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Speaker 1: Hello, and welcome to another episode of the All Thoughts Podcast.

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Speaker 1: I'm Tracy Alloway.

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Speaker 2: And I'm Joe Wisenthal.

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Speaker 1: Joe, have you ever been to the Highland Shopping Mall

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Speaker 1: in Austin?

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Speaker 2: Absolutely, that's a debt. Is it still there? That's like

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Speaker 2: the one that's not done well?

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Speaker 3: Right?

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Speaker 1: I think it has officially died.

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Speaker 2: Okay, I know exactly, Okay, I just I know there's

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Speaker 2: a few, and I know exactly which one that is.

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Speaker 2: I have spent time in it multiple times. I was

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Speaker 2: there before it died because I lived there twenty years ago.

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Speaker 2: But when I did, it was pretty quiet overall, like

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Speaker 2: it was pretty grim.

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Speaker 1: Yeah, this was sort of a classic Texas mall from

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Speaker 1: what I can gather, opened in nineteen seventy one and

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Speaker 1: then closed for good in twenty fifteen. Here's another question.

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Speaker 1: Have you ever been to the domain?

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Speaker 2: Yes? And that one is much more busy and I'm

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Speaker 2: pretty and still exists.

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Speaker 1: Yes, So that one opened in two thousand and seven.

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Speaker 1: It is still open. From what I can tell, it's

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Speaker 1: very popular. It's sort of an upscale shopping destination. And

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Speaker 1: these two shopping malls, the reason I bring them up

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Speaker 1: is they kind of stick in my mind as the

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Speaker 1: classic example of what happened to malls in the sort

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Speaker 1: of twenty tens. So you had this bifurcation in the

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Speaker 1: market where some of the upscale ones, the ones that

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Speaker 1: had some sort of i don't know, like specific offering

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Speaker 1: in terms of entertainment things like that, did pretty well,

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Speaker 1: while the old school ones, the ones that maybe had

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Speaker 1: big anchor tenants that were no longer as popular, a

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Speaker 1: lot of those went out of business totally.

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Speaker 2: I didn't first of all, I just want to say

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Speaker 2: I appreciate and didn't realize that this is going to

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Speaker 2: be an Austin, Texas episode, So thank you for that.

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Speaker 1: Yeah, just for you, Joe.

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Speaker 2: But that did you know that crystallizes it perfectly for

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Speaker 2: me because I know those two malls and I know

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Speaker 2: how different they are. And the High Island Mall was

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Speaker 2: sort of you know, off a highway, not in a

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Speaker 2: great location. Is the kind of place where it probably

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Speaker 2: had some you know, fast food Chinese in the food court,

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Speaker 2: probably a place that sold hats, maybe a candle store,

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Speaker 2: something like that, you know, called like wis.

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Speaker 1: You are actually like vividly bringing to life for me,

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Speaker 1: like the early two thousands American.

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Speaker 2: Mall, and then the domain has like, you know, probably

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Speaker 2: a really nice apple store in it. I don't know

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Speaker 2: for sure, a really nice apple store, and some really

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Speaker 2: nice restaurants, probably like a cool like burrito restaurant and

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Speaker 2: stuff like that. So yeah, I think that's it. That's

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Speaker 2: the story of malls. You nail it.

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Speaker 1: Yes, And the reason I bring up malls in general

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Speaker 1: is because obviously there's been a lot of discussion about

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Speaker 1: the future of commercial real estate and malls fit squarely

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Speaker 1: into that category, but also in the context of concerns

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Speaker 1: about stress in the office market in particular. Yeah, I

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Speaker 1: keep reaching back to malls as the analogy here, so like,

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Speaker 1: clearly there is a structural issue happening in the market.

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Speaker 1: But that said, you know, you can have specific properties

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Speaker 1: that do better, you can have specific properties that go

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Speaker 1: out of business completely, like the Highland Wall, And so

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Speaker 1: that bifurcation seems really important to me.

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Speaker 2: And I think, you know, we've never we've obviously done

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Speaker 2: a handful of of office episodes, but it makes sense

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Speaker 2: to think more about this bifurcation because one thing that

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Speaker 2: we've learned, even from talking to various people in the

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Speaker 2: office spaces, like oh, class A is fine now that

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Speaker 2: I know A. Class A is definitely but they're like, okay,

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Speaker 2: Class A the really nice new locations, they're fine. It's

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Speaker 2: just that there's a lot of other space that is

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Speaker 2: not what people think of as the modern office building.

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Speaker 2: That's right.

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Speaker 1: There's domains and there's highlands.

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Speaker 3: So I love it.

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Speaker 1: So on this episode, we're going to be digging more

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Speaker 1: into the office sector and commercial real estate more broadly,

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Speaker 1: and I am very pleased to say that we do

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Speaker 1: indeed have the perfect guest. We're going to be speaking

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Speaker 1: with Liza Crawford. She's a portfolio manager and co head

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Speaker 1: of Global Securitized over at TCW and a long time

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Speaker 1: investor in this space, someone who also covered malls for

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Speaker 1: a while in the I think in the early twenty

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Speaker 1: or twenty ten. So we're going to get into all

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Speaker 1: of that with her. Liza, thank you so much for

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Speaker 1: coming on all thoughts, thank.

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Speaker 3: You so much for having me. I'm so excited to

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Speaker 3: be chatting with y'all today.

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Speaker 1: Well we're very excited as well. Ooh, and you said y'all,

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Speaker 1: so we're really like, we're bringing the Texas theme in

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Speaker 1: this episode.

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Speaker 3: Love it?

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Speaker 2: Are you Texan?

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Speaker 3: I was born in Houston. I went to high school

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Speaker 3: in Dallas, so I've moved around to fair Bit though. Awesome.

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Speaker 1: So did I get your career summary broadly correct? A

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Speaker 1: longtime player in the securitized space, including in commercial real estate,

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Speaker 1: so things like commercial mortgage back bond CMBs, stuff like that.

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Speaker 1: And also you weren't looking at malls at one point, right, Yeah.

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Speaker 3: So I've always been in securitize for my career and

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Speaker 3: I started in two thousand and nine, so a pretty

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Speaker 3: exciting time. Interned in two thousand and eight particularly exciting

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Speaker 3: as well, and I focused on various areas of securitize.

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Speaker 3: But when I joined TCW, the firm I work at now,

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Speaker 3: I was a commercial mortgage backed securities trader, so I

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Speaker 3: dedicated all of my time to commercial real estate research

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Speaker 3: and trading and to your commentarycy, it involved a number

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Speaker 3: of property tours and years ago malls were the focus

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Speaker 3: and it was pretty grim out there for a number

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Speaker 3: of tours, but you guys nailed it on the bifurcation.

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Speaker 3: You can really see that when you're visiting these assets,

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Speaker 3: and you can see it come through in cash flows

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Speaker 3: and sponsored decision making. And then currently at TCW. I'm

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Speaker 3: cohead of Global Securities, so now I have the pleasure

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Speaker 3: of looking across the broader almost thirteen trillion dollars securitized market.

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Speaker 1: Joe, Can I just say when analysts go on the

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Speaker 1: real life tours of shopping malls or stores in general,

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Speaker 1: that is my all time favorite research. Like, I love

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Speaker 1: the idea of everyone just like hopping in a car

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Speaker 1: and we're going to look at football at this mall.

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Speaker 3: Well.

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Speaker 2: Same, And actually that was going to be my question

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Speaker 2: because you know, I remember the Highland Mall that Tracy

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Speaker 2: brought up. I know the domain, and I do remember

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Speaker 2: you know, the Highland Mall is pretty quiet. But I

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Speaker 2: have to imagine that as a professional you walk through

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Speaker 2: the mall. I walked through the mall. I just sort

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Speaker 2: of noticed vaguely like this is quiet, this is busy.

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Speaker 2: What does a professional look at when you're on one

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Speaker 2: of these site tours for a mall and you're like

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Speaker 2: looking at them from a sort of due diligence investment standpoint?

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Speaker 2: What are the things that the pro really notices beyond

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Speaker 2: just this is kind of quiet.

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Speaker 3: Yeah, So with respect to the malls, you're looking to

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Speaker 3: see if the atmosphere is inviting, so have sponsors meent

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Speaker 3: any effort to try to add natural light, to try

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Speaker 3: to add seasonal decor, so that's just the natural ambiance.

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Speaker 3: Then you're also looking at the density, so is it populated,

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Speaker 3: are people walking around, what are people holding? Are they

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Speaker 3: holding bags that they're shopping or are they just kind

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Speaker 3: of hanging out and they're taking advantage of air conditioning.

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Speaker 3: You're checking out the parking lot to see if they

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Speaker 3: are a number of cars there. And then you're looking

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Speaker 3: at the tenant mix, and this is you know, you

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Speaker 3: can see the real bibercation. So I remember just Burlington

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Speaker 3: coat factories would always be crushing it. There'd be so

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Speaker 3: many people in there. And then there'd be areas where

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Speaker 3: you've got your fourth sneaker store and nobody's in any

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Speaker 3: of these properties, or you'd have another hat store or

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Speaker 3: eyebrow a shop that you realize they're probably not paying

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Speaker 3: any rent, they're not really even economic, but they are

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Speaker 3: at least kind of filling space. And then one of

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Speaker 3: the most kind of egregious things you'll see on these

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Speaker 3: property tours for weak er assets is whole areas that

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Speaker 3: are effectively close off or there are very explicitly tenant

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Speaker 3: temporary tenants, so army recruiting, for example, polling stations. So

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Speaker 3: there you can see a landlord perhaps exploring alternative uses,

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Speaker 3: but as a debt investor, some of it looks like

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Speaker 3: a little bit of a smoke screen to use occupancy

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Speaker 3: numbers that frankly don't drive value for the asset.

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Speaker 2: Tracy. The last time this is a fact. The last

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Speaker 2: time I was in the Highland Mall.

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Speaker 1: I know this.

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Speaker 2: I happened to be with my mother in law. She

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Speaker 2: was voting. It was a polling location at the mall,

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Speaker 2: So there you go. That was her local place too.

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Speaker 2: And I don't know why we why we're tell you along. Yes,

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Speaker 2: that is my last memory of the Highland Mall.

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Speaker 1: I'm so pleased with this anecdote that it's like worked

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Speaker 1: out so perfectly because we didn't actually talk about this

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Speaker 1: before the podcast, but this is great. So just going

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Speaker 1: back to that analogy of the Highland and the domain

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Speaker 1: and its sort of application to the broader commercial real

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Speaker 1: estate market and office properties in particular. I mean, I

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Speaker 1: mentioned that's the mall is the sort of prism that

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Speaker 1: I'm looking at the office space through. But tell us

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Speaker 1: how you're viewing it, Like, how useful is the shopping

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Speaker 1: mall sector as an analogy to stress in the office

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Speaker 1: market right now?

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Speaker 3: It's very helpful as an analogy with respect to bifurcation.

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Speaker 3: I think one of the mistakes folks can make is

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Speaker 3: paint everything with a broadbrush. And I'm sure you y'all

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Speaker 3: remember plenty of headlines of malls are all dead, and

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Speaker 3: there were plenty of malls that were on their way

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Speaker 3: to dying, zombie, ugly irrelevant. There are too many of them,

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Speaker 3: et cetera. So, of course, but there are some malls

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Speaker 3: that continue to drive consumer demand, serve a purpose, be

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Speaker 3: well managed. So that bifurcation trend is very real in

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Speaker 3: the office space now. And would love to get into

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Speaker 3: kind of compare contrast of what as a debt investor

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Speaker 3: we look for in the different spaces and the different

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Speaker 3: kind of workouts and evolution of these two property types.

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Speaker 3: But importantly in office we're really seeing that bifurcation now. Joe,

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Speaker 3: you mentioned Class A earlier, and even Class A is

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Speaker 3: being reviewed and now we have trophy or premiere, and

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Speaker 3: you know what differentiates Class A from you know, the

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Speaker 3: actual trophy premiere. Well, Everything that was a newer build

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Speaker 3: maybe fifteen twenty years ago, was Class A. Anything that

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Speaker 3: maybe had a good view or it would be Class A.

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Speaker 3: And now Trophy Premiere means it's either a more recent build,

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Speaker 3: best in class or a more recent renovation, and it

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Speaker 3: has more than just a good view or location. It

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Speaker 3: has actual amenities to attract tenants, whether that's conference space

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Speaker 3: or an excellent food court or gym, et cetera.

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Speaker 2: I want to obviously talk more about office and start

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Speaker 2: getting into this, but I just have one deep tale

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Speaker 2: going back to the mall question. What stood out to

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Speaker 2: you about the existence of a bustling Burlington coke factory.

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Speaker 2: What was it specifically that that told you, because that

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Speaker 2: was the one brand that you identified as a thing.

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Speaker 2: What was that saying to you?

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Speaker 3: Yeah, I think when you're when you're touring malls and

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Speaker 3: it gets really sad, you really get excited about the

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Speaker 3: bright spots, and Burlington co Factory was really that bright spot.

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Speaker 3: And it also signals that there is demand to be

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Speaker 3: identified and you know, leaned into as a landlord or sponsor.

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Speaker 3: So a lot of these properties needed to be right

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Speaker 3: sized from a square footage for the actual you know,

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Speaker 3: retail demand, but there's consumer demand in the area and

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Speaker 3: you need to retenant your space to meet that demand.

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Speaker 3: And what you see in office as well as you

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Speaker 3: saw in retail is that bifurcation translates into sponsors making

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Speaker 3: a decision this asset is not core to my portfolio

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Speaker 3: and I'm planning on walking away from it or you know,

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Speaker 3: rolling off of it in the coming years. So what

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Speaker 3: is the point of investing any energy in leasing it up,

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Speaker 3: in making sure our tenants are happy with the location

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Speaker 3: that we are investing in demand drivers that ultimately help

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Speaker 3: the broader kind of ecosystem of tenants. So instead you

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Speaker 3: just see the under investment so present from waldoff areas

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Speaker 3: or these you know, day to day tenants or month

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Speaker 3: to month tenants likely not paying any rent, and then

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Speaker 3: the successful you know, consumer demand moving into some of

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Speaker 3: these some of these retailers that are actually relevant to

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Speaker 3: the local population.

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Speaker 1: Just going back to what you were saying about trophy

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Speaker 1: properties and some signs of stress even creeping into trophy

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Speaker 1: office buildings. So you know, we heard a lot about

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Speaker 1: how important quality is in the office space and that

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Speaker 1: some of the older offices are probably going to encounter

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Speaker 1: significant troubles in the current cycle. But maybe the Class

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Speaker 1: A would do okay, and certainly the trophy properties should

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Speaker 1: be doing relatively well. But it is interesting if we're

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Speaker 1: seeing even those start to come under pressure. So I

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Speaker 1: guess I'm curious, like why that's happening. And then secondly,

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Speaker 1: how much of it is rents versus interest rates going up?

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Speaker 3: They're great question. So with respect, so why we're seeing

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Speaker 3: that Class A cut under pressure? There are two main reasons. One,

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Speaker 3: time you know, something that is Class A doesn't just

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Speaker 3: remain Class A. You can't set it and forget it.

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Speaker 3: You know, you need to continuously invest in that asset

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Speaker 3: and make sure it is designed to meet tenant demands

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Speaker 3: of today. And then two, you had COVID. COVID all

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Speaker 3: of a sudden introduced every CEO you know, into the

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Speaker 3: conversation of what do we want our employees to benefit

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Speaker 3: from in shared office space. I think we all took

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Speaker 3: it for granted before COVID happened. We just showed up

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Speaker 3: to the office and if we had a terrible cubicle,

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Speaker 3: we just went with it. I work on a trade floor,

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Speaker 3: so personal space is lacking. I don't you know. I

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Speaker 3: don't use an office. I don't have a cubicle, but

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Speaker 3: if I explore other floors of our company, there's just

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Speaker 3: you know, cubicle on cubicle, and there's a lot left

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Speaker 3: to the imagination. It's not as engaging and you don't

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Speaker 3: always benefit from that shared space communication, et cetera. So

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Speaker 3: TCW is actually a great example. We've upgraded our space.

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Speaker 3: We're moving in a couple of weeks to Class A property.

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Speaker 3: We're in what perhaps was once considered Class A now

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Speaker 3: but it's arguably Class B in dropping quickly. But we're

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Speaker 3: moving into a clas where you have more natural light,

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Speaker 3: you have brighter colors, you have upgraded amenities, you have

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Speaker 3: technological improvements, and more shared space. So it really is

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Speaker 3: an evolution of meeting tenant demand, and tenant demand is

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Speaker 3: the number one priority. As we're in a tough market

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Speaker 3: for office landlords. They are seeing a net reduction in

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Speaker 3: demand and they need to be proactive to get the

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Speaker 3: best tenants in their space and build out the amenities

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Speaker 3: and whatnot that they need. And that really is fundamentally

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Speaker 3: the definition between what is trophy and what is a

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Speaker 3: Class A. That just keeps falling further down the quality spectrum.

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Speaker 1: So at the same time that they're needing to invest

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Speaker 1: in the properties. I mean, rental income is presumably flat

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Speaker 1: or going down because demand is weakening, but costs are

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Speaker 1: going up in the form of financing.

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Speaker 3: Yes, so excellent point. With the rate move in the

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Speaker 3: last kind of eighteen months, the capital markets have created

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Speaker 3: acute stress for landlords that use financing to own and

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Speaker 3: operate their real estate portfolios. And it's very common. Commercial

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Speaker 3: real estate is a levered asset class. It is sensitive

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Speaker 3: to interest rates. The sponsors that have locked in lower

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Speaker 3: fixed rate debt in twenty twenty, twenty twenty one, they're

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Speaker 3: sitting tight, right. They might have a ten year fix strate,

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Speaker 3: they've got plenty of time. But other sponsors took out

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Speaker 3: shorter floating rate debt, so they are acutely vulnerable to

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Speaker 3: their rates resetting five and a half points higher. And

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Speaker 3: it is acting as a catalyst for them to accelerate

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Speaker 3: their decision making of what assets belong in their portfolio,

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Speaker 3: what assets will make sense long term, what assets are

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Speaker 3: economic to own, and what assets just don't make sense anymore. So.

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Speaker 3: After ten years of low rates and low growth, the

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Speaker 3: debt markets got very sanguine in both the appraisals they'd

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Speaker 3: accept for office, in the lack of differentiation they demanded

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Speaker 3: from these valuations and sponsor quality, et cetera. In office

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Speaker 3: and borrowers or the sponsors the owner operators that borrow

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Speaker 3: in the capital markets got aggressive with the amount of

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Speaker 3: leverage they felt comfortable with their assets. So to your point, Tracy,

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Speaker 3: that's where we're seeing very quick pivots for some very

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Speaker 3: large sponsors to exit the entire office properties. You know,

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Speaker 3: Blackstone and Brookfield are great examples there.

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Speaker 2: By the way, just going back to what you were

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Speaker 2: saying about, like, there was actually a great New York

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Speaker 2: Times article three days ago November twenty six, the Envy

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Speaker 2: office can instagrammable design lore young workers back by Emma

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Speaker 2: Goldberg and and a code. But it sort of speak

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Speaker 2: to exactly what you're saying, light and everything, and they have,

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Speaker 2: you know, these offices that are featured at all, you know,

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Speaker 2: like Millennial Pink and all that stuff. What else goes

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Speaker 2: into Joe.

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Speaker 1: I don't know why you don't like millennial Pink. You

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Speaker 1: always mention it as like a negative example. I like it.

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Speaker 2: I'm just so tired of it. It's cool twenty thirteen

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Speaker 2: is like, oh cool new color. It's everybody's like, oh

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Speaker 2: my god. Twenty twenty three are still around. What else

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Speaker 2: looks like? A true when you if you know, you

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Speaker 2: walk into an obvious like okay, this is a trophy asset.

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Speaker 2: What does that look like? What are some other things

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Speaker 2: that you would expect to see.

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Speaker 3: You'd expect to see very high quality entryways, lobbies, lofty ceilings.

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Speaker 3: You know, ideally, like atrios, you would have separate elevator

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Speaker 3: banks for either different floors or different tenants. A luxury feel, right.

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Speaker 3: You want both your employees to feel really excited and

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Speaker 3: proud and productive when they come to work. But you

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Speaker 3: also want your clients to feel like they're special and

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Speaker 3: that they are working with a really high quality company.

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Speaker 3: And then I mentioned kind of those amenity these floors.

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Speaker 3: Other examples include just having outdoor space, just giving your

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Speaker 3: employees the opportunity to step outside and get some fresh air,

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Speaker 3: see some greenery. And then I think everyone and you know, Bloomberg,

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Speaker 3: you guys are leading the charge on it, but everyone

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Speaker 3: wants to snacks. The coffee upgrade, So we've seen, you know,

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Speaker 3: beyond just maybe shared amenities that multiple tenants can enjoy.

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Speaker 3: You've also got more amenity focus on tenants dedicated floor

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Speaker 3: space because people want to be able to take a

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Speaker 3: break and get a nice coffee.

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Speaker 2: We don't have any Instagram walls here at Bloomberg as

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Speaker 2: far as I know, although actually in the basement there's

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Speaker 2: a pretty cool art installation that is pretty grammable. But

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Speaker 2: by and large, I do feel like we work in

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Speaker 2: a trophy office here in New York, just sitting aside

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Speaker 2: the sort of more qualitative differences, Like can you speak

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Speaker 2: to the quantitative differences that you see right now in

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Speaker 2: this sort of trophy, whether it's vacancy rates or cap

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Speaker 2: rates or anything else versus everything else.

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Speaker 3: Yes, And then I think it's important we also talk

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Speaker 3: about geography and specific city stories, so as it relates

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Speaker 3: to the quantitative differentiation we're seeing for trophy assets. It's

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Speaker 3: not uncommon to see post COVID stress translate into a

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Speaker 3: ten percent vacancy. There are some assets that only have

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Speaker 3: a three percent vacancy, whereas a BC or even a

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Speaker 3: weaker class A had ten percent going into COVID currently

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Speaker 3: has a twenty twenty five percent. And then some assets

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Speaker 3: are effectively vacant and those are that's where you see

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Speaker 3: these distress sales come through. Want to lean into a

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Speaker 3: couple items here, So how do trophy offices how are

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Speaker 3: they best able to maintain higher occupancy? It's because they

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Speaker 3: attract high quality tenants and they demand high quality leases

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Speaker 3: from those tenants. They have to pay for it in

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00:21:01,040 --> 00:21:03,800
Speaker 3: today's market. So what is a high quality lease? A

371
00:21:03,880 --> 00:21:07,399
Speaker 3: high quality lease is a ten year term with no

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Speaker 3: contraction options, no termination options. You're trying to avoid volatility

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Speaker 3: in your tenant role. You're trying to avoid your tenants

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Speaker 3: having too much optionality to walk, and then you're also

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Speaker 3: adding high quality tenants, so you're mitigating the risk that

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Speaker 3: they go bankrupt, right, So high quality sponsors are very

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Speaker 3: focused on that. I think eessel Green is a public

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Speaker 3: read and they're the largest Manhattan office landlord. They're always

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Speaker 3: highlighting that they do an excellent job with that one.

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Speaker 3: Vanderbilt is their trophy asset, and it's very evident in

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Speaker 3: that property. What happens in weaker kind of BC offices

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Speaker 3: is the sponsors are on their back feet. They have

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Speaker 3: to accept what tenants are willing to give them, so

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Speaker 3: that typically translates into shorter lease terms. So kind of

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Speaker 3: a two to five year and that creates even more

386
00:22:01,440 --> 00:22:06,440
Speaker 3: vulnerability to the economic cycle, to tenants downsizing or rotating

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Speaker 3: into another asset. And it also means that you have

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Speaker 3: a weaker tenant base, you are more exposed to bankruptcies

389
00:22:15,600 --> 00:22:19,639
Speaker 3: and the need to renegotiate rent lower. We work. It's

390
00:22:19,680 --> 00:22:23,320
Speaker 3: a great example of the tenant that nobody really wanted.

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Speaker 3: They were expanding massively for years, but sophisticated landlords made

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Speaker 3: sure they were two percent or less of their revenues

393
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Speaker 3: to mitigate that risk. Yeah, we work is from a

394
00:22:35,920 --> 00:22:40,320
Speaker 3: debt investor perspective, they've been you know, it's a curious

395
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Speaker 3: story and I don't know how open I can be,

396
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Speaker 3: but it's very frustrating to see some of their behavior.

397
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Speaker 3: So on the quantitative side, we should see that bifurcation

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Speaker 3: to continue to play out. And perhaps one of the

399
00:22:51,560 --> 00:22:54,680
Speaker 3: most stark ways to evidence this is when we see

400
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Speaker 3: some of these distressed sales. It's still early in distress sales,

401
00:22:58,160 --> 00:23:03,080
Speaker 3: but from a dollar per square foot valuation perspective, you

402
00:23:03,160 --> 00:23:06,960
Speaker 3: would usually pre COVID see one thousand per square foot

403
00:23:07,040 --> 00:23:11,000
Speaker 3: for a trophy class A off a trophy asset in

404
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Speaker 3: New York City in San fran with the rate move,

405
00:23:15,000 --> 00:23:17,920
Speaker 3: with the stress in the capital markets, we as set

406
00:23:18,000 --> 00:23:20,840
Speaker 3: investors quickly reset to closer to a five hundred per

407
00:23:20,880 --> 00:23:24,240
Speaker 3: square foot implied mark to market valuation. Now, if you're

408
00:23:24,280 --> 00:23:26,800
Speaker 3: a sponsor with a ten year fixed rate mortgage and

409
00:23:26,840 --> 00:23:29,360
Speaker 3: you have your tenants in there for ten years, you're

410
00:23:29,400 --> 00:23:33,000
Speaker 3: insulated from this period of time, so you don't need

411
00:23:33,040 --> 00:23:36,520
Speaker 3: to monetize that implied mark to market valuation. You can

412
00:23:36,600 --> 00:23:39,600
Speaker 3: hide it, you know, with various even with a JV

413
00:23:39,720 --> 00:23:43,160
Speaker 3: interest sale, you can nagle away to really preserve that

414
00:23:43,560 --> 00:23:47,960
Speaker 3: kind of topic valuation. But for weaker assets, they cannot hide.

415
00:23:48,359 --> 00:23:50,720
Speaker 3: The sponsors walk away from them, They hand over the

416
00:23:50,760 --> 00:23:53,439
Speaker 3: keys to the lender, and the lender gets an updated

417
00:23:53,480 --> 00:23:57,320
Speaker 3: appraisal that's closer to market, and or the lender sells

418
00:23:57,320 --> 00:24:00,119
Speaker 3: the asset into the market, and that's where you're seeing

419
00:24:00,440 --> 00:24:05,520
Speaker 3: valuation declines beyond seventy percent. I mentioned Blackstone walking away

420
00:24:05,520 --> 00:24:09,080
Speaker 3: from an asset in New York City that's seventeen forty Broadway.

421
00:24:09,160 --> 00:24:12,679
Speaker 3: It's basically empty, and the valuation was closer to one

422
00:24:12,680 --> 00:24:16,520
Speaker 3: thousand per square foot. In twenty fifteen, they committed over

423
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Speaker 3: three hundred million with that acquisition and they locked once

424
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Speaker 3: the largest tenant rolled, and the valuation came in around

425
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Speaker 3: three hundred per square foot, just under the updated appraisal.

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Speaker 3: So it is dire out there. But yeah, so if

427
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Speaker 3: you are insulated, owning and operating a business using prudent leverage,

428
00:24:37,160 --> 00:24:42,359
Speaker 3: you can navigate economic cycles. If you are overlevered or overextended,

429
00:24:42,640 --> 00:24:46,800
Speaker 3: or going through your portfolio and exiting the losers, that's

430
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Speaker 3: where we see kind of these real prints come through,

431
00:24:49,359 --> 00:24:54,719
Speaker 3: and it adds that quantitative data to really ink, you know,

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Speaker 3: how far some of these assets can fall.

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Speaker 1: So I definitely want to ask you more about the

434
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Speaker 1: specific things that go into a decision by a sponsor

435
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Speaker 1: to walk away from a property or try a workout.

436
00:25:23,480 --> 00:25:27,000
Speaker 1: But since you mentioned geographies, and since a lot of

437
00:25:27,000 --> 00:25:29,360
Speaker 1: what we're talking about is bifurcation in the market, tell

438
00:25:29,440 --> 00:25:31,640
Speaker 1: us what you're seeing in different areas.

439
00:25:32,320 --> 00:25:36,240
Speaker 3: Yeah. So we work in downtown La here at TCW,

440
00:25:36,359 --> 00:25:40,320
Speaker 3: and the vacancy is thirty percent and that seems like

441
00:25:40,480 --> 00:25:42,560
Speaker 3: a number on a good day, but that's the official

442
00:25:42,640 --> 00:25:45,840
Speaker 3: reported number. So there is just too much supply for

443
00:25:45,920 --> 00:25:51,159
Speaker 3: limited demand and there are no real, tangible, massive demand

444
00:25:51,280 --> 00:25:57,119
Speaker 3: drivers to soak up that incremental supply, So it is

445
00:25:57,160 --> 00:26:02,520
Speaker 3: a central business district that suffer from competitors around it.

446
00:26:02,720 --> 00:26:07,480
Speaker 3: West Hollywood or sorry, West LA offers more attractive properties

447
00:26:07,960 --> 00:26:12,560
Speaker 3: for some office users. Then you've got Century City, which

448
00:26:12,600 --> 00:26:17,560
Speaker 3: has the trophy assets in the market. So Downtown LA

449
00:26:18,040 --> 00:26:22,440
Speaker 3: really almost fits more of that super regional mall traditional

450
00:26:22,440 --> 00:26:25,520
Speaker 3: story of the area. That demand in the area just

451
00:26:25,600 --> 00:26:29,520
Speaker 3: cannot support three competitive assets, so you're going to have

452
00:26:29,560 --> 00:26:32,480
Speaker 3: that bifurcation. One's going to win and one to two

453
00:26:32,480 --> 00:26:35,520
Speaker 3: are going to lose. So that's the story in Downtown LA.

454
00:26:35,560 --> 00:26:39,760
Speaker 3: For example, if we move to San Francisco, that area

455
00:26:40,119 --> 00:26:42,800
Speaker 3: has so many headwinds, but you know, one of the

456
00:26:42,920 --> 00:26:47,480
Speaker 3: major issues is the amount of tenant concentration. It's healthy

457
00:26:47,480 --> 00:26:50,119
Speaker 3: to do a compare contrast of San Francisco and New

458
00:26:50,200 --> 00:26:52,960
Speaker 3: York City. San Francisco and New York City both had

459
00:26:53,000 --> 00:26:57,399
Speaker 3: full valuations. They had a lot of international investors that

460
00:26:57,480 --> 00:27:01,920
Speaker 3: really supported high persquare foot valuations for office real estate.

461
00:27:02,560 --> 00:27:07,360
Speaker 3: San Francisco before twenty nineteen had before COVID had a

462
00:27:07,400 --> 00:27:11,600
Speaker 3: sub five percent vacancy and now it's closer to you know,

463
00:27:11,720 --> 00:27:16,399
Speaker 3: thirty percent. It still has headwinds to remote work. I

464
00:27:16,440 --> 00:27:19,000
Speaker 3: was just reading that around. You know, I think around

465
00:27:19,080 --> 00:27:22,480
Speaker 3: thirty plus percent of job postings are remote in San Francisco.

466
00:27:22,920 --> 00:27:26,160
Speaker 3: Compare that to Manhattan, where you're attracting talent that wants

467
00:27:26,200 --> 00:27:28,320
Speaker 3: to be there, wants to live there, and there's a

468
00:27:28,400 --> 00:27:32,040
Speaker 3: large financial presence that is going to demand their tenants

469
00:27:32,040 --> 00:27:35,840
Speaker 3: are in the office. In the technology space, you have

470
00:27:36,640 --> 00:27:40,919
Speaker 3: some larger employers like a Google that have indicated they

471
00:27:40,960 --> 00:27:43,919
Speaker 3: want some type of office presence, but you also have

472
00:27:44,080 --> 00:27:48,120
Speaker 3: many smaller firms that would love to continue to save

473
00:27:48,240 --> 00:27:53,399
Speaker 3: money on office expense, and their business models work fully remote,

474
00:27:53,520 --> 00:27:56,600
Speaker 3: and they're going to continue to benefit from that until

475
00:27:56,960 --> 00:28:01,840
Speaker 3: you know, their venture capital investor demands that they get

476
00:28:01,840 --> 00:28:04,359
Speaker 3: an office space and go about things that way. So

477
00:28:04,760 --> 00:28:08,240
Speaker 3: San Francisco, you know, unfortunately it has way too much

478
00:28:08,280 --> 00:28:13,920
Speaker 3: ten and concentration. There's a decline in office space demand

479
00:28:14,080 --> 00:28:17,119
Speaker 3: in that sector. And then adding insult to injury, the

480
00:28:17,200 --> 00:28:22,680
Speaker 3: valuations were so frothy that these owner operators are inevitably

481
00:28:22,760 --> 00:28:27,360
Speaker 3: particularly over levered with their debt. So this idea that

482
00:28:27,600 --> 00:28:31,040
Speaker 3: the catalyst of making a faster decision on what assets

483
00:28:31,040 --> 00:28:33,560
Speaker 3: you keep what assets you leave is your debt maturity.

484
00:28:33,720 --> 00:28:37,679
Speaker 3: I think there's around four billion of Sandfran office in

485
00:28:37,760 --> 00:28:41,040
Speaker 3: this commercial mortgabacked securities market that's coming due in twenty

486
00:28:41,040 --> 00:28:43,880
Speaker 3: twenty four, so we'll see, you know, how more of

487
00:28:43,920 --> 00:28:48,120
Speaker 3: this plays out. And then unfortunately San Francisco also has

488
00:28:48,480 --> 00:28:52,200
Speaker 3: declined in its level of attractiveness for employees. There are

489
00:28:52,280 --> 00:28:56,520
Speaker 3: plenty of reports everyone sees them of blights, crime, et cetera.

490
00:28:56,640 --> 00:29:00,080
Speaker 3: So it really, it really continues to suffer and it

491
00:29:00,080 --> 00:29:02,160
Speaker 3: it doesn't take too much to try to improve things.

492
00:29:02,200 --> 00:29:05,320
Speaker 3: But if we think about the tech bubble, I think

493
00:29:05,320 --> 00:29:07,680
Speaker 3: that took around six years for San frian to come back,

494
00:29:08,120 --> 00:29:12,479
Speaker 3: so it's gonna take some time and concerted effort.

495
00:29:12,560 --> 00:29:16,080
Speaker 2: You know, you mentioned Century City and that happens to

496
00:29:16,120 --> 00:29:18,920
Speaker 2: be where Bloomberg has its Los Angeles office, which I've visited,

497
00:29:19,520 --> 00:29:22,920
Speaker 2: and it is indeed trophy property exactly like how you

498
00:29:22,960 --> 00:29:25,080
Speaker 2: I think imagine, you know, the ground floor there's like

499
00:29:25,400 --> 00:29:29,120
Speaker 2: Sweet Greens and Poke restaurants, et cetera. You know, we've

500
00:29:29,160 --> 00:29:32,400
Speaker 2: done We did an episode once on the challenge of

501
00:29:32,480 --> 00:29:36,960
Speaker 2: converting office to residential, which is very tricky and limited.

502
00:29:37,280 --> 00:29:40,320
Speaker 2: How much effort is there or how possible is it

503
00:29:40,400 --> 00:29:44,719
Speaker 2: to upgrade A I don't know Class B to something

504
00:29:44,760 --> 00:29:47,400
Speaker 2: that resembles Class A or Class A is something that

505
00:29:47,760 --> 00:29:50,960
Speaker 2: resembles trophy. Is that a thing that some of these

506
00:29:51,080 --> 00:29:54,400
Speaker 2: owners of underperforming assets are attempting to do.

507
00:29:55,120 --> 00:29:57,880
Speaker 3: It is a thing, but it's not super easy and

508
00:29:57,920 --> 00:30:01,840
Speaker 3: it's expensive, especially when everyone's cost of financing has shot

509
00:30:01,880 --> 00:30:05,440
Speaker 3: through the roof. But it just takes everyone should have

510
00:30:05,560 --> 00:30:09,880
Speaker 3: upgraded their lobby and their elevators over the last kind

511
00:30:09,880 --> 00:30:12,160
Speaker 3: of five to ten years, and what a fantastic time

512
00:30:12,200 --> 00:30:14,120
Speaker 3: to do it, you know, with respect to COVID and

513
00:30:14,160 --> 00:30:16,560
Speaker 3: having no tenants in not everyone did that, but that's

514
00:30:16,600 --> 00:30:21,160
Speaker 3: a great example of a class B effort to maintain relevance.

515
00:30:21,480 --> 00:30:23,680
Speaker 3: And then also if you're looking at some of these

516
00:30:24,160 --> 00:30:28,360
Speaker 3: smaller office spaces that are a lot of your kind

517
00:30:28,360 --> 00:30:33,360
Speaker 3: of Class B and C, the focus is less to

518
00:30:33,440 --> 00:30:35,680
Speaker 3: make them all of a sudden a trophy and more

519
00:30:35,760 --> 00:30:39,880
Speaker 3: to design around what the tenant demand is. So hopefully

520
00:30:39,880 --> 00:30:44,680
Speaker 3: you still have you know, doctors, dentists, or lawyers or

521
00:30:44,720 --> 00:30:50,040
Speaker 3: somebody that is comfortable with a smaller office footprint. There's

522
00:30:50,080 --> 00:30:54,000
Speaker 3: a geo geographic attraction. They want a lower per square

523
00:30:54,040 --> 00:30:59,000
Speaker 3: foot valuation, but they're also going to need better natural

524
00:30:59,080 --> 00:31:03,120
Speaker 3: light they're also going to need likely a better floor plan,

525
00:31:03,200 --> 00:31:06,200
Speaker 3: and that that costs money from the sponsor. So I'd

526
00:31:06,200 --> 00:31:09,960
Speaker 3: say we're likely to see the b's and the A

527
00:31:10,120 --> 00:31:14,120
Speaker 3: minuses make upgrades to make themselves more attractive to tenants

528
00:31:14,160 --> 00:31:18,000
Speaker 3: and make economic decisions that way, rather than see too

529
00:31:18,080 --> 00:31:21,840
Speaker 3: many assets go from an A minus B to we're

530
00:31:21,840 --> 00:31:24,840
Speaker 3: going to just go for broke with trophy. There are

531
00:31:25,560 --> 00:31:29,000
Speaker 3: some assets that are that we're having fun watching. I'll

532
00:31:29,000 --> 00:31:31,880
Speaker 3: give you an example, but two forty five Park is

533
00:31:31,920 --> 00:31:34,800
Speaker 3: in New York City. It's a large you know, I

534
00:31:34,800 --> 00:31:37,200
Speaker 3: think it's fair to call it a trophy office. It

535
00:31:37,680 --> 00:31:41,000
Speaker 3: was owned by H and A back in twenty seventeen

536
00:31:41,080 --> 00:31:44,600
Speaker 3: with some very aggressive financing up to eighty percent loan

537
00:31:44,680 --> 00:31:47,080
Speaker 3: to cost and the mezzanine lenders.

538
00:31:47,440 --> 00:31:49,600
Speaker 1: Well, sorry, you just reminded me. H and A have

539
00:31:49,920 --> 00:31:54,000
Speaker 1: like a really weird portfolio of properties from what I remember.

540
00:31:55,080 --> 00:31:58,240
Speaker 3: Yeah, so there was a there was an influx of

541
00:31:58,840 --> 00:32:04,320
Speaker 3: inn international buying, but particularly some of these Chinese conglomerates

542
00:32:04,360 --> 00:32:07,880
Speaker 3: that had insurance but also pharmaceutical companies and H and

543
00:32:07,960 --> 00:32:11,920
Speaker 3: A and and Bang our examples, and their portfolios included

544
00:32:11,960 --> 00:32:15,760
Speaker 3: things like air airlines and then they really leaned into

545
00:32:16,160 --> 00:32:19,000
Speaker 3: New York City Office and New York City Office, you know,

546
00:32:19,080 --> 00:32:21,640
Speaker 3: as well as in Sandfray in office. The benefit of

547
00:32:21,720 --> 00:32:25,280
Speaker 3: those kind of investments is you're putting a slug of

548
00:32:25,320 --> 00:32:28,880
Speaker 3: money to work at once. Right, these are expensive, they're large,

549
00:32:28,920 --> 00:32:31,560
Speaker 3: we have excellent property rights here. You do have kind

550
00:32:31,560 --> 00:32:34,080
Speaker 3: of an established tenant role and can feel good about

551
00:32:34,200 --> 00:32:37,440
Speaker 3: underwriting the cash flow. And at the time, financing was

552
00:32:37,520 --> 00:32:39,800
Speaker 3: really cheap, so you could buy. You could go on

553
00:32:39,840 --> 00:32:43,320
Speaker 3: a buying spree with pretty attractive financing. So for this

554
00:32:43,400 --> 00:32:47,680
Speaker 3: two forty five Park property, ultimately Esselgreen moved from being

555
00:32:47,760 --> 00:32:52,600
Speaker 3: the most subordinate lender to the owner and operator, so

556
00:32:52,800 --> 00:32:56,960
Speaker 3: using their lender rights when H and A defaulted and

557
00:32:57,360 --> 00:33:00,240
Speaker 3: two forty five Park, I was able to visit by

558
00:33:00,360 --> 00:33:03,040
Speaker 3: leveraging the fact that I'm a client to one of

559
00:33:03,080 --> 00:33:07,480
Speaker 3: their tenants, and it was really fun to see. That's

560
00:33:07,520 --> 00:33:10,200
Speaker 3: a space where you're not going to compete. You're in

561
00:33:10,240 --> 00:33:13,160
Speaker 3: an area with GP Morgan's new build and you're in

562
00:33:13,200 --> 00:33:16,400
Speaker 3: an area with Eslo, Greens One Vanderbilt. You're not going

563
00:33:16,440 --> 00:33:19,560
Speaker 3: to suddenly become them. But what you can do is

564
00:33:19,640 --> 00:33:23,560
Speaker 3: upgrade what you have and benefit from your excellent location.

565
00:33:23,920 --> 00:33:26,880
Speaker 3: Right by Grand Central, so I got to see their

566
00:33:26,920 --> 00:33:29,320
Speaker 3: executive floor, So you lean into things like that, your

567
00:33:29,360 --> 00:33:32,560
Speaker 3: tenants want a really fancy floor to bring their clients in.

568
00:33:33,000 --> 00:33:36,320
Speaker 3: The entryway was grade. Everything had. Everything that I saw

569
00:33:36,440 --> 00:33:39,200
Speaker 3: had more of a luxury feeling. So I think that's

570
00:33:39,280 --> 00:33:43,160
Speaker 3: probably a great example of an older asset that's making

571
00:33:43,280 --> 00:33:47,320
Speaker 3: strategic upgrades to really hold its own even though it

572
00:33:47,360 --> 00:33:53,000
Speaker 3: can't suddenly become a twenty twenty delivered new build.

573
00:33:53,600 --> 00:33:57,800
Speaker 1: So setting upgrades aside, can you talk a little bit

574
00:33:57,800 --> 00:34:01,720
Speaker 1: more about the options that sponsor actually have. So let's

575
00:34:01,760 --> 00:34:05,800
Speaker 1: say I'm sitting on a property that no longer makes

576
00:34:05,960 --> 00:34:09,920
Speaker 1: economic sense, Like, what are the options that I have?

577
00:34:11,520 --> 00:34:14,160
Speaker 1: I guess they span like a range from trying to

578
00:34:14,480 --> 00:34:18,360
Speaker 1: raise additional capital to maybe just handing back the keys

579
00:34:18,520 --> 00:34:19,560
Speaker 1: or something like that.

580
00:34:21,000 --> 00:34:24,120
Speaker 3: Yeah, and that's key, you know, part of our investment

581
00:34:24,120 --> 00:34:27,080
Speaker 3: analysis on the debat side. So it is very easy

582
00:34:27,120 --> 00:34:29,719
Speaker 3: in the commercial mortage backed securities market to just hand

583
00:34:29,719 --> 00:34:34,800
Speaker 3: back your keys. CNBS isn't a relationship lender like base

584
00:34:35,120 --> 00:34:37,839
Speaker 3: or insurance companies. So and what do I mean by

585
00:34:37,840 --> 00:34:41,399
Speaker 3: relationship lender that there's no recourse in a CMBs loan?

586
00:34:41,560 --> 00:34:45,400
Speaker 3: It just asks for adverse selection for sponsors, and you

587
00:34:45,520 --> 00:34:48,759
Speaker 3: see that translate into their financing. The sponsors, at the

588
00:34:48,840 --> 00:34:52,200
Speaker 3: end of the day, they're obligated to pay their debt

589
00:34:52,280 --> 00:34:54,799
Speaker 3: on an asset. If they don't, they're in default and

590
00:34:54,920 --> 00:34:58,719
Speaker 3: lender writes kick in. They can either negotiate with the

591
00:34:58,800 --> 00:35:02,480
Speaker 3: lender to get a modific A modification can include some

592
00:35:02,600 --> 00:35:07,279
Speaker 3: type of relief for a temporary period of time forbearance

593
00:35:07,600 --> 00:35:10,560
Speaker 3: is what it's called, on their cost of financing, sorry

594
00:35:10,560 --> 00:35:14,399
Speaker 3: on their loan, or it can include more structured solutions

595
00:35:14,480 --> 00:35:17,919
Speaker 3: like an extension for two to three years at some

596
00:35:17,960 --> 00:35:21,480
Speaker 3: sort of adjusted rate within a lower rate, within an

597
00:35:21,480 --> 00:35:25,760
Speaker 3: incremental kind of equity investment, good faith investment from the sponsor.

598
00:35:26,040 --> 00:35:29,880
Speaker 3: And we're seeing that play out. If you took out

599
00:35:29,920 --> 00:35:35,200
Speaker 3: a fixed rate loan five years ago, you're incentivized to

600
00:35:35,400 --> 00:35:39,680
Speaker 3: extend that fixed rate maturity rather than go into today's

601
00:35:39,719 --> 00:35:44,120
Speaker 3: market and accept lower valuations on your asset, lower leverage

602
00:35:44,160 --> 00:35:46,759
Speaker 3: on your asset, higher cost of financing, and come out

603
00:35:46,760 --> 00:35:50,120
Speaker 3: of pocket. So we'll continue to see those maturity defaults

604
00:35:50,160 --> 00:35:55,640
Speaker 3: and modification extension solutions, and that's actually encouraging to see

605
00:35:55,640 --> 00:35:58,719
Speaker 3: in a number of circumstances because it at least signals

606
00:35:59,000 --> 00:36:01,560
Speaker 3: that the sponsor care about this asset. You know, we're

607
00:36:01,560 --> 00:36:04,880
Speaker 3: always going to look for evidence of them continuing to

608
00:36:05,000 --> 00:36:07,920
Speaker 3: invest in the asset and ensure it's relevant and generating

609
00:36:08,160 --> 00:36:11,719
Speaker 3: income and whatnot. But the fact that they're not immediately

610
00:36:11,760 --> 00:36:15,719
Speaker 3: walking away is encouraging. Whereas on the other side, give

611
00:36:15,760 --> 00:36:18,680
Speaker 3: you some examples of tenants walking away or sorry, of

612
00:36:18,840 --> 00:36:23,319
Speaker 3: sponsors walking away. We talked about seventeen forty Broadway for

613
00:36:24,080 --> 00:36:27,120
Speaker 3: Blackstone in New York City. You also have Gas Company

614
00:36:27,200 --> 00:36:30,320
Speaker 3: Tower as an example in downtown LA and the Ey

615
00:36:30,440 --> 00:36:34,480
Speaker 3: Building where Brookfield walked away, and that is it is

616
00:36:34,520 --> 00:36:38,120
Speaker 3: as simple as no longer paying your debt and basically

617
00:36:38,200 --> 00:36:41,959
Speaker 3: not answering the call when servicers are looking to find

618
00:36:42,040 --> 00:36:45,160
Speaker 3: you and not being available for a solution, and what happens.

619
00:36:45,200 --> 00:36:48,960
Speaker 1: There are there repercussions for doing that, Like, you know,

620
00:36:49,160 --> 00:36:52,440
Speaker 1: does Brookfield's reputation take a knock when it just walks

621
00:36:52,440 --> 00:36:54,440
Speaker 1: away from a property like that or is.

622
00:36:54,400 --> 00:36:55,120
Speaker 2: It just business?

623
00:36:56,880 --> 00:37:01,560
Speaker 3: Unfortunately, there aren't enough repercussions. That's kind of part of

624
00:37:01,600 --> 00:37:04,920
Speaker 3: the fun with CMBs. I suppose we do focus on

625
00:37:05,000 --> 00:37:08,719
Speaker 3: sponsors and their capitalization. So it's a great example Brickfield

626
00:37:08,800 --> 00:37:11,560
Speaker 3: is well capitalized, but you have to also check on

627
00:37:11,640 --> 00:37:16,480
Speaker 3: the assets performance and the assets relevance in their portfolio

628
00:37:16,560 --> 00:37:19,800
Speaker 3: to really determine if this is going to be something

629
00:37:19,840 --> 00:37:22,680
Speaker 3: they focus on and they keep. And I mentioned earlier

630
00:37:22,719 --> 00:37:26,799
Speaker 3: that CNBS in particular is a non recourse lender and

631
00:37:26,840 --> 00:37:30,920
Speaker 3: it's not really a relationship lender, so it lends itself

632
00:37:30,920 --> 00:37:33,960
Speaker 3: to adverse selection. And you saw that, you know, both

633
00:37:34,040 --> 00:37:37,360
Speaker 3: on the retail side as well as in today's office market.

634
00:37:37,880 --> 00:37:41,760
Speaker 3: To give you examples, Simon Property Group, an excellent owner

635
00:37:41,800 --> 00:37:47,280
Speaker 3: operator of malls, would strategically finance their non core malls

636
00:37:47,400 --> 00:37:50,640
Speaker 3: in CNBS. They would get pretty creative. You could see

637
00:37:50,640 --> 00:37:54,280
Speaker 3: there was zero incremental investment in the assets, but somehow,

638
00:37:54,360 --> 00:37:56,880
Speaker 3: you know, the valuation has increased off of you know,

639
00:37:56,920 --> 00:38:00,440
Speaker 3: no incremental cash flow growth, really just a capital markets

640
00:38:00,480 --> 00:38:04,200
Speaker 3: arbitrage benefiting from lower rates lower cap rates. You'd also

641
00:38:04,239 --> 00:38:08,479
Speaker 3: see them take three properties and combine them with one

642
00:38:08,520 --> 00:38:12,200
Speaker 3: that's pretty good and then two that are weaker and

643
00:38:12,360 --> 00:38:15,719
Speaker 3: juice the overall metrics to see if the debt investors

644
00:38:15,760 --> 00:38:19,920
Speaker 3: would feel more comfortable with owning that security. On the

645
00:38:21,239 --> 00:38:26,440
Speaker 3: office side, you also see some strategic adverse financing. I

646
00:38:26,640 --> 00:38:30,839
Speaker 3: use the example of gas company Tower for Brookfield, and

647
00:38:30,880 --> 00:38:35,640
Speaker 3: they use shorter floating rate debt, and that's where it's

648
00:38:35,680 --> 00:38:39,120
Speaker 3: tough to underwrite the asset for ten years. You really

649
00:38:39,160 --> 00:38:41,560
Speaker 3: can't afford to support a ten year fixed rate because

650
00:38:41,680 --> 00:38:46,040
Speaker 3: your tenant role is heavy, your current occupancy is weak.

651
00:38:46,360 --> 00:38:50,360
Speaker 3: And then they levered it with additional debt beneath the mortgage,

652
00:38:50,400 --> 00:38:54,040
Speaker 3: so mezzanine debt, and so really that can be viewed

653
00:38:54,280 --> 00:38:56,719
Speaker 3: not to be too cynical, but debt investors, we have

654
00:38:56,800 --> 00:39:00,840
Speaker 3: to be cynical as trying to reduce your basis in

655
00:39:00,920 --> 00:39:04,200
Speaker 3: the asset as much as possible and set yourself up

656
00:39:04,239 --> 00:39:09,720
Speaker 3: to even more conveniently walk away. And that's exactly what happened.

657
00:39:09,760 --> 00:39:12,439
Speaker 3: You just hold the asset while you're still collecting cash

658
00:39:12,440 --> 00:39:16,040
Speaker 3: flow from it. As soon as rates reset and you're happy,

659
00:39:16,080 --> 00:39:17,759
Speaker 3: you have to come out of pocket to cover cash flow,

660
00:39:18,000 --> 00:39:20,319
Speaker 3: you're walking. Yeah, as simple as that.

661
00:39:20,640 --> 00:39:24,520
Speaker 2: I have just two questions, and then one is very short.

662
00:39:24,920 --> 00:39:26,520
Speaker 2: The next time you're in New York for work, could

663
00:39:26,520 --> 00:39:28,480
Speaker 2: you take me and Tracy on a like an office

664
00:39:29,360 --> 00:39:32,160
Speaker 2: the field trip. Just just bring us along. Okay, great,

665
00:39:32,320 --> 00:39:34,840
Speaker 2: we'll make that happen. So I guess the other question

666
00:39:34,960 --> 00:39:38,200
Speaker 2: going back to the malls, like as you mentioned, I remember,

667
00:39:38,360 --> 00:39:41,160
Speaker 2: you know, the zombie mall discourse, the end of the mall,

668
00:39:41,200 --> 00:39:43,200
Speaker 2: and as you pointed out, it was just way too

669
00:39:43,280 --> 00:39:46,120
Speaker 2: simplistic because not all malls were the same. What happened

670
00:39:46,160 --> 00:39:49,879
Speaker 2: to those zombies, the ones that really were dead. Did

671
00:39:49,880 --> 00:39:53,640
Speaker 2: they become top golf locations? Did they get totally torn down?

672
00:39:54,040 --> 00:39:57,440
Speaker 2: Is there any lessons to be learned about what ultimately

673
00:39:57,480 --> 00:40:01,000
Speaker 2: happened to physical spaces that like just were nowhere close

674
00:40:01,080 --> 00:40:02,839
Speaker 2: to being economical in the new era.

675
00:40:04,000 --> 00:40:06,800
Speaker 3: Yeah, it's still playing out, so you are seeing a

676
00:40:06,880 --> 00:40:10,600
Speaker 3: transfer of ownership. We talked earlier about the Signmon example.

677
00:40:10,800 --> 00:40:14,759
Speaker 3: Simon has excellent malls Class A malls now or you

678
00:40:14,800 --> 00:40:17,080
Speaker 3: can find Class A plus malls that are over a

679
00:40:17,120 --> 00:40:20,000
Speaker 3: thousand per square foot sales versus you know, six hundred

680
00:40:20,080 --> 00:40:24,080
Speaker 3: years ago that seemed more attractive six fifty. So they

681
00:40:24,320 --> 00:40:27,520
Speaker 3: exited non core assets in their portfolio. There are some

682
00:40:28,080 --> 00:40:31,600
Speaker 3: owner operators where that's their niche. They're going to find

683
00:40:32,000 --> 00:40:35,479
Speaker 3: the unloved mall that has been held by a really

684
00:40:35,520 --> 00:40:39,400
Speaker 3: big player and there's been no leasing activity or focus

685
00:40:39,480 --> 00:40:42,960
Speaker 3: on tenant composition for the last ten years and try

686
00:40:43,000 --> 00:40:47,440
Speaker 3: to rehabilitate it, and there's probably some you know, reduction

687
00:40:47,560 --> 00:40:50,719
Speaker 3: overall of square footage, and then there's also that kind

688
00:40:50,760 --> 00:40:54,200
Speaker 3: of upgrade into whatever the demand looks like for the

689
00:40:54,239 --> 00:40:57,480
Speaker 3: local population. Top golf you mentioned jokes, that's fantastic. I

690
00:40:57,520 --> 00:40:59,440
Speaker 3: love top golf. So that's a great example. You know

691
00:40:59,480 --> 00:41:03,200
Speaker 3: that there's be more top golfs everywhere. Yeah, but you

692
00:41:03,480 --> 00:41:08,839
Speaker 3: actually have these David busters to see that is actively,

693
00:41:09,360 --> 00:41:13,120
Speaker 3: actively happening and continues to And then there's some where

694
00:41:13,200 --> 00:41:15,359
Speaker 3: it's just going to be an empty parking lot and

695
00:41:15,400 --> 00:41:18,600
Speaker 3: a dilapidated building that's just going to be you know, blight.

696
00:41:18,680 --> 00:41:23,280
Speaker 3: Effectively for years there was frankly overbuilding. There are areas

697
00:41:23,280 --> 00:41:26,560
Speaker 3: where you really don't need it. There are some efforts

698
00:41:26,640 --> 00:41:30,680
Speaker 3: to redevelop into multifamily, for example, and that takes time

699
00:41:30,800 --> 00:41:35,040
Speaker 3: and good developers and owner operators and coordination with you know,

700
00:41:35,120 --> 00:41:39,319
Speaker 3: local governments. And you'll probably remember when there was so

701
00:41:39,480 --> 00:41:44,080
Speaker 3: much buzz about all these spaces becoming industrial facilities. And

702
00:41:43,880 --> 00:41:46,680
Speaker 3: that's maybe a great example to talk about bifurcation as well.

703
00:41:47,200 --> 00:41:50,560
Speaker 3: In theory. Uh, if you have a mall that's typically

704
00:41:50,600 --> 00:41:54,440
Speaker 3: located at a highway intersection. It could be a good

705
00:41:54,520 --> 00:41:59,040
Speaker 3: location for some type of warehouse distribution, but in practice

706
00:42:00,080 --> 00:42:04,600
Speaker 3: you build is relatively efficient and is what tenants like

707
00:42:04,640 --> 00:42:10,440
Speaker 3: an Amazon typically want, And you can also find cheaper

708
00:42:10,440 --> 00:42:14,080
Speaker 3: to access or easier to own an operate space away

709
00:42:14,080 --> 00:42:18,280
Speaker 3: from just absorbing a two million square foot you know, structure.

710
00:42:18,400 --> 00:42:21,120
Speaker 3: So it was kind of theory versus practice that that

711
00:42:21,280 --> 00:42:23,359
Speaker 3: is also, you know, we're not going to save all

712
00:42:23,440 --> 00:42:25,520
Speaker 3: malls through industrial the same way we're not going to

713
00:42:25,880 --> 00:42:28,960
Speaker 3: save all office properties through multi family conversion.

714
00:42:29,880 --> 00:42:32,000
Speaker 1: So I am conscious of the time and I realized

715
00:42:32,000 --> 00:42:34,719
Speaker 1: we could probably ours. Yeah, we could go on for

716
00:42:34,840 --> 00:42:35,640
Speaker 1: hours with you, but.

717
00:42:36,480 --> 00:42:37,560
Speaker 2: Just listing addresses.

718
00:42:38,800 --> 00:42:41,400
Speaker 1: I'm talking about individual properties. But since we are on

719
00:42:41,480 --> 00:42:44,239
Speaker 1: the theme of bifurcation, I feel like I have to

720
00:42:44,280 --> 00:42:48,319
Speaker 1: ask you about differences in the capital stack as well.

721
00:42:48,480 --> 00:42:52,680
Speaker 1: So like junior versus senior loans for commercial properties, are

722
00:42:52,719 --> 00:42:56,040
Speaker 1: we seeing that bifurcation story there as well?

723
00:42:57,320 --> 00:43:00,120
Speaker 3: We are, Yeah, you guys are where there's plenty of

724
00:43:00,320 --> 00:43:02,839
Speaker 3: stress in the SIERI market, but under the hood there's

725
00:43:02,840 --> 00:43:07,080
Speaker 3: also a risk transfer in you know, subordinate notes. So mezzanine,

726
00:43:07,160 --> 00:43:10,319
Speaker 3: for example, you've got some players that are going to

727
00:43:10,320 --> 00:43:12,920
Speaker 3: take advantage of that as an access point to to

728
00:43:13,000 --> 00:43:16,600
Speaker 3: take over assets. You've got other players that bought a

729
00:43:16,680 --> 00:43:20,080
Speaker 3: five percent fixed rate mez thinking it was an attractive

730
00:43:20,120 --> 00:43:23,480
Speaker 3: return three years ago in a relatively safe asset that

731
00:43:23,600 --> 00:43:26,839
Speaker 3: no longer want to have that exposure. It's defaulted. They

732
00:43:26,840 --> 00:43:29,280
Speaker 3: don't know what to do. They weren't trying to access

733
00:43:29,280 --> 00:43:32,319
Speaker 3: a property through that. So from our perspective, we have

734
00:43:33,719 --> 00:43:37,520
Speaker 3: as set investors where we're trying to make thoughtful investments

735
00:43:37,560 --> 00:43:39,400
Speaker 3: where we're not having to take over an asset that

736
00:43:39,440 --> 00:43:42,279
Speaker 3: would mean that it defaulted. There's some examples where you know,

737
00:43:42,320 --> 00:43:44,919
Speaker 3: maybe maybe that's a play we could consider. So we're

738
00:43:44,920 --> 00:43:48,400
Speaker 3: typically reviewing or we're always reviewing the quality of the asset.

739
00:43:49,000 --> 00:43:51,840
Speaker 3: Most investors are going to focus on things that avoid default,

740
00:43:52,120 --> 00:43:54,160
Speaker 3: and then where you play in the capital structure is

741
00:43:54,200 --> 00:43:56,840
Speaker 3: going to be determined by you know, relative value and

742
00:43:56,960 --> 00:44:01,920
Speaker 3: kind of sourcing. So we we're more commonly in the

743
00:44:01,960 --> 00:44:05,040
Speaker 3: mortgage portion, in the CMBs portion that gets kind of

744
00:44:05,560 --> 00:44:08,000
Speaker 3: tranched out, so you can play in seniors, you can

745
00:44:08,040 --> 00:44:10,799
Speaker 3: play across the cab stack as you'd expect if you

746
00:44:10,960 --> 00:44:13,560
Speaker 3: like the mortgage. So let's say it's a one billion

747
00:44:13,560 --> 00:44:17,440
Speaker 3: dollar mortgage. You typically like the billion dollar CMBs deal

748
00:44:17,600 --> 00:44:21,560
Speaker 3: that's turning out that mortgage, that's reframing it into more

749
00:44:21,560 --> 00:44:24,799
Speaker 3: marketable securities. And then your decision making really comes down

750
00:44:24,800 --> 00:44:29,719
Speaker 3: to relative value. With respect to reviewing the capital structure,

751
00:44:29,960 --> 00:44:32,080
Speaker 3: you always want to be mindful of how much leverage

752
00:44:32,080 --> 00:44:34,759
Speaker 3: is on the asset and the reason the sponsor took

753
00:44:34,800 --> 00:44:39,560
Speaker 3: out so much leverage. It typically is a negative signal

754
00:44:39,600 --> 00:44:43,000
Speaker 3: if there's too much complexity in the capital structure. If

755
00:44:43,120 --> 00:44:46,640
Speaker 3: you've got three mes notes, that's an easy red flag.

756
00:44:46,960 --> 00:44:49,719
Speaker 3: That means you couldn't find one slug of mes, You

757
00:44:49,760 --> 00:44:52,240
Speaker 3: couldn't find a buyer for one slug of mes. Instead,

758
00:44:52,280 --> 00:44:54,000
Speaker 3: you're kind of just trying to slice and dice and

759
00:44:54,040 --> 00:44:56,840
Speaker 3: find the best the best buyer for specific portions and

760
00:44:56,880 --> 00:45:00,000
Speaker 3: their levels where they you know the return they need

761
00:45:00,120 --> 00:45:03,400
Speaker 3: to see to take that risk. And then also you

762
00:45:03,440 --> 00:45:05,880
Speaker 3: always want to see who those buyers are because they

763
00:45:05,920 --> 00:45:09,800
Speaker 3: are first in line to navigate distress in the asset.

764
00:45:10,120 --> 00:45:12,759
Speaker 3: We talked earlier about two forty five Park. When we

765
00:45:12,840 --> 00:45:16,680
Speaker 3: see H and A as a non traditional owner operator

766
00:45:16,800 --> 00:45:20,560
Speaker 3: of New York City Office acquire that asset at an

767
00:45:20,680 --> 00:45:25,240
Speaker 3: uneconomic capitalization rate, that's a head scratcher, and eighty percent

768
00:45:25,360 --> 00:45:28,120
Speaker 3: load to cost is a head scratcher. But when you

769
00:45:28,160 --> 00:45:32,120
Speaker 3: see sl Green position themselves in that mez see, you

770
00:45:32,239 --> 00:45:34,200
Speaker 3: know how that's going to work out. You know they

771
00:45:34,200 --> 00:45:38,840
Speaker 3: are strategically investing in that most subordinate mes to be

772
00:45:39,080 --> 00:45:42,120
Speaker 3: in position to step in and ultimately take control of

773
00:45:42,160 --> 00:45:45,840
Speaker 3: that asset. So those are all things we're always analyzing

774
00:45:45,840 --> 00:45:48,480
Speaker 3: who the players are looking at relative value across the

775
00:45:48,520 --> 00:45:51,200
Speaker 3: capital structure. And then for our you know, most of

776
00:45:51,200 --> 00:45:54,200
Speaker 3: our client portfolios really focused on the debt side, and

777
00:45:54,280 --> 00:45:55,800
Speaker 3: I don't want to surprise you all, but plenty of

778
00:45:55,800 --> 00:45:58,320
Speaker 3: people that are focused on the dead side that underwright

779
00:45:58,400 --> 00:46:02,160
Speaker 3: to find credits that should avoid defaults are probably scratching

780
00:46:02,200 --> 00:46:04,680
Speaker 3: their heads at the amount of loans that have default

781
00:46:04,760 --> 00:46:07,200
Speaker 3: risk in their portfolios. And you know, I think that

782
00:46:07,200 --> 00:46:09,719
Speaker 3: fits into some of the regional banks and we'll see

783
00:46:09,719 --> 00:46:11,600
Speaker 3: that kind of play out over time as well.

784
00:46:12,280 --> 00:46:15,399
Speaker 1: Oh man, I feel bad ending the interview right there,

785
00:46:15,440 --> 00:46:17,960
Speaker 1: because I would love to talk about bank exposure to

786
00:46:17,960 --> 00:46:19,400
Speaker 1: see are we although I think we did do an

787
00:46:19,400 --> 00:46:21,640
Speaker 1: episode earlier in the year. Okay, so we are sort

788
00:46:21,680 --> 00:46:25,320
Speaker 1: of covered, but our producers are giving us the time signal.

789
00:46:25,320 --> 00:46:28,200
Speaker 1: But Liza, that was so good. Thank you so much

790
00:46:28,280 --> 00:46:30,160
Speaker 1: for joining odd lots really appreciate it.

791
00:46:30,920 --> 00:46:33,840
Speaker 3: This was so much fun. I appreciate y'all letting me join,

792
00:46:34,080 --> 00:46:37,440
Speaker 3: and I'm completely happy to take you all on property tour, right.

793
00:46:37,560 --> 00:46:39,480
Speaker 2: Yeah, we are serious. We are for real going to

794
00:46:39,560 --> 00:46:41,600
Speaker 2: take you up on that next time or next time

795
00:46:41,640 --> 00:46:42,160
Speaker 2: we're in LA.

796
00:46:42,200 --> 00:46:42,839
Speaker 3: We should at all.

797
00:46:43,480 --> 00:46:44,480
Speaker 2: We'll do, We'll do.

798
00:46:45,960 --> 00:46:46,360
Speaker 3: Excellent.

799
00:46:46,560 --> 00:47:03,360
Speaker 1: Sounds great, Joe. Just to bring it full circle, one

800
00:47:03,520 --> 00:47:07,879
Speaker 1: of the loans financing Highland did actually end up in

801
00:47:08,120 --> 00:47:11,919
Speaker 1: a CMBs deal. It was put together by JP Morgan.

802
00:47:12,440 --> 00:47:12,840
Speaker 3: And.

803
00:47:14,160 --> 00:47:16,480
Speaker 1: I think that the only reason I remember it is

804
00:47:16,480 --> 00:47:18,799
Speaker 1: because I wrote about it back in twenty thirteen. The

805
00:47:18,840 --> 00:47:22,400
Speaker 1: reason I wrote about it was because that particular CMBs

806
00:47:22,480 --> 00:47:25,880
Speaker 1: deal had a reported loss of one hundred and twenty percent,

807
00:47:26,480 --> 00:47:29,839
Speaker 1: which was the highest ever recorded for a CMBs deal

808
00:47:29,880 --> 00:47:32,279
Speaker 1: at the time. According to Moody's I'm not even sure

809
00:47:32,280 --> 00:47:34,640
Speaker 1: how you can get a loss above one hundred percent.

810
00:47:34,400 --> 00:47:36,400
Speaker 2: But yeah, I just that's crazy.

811
00:47:36,520 --> 00:47:37,960
Speaker 1: Yeah, I'd have to go back and look at it,

812
00:47:38,000 --> 00:47:40,400
Speaker 1: but yeah, crazy stats. So there was so much to

813
00:47:40,440 --> 00:47:43,680
Speaker 1: pull out of that conversation. One thing that kind of

814
00:47:43,680 --> 00:47:46,920
Speaker 1: surprised me but it makes intuitive sense. Is this idea

815
00:47:47,239 --> 00:47:49,759
Speaker 1: that you know, if you have a property, you kind

816
00:47:49,760 --> 00:47:53,040
Speaker 1: of have to keep putting money into it. And like

817
00:47:53,600 --> 00:47:57,279
Speaker 1: Isa was talking about how with regional malls, if you're

818
00:47:57,320 --> 00:48:01,320
Speaker 1: walking around and you see seasonal decoration, like Christmas decorations,

819
00:48:01,320 --> 00:48:04,320
Speaker 1: that's a good sign. It means someone cares about the property.

820
00:48:04,400 --> 00:48:06,960
Speaker 1: So I guess B class office building should be putting

821
00:48:07,000 --> 00:48:07,680
Speaker 1: up decorations.

822
00:48:07,840 --> 00:48:11,400
Speaker 2: At least put up a wreath. By the way, thanks it.

823
00:48:11,760 --> 00:48:15,040
Speaker 2: I said that our office here didn't have any Instagram walls,

824
00:48:15,160 --> 00:48:18,080
Speaker 2: and then our producer Dash immediately messaged me, and we

825
00:48:18,120 --> 00:48:20,799
Speaker 2: do have a very grammable office. I've grahmmed from here

826
00:48:21,239 --> 00:48:24,719
Speaker 2: fish tanks esque, the curve escalator, so we do have

827
00:48:25,120 --> 00:48:28,719
Speaker 2: plenty of visual delights in our office. But to the conversation,

828
00:48:28,760 --> 00:48:31,040
Speaker 2: I thought that was amazing, and I obviously I really

829
00:48:31,160 --> 00:48:34,160
Speaker 2: liked the I mean, I loved that Liza was able

830
00:48:34,200 --> 00:48:37,000
Speaker 2: to mention so many specific addresses and I could hear

831
00:48:37,040 --> 00:48:38,960
Speaker 2: both once again, both of us type against the same

832
00:48:39,000 --> 00:48:43,840
Speaker 2: time looking up those addresses seventeen forty Broadway, the Money building.

833
00:48:43,880 --> 00:48:48,120
Speaker 2: I didn't it's a interesting Wikipedia page. And then also

834
00:48:48,400 --> 00:48:50,799
Speaker 2: I liked some of the things especially at the end

835
00:48:51,080 --> 00:48:53,399
Speaker 2: the clues you can get from looking at who's who

836
00:48:53,440 --> 00:48:56,480
Speaker 2: in the capitals that in response to your question, just like, Okay,

837
00:48:56,520 --> 00:49:00,040
Speaker 2: you have this sort of untraditional main sponsor, then the

838
00:49:00,080 --> 00:49:02,719
Speaker 2: sort of savvy player at the mes level, they might

839
00:49:02,719 --> 00:49:05,600
Speaker 2: be positioning themselves to take it over at some point.

840
00:49:05,840 --> 00:49:07,880
Speaker 2: That is a I really enjoyed the way she was

841
00:49:07,920 --> 00:49:09,960
Speaker 2: able to bridge both like this sort of the highly

842
00:49:10,000 --> 00:49:13,719
Speaker 2: technical financial stuff as well as just you know, good light.

843
00:49:13,960 --> 00:49:14,800
Speaker 1: Yeah, exactly.

844
00:49:15,120 --> 00:49:15,319
Speaker 3: Yeah.

845
00:49:15,360 --> 00:49:17,719
Speaker 1: We'll have to have Liza on again next year and

846
00:49:17,760 --> 00:49:20,040
Speaker 1: talk some more because there are so many more questions

847
00:49:20,160 --> 00:49:22,600
Speaker 1: that I want to ask her. But for now, shall

848
00:49:22,600 --> 00:49:23,120
Speaker 1: we leave it there?

849
00:49:23,200 --> 00:49:23,879
Speaker 2: Let's leave it there.

850
00:49:24,320 --> 00:49:27,200
Speaker 1: This has been another episode of the Odd Thoughts podcast.

851
00:49:27,280 --> 00:49:30,600
Speaker 1: I'm Tracy Alloway. You can follow me at Tracy Alloway.

852
00:49:30,320 --> 00:49:33,360
Speaker 2: And I'm Joe Wisenthal. You can follow me at the Stalwart.

853
00:49:33,560 --> 00:49:37,239
Speaker 2: Follow our producers Carmen Rodriguez at Carmen Ermann, Dash, Ol

854
00:49:37,239 --> 00:49:40,759
Speaker 2: Bennett at Dashbod and Kilbrooks at Kelbrooks. Thank you to

855
00:49:40,800 --> 00:49:43,759
Speaker 2: our producer Moses Ondam. For more Odd Lots content, go

856
00:49:43,880 --> 00:49:46,360
Speaker 2: to Bloomberg dot com slash odd Lots, where we have

857
00:49:46,480 --> 00:49:50,319
Speaker 2: transcripts a blog and a newsletter. And if you want

858
00:49:50,320 --> 00:49:53,160
Speaker 2: to talk about dead malls or trophy office buildings or

859
00:49:53,160 --> 00:49:56,360
Speaker 2: anything else real estate, go to our discord Discord, do

860
00:49:56,560 --> 00:49:59,160
Speaker 2: gg slash odd Logs. We have a real estate channel

861
00:49:59,239 --> 00:50:02,439
Speaker 2: in there. Try people be sounded off on the show.

862
00:50:02,760 --> 00:50:05,200
Speaker 1: And if you enjoy All Bobs, if you like it

863
00:50:05,200 --> 00:50:08,080
Speaker 1: when we do deep dives into the office market, then

864
00:50:08,080 --> 00:50:11,839
Speaker 1: please leave us a positive review on your favorite podcast platform.

865
00:50:11,880 --> 00:50:18,440
Speaker 1: Thanks for listening.