October 24, 2023
Paying it forward.
In this month’s newsletter, I briefly discuss the implications of recent economic data on interest rates and the commercial real estate (CRE) sector. Then I take a deeply personal journey into the world of mentoring, which hopefully may inspire some readers to consider the value of “paying it forward” themselves.
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Powell ain’t done yet
High interest rates are one of the most difficult challenges facing CRE investors today. Four fresh nuggets of U.S. economic data were recently announced that make it increasingly unlikely that the Fed will pivot away from rate hikes anytime soon: (1) CPI increased 3.7% year-over-year, above the consensus forecast and buoyed by rising energy and housing costs; (2) wholesale prices (PPI) similarly increased by 0.3% month-over-month in September, also above the consensus forecast; (3) non-farm payrolls increased by a robust 336,000 in September, nearly twice the consensus forecast, and (4) retail sales excluding autos jumped 0.6% in September, more than three times the consensus forecast.
The U.S. consumer and economy continue to defy the odds, including our predictions a year ago. The economy continues to fire on all cylinders, fueled by several factors including a tight labor market, fiscal stimulus (CHIPS and IRA) and increasing onshoring. Given the recent data on inflation and the economy, as well as heightened uncertainty from political dysfunction in Washington D.C. and wars in the Middle East and Ukraine, the 10-year Treasury yield – a key metric upon which much corporate and CRE debt is priced – soared to 4.9%, up more than 100 bp from July.
“Alive ‘til ‘25”
As a result of high interest rates, storm clouds are clearly brewing for the CRE sector. With $1.2 trillion of CRE debt maturing in the next few years – mostly from 2023 to 2025 – the outlook for highly leveraged CRE investors and lenders has only grown more challenging. Let’s see how successful “extend-and-pretend” will be this time around.
With respect to Paladin’s portfolio, we’ve always taken a conservative approach towards debt and were fortunate to have locked in historically low, fixed interest rates on the vast majority of our holdings.
Paying it forward – the immense value of being a mentor
I’m heading back to NYC in a few weeks to celebrate the 60th birthday of a long-time friend. Mike and I first met as new college graduates back in 1986… in the men’s room of Chemical Bank (now JP Morgan Chase) to be exact, while holding dixie cups for our drug tests a few days before the credit training program was to begin. We’ve been fast friends ever since.
As Mike’s 60th birthday approaches, I’ve started feeling nostalgic and been reflecting on my own career. What stands out most has been the immense value that a handful of mentors have played in guiding my professional and personal life.
In short, I wouldn’t be who I am and where I am today without them.
I’ve been so fortunate to benefit from mentors at every stage of my life. High school and college came pretty easy for me; I could get A’s and B’s without diving too deeply into textbooks. And yet, I was lucky enough to have a half dozen teachers and professors who were just like Robin Williams’ portrayal of John Keating in Dead Poet’s Society. They were young, inspiring and unrelenting in their efforts to push me to push myself further.
My first boss at Chemical Bank recognized the fruits of those early mentors. I indeed pushed myself further and was given the choice of joining any business unit within the bank. The head of the banking division I eventually joined took me under her wing. She gave me more responsibility than I deserved but was always there with guidance and support. Importantly, she taught me… well, at least she tried to teach me… how to temper the self-confidence and ego that had naturally blossomed with my success at the bank, a valuable lesson for any corporate setting.
In doing so, each one of these mentors served as role models to me, demonstrating patience, empathy and a genuine interest in my success. I wouldn’t be who I am today – the husband, father, friend, business leader – without the guidance and wisdom these mentors shared with me.
It’s one of the main reasons I’ve always said “yes” when asked today to mentor young professionals in their careers. The vicarious enjoyment I gain in their success makes it all the worthwhile.
I hope these personal reflections may inspire some of you to “pay it forward” as well.
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