Takeaways from the IMN Winter Forum

Are we there yet?
The market has reset, but has it bottomed? Uncertainty in underwriting new investments will persist until (1) the Fed pauses and rate visibility improves; (2) senior debt liquidity improves, allowing the rest of the capital stack to follow; (3) concerns about recession and cash flow resiliency ease, particularly in Home Building, Multi Family and Single Family Rental (SFR).

The Fed and the forward yield curve are sending different messages.
This confusion has led to an increasing number of investors and lenders conservatively leaning towards the Fed sticking to its current path of sustained higher rates, versus softening any time soon.

Why buy when you can lend?
This was a prevailing message from investors, but preferred equity, mezzanine debt, and bridge loans are blending through creative structures to manage risk and provide needed liquidity, particularly for projects under construction. We believe this is a temporary condition, but likely to persist in the near-term

We’ll see capital flow out of real estate investments, but long-term positive flow into SFR.
While pension, insurance, and sovereign wealth funds are generally overweight real estate vs. targeted asset allocation, they are underweight single-family exposure but looking for an attractive entry point.

We’re in the early innings for Bad Debt.
To date, most owners and operators are still covering their debt service coverage ratio (DSCR) gaps, but it’s not yet clear if they will continue to support assets through a recession. Annual audits, cap rate ceilings, and upcoming loan maturities could surface problem loans in 2023-2024.

Cash is king.
As usual, having dry powder will result in opportunities to acquire attractive assets as the housing market settles, and potentially before capital markets become more liquid.