Selective liquidity abounds as lenders hunker down

Lenders and borrowers are still making deals despite mounting concerns over the cost of capital and economic stagnation, according to George Smith Partners’ Gary Mozer.

In the face of historic interest rate hikes, rampant inflation and a potential recession, Gary Mozer, a principal at Los Angeles-based George Smith Partners, insists liquidity is still out there – but only for the right project. 

“There’s plenty of liquidity in the marketplace, it’s just being very selective,” Mozer told Real Estate Capital USA. This selective liquidity is in contrast with past periods of distress. “[Then] all the liquidity got sucked out of the real estate markets,” he added. 

Banks and debt funds are still eager to lend on best-in-class multifamily developments and emerging industrial facilities, for instance, as these projects have strong enough fundamentals to offset broader secular concerns of inflation, rate hikes and recessions. 

“It’s about the basics,” Mozer said. “What is the demand drive? What is the supply? Economics 101.”

Recession for some 

After the US saw two straight quarters of GDP declines, debate raged over whether the US has in fact dipped into recession. For Mozer, the answer is: it depends. 

“If I have an industrial deal in a supply-constrained market like the Inland Empire, [I think] ‘What recession?’ If I am working on a tertiary office deal, it’s a depression, not a recession,” Mozer said. 

The specific qualities of each project can always outweigh broader economic concerns, he continued. “That’s why we’ve always been able to make money in real estate because it’s street by street, block by block, building by building.” 

While lenders are still eager to invest in the right project, sponsors are more divided on whether to lock in rates now before they rise further, bet on lower rates by choosing floating-rate financing or simply wait for rates to decline again before borrowing.  

Mozer tries to solve this problem by finding people who see the current confusion as a reason to sell and matching them with those who see it as a reason to buy. But he admits current conditions make forward-looking analysis difficult. 

“It’s two schools of thought… I have some clients that want to lock in rates today and some who say, ‘I really want to do a 10-year deal, but I am going to do a four- to five-year deal because I think rates are going to come down again.’ When you’re in the middle of the storm, it’s hard to see the clear skies again,” Mozer said. 

Despite the murkiness, he has yet to see a worrying drop-in activity. “We’re still getting deals done every day. It just costs more.”