www.mmhaonline.org The Advocate 14 “The industry is using lower leverage for developments and acquisitions,” Campo says. “There is also a requirement for increased tangible net worth for any development company that is guarantying construction debt. This has led to even the biggest merchant builders doing fewer projects.” What Happens Next? After years of growth, the apartment industry and the economy at large seem due to hit a rough patch in the coming years. When that happens, developers often get hit the hardest. Conservative underwriting should limit the damage. “I think developers are in very good shape in this cycle and it is unlikely you’re going to see the trouble they had previously,” Schwartz says. “That doesn’t mean there will be no bad deals. With high supply in some markets, looming maturities and high interest rates, refinancing could become even more challenging for owners of all types of assets.” When a correction occurs, Bolton predicts a relatively soft landing for the apartment industry as a whole. He says some borrowers who are utilizing shortterm debt could get into trouble. “Although I expect cap rates to widen and rental growth to continue to slow, I don’t see as severe of a crisis over the next few years,” he says. “Balance sheets at all levels seem healthier this time around and there is plentiful liquidity in the system currently.” I think developers are in very good shape in this cycle and it is unlikely you’re going to see the trouble they had previously. – David Schwartz, CEO, Chairman & Co-Founder, Waterton Associates It is not just apartment executives who think the sector will weather the next recession. Moody’s Analytics Chief Economist Mark Zandi speaking recently at a conference says the housing and commercial real estate sectors will “navigate gracefully” through the next recession because of relatively low leverage and little supply. There are trouble spots: Mutz wonders if investors are mis-pricing risk and buying at thinner margins than they should be. He senses that excess liquidity in the financial system is the driving force behind their confidence. “There will be a recession at some point, and the stock market will correct, but I don’t think it will be as severe as 2008,” Mutz says. “I’m not worried that we are going to see a total collapse, but we are being cautious and mindful that, at some point, this recovery will run out and there will be some sort of correction.” Over the longer term, Bolton thinks that while today’s enhanced information flow and transparency could at least help mitigate the severity of cycles, the drive for investment returns will require increasing risk tolerance, which ultimately ignites downturns. “The exact combination of factors that fueled the 2008 financial crisis may not come together again, but there will be others that will come together and very likely fuel another recession, and possibly a financial crisis comparable to 2008, at some point in the future,” Bolton says. Like Bolton, Campo does not see the factors that triggered the 2008 crisis coming together again anytime soon. But he could see “a major dislocation” given high asset prices worldwide driven by very low interest rates. “Until we get back to more normal global interest rates, the ending of The Great Recession will continue to be unwritten,” he says. And once the ending of The Great Recession is written, Mutz hopes younger executives who may not have been in the business at the time continue to heed its lessons of conservatism in underwriting. “You take up a lot of excessive risks if you have not lived through it,” Mutz says. “The people who lived through it will always be mindful of it. It was scary.” Les Shaver is Editor, Online Publications, and can be reached at firstname.lastname@example.org.