CDO Stack: The Upside of a Slowdown for CRE

One of real estate’s great qualities is that the land it sits on is inherently scarce. As the saying goes, they’re not making more of it. Usually that means the value of the land, and whatever is on it, goes up, but sometimes the market corrects and values drop. Having lived through multiple cycles, I know that the dynamics of each cycle are unique. As we enter this one, it appears that new inventory coming online isn’t a big problem, fundamentals look good in most asset categories and leverage is generally below where it was at the beginning of the Great Financial Crisis.

John D’Angelo

That said, the rest of the year looks to be a challenge. Investors are seeking to rebalance their portfolios, headlines about the office sector aren’t great and financing is much more expensive than it was a year ago. As a result, owning, operating and investing in commercial real estate is considerably different than it was at the beginning of 2022.

I realize that I’m writing this column for the chief digital officer (or the equivalent executive), not for the CEO or chief investment officer. However, what happens now impacts the CDO, and that’s what I’d like to explore briefly.

For one thing, if you use leverage, reliable information is important, and it’s just good financial hygiene. Fifteen years ago, I was astonished by the number of very large CRE owners which didn’t have key details about their debt at their fingertips, and consequently scrambled to assemble details or review loan documents. I think we’re in much better shape today, but there’s still room for improvement.

Speaking of improving, now that mark-to-market value adjustments are generally down, generating differentiated total returns requires getting more efficient at operations and margins. This means no longer just throwing people at inefficient processes; it calls for taking a hard look at how you operate, how work gets done and whether it makes sense to self-perform, outsource or co-source that work. In just the last few weeks, we’ve had multiple calls from CRE clients asking us to help review operating models and headcounts by function.

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In addition to having solid debt information, now is a good time to make sure that you’re in good shape with asset and operational data. That information is important to understanding what’s happening and to making decisions in a dynamic market. It’s just not enough to have data that is incomplete or weeks old.

Finally, I understand the realities of investing in your business right now. We’re seeing projects that are considered necessary start or continue, while the pace of “optional” or “nice to have” projects has certainly slowed. But this is a great time to make operational upgrades that have long been deferred. Not only are these steps important for our industry as we compete for talent, but because transaction volume is down dramatically, more time is available to invest in the business. What’s more, you might find that you’re in a better bargaining position. And as with all cycles, remember that this one, too, shall pass.

John D’Angelo is a managing director with Deloitte and is the firm’s real estate solutions leader. With more than 30 years of experience as a management consultant to the global real estate industry, John has helped some of its biggest names leverage technology and data to optimize and transform their operations.

Read the June 2023 issue of CPE.