Trends Watch: Commercial Real Estate

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.   

This week, Elana talks with Frank Scavone, Managing Partner, Trawler Capital.

What is your outlook for real estate? 

Our outlook for commercial real estate (CRE) debt investment is positive as we believe growth in rents and valuations will continue, albeit at a slower rate as we approach the end of an extended CRE cycle. We are solely focused on stabilized property types, given our concerns about new construction into an uncertain medium-to-long term environment. In the CRE debt space, we have observed more aggressive efforts by banks and insurance companies that appear to have resulted in those participants edging higher into the capital stack.  Fund-based lenders continue to compete to fill the equity gap.  These factors in combination with the reapplication of collateralized loan obligation (CLO) structures should continue to drive the declining market share of commercial mortgage-backed securities (CMBS) lenders.

What is your outlook for the economy?

We don’t hold ourselves out as economists. We prepare to defend against an eventual increase in interest rates, although we don’t expect this in the near term. With regard to growth expectations, we are prepared for a material slowdown and retraction of CRE values, however again we do not expect this in the near term. Finally, we believe that the large amount of “dry powder” for CRE investment should serve to buoy values.

What keeps you up at night?

Given our focus on the junior position in the capital stack, we are highly focused on finding “credit good” opportunities. Our analysis is based on underwriting existing, not projected, cash flows and mitigating both event and maturity risk. High valuations, compressed debt yields and late cycle uncertainty have made it difficult for managers to deploy capital. Accordingly, there has also been some erosion of credit practices. While I have confidence in our credit practices, and we are a hold to maturity strategy, I do worry about the impact of prevailing credit practices on credit spread volatility and therefore asset valuations.