The current real estate cycle is considered to be in the later innings of the baseball game with some calling it a post 7th inning stretch and others describing it as long in the tooth, more closely resembling a game in extra innings. One thing is for certain, the back end to this real estate cycle is much different than the lead-up to the 2008 financial crisis. Overall leverage and lending practices are much more conservative, with financial institutions approaching loans with a more cautious appetite resulting in heathier loan metrics. This approach has resulted in higher debt service coverage and higher debt yields on loans with a different perspective being attributed towards credit. With more controls in place than the last recession, the hope is that this upcoming downturn will be relatively gentle as we approach the end of the runway to the current real estate cycle.
As we approach the end to this real estate cycle, many fundamental things have changed relating to capital markets and individual asset classes. Over the last 10 years, financial capital markets have become more stringent and have taken a more cautious approach to lending money. It is no longer the case that they are lending funds to anyone or any project that applied for them. The requirements for borrowers to have ample equity in their deals and realistic project fundamentals is more important today than ever before. Retail has seen significant changes, as well as over the last decade with big box cutting down prototypes to more maneuverable footprints, adjusting to changing consumer demands, and the adoption of ecommerce. The office market has changed significantly as well with reduced needs for space per employee, the evolution of co-working, and overall changes to how we work today. Cycles are cycles and fundamentals are fundamentals. The shoes that investors walk in today are significantly different than the shoes that they walked in during the last real estate cycle. It will be very interesting to monitor the changing environment as we move into the future!