Sam Zell: “One of my favorite quotes, paraphrased, is 'Those who cannot remember the past are condemned to repeat it.'"
It's interesting to look back at prior cycles to see what rhymes and what doesn't vs. current conditions.
There's nothing magic in the words that were written long ago, but there's something buried in first-hand accounts, particularly when they're from industry leaders in times of extreme transition.
Here's a good example from a JP Morgage Asset Management presentation at the peak of the financial crisis.
Key similarities vs. today...
-- Stalled transaction volumes
-- Pensions funds sidelined by denominator effects
-- Assumable debt helps transactions since mortgage rates spiked
-- Exit queues for open-end funds
-- Balance sheet lenders on the sidelines
-- Cost of debt up from 6% to 9%
-- DSCR requirements up from 1.4x to 2.1x
-- Market "resigned to this being an 8-10% cap rate world"
-- Special servicing and delinquency spikes
-- Cash is king, harshly punished for liquidity issues
-- No value for income growth
Key differences vs. today...
-- The industry has been shocked over the last 18 months by 6-8% cap rates, but it wasn't that long ago when 8-10% was the baseline expectation.
-- The CRE subsector outlooks were meaningfully different vs. today and much more correlated/similar to each other vs. now. i.e., apartments sounded difficult, retail had a long way to fall, no real pockets of strength.
-- Perhaps the most interesting takeaway: You can get the sense of the fear that permeated the industry in 2008. The issue wasn't discomfort or even equity losses; the issue was survival. And it was obvious that many big names weren't going to make it through the crisis. There will be meaningful differences between winners and losers over the next few years, but it seems like the CRE industry is, on balance, in a much better position today than in the financial crisis.
Indicator of relative stress: Short interest in REITs was 10%+ during the financial crisis vs. 3.6% of REIT shares currently held short. i.e., 3x more investors were betting on devaluation, even after the biggest and fastest decline in values, during than GFC vs. today.
Question for CRE professionals who lived through prior crises: Does this make you feel better or worse about the current situation?
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