From the Desk of Professor Eyzenberg 

“Sort of like debt, sort of like equity, I call it dequity”
– The late and great Lawrence Fiedler (of NYU Schack Fame)

 Larry was my (favorite) professor when I was a student in the NYU real estate masters program during the late aughts.  To many of us he was like a giant swami (for those that knew him understand what I mean), a veritable lord of the (CRE) flies if you will.  He was also (fairly) forward looking and extolled the virtuous benefits of DCF analysis over cap rates.  I didn’t quite appreciate it at the time, but it was important to understand the distinction between the levered vs. unlevered economics of a transaction.  
Fast forward to today where people are scratching their heads and wondering why haven’t cap rates gapped out in lockstep with interest rates.  The most obvious answer is that real estate is purchased on the long end of the curve. This means that there are other factors at play for valuation (Larry’s DCF lessons sure help put things in perspective.)  In the 80’s interest rates were high double digits while cap rates were still averaging single digits.  This does not mean that cap rates won’t widen out, as they have begun to do so gradually, but that may have more to do with an increase in the risk premium people expect on assets with less future upside.An interesting dichotomy exists among the asset classes for perceived upside. In a slowing economy discretionary consumer/business spending tends to decline to retrench the cash flow and balance sheet statements.  However, necessity-based spending tends to be flat as people make allocation choices.  Therefore, you are not seeing any significant deterioration in rental rates for multifamily, BTR or student housing across most markets. In fact, a rising interest rate environment tends to push many people out of the buyer pool and into the rental market.
Structured Capital has risen to unprecedented prominence and importance to structure around the gap of long-term intrinsic value (a Fiedler phrase) and short-term financing costs. Short-duration negative-leverage makes it impossible to get significant first mortgage proceeds due to the current pay requirements of senior lenders.  The ability of Mezzanine and Preferred Equity providers to reduce current pay requirements and bank on value creation to de-risk the accrual component is key to making deals work today.  For Sponsors seeking “full” leverage up to 80% on institutional quality assets this “dequity” component is a necessity.  

– David Eyzenberg (Adjunct Professor at NYU Schack Institute of Real Estate & University of Miami Herbert Business School)

Real Estate Capital Alliance (RECA) Q3 2022 Statistics 

Eyzenberg & Company is a member of Real Estate Capital Alliance. RECA members arranged over $3.9 billion in capital in 2021. Below are the complete RECA production statistics for Q3 2022.