Peachtree Group welcomed Mark Zandi, Chief Economist at Moody’s Analytics, for our most recent Market Update. Mark is responsible for directing economic research across macroeconomics, financial markets and public policy and offered his insights into the U.S. economy's performance and near-term prospects, highlighting reasons for optimism while focusing on the stabilizing benefits for commercial real estate and private credit investments amid moderating inflation.

Here are some key highlights from his presentation:

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Economic and Market Performance:

1. 2023 Real GDP Growth: Approximately 2.5%, surpassing expectations and indicating a strong year despite initial downturn concerns.
2. 2024 Real GDP Growth: Projected at around 1.5% for the first half, with an expectation of about 2% for the full year.
3. Unemployment: Currently just over 4%, a slight increase from previous years but still considered low.
4. Inflation: Continues to moderate, with current levels very close to the Federal Reserve's target of 2%.
5. Long-Term Rates: The 10-year Treasury yield is expected to stabilize around 4-4.5%, with mortgage rates potentially settling just below 6%.
6. Commercial Real Estate: The market is adjusting, particularly in the office sector, but overall price declines and transaction volumes are expected to stabilize over the next couple of years.

Positive Developments:

1. Supply-Side Improvements: Increased immigration, productivity, and a surge in U.S. oil production have helped ease inflationary pressures.
2. Consumer Spending: High-income households are in a strong financial position, driving the economy forward despite struggles among lower-income     households.

Potential Risks:

1. Federal Reserve Policy: Concerns that if the Fed does not cut rates soon, it could lead to financial instability.
2. Election Outcomes: Potential for social unrest and policy uncertainty depending on the results.
3. Long-Term Fiscal Issues: High debt-to-GDP ratios and the potential for future fiscal crises if long-term fiscal challenges are not addressed.

Investment Environment:

We, too, are optimistic about the economy and believe a soft landing is the most likely scenario, aligning well with how we are investing our capital. While certain commercial real estate investments will experience challenges as they're calibrate to a higher-for-longer interest rate environment, it still remains a favorable climate for Peachtree Group’s near- and long-term capital investments in credit, as well as opportunistic strategies, including development in the hotel sector for the coming years. Overall, many of the overarching themes Mark discussed echo what we have observed in the market, specifically:

1. Stabilizing Interest Rates: The highly dislocated lending environment, with $2 trillion in loans maturing in the next three years, becomes more manageable as 10-year Treasury yields and mortgage rates stabilize, creating a predictable environment for financing and refinancing commercial real estate projects. This could lead to increased investment activity.
2. Inflation Moderation: As inflation moderates, cost pressures on property operations and development ease, enhancing profitability and investment returns.
3. Consumer Spending: Strong consumer spending, especially from high-income households, supports demand for commercial spaces in retail and hospitality sectors, despite current challenges.
4. Private Credit Opportunities: The dislocation in traditional lending markets creates significant opportunities for private credit investments, offering attractive, equity-like returns with relatively lower risk due to substantial equity buffers in transactions.
5. Regulatory Environment: Regional banks facing pressures may retreat from commercial real estate lending, opening opportunities for alternative lenders. This benefits private credit investors and those with capital for loan purchases and recapitalizations, leveraging the firm's disciplined processes and strategic real estate ownership.

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Mark Zandi is chief economist of Moody’s, where he directs economic research. Moody’s is a leading provider of economic research, data and analytical tools. Zandi was a co-founder of Economy.com, which Moody’s purchased in 2005. He is on the board of directors of MGIC, the nation’s largest private mortgage insurance company; is the lead director of Policy Map, a data visualization company; and is on the board of the Coleridge Institute, a non-profit that facilitates the use of data across federal, state and local governments. An influential source of economic analysis for businesses, journalists and the public, Zandi frequently testifies before Congress. He is the author of Paying the Price: Ending the Great Recession and Beginning a New American Century, which assesses the monetary and fiscal policy response to the Great Recession. His other book, Financial Shock: A 360º Look at the Subprime Mortgage Implosion, and How to Avoid the Next Financial Crisis, has been described by the New York Times as the “clearest guide” to the financial crisis. Zandi earned his BS from the Wharton School at the University of Pennsylvania and his PhD from the University of Pennsylvania, both in economics.

Peachtree Group recently had the privilege of hosting David Bitner, a renowned expert in the commercial real estate industry, on our quarterly market update call. As the global head of research for Newmark, a leading commercial real estate advisor, David's insights on the ongoing transition in commercial real estate (CRE) were invaluable. His discussion outlined a significant shift in the commercial real estate market, highlighting the transition from a low-interest rate environment post-Global Financial Crisis (GFC) to a period of higher rates that are reshaping investment strategies.

Highlights from the conversation included:

• Interest Rates and Market Transition: The shift from historically low interest rates to a "more normal rate     paradigm," emphasizing the end of a prolonged period of declining     rates. This shift will likely affect all risk assets, including commercial real estate, by reducing the tailwinds that previously inflated asset prices and supported various investment strategies.
• Impact on CRE and Investments: As interest rates rise, the cost of borrowing increases, impacting the valuation and affordability of real estate investments. This shift could lead to higher capitalization rates (cap rates) and change the dynamics of investment returns, making it crucial for investors to adapt their strategies     accordingly. Floating rate debt, once considered a cheaper option, may no longer be the most economical option due to rising rates.
• Market Volatility and Opportunities: While increased volatility in the market is expected as it adjusts to the new rate environment, it also brings a silver lining of opportunities. This can lead to both risks and opportunities. While some investors may face challenges, those with "dry powder" or readily available capital might find attractive entry points into the market, fostering a sense of optimism amidst the changes.
• Long-term Outlook and Strategy Adjustments: Investors need to prepare for a sustained period of higher interest rates and adjust their strategies to remain viable. This includes expecting higher costs of debt and being cautious of investment valuations that do not adequately account for the new economic conditions.
• Banking Sector and CRE Debt: There's a concern about the impact of rising rates on the banking sector, particularly smaller regional banks heavily invested in CRE loans. The potential for increased defaults and financial strain on these banks could lead to broader economic implications if not managed carefully.
• Long-term Implications for Asset Values and     Investment Returns: The long-term outlook is cautious, with expectations of continued market adjustment to the higher rate environment. This adjustment is anticipated to be gradual, with investors continuing to reassess risk and return parameters.

Overall, the discussion highlights a transformative period in the commercial real estate market, prompted by the shift to a higher interest rate environment. This change presents an opportunity to refine investment strategies, enabling investors to navigate and capitalize on the evolving market dynamics effectively.

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Peachtree's track record in commercial real estate is impressive. Our team has thrived through three significant economic disruptions. Our senior leaders have been instrumental in that success. Recently we asked those leaders to reflect on their lessons learned and share how that experience has shaped their thought process moving forward.

Here are a few of those insights.

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Lessons Learned with Peachtree Leaders Managing Principles

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"Building a formidable team is crucial for realizing your vision. Select individuals based on their exceptional skills and expertise and then trust them to excel in their roles. Empowering your team unlocks their full potential, driving extraordinary results and propelling your organization to new heights."

Greg Friedman and Jatin Desai – Managing Principals

“Foresight is critical in the investment process, requiring continuous consideration of macroeconomic conditions alongside local economic factors. This dual analysis enables us to identify nuanced opportunities and manage risks more effectively. By integrating global and regional insights, we can make more informed and strategic decisions, enhancing the potential for the investment's long-term success."

Greg Friedman, Managing Principal and CEO

“Ensure sufficient liquidity to maintain resilience. We have implemented and consistently maintained this approach for our Funds. While it may impact internal rates of return (IRR), it will allow us to endure market volatility and retain assets. Asset values typically rebound if adequate capital is available to weather downturns.”

Jatin Desai, Managing Principal and CFO

Lessons Learned with Peachtree Leaders

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“Navigating through development always entails its share of challenges and victories, a reality underscored especially during Covid. While previous downturns primarily revolved around financial aspects, the pandemic introduced disruptions in cost, labor, and material supply chains. Reaching a semblance of normalcy took nearly three years, during which we remained steadfast in risk mitigation across these fronts. Adaptations in processes, timing, procurement strategies, and collaborations with skilled contractors were pivotal in this regard. Despite each disruption, we observed a consistent upward trend in average daily rates, particularly for newer or like-new assets.”

Mitul Patel, Principal

“Anticipate various exit scenarios: While one of our investments succeeded with the SBA refinance strategy, another encountered challenges. Legal issues with the borrower disqualified them from SBA eligibility, leading to loan refinance challenges. In hindsight, we were too dependent on a single exit source and now underwrite deals to ensure there are several (refinance, sale, loan sale) exit options available.”

Michael Harper, President, Hotel Lending

“Constant exposure to various transactions across different levels has enabled us to recognize patterns and anticipate issues during negotiations. This depth of experience has honed our ability to streamline the process, focusing on the crucial issues and avoiding unnecessary distractions. Ultimately, efficiency is paramount.”

Kevin Cadin, General Counsel

“The priority lies in cultivating a pipeline rather than managing individual transactions. The true value lies in the pipeline itself, not the deals outlined in term sheets. This approach grants the freedom to negotiate without the pressure of immediate results. Consequently, I rarely push terms or additional proceeds because I know the depth of additional opportunities and have confidence in the channels that have been developed to continue generating opportunities.”

Daniel Siegel, Principal and President, CRE

“The90% rule. It is often better to make a decision with 90% of the information or90% of what you would ideally like an output to be. That last 10% which is for perfection often leads to analysis paralysis and the opportunity cost of waiting is often greater than the value achieved in getting the last 10%. There is no such thing as perfect.”

Brian Waldman, Chief Investment Officer

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