continued in the apartment industry’s favor, its trajectory is characterized less by a neatly forking path than by a glade of ambiguous questions.

One is whether single-family homes will ever regain their role in the American psyche as most family’s default long-term investment — a mentality behind which, as recently as the George W. Bush administration, the federal government threw its full weight. If Americans come back around to homeownership this decade, the rental markets would undoubtedly suffer. But that’s far from a sure thing.

“Homeownership has come crashing down from almost 70 percent to the low 60s” since the financial crisis, Walker noted. “There’s been almost no net new single-family housing delivered to the market.”

More specifically, homes that were built over the last 10 years have been weighted towards offerings for upper- and upper-middle-class families, a phenomenon that’s left entry-level renters “stuck, or trapped, in multifamily now,” as per Walker. “They’d like to move out, but they can’t afford to.”

But builders are beginning to turn their attention back to the lower end of the single-family market, a move that could shake up that dynamic as the 2020s get underway.

Given a rapidly evolving political landscape that could, this year, swing from Donald Trump’s conservative nationalism to the far-left progressive politics of a Democratic nominee such as Bernie Sanders or Elizabeth Warren, the path forward starts to look quite opaque indeed.

“If Trump stays in, he’s locked into the privatization of Fannie and Freddie,” Walker said. “I don’t know specifically what Elizabeth Warren would do, but if her or Sanders came in, I think you’d get a lot of what’s in place now unwound.”

The lodging expert

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Elliot Eichner. Photo: Scott Granger/Commercial Observer

It wasn’t so long ago that the hospitality industry faced what felt like an existential threat: the internet’s potential to decimate companies’ willingness to spend big bucks on business trips.

“I remember, ‘Oh, videoconferencing. No one’s going to travel,’ ” said Elliot Eichner, who, along with his partner David Sonnenblick, co-leads one of the industry’s most prominent lodging-focused debt brokerages. “The technology was novel, and no one knew what would happen. But I don’t think that really took hold.”

Instead, he said, the 2010s saw the hotel space reinvigorated with an ever-growing diversity of brands, amenities and independent operators. And crowded capital markets have shown no hesitancy about funding the bull market’s latter-day legs.

“There’s no shortage of capital. We haven’t heard of anyone pulling back,” Eichner said. “Interest rates are still low. The economy is great and credit spreads are tight. It’s still a great time to be a borrower. And if you are a lender putting money out, everybody still wants to transact.”

The properties that those lenders are funding are growing more diverse by the year, the broker noted, pointing to a trend he thinks will continue to define the industry in the decade ahead. Even in New York, it wasn’t so long ago when the lodging options were limited to towering — and relatively interchangeable — brand-name hotels that mostly stood along the avenues.

After a decade of experimentation, the field has broadened considerably, as neighborhoods such as SoHo, the East Village and NoMad have swelled with new boutique options. While the internet hasn’t curtailed travel as the industry feared, it has made it easier for unflagged properties to find a clientele. Online marketing will continue to grow in importance in the decade to come, Eichner said.

“From my experience financing hotels, that’s been extremely powerful,” Eichner said. “The marketing people at hotels who run this spend every day trying to position their hotel at the top of the [online search results]. It’s that powerful.”

Meanwhile, up-and-coming markets in the Sun Belt are likely to get a new look from lodging lenders this decade. Destinations across the South from coast to coast have long drawn tourists with sunny weather, but soon, they may be drawing more business travelers, too.

“Right now, we’re working on deals in Texas and Florida,” Eichner said — two markets liable to see renewed investment in the years ahead.

The senior-housing investor

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Shlomi Ronen. Photo: Dekel Capital

In Los Angeles, Shlomi Ronen set up Dekel Capital’s joint venture equity arm to invest in standard-fare multifamily properties as well as those geared towards seniors. But as the 2020s approached, he’s been focusing more of his attention on housing for the elderly than ever before.

The oldest baby boomers will begin turning 75 years old next year, kicking off a decade when an accelerating number of Americans will reach that milestone. As of last year, about 34 million members of the generation — about half of it — had already retired. This decade, a growing share of those people will need places to live as they age.

“We’re still seeing decent risk-return ratios [on seniors’ housing] compared with other product types, where development yields have gone so low.” Ronen said.

Lenders, on the other hand, remain a little more tepid about the asset class. Because the sector is maturing so rapidly, institutional owners and operators haven’t come to dominate the playing field yet — and banks are cautious about advancing capital to landlords that might be less known or capitalized than leaders in other property types.

“They’ve been cautious in terms of who they lend to and where they lend,” Ronen said. “It’s still a very small subset of lenders that will entertain seniors’ housing.”

That could change as demand grows more fervent over the next 10 years. Ronen pointed out that the industry still lacks the equivalent of a Hilton or a Marriott — a widely recognized brand with a national reputation. If such a company emerges — Ronen thinks the opportunity is there — then that could help improve the quality of care. There’s also a shortage of workers to care for residents, and the smaller companies that dominate the space today don’t have the wherewithal to fund large-scale training programs for new workers.

A more institutional ownership model might make it easier to invest in that kind of training.

“There are not enough universities or vocational schools training people how to run nursing homes,” Ronen said. “You need to have that infrastructure.”

 

The rising debt broker

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Justin Horowitz. Photo: Cooper-Horowitz

When the financial crisis rolled around, Justin Horowitz, a debt broker at Cooper-Horowitz in New York City, was still a freshman at Syracuse University. That means that for the entirety of his seven-year career in the industry, the lending environment has been making the work look easy. 

As the 2020s begin, competitive pressures are helping him lock in terms for clients that would have been unthinkable not long ago.

“For example, it seems like savings banks are offering more interest-only debt recently,” Horowitz said. “There is a lot of competition from the debt fund space, so a lot of lenders are looking to get creative in today’s cycle.”

This year he thinks business will be off to a strong start. Rates are still low, but who knows for how much longer. That’s made it a ripe opportunity to chat with many Cooper-Horowitz clients about locking in a fresh round of long-term debt.

“If there’s an opportunity to place a low-interest loan with a life insurance company, it makes sense to put that to bed now, long-term,” the broker said. “There are so many lenders offering long-term loans right now.”

Horowitz, who has also worked at Savills and Brickman, knows full well that thanks to a remarkably steady business cycle, his seven-year career has only exposed him to one side of the coin. Given that the typical U.S. business cycles lasts about five years, according to the National Bureau of Economic Research, it’d be downright shocking if Horowitz is so lucky for another decade.

“I’ve been working since 2013, so I’ve seen nothing but success,” the 28-year-old said. “But [preparing for a downturn] will be just about trying to stay on my toes. Overall, I’m optimistic about the market.”