CRE’s Crystal Ball: Executive Predictions, Past & Present

In this continuing series marking CPE’s 30th anniversary, seasoned executives reflect on past predictions and discuss what's on the industry's horizon.

Predictions_CrystalBall_iStock-537355390Anticipating major shifts in  commercial real estate and acting on them is a hallmark of successful executives. To mark CPE’s 30th anniversary this year, we are inviting industry leaders to reflect on major predictions that came true, others that didn’t pan out, and offer educated guesses on what’s ahead. This month, we turn to three seasoned executives representing investment, capital markets and development.

Dan Walsh, founder & CEO of Citymark Capital

What have been the most significant predictions about the industry during your career, and which turned out to be true?

Dan-Walsh-Citymark-CapitalI was asked to lead the KeyBank Real Estate Capital Markets division in late 2007, which was right at the time when the subprime crisis was starting to hit. At that time, there were two predictions that were proven to be wrong. One was that because single-family home prices had never dropped before, they never would. That was what led to the whole subprime run-up in the first place, where people continued to put higher and higher values on single-family homes without regard to the fact that the values were being inflated by speculators.

The other prediction was that there wouldn’t be a contagion effect to the commercial real estate sector. But because the capital markets were so intertwined and the financing companies were warehousing all of the debt supporting both subprime and commercial property, once they started to have liquidity problems, it definitely flooded over to the commercial market.

What are your predictions for the next stage of the industry?

There is much discussion about what will happen as Millennials get married and start families and what that might mean for the multifamily industry in general as well as in urban cores, where many young professionals now live. I predict that many Millennials will eventually move to the suburbs for things like more space and access to better school districts, as part of the natural cycle of life and the American dream.

As a national real estate private equity fund manager that invests in institutional quality multifamily properties, our firm continually analyzes both micro and macro trends and we predict continued growth in the demand for well-located urban and suburban multifamily properties. The demographics support the fact that as Millennials age, there is another group coming up right behind them to take their place as the U.S. population overall also continues to grow. The main reason why real estate is a good investment is that people will always need shelter. It’s a core driver of investments stability and that’s not going to change.

Adam Mermelstein, principal at Treetop Development

What have been the most significant predictions about the industry during your career, and which turned out to be true?

mermelstein-adamMy most notable real estate prediction was the market crash of 2008, which, of course, turned out to be accurate. At the time, Treetop Development was heavily invested in ground-up condo development in the greater New York City area. My partner Azi Mandel and I anticipated that a downturn was imminent due to a number of market indicators and we were able to safely exit all of our condo development deals in time without suffering significant losses.

Additionally, Azi and I foresaw the run-up in multifamily pricing that occurred in Upper Manhattan between 2011 and 2016. During that timeframe, Treetop Development purchased, improved and sold more than 2,500 apartments located north of 110th Street, which also contributed to the overall enhancement of the neighborhoods in which we invested.

What are your predictions for the next stage of the industry?

I believe that the real estate industry will remain in a stable plateau state in the near-term. I don’t see the industry rising from here, but, at the same time, I don’t believe that we will experience a market downturn until there is a major political, financial or world event that prompts it.

Josh Schuster, managing principal at Silverback Development

What have been the most significant predictions about the industry during your career, and which turned out to be true?

Josh-Schuster-SilverbackPredicting market movements can prove challenging. However, there is a herd mentality in the real estate market place that can swiftly change. For example, realizing there was a shortage of oversized (high bedroom count) units in 2011/2012, we were able to build for this end user and sell successfully at 12 E. 13th St. Alternatively, noticing a growing supply that followed shortly thereafter, we refocused on constructing the opposite (more efficient units at lower price points) at 50 Clinton St. and sold 80 percent of those units off of floorplans. In both instances, timing was crucial.

What are your predictions for the next stage of the industry?

I think there will be a growing trend to refocus on structure and spend more attention on the capital stack with alternate sources of capital. Structured credit (preferred equity and mezzanine financing) will be used to fill a shortage of equity in the marketplace as big equity remains hesitant considering overall supply and the potential for a market recession due to external factors (Brexit, conflicts in Korea, rising interest rates, etc.).  Additionally, due to continued construction cost escalation and land prices remaining high, we will see more joint ventures and ground lease structures to make both equity and debt participants comfortable.

Images courtesy of Citymark Capital, Treetop Development and Silverback Development