2007 Real Estate Forum: Critical Insight
CCRMA was delighted with the fantastic turnout at the Real Estate Forum held on March 15 at the Columbia Hilton. More than 90 bankers and other risk professionals joined us for an afternoon filled with valuable insights from a wide range of real estate experts.Charlie Ruch, current President of CCRMA and a Senior Vice President at Centreville National Bank, kicked off the event with a welcome message that detailed some milestones he observed in the local real estate market over his 25 year banking career. He also reminded attendees of the value of RMA membership. Charlie thanked the two Board Members who graciously volunteered their time and energy to organize and plan the event: David Miller from SunTrust and Vickie Tillman from LaSalle Business Credit. Robert Dye – Apartment Markets in the Mid-Atlantic - Charlie was followed by Robert Dye, PhD who gave a thorough presentation on both the general economic environment and more specifically the apartment markets in the Mid-Atlantic Region. Robert Dye is an economist for Realpoint (Capmark) whose role is to provide macroeconomic and regional analysis, project expertise, and econometric modeling and economic forecasting. Dr. Dye started his presentation by the noting that economic world was in a sea of change. Until a few weeks ago, most economists had been predicting stability. However, there has been a shift toward a predominance of downside risk. In general, the economy continues to have notable strengths: Bernanke and the Fed are proactive against inflation, global GDP growth is strong, and emerging markets are doing well. However, Dr. Dye cautioned that as the global leader, if the US economy stalls there will be global repercussions. Other threats to the economy includes energy prices, which remain inflated due to rapid consumption driven by global demand, potentially weakening consumer confidence, unexpected market volatility, and waning productivity. The negatives are mounting and beginning to out-weigh the strengths. Despite the weaknesses, Dr. Dye projected 2% GDP growth for 2007. Dr. Dye then focused his analysis more specifically to housing trends and the apartment market. The low interest rate environment in the early 2000 resulted in a high level of housing affordability. However, Fed tightening has decreased affordability. Home ownership reached a plateau and should stay flat or decrease slightly. The implication for the apartment market is that single family housing will not be a drain on multi-family housing. The demographics are also positive for multi-family housing with a large number of 20 to 29 year olds. Although there have been wage increases, renters in general are spending more of their income on rents. Most renters have income less than $40,000 per year. The general trend for multi-family buildings is for larger projects. There has also been a shift back from condos to apartments. Apartment related REITS are doing well and occupancy rates remain high. The primary downside risk to the apartment market is that of a recession. Dr. Dye predicted that should a recession occur it would be short and shallow, similar to the last recession. The Fed has room to reduce rates, which should minimize the potential impact. It will have a regional focus with the Midwest and Northeast being the hardest hit. The auto sector will be particularly hard hit. The Mid-Atlantic should not be as hard hit with continued government spending and the positive impact of BRAC. As with most recessions, the speculative real estate market will be hardest hit. Other areas hit will be vacation homes, condos (which are over built), hotels (less travel), and apartments (larger households). Molly Boesel – Economic Housing and Mortgage Market - Molly Boesel, Senior Economist with Fannie Mae, focused her presentation on the Economic Housing and Mortgage Market.
Ms. Boesel predicted economic growth in a similar range of 2.0% to 2.5%. More specifically, concerning interest rates, she noted that Fed is still trying to balance inflation versus the economic stability. She noted that should inflation tick upward and the Fed is forced to increase rates that the economy would likely be pushed into a recession. Generally, she predicted short term rates to remain flat but there could be some easing in the second half of the year. Her prediction was for two 25 basis point decreases by year end. She predicted that long term rates should trend upward slightly, and, with the potential short term rate cuts, the inverted yield curve should return to a normal curve. With the housing market, Ms. Boesel noted the double digit decline in home sales during 2006 and predicted a further 8% decline in 2007. Despite stable job and income growth, affordability remained very low, but a modest level of improvement was expected in 2007 due to the soft market. Investor and second home demand remained weak. Overall there continued to be an inventory build-up. U.S. home prices declined 1% in 2006. Home value trends are expected to be similar to the early 1990s. Ms. Boesel also shared her insights on the local market. Job growth in both Maryland and the DC markets were stronger than the national averages. According to Office of Federal Housing Enterprise Oversight data, home prices in Maryland and DC peaked in 2005. The MRIS data indicated that the median home prices declined in the DC market by 3%. However, despite a notable decline in growth, Maryland prices median home prices remained positive. All local markets indicated increasing supply. The following is a summary of the months inventory on hand for several local markets: Baltimore – 7 months; Montgomery County 5 – months; and Northern Virginia – 7 months.
Ms. Boesel wrapped up her presentation with a Q&A session. When asked for her advice to local bankers, she summarized her thoughts by saying that the lenders should concentrate on fundamentals in their underwriting. John Meade – Homebuilding 2007 - After the presentation by the two economists, the focus of the conference shifted to practitioners. First up was John Meade, Baltimore Division President of Ryland Home, who renamed his presentation “A View from the Trenches”. When describing Ryland’s market, Mr. Meade was quick to point out that Ryland was not active at the Delaware beaches or Cambridge, two markets he viewed as having tremendous oversupply. Mr. Meade characterized the real estate market from 2000 to 2005 as strong expansion with tremendous price growth driven by pent up housing demand, low rates, and creative financing options. Since early 2005 to the present, there has been a market downturn with a price correction. The downturn has been influenced by investors exiting the market, increases in short term interest rates, a reigning in of creative financing, and excess inventory. As a result, builders’ balance sheets are full and land purchases have been scaled back.
During the growth phase of the market, Mr. Meade noted that smaller builders had trouble acquiring properties in the core market and had to expand outside the market to commuter markets such as Pennsylvania, Western Maryland, and West Virginia. However, the strength of national builders allowed them to stay in the core market. This continued concentration on the core market coupled with the strength of their balance sheets and patient financing sources will allow the national builders to weather the current slow down. Mr. Meade remained bullish on the Baltimore market noting the following strengths: BRAC; core market inventory levels, and increased traffic in models during early 2007. However, he noted weakness and concern about the outlying commuter markets due to gas prices and traffic concerns. He also was concerned about oversupply in condos, age restricted communities, and hybrid projects (piggy back units, etc.).
Mr. Meade listed Ryland’s strategies as retraining the sales staff (change from order takers to sales); aggressive pricing on old inventory; refocus on merchandising (“fluffing” inventory to attract emotional buyers); and getting the product to market quickly. With land purchases, Ryland is concentrating only on core markets, first time buyer homes, core products (single family and townhomes with garage); finished lot deals only (avoiding approval process); and small lot counts. Larry White – More Really IS Better - Larry White, Chief Operating Officer of Development for Struever Brothers, Eccles & Rouse, Inc. followed Mr. Meade. While Mr. White’s presentation shared some similarities there were some difference of opinion.
Whereas Ryland focuses almost exclusively on its niche (single family homes), Struever Brothers has focused on mixed-use developments. While they have modified some projects to minimize the condo component, they remain active in the condo market and see the condos as beneficial to a project as an instant source of cash flow. Mr. White noted benefit of the flexibility of mixed use developments – weakness in one segment can be offset by strength in other segments. Projects can be redesigned to focus on the strong markets: i.e. planned condos developed as apartments. Mr. White thoroughly described several projects in both the Baltimore market and several other markets. Local projects highlighted included Baltimore Harbor Point; Harbor East; Clipper Mill, and Four Seasons. One of the more interesting points was the condos in the Four Season project were selling near $1,000 a square foot and this was considered on the low end for a Four Season project. Other projects outside of Baltimore included projects in Yonkers, Durham, Boston, and Nashville. The common themes in the projects according to Mr. White are as follows: maximizing density and diversity; more large scale mixed use projects, fewer condos included in projects, more retail, and diversified risk. The larger projects have resulted in more complicated loans including public/private partnerships, tax increment financing, historic tax credits, new market tax credits, and syndications. The focus of the presentations shifted to BRAC with two separate presentations by Mike Hayes and Bob Penn.Mike Hayes & Bob Penn – BRAC – Maryland Update - Mike Hayes, the Director of Military & Federal Affairs, Maryland Department of Business and Economic Development, started his presentation by describing BRAC as an attempt to find efficiencies by reducing costs. However, the end result of the BRAC 2005 may actually cost taxpayers money even though they are designed to improve readiness and efficiency. Mr. Hayes provided a summary for attendees that gave a basic over view of BRAC and its projected impact. In his presentation, Mr. Hayes was careful to distinguish between jobs and people. The 40,000 to 60,000 jobs being created does not necessarily mean the same number new people. It is possible that existing residents will leave their current positions possibly outside the area to fill new created positions. He differs in opinion on this point with local economist, Anirban Basu, who believes that the two term jobs and people can be synonymously. Mr. Hayes noted that the majority of the moves will occur in 2009, 2010, and 2011. However, prior to the moves there will be substantial demand in the construction industry to build the space and infrastructure in anticipation of these positions. The primary positive impact from BRAC will be a boom surrounding Fort Meade and Aberdeen Proving Grounds. However, BRAC will not have a positive impact in St. Mary’s County for example where there has been a decrease in jobs. Bob Penn was an employee for the U.S. Army Corp of Engineers, Baltimore District, Real Estate Division. Mr. Penn is charged with finding ways to make money from under utilized real estate on military bases as a way to offset declining operating and maintenance budgets. Conversions have included, office buildings, hospitals, mixed use projects, and even wind power. Income from the conversions cannot be in cash but only in kind services. So the developers of the project would have to provide the military some type of service for the development rights tied to the project. Local projects included both conversations at Fort Meade and Aberdeen. Steve Bareford – Implementation of Interagency Guidance on Concentrations in Commercial Real Estate Lending Sound Risk Practice Management - Last, but not least, Steve Bareford, Assistant Vice President of regional and community bank supervision, Federal Reserve Bank of Richmond gave an update on the implementation of Interagency Guidance on Concentrations in Commercial Real Estate Lending Sound Risk Practice Management. The Interagency Guidance was proposed in 1/06 after a tremendous amount of feedback was received (including feedback from RMA). There were common themes in the feedback including concern that the regulations would be randomly applied similar to BSA. Mr. Bareford thought the CRE regulation would be smoother because CRE is something that both the bankers and regulators are intimately familiar. Final guidance was issued on 12/12/06. The reason that the Guidance was issued included the significant business line that CRE lending represents, the cyclical nature of CRE, concerns that CRE concentrations had hit record levels, the negative impact that rising interest rates may have on debt service coverage, and because underwriting has not kept up with the growing complexity of CRE lending. Most importantly, Mr. Bareford noted that the regulations should not be viewed as limits on lending activities, only guidance on how to manage risk, and the sophistication of the required risk management systems in place are not expected to be one size fits all. At the conclusion of the presentation, the attendees enjoyed a networking reception with an open bar and plentiful appetizers. Click here for copies of the speakers handouts and/or powerpoint presentations (near bottom of page).
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Advice for Young Financial Professionals from Seasoned Professionals
Performance and reliability need to be demonstrated to your organization, advised Carolyn O'Leary, Annapolis Banking & Trust at the recent Young Financial Professionals breakfast with senior bankers. Scott Nicholson, Columbia Bank warned that decisions you make will follow you, as the banking community is a small world and David Horsman, SunTrust Bank said to control the things that are important to you.They also provided insight on how to stand out in a crowd, professional certifications, managing office politics, leadership development, bank mergers, best career experiences, mentors, and future opportunities for young bankers. Here is a recap of the responses from panelists David Horsman, EVP & Regional Manager, Real Estate Finance Group, SunTrust Bank; Scott Nicholson, EVP, Acquisition, Development & Construction Dept, Columbia Bank; Carolyn O'Leary, EVP & Chief Credit Officer, Annapolis Banking & Trust; and J. Ritchie Solter, VP Commercial Lending, Farmers & Merchants Bank. Q: How did you start off in banking?
Dave: Started with Maryland National Bank and expanded into real estate.
Ritchie: Started with Maryland National Bank in their commercial banking division.
Carolyn: Originally worked as a schoolteacher. Later went back to school for accounting. Was told that she was too old, too married, etc., to qualify for a position with a Big 8 accounting firm. Instead, she turned to banks, where she started as a credit analyst in Miami.
Scott: Originally worked as a courier for a mortgage company while in college, was offered a position as a commercial lender. Q: Were you surprised at where you ended up in your career?
Dave: Father-in-law was a developer who suggested he stay with banking to learn the trade. He was surprised at the challenges he faced and the many lessons he learned in banking.
Ritchie: Surprised to work in a community bank, but very pleased. Likes the benefits of a smaller bank, such as the fact that he believes small banks value customers more.
Carolyn: Was not surprised because her career was a gradual progression to where she is now. Like Ritchie, was surprised to work in a community bank.
Scott: Was not surprised to be a manager, as he had previous managerial training working in a restaurant. He was however, surprised to become a bank executive. Q: How do you actively manage your career?
Carolyn: Explored opportunities as they arose.
Dave: Look for new a challenge, that’s why he went into special loans with Maryland National. Joined Crestar when he needed a change. Likes to try something new and feels stale if he stays in one spot too long.
Ritchie: Believes it is difficult to manage your career because of mergers. He emphasizes the need to stay flexible, and not to be afraid to leave an institution if the opportunity is right.
Scott: Believes that his career chose him due to the acquired skills over previous jobs that helped him in roles. Q: How do you stand out?
Scott: You make yourself stand out by competing successfully through exceeding expectations.
Carolyn: Understand the expectations before you can exceed them. Look at the high performers and see what they are doing. It also helps to have a manager with reasonable expectations.
Ritchie: Focus in an area where you excel. Senior managers look for unique talents.
Dave: Learn as much as you can. Become an authority on a particular subject. Find a balanced approach to work. Q: What mistakes have you made in your career?
Ritchie: Everyone makes mistakes. Biggest mistake was doing something he felt uncomfortable with because his manager instructed him to do so. Don’t get into a situation where you can’t control the outcome.
Dave: Don’t take things personally. Have passion, but don’t become emotionally troubled by it.
Scott: Best and worst experiences were the same. Due to a comment that he made, an executive fired him. However, it led to him working with a better institution.
Carolyn: No real career mistakes, but would from time to time get too busy and was not always prepared for meetings and such. Q: How do you feel about the role of mentors?
Carolyn: Never had a mentor, but was lucky to have managers who took an interest and gave her feedback.
Ritchie: Mentors are important, but very hard to find and keep. Develop mentors outside your company, even your industry.
Scott: The higher up the ladder you travel, the fewer mentors there are, because there are less people with your experience.
Dave: Had a senior level manager who helped him with formal and informal things. Pick someone who you want to emulate, who has your values. Don’t be afraid to even look to clients. Q: In making the jump from young professional to executive, what technical experience, such as an MBA, etc, is necessary?
David: Emphasizes on-the-job training, attending seminars, and continuously improving your work. Don’t become a professional student!
Ritchie: Not everyone will be an effective manager. If you don’t think you will perform well at a certain job, don’t do it.
Carolyn: As you progress, your time horizon for accomplishments gets longer and longer. Lower levels expect you to develop into your position quicker. At lower levels, there isn’t a need for extensive knowledge about policy and regulation. There is at higher levels. While an MBA doesn’t hurt, it doesn’t compare to a person’s drive, work ethic, and performance.
Scott: You need all skills to be well rounded. While you must be ready for your next move, don’t move too fast. Q: What are your thoughts on the impacts of bank mergers?
Ritchie: It is inevitable that all will go through a merger.
David: Embrace it. If you are doing you job, you will be recognized. Don’t burn any bridges. Q: How have civic and professional groups helped?
David: Worked with Jr. Achievement, met new folks and was provided great networking opportunities. Make sure to surround yourself with strong people.
Ritchie: Civic and profession groups help with personal enrichment. The personal benefits outweigh the professional benefits. Just don’t overdo it. Q: How did you build your career network?
Scott: Built network with people he worked with over the years.
Carolyn: Cites RMA as important. Participated in many local standing committees, then sat on the national board. They helped her business because they shared similar experiences. Q: How do you manage office politics?
David: Stay away from “water cooler conversations.” Loose lips sink ships. Be aware of the politics, but don’t let it become all-consuming. Q: What are the best leadership skills and how did you develop them?
Ritchie: Observe and emulate the leaders. However, leadership skills are internal.
David: You earn the mantel of leader. There is a difference between managers and leaders. Managers supervise, while leaders act as a coach and motivator.
Karen: Communication is key to being a good leader. Q: What are some recommendations for young bankers?
Carolyn: Performance and reliability need to be demonstrated to your organization. Have integrity.
Scott: Decisions you make will follow you, as the banking community is a small world.
Ritchie: Focus on something you like. Everything else will follow.
David: Emphasis on training. Control the things that are important to you. Q: What are the future opportunities for young bankers?
David: The industry’s generation gap will create opportunity. Find your niche.
Scott: Don’t be afraid to work in a different area. Q: What do you do when you have issues with your manager?
Carolyn: Go to your manager and address your grievance. If it doesn’t work, try to find mentors who are better.
David: Ask you boss for assistance with expectations and development. Q: What do you see happening in the Baltimore Market with mergers and acquisitions?
Ritchie: It will be good for community banks because they are more relationship driven. Find out from customers if there are changes in how their accounts are handled with their new bank. If they are unhappy with their new bank, an opportunity may arise for their business.
Carolyn: The Baltimore Market is getting stronger. BRAC (Base Realignment and Closure) will bring up to 25,000 new jobs to the area.
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