The Commercial Real Estate Finance Council (CREFC) is hosting its first in-person annual New York City conference in three years this June amid a time of market uncertainty for the industry.
The three-day event runs June 13 through June 15 at the The New York Marriott Marquis and will kick off at 9:30 a.m. with a commercial real estate outlook from Kara McShane, head of commercial real estate and executive vice president at Wells Fargo. CREFC also will host its first Sustainability Summit as part of the conference on June 15. It will focus on the increasing role environmental, social and corporate governance (ESG) factors are playing in CRE finance.
“We are coming together at such a critical time for commercial real estate finance as industry participants continue to navigate historical levels of inflation, rising interest rates and overall uncertainty in the market,” said Lisa Pendergast, executive director of CREFC. “Additionally, as ESG becomes an increasingly important consideration in commercial real estate finance, we are thrilled to dedicate an entire day of our conference to this topic.”
Pendergast spoke with Commercial Observer about her expectations for the conference and how the CRE finance industry is grappling with multiple challenges in 2022.
Commercial Observer: What are expectations for CREFC’s first in-person annual conference since 2019?
Lisa Pendergast: This year’s conference comes at a time when the U.S. economy and markets are as fragile as they were during the early days of COVID, with the real potential for a bout of stagflation that will negatively pressure both the economy and financial markets. What’s more, the pandemic has the potential to change the shape of commercial and multifamily real estate on a go-forward basis. Does office occupancy revert back to pre-pandemic levels? Is retail ever more a predominantly e-commerce enterprise? These questions and so many more are top of mind for CREFC members, and there is no better place to hear myriad views and expert opinions than the CREFC annual conference.
How do you expect general sentiment to be at the conference given all the uncertainty facing the commercial real estate market this year?
Today’s environment is all about uncertainty. And while, yes, there is a growing level of pessimism amongst the industry given the macro environment, there are myriad areas that are new and fresh and a growing focus in CRE and CRE finance. … Think ESG and the new climate-related data that CRE lenders and borrowers will need to track and report through the SEC. In addition, there is a groundswell of concern and focus from the GSEs and government on the issue of housing stability and affordability. To the good, CREFC has all lender types as members, so we’ll hear from agency and non-agency lenders on this issue.
How are CREFC members responding to volatility in the market?
We are an industry of pros who have seen an economic cycle or two, and are responding accordingly. By its very nature, volatility is unpredictable, which forces market participants to participate in markets with a heightened level of conservativeness and diligence, and that is just what we are seeing. During these times, CMBS and CRE CLO issuers tend to tighten their underwriting standards and both loan and security structures.
For investors, they traditionally move up in credit and shorten term/duration. In the CMBS markets, for example, higher rates and wider spreads afford investors the ability to not only realize a solid return but also stay up in credit, where they are well credit-enhanced and tend to be more liquid from a secondary trading perspective. And should markets settle down, they’ll also benefit from any credit spread tightening.
CREFC is hosting its first Sustainability Summit as part of the annual conference. How important a role do you expect ESG and sustainability issues to play in commercial real estate going forward?
Yes, indeed, this year’s annual conference includes a Sustainability Summit that focuses on key ESG issues as they relate to commercial and multifamily real estate. Key to these discussions as it relates to CRE is how best to capture data that properly gauge environmental metrics within a given building, and how to relay that information to regulatory agencies, such as the SEC. CREFC just finished working on our response to the SEC climate disclosure proposal.
How do you see the CMBS and CLO markets shaping up for the rest of the year amid volatility and inflationary pressures?
As in all markets, the first concern is the Federal Reserve and whether they can orchestrate a soft landing for the U.S. economy. If that happens, the outlook for the CMBS and CRE CLO market and all markets improves considerably. For now, Chairman [Jerome] Powell is setting his sights on a softish landing, which may be good enough to allow markets to stabilize.
However, it’s possible that we are in for a protracted bout of uncertainty and weak economic growth, which will keep both CMBS and CRE CLO issuers on edge. Borrowers have many pockets of liquidity to tap, so may look to more traditional balance sheet lenders in such an environment. Yet, should the softish landing not materialize, all lenders will need to grow more conservative not only on what they lend on but also on how they lend. A weaker economy means less leverage and more structure and debt service coverage for borrowers.