Today we’re excited to bring you an interview with a special guest, Dr. Sam Chandan, President and Chief Economist of Chandan Economics and an adjunct professor at the Wharton School of the University of Pennsylvania. Dr. Chandan is amongst the commercial real estate industry’s leading voices in relation to capital and credit markets and the dynamic relationship between the economy, regulation, and market performance.
Sam, first off congratulations on the launch of Chandan Economics! How does Chandan Economics distinguish itself from other commercial real estate research firms?
The new firm brings two services to the market that are not directly addressed by our peers: Real Estate Economics and Debt Analytics.
First and foremost, our Real Estate Economics service tracks real estate trends in the context of the broader economy and capital markets. In doing so, it informs investors’ and lenders’ understanding of how macro trends, policy developments, and capital and credit flows into and out of real estate are driving outcomes in our industry. In fact, we track many of the same metrics that the well-known economic research firms will report on. The jobs report, for example. Our difference is in focusing specifically on what the data and trends mean for commercial real estate, something the generalist economic research firms do not do.
Our second area of expertise and reporting relates to the performance of the commercial real estate debt market and, more specifically, the quality of loans being made to support transactions and refinancing. We do this on a macro level as well as for specific loan pools. Coming out of the financial crisis, there is ample evidence of gaps in our industry’s understanding of the procyclical role that debt and leverage play in driving value cycles. Our research seeks to narrow that gap by empowering debt investors, lenders, and regulators with a better understanding of trends in loan quality and credit risk.
Since you’re much more in tune with the macro economic factors affecting property fundamentals than the average real estate practitioner, what are two major indicators we should focus on as they relate to the overall health of the CRE market?
At this juncture, a clear understanding of labor market trends and the underlying reasons for the weak jobs recovery is critical. In the largest markets, property values and lending are pulling away from the basic drivers of absorption much earlier than we have observed during past cycles. Where strong capital inflows to these markets are supporting this decoupling, detailed tracking of job growth trends is an essential component of the risk mitigation strategy. From an opportunistic perspective, as well, there are markets with strong labor and fundamentals characteristics that remain below the institutional investment radar and where the value proposition should be drawing more interest.
Interest rates are another aspect of the market that requires careful monitoring. The relative attractiveness of real estate as an asset class, the cost of financing, and discount rates and cap rates are all key drivers of the real estate cycle that are related to the broader interest rate environment. This is a particularly important facet of the market now, given the extent to which the CRE investment recovery and loan modifications have benefitted from historically low interest rates and accommodative monetary policy. The favorable interest rate environment will not persist indefinitedly; rather, we can say with near-certainty that rates will rise over the investment time-horizon. This whole equation is made more complex when you introduce uncertainties around the perceived creditworthiness of US Treasuries. In our view, interest rate risks deserve much more attention within the CRE community than they currently garner.
What’s the most profound change you have seen in the commercial real estate business since you started working in the field?
The market has taken some exceptional turns since the days of the Resolution Trust Corporation, so it is difficult to isolate one particular thing that stands out above the rest. Because I am on the research side of the business, one issue I am very conscious of is the disconnect between the research function and market outcomes. The profound change is that we now have access to a wealth of data. A decade ago, the industry was far less transparent. At the same time, the profound reality is that information is not yet driving markedly better decision-making when it comes to managing risk. We have some work to do here.
Chandan Economics is active on both Facebook and Twitter. What are your goals with these social networks?
Both Twitter and Facebook allow us to engage with other market participants in a way that is sometimes more direct, timely, and dynamic than the traditional broadcast models. That level of engagement is important to ensuring that research is impactful in helping to shape CRE business decisions. We are currently working to port some of the social media communication models to our client content delivery channels. Not everything will translate well; we will leverage the elements that work to offer a richer and more valuable experience for our partners. For anyone who would like to follow us, our Facebook address is facebook.com/ChandanEconomics.
What’s your favorite building, and why?
Without a doubt, Basílica i Temple Expiatori de la Sagrada Família in Barcelona. If I may beg your indulgence: a truly great building is a work of art and an unequivocal expression of its highest and best and most noble use. The means and tale of its creation are as important as the building itself, as is the purity of the motivation of its crafters. Standing inside a great structure — whether it be grand or modest — invites one to transcend ordinary experience in a way that does not depend on creed or gender or aesthetic affinity. Instead, it appeals to something shared in the human condition. Construction of Sagrada Familia began in 1882, with Antoni Gaudi assuming control of the project a year later. It will not be complete for another fifteen years but it is already alive with purpose. It is not about scale. I would describe Ben Gurion’s very modest home in the Negev, which I had the opportunity to visit during my last trip to Israel, in the same terms.
Thanks Sam! Best of luck with your new firm.
Model For Success readers: please post your questions for Sam in the comment area below!