Commercial Magazine

Gregg Gerken, TD Bank

The late-cycle market continues to shrug off threats

By Victor Whitman

Going into 2019, many analysts believed interest rates would rise and that escalating rates would take some steam out of the commercial real estate market. Instead, rates have fallen and are now expected to stay low, while the Mortgage Bankers Association (MBA) reported this past February that commercial mortgage origination volumes for banks and life insurance companies would likely set a new record in 2019.

Still, given the extraordinary length of this commercial real estate cycle, the upcoming presidential election and global turmoil, there remains plenty of uncertainty about how the market will fare for the remainder of 2020. Gregg Gerken, head of commercial real estate at TD Bank, spoke to Scotsman Guide about the outlook during a break at MBA’s Commercial Real Estate Finance/Multifamily Housing Convention & Expo in San Diego this past February.

How is the commercial mortgage market doing right now?

The market is doing phenomenally well and it looks like we’re going to have another record year above what the volume was even for 2019, which was the last record year. In terms of the [sales] volume activity, a lot of that was spurred in the fourth quarter [of 2019] because of low rates.

A number of people seem to be concerned about a downturn, however.

Well, the worrisome part is that it’s late cycle. There was always that concern about what inning we are in. I mean, we’re so far past the game being over in the context of how long a recovery typically lasts. For the most part, the marketplace has just shrugged off the drags on the economy. There’s still a tremendous amount of capital out there to finance commercial real estate.

What about the availability of funds for higher-risk assets, such as retail and hotels?

Well, I think you have to keep a close eye on retail. And retail I’d put into two very different stories. If you look at the number of store closures, it has primarily been in a dry-goods space, but the supermarkets are doing quite well. Shopping centers all seem to be doing just fine. But when you look at where the Armageddon, if you will, in retail has been happening, it has been in those Class B and C mall-space markets where there just isn’t enough demand to support those. Just look at the number of store closings that have happened. You can tell why some lenders are avoiding that altogether.

It’s hard to say what’s going to happen. The market has had this propensity and this ability to shrug off just about everything that has happened.

Do you have any concerns about record asset prices?

They’ve fully recovered from the downturn. They’ve been a function of a very low cost of capital. So, if you can borrow inexpensively, your cap rates are much lower. And what the asset trades at is at one of the highest points in the cycle as well.

Does that cause any problems from a risk or sales-volume perspective?

If we were sitting here a year ago, all the money was on rates going up, right? There was a lot bigger concern a year ago that, with rates going up, cap rates would go up and therefore values would be either capped or, to some extent, would go down. Today, you keep hearing the phrase, “lower for longer,” with no expectation that the Fed will budge on rates.

So, what is the outlook for commercial real estate this year?

It’s hard to say what’s going to happen. The market has had this propensity and this ability to shrug off just about everything that has happened. You know, it was only two months ago that we were talking about a new nuclear proliferation, this standoff with Iran. That’s old news. Now we’re under the coronavirus threat. All of these events eventually can have a chilling effect on the market. You just don’t know which one.


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