Josh Zegen
Managing Principal and Co-Founder at Madison Realty Capital
Where in the capital stack are you most comfortable playing today, and where are you finding the best lending opportunities?
Madison typically provides capital between 50 to 80 percent of cost with an LTV as complete/as executed of sub 65 LTV. We remain committed to providing capital in this range, but the “V” part of the equation is harder to ascertain given a very volatile market and few(er) trades. Madison will remain active in this market, and we are looking for opportunities where people must transact. For example, in situations where there is a cost or timing impetus for doing a deal. We have seen a number of deals that hit budget shortfalls because of interest carry, execution, or costs related to the pandemic that are creating opportunities for us to provide solutions for deals of all sizes, with speed, certainty and flexibility.
What’s your best piece of advice for borrowers seeking financing?
Now is the time to put your best foot forward from a details and organization perspective. Lenders don’t need many reasons to say no today as the bar is higher, so it’s very important to be as transparent as possible. If you don’t have to transact, don’t transact.
Would you rather finance a well-established sponsor on a Class B office renovation in New York City, or the first-time developer of a multifamily project in the Sun Belt today? Discuss.
A sponsor’s reputation, financial wherewithal and execution ability are critical pieces of our underwriting, but Madison is very basis-focused. When reviewing opportunities to lend, it is the first and foremost piece of analysis we use. Madison is typically more drawn to residential-related real estate, so to the extent the project checked our boxes, with all else equal, we would choose the Sun Belt multifamily.
What’s your take on an impending recession? How bad might it get, and what are any silver linings?
If the Fed continues this harsh stance on monetary policy for an extended period, it could lead to a deep recession. However, I don’t believe this recession/financial downturn will be anything like the Great Recession. The fundamentals that drove the economy into the extreme financial condition during those years are not evident today. As a result of tightened regulation, we don’t have an over-
levered banking system or consumer as we did leading up to the Great Recession. I don’t believe we have an oversupply of real estate, especially an oversupply of housing, which also contributed to the Great Recession. About one-third of all homeowners have a mortgage rate under 4 percent, providing low-cost housing to homeowners and leading to limited supply of for-sale housing. Owners will not want to sell and buy a home with an expensive mortgage. I also believe the current interest rate environment will put several new projects on hold, which will continue to limit new supply.
When will we reach the bottom of the market?
We will reach the bottom when the Fed starts to give some guidance that it will slow down the pace or stop raising rates. It is very challenging for investors to price risk when there is a constant moving target in the rate environment, which leads to a lot of uncertainty and caution. Once there is some settling in the markets for an extended period, I think markets will start to normalize and investors/debt investors will feel more settled and willing to transact.
What would you do differently during the next pandemic?
Madison was very active during the pandemic. We started to transact as early as April 2020, and completed more than $1.5 billion in transactions that year. I obviously wish we had done more during those first few months. There were tremendous opportunities given the lack of liquidity in the market.
What keeps you up at night, and what helps you sleep?
There are a lot of things going on in the world that keep me up at night. The Ukraine situation, partisan politics, and the current inflation/interest rate environment are just a few, but this country is a safe haven, it has remarkable resilience, and that keeps me grateful and equally confident. The United States has a unique entrepreneurial culture that is buoyant and marketable. If you want evidence, look no further than the continued global demand for our real estate.
Lighting Round: Would you rather…
Refinance a Class B office property or be locked in a room for a month with Vladimir Putin?
Go ahead and lock me in a room with Vladimir Putin.
Do an all-haggis diet or extend a suburban mall loan for three years?
Extend a suburban mall loan for three years.
Lend on the New York office sector or take a job as a septic tank repairman?
Lend on the New York office.
Traverse Jurassic Park on foot or relive 2008?
Relive 2008.
Babysit triple infants who just ate their weight in beans or finance Adam Neumann’s latest venture?
Finance Adam Neumann’s latest venture.
Be paid in crypto or Nestle Crunch bars?
I’ll take blue chip crypto.
Be the British prime minister or the guy who has to announce interest rate hikes?
The guy who has to announce interest rate hikes.
Run a marathon or swim in the Gowanus Canal?
Swim in the Gowanus Canal.
Sit in L.A. traffic for two hours or sit in a stalled NYC subway car for 30 minutes?
L.A. traffic.
Fight 100 duck-size horses or one horse-size duck?
100 duck-size horses.
