Cognitive Dissonance – My Takeaway from the CREFC Europe Conference

Last week during the week of November 7,2022, I traveled to London for the CREFC Europe Conference that was aptly titled Navigating the Transition.

Things are changing globally from an economic perspective – and it’s happening quickly.

Having said that, the feeling is one of cognitive dissonance.  Governments are increasing rates to temper inflation, but a good majority of the population is still shopping and eating out.  Restaurants are busy and company’s earnings are surprising to the positive all while consumers are expressing severe negative consumer confidence. 

As we all know, governments injected money in their respective economies and spent money like drunken sailors during the COVID-19 pandemic in order to prop up their economies to help individuals, families, and businesses get through a difficult period of uncertainty.

However, anyone who has studied basic economics knew that this should create inflation.  The fact that Central Bankers disregarded that premise publicly shows one of two things – either they are not as smart as Econ 101 students, or they did not want to disclose the negative ramifications to a populous that was already stressed and worried.  My guess is that the reason is the latter, not the former, but then it makes me wonder how politicians are befuddled by the fact that the public trust has been broken. 

This is only the second conference I’ve been to since the pandemic, however, I will say that this was the best put together conference with the most logical topics for the current times that I may have ever been to in my entire career. 

The conference started with a macroeconomic view followed by a macroeconomic view specific to real estate.  The next topic related to going through cycles.  And then the discussion turned to financing – discussing both the challenges and opportunities.  The conference then discussed the market for lending for lenders.  The conference ended with a deep dive into demography.


The macroeconomic situation is not good in the UK, the situation is mixed in Europe, and while the situation is faring better in the US, it’s expected to turn in the coming quarters.  I will highlight the biggest themes affecting economic recovery below:

  • High inflation
  • Interest rate increases
  • High energy costs are impacting lifestyle
  • Worsening consumer confidence
  • Increased conservatism with 40% of families already cutting back on food and other essentials and 67% of families cutting back on non-essentials due to cost of living increases
  • Housing price drops
  • Rental rate increases
  • Government austerity (particularly in England)
  • Government threats of increased income taxes
  • Recession (already announced in the UK)
  • Increased unemployment, which is starting to show in the market already
  • Muddled policy in Europe with some economies faring better than others like Germany, Latvia, and Italy
  • War in Ukraine is negatively impacting economics

There are obviously many headwinds for the global economy, as many economies are facing the same situations.  Not every government has the means to combat inflation like is being done in the US, UK, and Europe, so the global economy could be facing a significant period of higher inflation across the globe.

The following are some of the impacts that the macroeconomic environment is having on the commercial real estate market specifically:

  • Challenges with underwriting due to lack of predictability with underwriting
  • Rapidly slowing acquisition market
  • Interest rate increases creating more market volatility
  • Real estate values are expected to see 10-20% declines
  • Lending opportunities in private credit, gap funding, and alternative lending are increasing
  • Cap rates are expected to increase
  • Distressed assets are few and far between at this point, but cracks are forming
  • Price discovery is expected to be found quickly in this cycle
  • Good properties in prime locations will get financed

As the Cycle Turns

There were some common themes discussed in this panel.  Where do consumers want to live and work, where do lenders want to lend, and what is the outlook for the economy.  The following are some of the highlights from the panelists:

  • There is clearly a pricing disconnect between buyers and sellers
  • Everything is taking longer due to increased debt costs and lender uncertainty
  • Prime locations and asset types are the only thing still selling
  • Putting a price on secondary markets is difficult
  • Sustainability will become increasingly more important
  • Lenders are better capitalized, but also tightening up on covenants and underwriting
  • Cap rate is irrelevant right now; only cash-on-cash returns are relevant currently
  • GDP and rental growth will decline, which obviously puts more pressure on values
  • Big question is whether the recession will be deep & short or shallow & long
  • We are in a pause period
  • 2023 could be the best buying time in history

Financing Real Estate Market Opportunities & Evolution of Debt on Debt

While there are significant headwinds and likely some near term fallout, there are also opportunities for creative lenders and buyers to lend on or acquire investments in the unfolding tumult.  The following are some of the highlights that came out of the panel:

  • Chaotic price discovery will become the norm in the market
  • Lenders need to be outwardly focused rather than internally focused
  • Borrowers and lenders need to re-frame their mindset
  • Banks are well capitalized, but should end up with even better books at the new valuations
  • Office is replacing retail as the pariah asset class
  • Real estate debt is the most compelling investment class with alternative lending believed to be the best space to be in
  • Majority of loan on loan lending is not accretive, so why take it

A World in Transition

The closing of the conference was with a Member of the House of Lords.  Her presentation sat well with me because I follow demography and she made many points that resonated with me based on my research.  One non-demographic comment was that the US is feeling more like Italy – I could only infer that the comment was discussing how the US is governmentally dysfunctional with social issues, education issues, and high crime.  The main points of her comments follow:

  • There is a big change in population occurring, which will be a big change for our lives
  • For the first time in history, there are more people in the 65 and over segment of the population than children 5 and under
  • People are re-thinking where they live, how we work, how we live, and how we die
  • The World is still moving to cities and becoming more urban
  • Many older people are un-retiring for various reasons – boredom, money, fulfillment, etc.
  • Having a sense of purpose is becoming more important. 
  • Employees want:
    • Flexible work
    • Meaningful work
    • Work that is a sustainable force for good

This one-day conference was well thought out and highly relevant for the current times.  I plan to attend the conference again next year.  The topics and points gave a lot of food for thought.  I see that many people are reticent and worried who have not been through a cycle before while like many who have seen a cycle or more, I am personally waiting to see how this cycle plays out and determine what opportunities may arise.

I’m on the hunt for opportunities both on the equity and debt side, but as in most cycles, they don’t play out the same.  History may not predict the future, but the themes and ultimate opportunities may rhyme from cycles past.

Until next time, let’s continue growing our passive cash flow and net worth together!


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