National conditions are so positive for builders and developers that it may be time to start getting nervous, because the good times just can't last, said lenders at a national real estate finance conference held Tuesday at Orlando's Hyatt Regency.
"The fact that fundamentals are so strong is a warning in itself," said Peter D'Arcy, commercial real estate segment head at M&T Bank.
D'Arcy was speaking at the Mortgage Banker's Association's CREF/Multifamily Housing Convention & Expo.
The peak may have been 2015, and now "we are deeper into a cycle," D'Arcy said. Land has become very expensive and institutional investors are starting to get out, having held their properties for the three or four years they usually do before delivering returns to investors.
D'Arcy reminded attendees, many of whom are active in Orlando construction, "real estate is cicular and you just don't know how long it will go."
There are already tell-tale signs in Orlando, with big, prime pieces of land becoming scarce, their prices rising and construction costs increasing.
When someone tried to remind speaker Steven Kenney, east region executive for Bank of America Merrill Lynch, about the oft-quoted phrase that Orlando and other strong parts of the country, "Are in the seventh inning," with extra innings possible, Kenney was having none of it.
"We've been saying that for two years," Kenney said. "And I'm not preparing for extra innings" in terms of very robust growth.
Banks "will become a modeling entity," where decisions are just made on crunching numbers and the character of the borrower won't really be taken into consideration, said D'Arcy.
The ultimate end to the good times should not be abrupt, nor nearly as painful as the last one, speakers said. The upward trajectory has not been as lengthy as the last, which led to the historic bubble, and bank regulators, taking a lesson from the last downturn, have put in measures designed to provide a softer landing.
"We've decided to be flat this year," said Matthew Galligan, president of real estate finance at commercial financier CIT. In other words, capital outlays will be no larger or smaller than in 2015.
As for reasons for the tempered look, Galligan said, conditions appear like they may soon begin moderating, interest rates seem to be headed higher and conditions are "not as frothy."
When discussing types of buildings that are appealing from a lending standpoint, Orlando and other areas were cited for both excellence and imperfection.
In general, "We're bullish on Orlando," said Jim Kerner, director of CMBS finance at Barclays. "We see a lot of positive trends," like continued demand for housing.
Many speakers discussed multi-family as an area that is still very vibrant. This is true for suburbs and downtown apartment buildings that are especially appealing, speakers said, and not just because downtown locations attract millennials. These areas are also appealing to baby boomers who want the convenience of stores that are close and the ability to age in place.
A nod was also given to Orlando as a tourist and conference destination, with a number of speakers saying they still found hotels appealing, although those showing wear and tear quickly lose their cachet among the hundreds of others that are not only kept up, but kept in pristine condition.
Office buildings drew few fans, with speakers saying many of the buildings were obsolete and would need to find other uses to remain viable. The kind of office building that would appeal to Kerner was one with "higher energy efficiency exposure," something that is often said about the 20- and 30-year-old office properties around Orlando.
And while retail was seen as a natural given the low unemployment rate and in Orlando's case, the throngs of new residents, single-tenant properties were seen as too risky, in part because they can lack succession plans.