Three Questions with Michael Franco
We sat down with Chief Executive Michael Franco to discuss current market dynamics, interest rates and the economy, go-forward strategies, and what keeps him optimistic amid recent headwinds.
High interest rates, turmoil in the banking sector and continued tech industry layoffs have created a dynamic and challenging macro environment. What trends do you expect to have the most impact on the commercial and residential mortgage markets this year and what could the long-term implications be?
Real estate finance is more macroeconomically sensitive than a lot of other areas in the broader economy. For example, residential real estate has been in a deep recession since last year, but the overall economy is not.
The level of interest rates and the size of credit spreads (risk premium) have an outsized impact on our business. For our services and software-as-a-service business lines, lower interest rates and smaller credit spreads generally mean more activity. Higher interest rates and/or wider credit spreads will decrease activity. Unfortunately, we are in a period today where rates are significantly higher and credit spreads are wider. Both factors are curtailing activity.
The recent banking turmoil will likely create more dislocation for both commercial and residential real estate markets. For commercial real estate, community and regional banks are huge liquidity providers to the sector and they will likely have to be more conservative moving forward. This retrenchment will create an outlet for more lending to move into the capital markets, assuming spreads aren’t too wide. For residential real estate, banks have been major investors in agency mortgage-backed securities (MBS). However, with many banks taking significant unrealized losses on those positions, the demand for those securities may decrease, increasing credit spreads and making mortgage rates higher.
I believe over the next 12 to 21 months, at least through the end of 2024, the environment is likely to be volatile. We may see declining underlying asset values, with deflation in CRE and RRE values in some markets. A significant change in players in the space is also inevitable, with some leaving, and some being created. These changes mean that the set of opportunities for participants throughout real estate finance will evolve.
What are the top three ways SitusAMC is helping clients navigate the current market dynamics?
When thinking about market dynamics, there is “navigating” and then there is “capitalizing.” I think there is a big difference, so I’ll address both.
If you are “navigating,” you are in choppy waters and looking for a way through. In those cases, you need a trusted partner to help you assess the situation and find safety. For clients who are “navigating,” we are focused first on helping those clients understand what they own through diligence and advisory offerings (CRE or RRE); second, to value those assets (CRE equity, CRE debt, RRE debt instruments/MSRs); and third, to achieve liquidity on those positions through special servicing, CRE workouts and brokerage.
If you are “capitalizing,” you are looking to deploy capital and take advantage of the dislocation in the market to earn premium returns. In those cases, you need a business partner who can move quickly to help you pounce on opportunities. For both our commercial and residential real estate clients in this area, we offer staffing solutions to augment and scale teams; provide technology to help clients launch new businesses quickly; and professional services to assist with due diligence. Our ability to manage and workout CRE assets through servicing and special servicing are also key capabilities.
With significant headwinds facing the real estate market and many of its participants, what are you optimistic about?
More than anything, I’m optimistic about SitusAMC outperforming our competitors. It’s going to be a difficult and choppy market for everyone. However, our diversity of offerings, ability to deliver on our objectives in both low-interest-rate and high-interest-rate environments, and unique ability to be value-added to our clients and partners are massive differentiators. We will come out on the other side with an even higher market share and even better relationships with the top-tier organizations in real estate finance.
I am also deeply encouraged by our people. SitusAMC has always been home to the best and brightest in real estate, technology and corporate functions. Our people’s tenacity through the pandemic and amid the recent economic turmoil has shown me just how resilient we are as a company. Through it all, I’ve seen them stay the course, deliver on our business priorities, and keep our clients’ needs at the center of all they do. I’m humbled to lead an organization like this and truly believe that with a workforce like ours, the future will be very bright.