CREFC Miami 2023 - Conference recap & takeaways

From January 8-11, the Commercial Real Estate Finance Council (CREFC), a CRE industry group, hosted its annual event in Miami, FL. The event attracted 2,300 CRE professionals from across the country. The conference is heavily focused on CRE debt financing (e.g. portfolio/balance sheet, structured credit/CMBS) but also touched on macro and property-level topics.

The following are some key themes I took away from the event.

Proceed with caution

Record attendance, warm weather, and many familiar and new faces made the conference exciting. But the warm Miami weather wasn’t enough to shake the chilly outlook that many panelists shared.

Over three days of panel sessions, speakers from different firms acknowledged the challenging year 2022 was and the difficulties expected to lie ahead in 2023. It seemed that the consensus was that 2022’s strong start was more of a spillover from 2021’s boom and that the slowdown in 2H22 will likely continue through the beginning of 2023.

Panelists acknowledged the slowing economic and commercial real estate activity in the higher rate environment amidst elevated market uncertainty.

Bumpy, not bubbly

Despite no “bubble talk,” many panelists acknowledged cracks appearing in certain parts of the CRE market, including the CLO/bridge space and Office. Many panelists expressed concern that property-level cash flows and pricing across property types will come under pressure in 2023 and therefore require more scrutiny now.

In the immediate period, this added emphasis on caution is extending due diligence and underwriting timelines, slowing production speeds. Many panelists made comparisons of the current environment to the late phases of prior credit cycles. However, they also acknowledged that the current CRE fundamentals remain more intact than during prior late phases.

Declining liquidity, raising credit concerns

In multiple sessions, panelists acknowledged the difficulty presented by the high cost of capital, not only for loan production activity but also as a potential catalyst of credit stress.

While many believed that we are not in a CRE crisis now, they noted the potential for elevated credit risk in the year ahead if liquidity available for CRE owners/borrowers continues to decline. CRE-focused capital still exists but is less available, as it has become much more cautious and costly.

The gap created by the pullback of bank lenders and CMBS new issuance is huge and will be challenging to fill with other sources. And one panelist shared their view that servicers will likely be much more active and more hands on with troubled collateral during the next rise in trouble assets.

Buy the dip

While many panelists on the various forums were focused on 2023’s anticipated challenges, many lenders and investors also flagged current attractive market opportunities created by the significant repricing of credit over the last nine months.

Multiple lenders spoke to the current environment being priced in lenders’ favor, though the higher risk-adjusted returns seem to come at the expense of overall volume.

Investors also acknowledged that the current rate and market volatility have contributed to creating attractive yield opportunities in specific segments of the CMBS market.

Seeking clarity on cash flows and values

As affordable CRE debt capital becomes less accessible and transaction activity slows, many market participants are left struggling to assess the sustainability of property cash flows and collateral values.

Regarding cash flows, at least two panelists mentioned that they were starting to see signs that cash flows are not growing at the rates expected when underwritten in 2020-2021.

And on the valuation front, many panelists spoke to the lack of clarity around valuations contributing to the overall sense of 2023’s uncertainty, meanwhile forcing more participants to focus on other metrics (e.g., LTC).