We are living in a yield-starved world, and commercial real estate continues to supply what hungry investors want most. In this episode of The Yield, Peter Kerr, CFA, is joined by Willy Walker, chairman, and CEO of Walker & Dunlop, one of the largest commercial real estate financing companies in the US, for a discussion on the ever-moving real estate market in the time of COVID.
[1:20] The impressive growth of Walker & Dunlop and key factors that drive their performance.
[6:20] The competitive advantages of having a relatively smaller balance sheet.
[8:21] Single asset versus multiple asset CMBS and the risks of each in today’s market.
[12:37] 2021 was a high transaction year in commercial real estate despite the pandemic.
[16:19] What is the future of office real estate?
[19:36] Insights into the affordable housing crisis in America.
[26:08] Who is modeling how to solve this crisis at a municipality level?
[27:05] The drivers in real estate in 2022.
[32:20] Which sectors are lenders most interested in today’s market?
Mentioned in This Episode:
It may seem that anyone who can secure a single-family real estate loan should also be able to get involved in commercial real estate, but there is a significant difference between lending in the single-family market and the commercial real estate market. Willy walks listeners through the process of each, highlighting the key differences of each. There are qualifications in the commercial side that simply don’t exist on the single-family side, including where the risk of the loan sits. Because the risk of commercial real estate loans stays with the originator of the loan, the underwriting, and the risk analysis are far more focused and real than on the single-family side, making commercial real estate a harder investment game to play.
2021 was a high transaction year in commercial real estate despite the pandemic, but why? Willy describes the current insatiable appetite for commercial real estate, specifically for multifamily or apartment buildings and industrial properties, as the result of historically high performance through both the great financial crisis and the pandemic. With an increased demand for multifamily properties and for industrial spaces exploding, their dynamics and risk profiles have gained the attention of institutional investors who are looking to put capital to them more than ever before.
And what about office space? While major companies like Google and Meta are taking their time returning to the office after the shutdown, they are also signing leases for upwards of 600,000 square feet of office space in brand new buildings. When companies this big are investing billions of dollars in office space, it’s apparent that the demand for office space is not diminishing as time goes by.
In today’s real estate market, there simply aren’t enough single-family houses for sale. There is a limited supply of new multifamily and no supply of affordable single-family, which means landlords have the ability to push rents. And at a time when the value of single-family homes is going up and interest rates are going up, it is all the harder for people to get into their first homes. Willy highlights the needs and the solutions of this crisis, with insights into the effects of inflation and rates dropping that are working against homeownership in today’s financial landscape.
It’s clear that investors today aren’t getting current income from buying treasuries or corporate bonds, and many companies cut their dividends during the great pandemic. As a result of that, we are living in what Willy calls a yield-starved world where one of the places where people can potentially find yield is investing in commercial real estate. This explains why there’s so much equity capital trying to chase returns in commercial real estate and it’s one of the reasons why CAP rates in commercial real estate will continue to go down.
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