Global Economy

Interview with Tom Flexner

By Paul Fiorilla on Jul 1, 2016 in News

Paul Fiorilla, Yardi Matrix’s Associate Director of Research, recently sat down with Tom Flexner, Citigroup’s Global Head of Real Estate, to discuss the global economy, the state of the commercial real estate market and new regulations that are impacting the sector. The interview was published in CRE Finance World, which is published by the Washington, DC-based trade group CRE Finance Council. Fiorilla serves as volunteer Editor in Chief of the magazine.

Some highlights are below, and the entire interview can be accessed here.

Flexner on the economy:

It just feels to me that we’re in the midst of adjusting to some sort of overarching longer-term secular change marked by continued tepid growth, low interest rates, low oil prices, forced deleveraging by foreign sovereigns and so on … So we have a whole bunch of things working against us, and frankly it’s hard to identify a single reason to be terribly optimistic about the world’s growth trajectory. Other than somehow it always seems to work out at the end. But, you know, up until the financial crisis we had a global economy supported by huge credit expansion — consumers, governments, companies. It lifted growth beyond what would have happened had credit not expanded at such a vigorous pace.

Today, we still have a significant amount of leverage, particularly at the sovereign level, but also in the banking systems in China, Japan and Europe; plus regulatory initiatives which will serve to constrain credit creation going forward. And this kind of countervailing pressure — deleveraging — will possibly hinder growth, as credit creation will not be the tailwind it once was.

And so I think the twin impacts of globalization and technology are showing they also have downsides. Technological advances used to amplify human muscle or human capital if you will. That was a fundamental precept during the first two industrial revolutions — you created machines that increased human productivity in a way that allowed everyone to participate in the benefits of enormously increased output. People were able to become much more productive and people harvested a portion of those gains for themselves.

But today, it seems that technology is as often substituting for or replacing human capital as it is amplifying human capital. Think robotics and automation. And that puts a lot of downward pressure on job growth and wage growth in the traditional sectors. And with globalization we have an entire world competing against each other for a finite number of jobs. That’s why there’s so much noise about unfair trade, currency manipulation and so on. The leaders of every country, if they want to stay in power, have to win on the jobs front, and globalization puts everyone in competition with everyone else.

On the real estate cycle:

Historically, most of the imbalances in real estate were driven by supply shocks — ample easy capital, or tax shelter demand, or improvident demand forecasting — leading to excess development. I think today, due in large part to regulatory constraints and an embedded lower risk tolerance, we are not going to see the profligate sort of lending we saw leading up to the crisis. And while underwriting standards did loosen a bit over the past several years, lenders are pretty disciplined compared to pre-’07. And the (buyers of junior CMBS) are lot smarter these days, so the market will to some degree regulate itself. And that will help put a cap on the supply side.

On regulations impacting the commercial real estate industry:

My view is the regulatory envelope will impose a level of discipline on the market that many players will not like. And many of the fine details of the regulations I don’t necessarily agree with, and they may in fact increase certain types of risk in an unintended way. But overall, the financial system is far stronger with greater regulatory oversight than it’s ever been historically, and I think this is a good thing long term.

But, having said all that, on a global basis including the US, I think real estate will outperform other asset classes over time. In this world we’ve been talking about — low rates, low growth, high volatility — real estate offers yield, stability and predictability, all characteristics which are attractive in such an environment. The world is starving for yield. So call real estate the least worst investment alternative, if you will.