IMN's Annual Winter Forum - Conference recap and key takeaways

Proceed with caution. The message was echoed by many of the panelists at IMN’s Annual Winter Forum On Real Estate Opportunity & Private Fund Investing in Laguna Beach, California last week (Jan 18-20). The 19th annual meeting of commercial real estate (CRE) professionals in the scenic southern Californian coastal city attracted capital allocators, fund managers, brokers, lawyers, and service providers from across the country. Despite hundreds of panelists speaking on dozens of panels focused on different topics, there were a few themes that seemed to be mentioned at nearly every session. Many of these themes were similar to those raised during CREFC Miami a week earlier.

The different makeup of the conference attendees (CREFC has larger representation of debt capital, while IMN has a larger representation of equity capital) shone through, adding some nuance to how each theme was discussed. That said, there seemed to be significant alignment amongst the key players across the capital stack.

Notable recurring key themes at IMN included:

Expectations for a turbulent 2023

No matter what the panel was billed as, nearly all spent some time discussing the challenges that began to emerge in the latter half of 2022 and those which lay ahead.

Across panels, speakers acknowledged the high cost of capital, combined with the pullback by many bank lenders and senior debt providers starting mid-way through 2022, and the skepticism of senior credit returning to the market in a very significant way for much of 2023.

Even though the event was focused on CRE, swings in macroeconomic data and recession risk were common talking points. Even though there were few speakers who seemed optimistic about avoiding a recession, a few noted that given how anticipated the next recession is, it likely will be slower moving than the pandemic recession and not as severe as the global financial crisis.

Inflation falling (but fast enough?)

Many panelists spoke to peaking inflation – a generally positive sign. However, on at least two panels, the speakers commented that while inflation is moving in the right direction, it is still having a costly impact on the industry.

A developer noted that while materials inflation has begun to normalize, labor (wage) inflation is still hurting many projects. Another speaker reported that consumers and renters are beginning to cut into their savings or change how they shop as they address the impact of inflation, but struggle to stretch financially.

Vague values and plunging prices

Acknowledging the uncertainty in the market and decreased price discovery, many raised questions about current valuations, especially as prices for other investable assets have experienced significant drops.

While this has caused some to pause and reassess, it has encouraged many others to look towards other asset classes and the broader capital markets as they look to better understand the relative value of projects and investments. Among speakers who were willing to share predictions on the estimated price changes, there were mentions of reductions in the low double digits (10-20%) from 2022’s peak.

O(uch)ffice

No panel spared getting a hit in on office. While there were some speakers who were more constructive on the property type, office took verbal abuse on nearly every panel.

Industrial and multifamily largely remained the attendees’ favorites; however, while one industrial portfolio executive said that leasing demand was fierce enough to pass on higher construction expenses to tenants, another panelist noted that the financially stretched consumer was starting to show interest in moderating multifamily rents.

Distress call

Even though many panels discussed anticipated CRE distress, few speakers offered (or were not willing) to share specifics about their distress forecast.

One speaker commented that there is too much uncertainty to anticipate the degree and severity; the same speaker also attributed this uncertainty as a key driver of institutional capital to niche property types at the expense of more traditional core. And while the tone of the speakers was calm and not panicked, more than once speakers noted that given the long prosperous period that preceded the pandemic bout of volatility, there is a significant shortage of business and investment professionals with recession experience.

And while this is a concerning thought, if worse comes to worst and forecasts are wrong (as they often are), many speakers remarked on how rational the market was behaving and the lack of obvious exuberance.