On September 16th, the first Graaskamp Center Leadership Series featured keynote speaker Karen Case, Executive Managing Director and President of Commercial Real Estate for CIBC (Canadian Imperial Bank of Commerce). Irgens Executive Director Michael Brennan began the event with news that the Wisconsin Undergraduate Real Estate Program was again ranked the #1 Public Program by US News World and Report. In addition, the new real estate private equity track, taught by Brennan and Graaskamp Director Mark Eppli, has raised more than 3 million dollars to invest in various projects thanks to donations from members of the Wisconsin Real Estate Alumni Association. Lastly, Brennan was very excited to announce that there are more than 500 students in the undergraduate real estate program and almost 30 students in the new MS Program – the largest enrollment in the program’s history.
Karen Case began by sharing her insights into how the pandemic has affected the market and its uncertain future in light of the upcoming flu season, the potential for another wave of COVID19 infections, and an election that will result in a negative market reaction regardless of the outcome. She detailed the need for spending to occur with the current recession in the service industries and anticipates a very bleak fourth quarter. When asked about how the pandemic has affected her business and the overall ability to pay by lenders, Case stated that CIBC has not seen a meaningful increase in defaults yet. While most banks are still actively lending, it is less common for banks to engage in large transactions, as there is still a great deal of uncertainty in the duration of the pandemic and what its continued effect on the economy will be.
Case explained the precautions that banks have been taking and the reassessment of the risk ratings on various loans. Overall, the banks are fairly well prepared for potential large loan losses and are now looking to understand which assets are going to be permanently impacted by the pandemic and which ones will come around.
When asked how CIBC is addressing certain assets and whether or not specific property types were “redlined” from receiving loans, Case affirmed that no matter the property type, there are always going to be good deals in bad markets and bad deals in good markets. She emphasized that hospitality is still struggling, retail is a “tale of two cities” with essential stores still remaining relevant, and multifamily is continuing to be financed for new developments. Locationally, properties in urban areas are suffering, as the desire for living in the central business district has declined. College graduates are currently choosing to live at their parents’ suburban homes rather than moving into the cities for their new positions.
In regard to office space, Case is unsure how different firms will react – will they take more space to engage more social distancing or will they take less space for less employees coming into work? She believes there is a hybrid opportunity in boutique office space that allows employees to come into a work environment on occasion while not having the hassle of elevators or large common spaces that are the main cases of concern during the return to work stages.
When asked about how the borrower profile has changed, Case explains that the market currently has more institutional capital and has seen an increase in joint ventures which gives more comfort to the banks, compared to capital from family and friends. CIBC has seen an increase in crowdsourcing as a keyway for capital financing, which she personally is not fond of, due to its ability to open up investment opportunities to a much broader group. This brings on greater risk from potential investor lawsuits and also makes it much harder for the crowdsource groups to raise follow up capital when it becomes necessary.
Case acknowledges that while default probability is obviously higher right now, there is less stress on the lenders because equity requirements are much larger than in previous years. The default loss would be of a smaller magnitude due to LTC ratios ranging from 55-65% compared to 85% in the 2000s. With this in place, CIBC believes that defaults do not necessarily relate to loan losses.
In her closing statements, Case gives real advice for both lenders and borrowers – be honest with each other. As a lender, she looks for integrity and the capability in the borrower and understands that the key to a successful relationship is to be upfront with the other party. You must have trust in each other and have very open communication so that there are no surprises. She states that there is nothing worse than not knowing vital information from a borrower and having to find out info from an external source that should have been conveyed between the two parties immediately. Whether it is good or bad news, there must be a two-way conversation between parties in order for everyone to feel comfortable.
Karen Case is a board member of Rush University Medical Center, Community Investment Corporation, TimeLine Theatre and the Juvenile Diabetes Research Foundation. She received her MBA from the University of Chicago and her B.S. in Business Administration from Washington University in St. Louis. Case is a predominant activist for women in the workplace and is known for being a great leader and coworker.