The one thing we know is this: markets hate uncertainty. And after reading this CoStar piece about Dodd-Frank I can see why there is a lot of angst and uneasiness among some investors in the commercial real estate market. It is going to take time -- and a lot of manpower and legal analysis -- to sort through yet another behemoth set of laws, rules and regulations. While I am not a deal guy, here's what I am thinking, and I encourage you to critique me or even tell me I am dead wrong.
Pricing and cap rates will have to be lower than they were to sustain any good returns on deals. If the days of what I liked to call "cowboy lending" are over, that is fine. I was never a big fan of it anyway as a lawyer. But we need to adjust to the fact that with lower LTVs on loans and stricter underwriting (including the requirement that lenders keep at least 5% of all their loans on the books as so-called "skin in the game") and more documentation (yay, lawyers!), this will be a change from the go-go days. Yes, we will all have to work a little harder and be a little more careful. Once again, fine with me. If you have real money at stake you are going to be more careful. But at the same time that means the "home runs" of a few years ago are going to be harder and harder to find, unless we go the the old days of, "Buy at a 10 cap, sell at an 8."
What I think is a dual concern and an opportunity is that some people will just stay out of real estate or exit the investment market. Why? Better places to make returns right now, even with prices deflated by as much as 50%. There is already evidence of banks dumping their RE investment arms and advisory groups to boot. So why is this an opportunity? Plenty of good pros will be out there needing something to do, and there will be a lot of property on the market. Hopefully one or two of them will be calling me. And what does this do to the hopefully slightly reviving CMBS market? Again, uncertainty.
Another concern is development. It might be a lot harder to build new projects with reforms and tighter standards in place, like we have had the last few years. Again, this is not necessarily bad, but without construction moving then how is the economy ever going to really recover?
This is not meant to be gloom and doom for real estate. I see and hear and know about opportunities in the market all the time. But I do think some certainty and then some major league creativity is going to be what it takes to really get the market moving again. That's going to be a fun cycle once it comes, be it next month, next year or down the road. We will all have to put on our thinking caps for each deal.
Lastly, I also wonder aloud to what extent this will make mezz financing even more popular as a means to improve return rates to the levels that some of the players really want. But we'll save that discussion for another time.