In a recent episode of a Yahoo Finance’s Catalyst, the host interviewed Richard Litton, president of Harbor Group Private Capital. The topic of discussion revolved around the current state of the real estate industry, the role of private capital and credit, and the implications of potential rate cuts by the Federal Reserve.
At the heart of the discussion was the ongoing shift in the real estate industry, with commercial banks retreating from the market, leaving a gap that has been increasingly filled by private capital. Richard highlighted the rising support of private lenders for the real estate industry, stating that there is an abundance of capital around private real estate credit. He also noted that the focus has turned to product types with strong fundamentals, like multifamily real estate, as opposed to office spaces.
The conversation then moved to the issue of Fanny Mae and Freddy Mack potentially going public, a topic that has been recurrent, especially during Republican administrations. Richard pointed out that the key issue here is the implicit government guarantee behind these financing sources for the housing market. He warned that pulling back this government guarantee could potentially increase rates, something the government will likely be wary of, given the already high interest rates for home buyers.
The host segued the discussion towards the lack of transparency inherent in private lending and the potential for consumer concern. Richard clarified that private lenders like Harvard Group primarily lend to sophisticated counterparties who are also sophisticated investors. Consequently, the process is transparent, and the private debt firms are accumulating loans and catering to many bond buyers who carry out their own risk assessments.
The interview also touched on whether private credit has undergone its real-world test yet. Richard remarked that the industry is indeed in a period of testing, especially in the face of elevated rates. He stressed the importance of real estate asset management experience in navigating these challenges.
The last part of the discussion centered around the bond market’s impact on the business. Richard explained that the high index treasuries for fixed-rate credit investments and sofa for floating rate provide a good return. However, he also emphasized the importance of assessing risks, considering the property’s underlying fundamentals, and determining one’s position in the capital stack.
In summary, the conversation with Richard offered valuable insights into the evolving landscape of the real estate industry. It underscored the significant role of private capital and credit in filling the gaps left by commercial banks, the potential implications of government-backed entities going public, and the ongoing real-world testing of the private credit sector.