WEBVTT - Lots More on the Big Can Kick in Commercial Real Estate 0:00:03.120 --> 0:00:10.559 Bloomberg Audio Studios, podcasts, radio news. You know, one of 0:00:10.600 --> 0:00:12.360 the things that kind of surprised me is there was 0:00:12.400 --> 0:00:16.680 all that concern about commercial real estate and specifically office buildings, 0:00:17.000 --> 0:00:19.640 and instead we've seen it feels like we've seen more 0:00:19.680 --> 0:00:21.720 stress in the multifamily space. 0:00:21.960 --> 0:00:24.000 Yeah, that's a good point. I don't know, Like I'm 0:00:24.040 --> 0:00:27.040 still worried because I still see these numbers, at least 0:00:27.080 --> 0:00:31.080 an aggregate of vacancies not improving. And I sort of thought, 0:00:31.480 --> 0:00:33.920 you know, about six months ago there was another rash 0:00:34.000 --> 0:00:37.640 of headlines about companies calling workers back to the office. 0:00:37.640 --> 0:00:40.880 But I'm not sure if there's improvement. Like I'm still anxious. 0:00:41.000 --> 0:00:43.479 I'm not comfortable saying coast is clear yet. 0:00:43.479 --> 0:00:46.680 But what do I know? You're caveating yourself caveat I 0:00:46.720 --> 0:00:47.879 feel like that's what you're doing. 0:00:50.320 --> 0:00:55.600 I did a deadlift one. 0:00:53.280 --> 0:00:57.360 Okay, barges. 0:00:57.520 --> 0:00:59.520 This isn't after school special, except. 0:00:59.280 --> 0:01:01.800 I've decided I'm in a base my entire personality going 0:01:01.840 --> 0:01:05.080 forward on campaigning for a strategic pork reserve in the US. 0:01:05.160 --> 0:01:06.880 Where's the best with imposta? 0:01:07.080 --> 0:01:09.640 These are the important question? Is that robots taking over 0:01:09.680 --> 0:01:09.960 the world. 0:01:10.120 --> 0:01:12.960 No, I think that, like in a couple of years, 0:01:13.120 --> 0:01:15.440 the AI will do a really good job of making 0:01:15.440 --> 0:01:18.800 the Odd Lonch podcast and people today, I don't really 0:01:18.800 --> 0:01:20.680 need to listen to Joe and Tracy anymore. 0:01:20.880 --> 0:01:26.959 We do have touching. You're listening to lots more where 0:01:27.000 --> 0:01:30.440 we catch up with friends about what's going on right now, because. 0:01:30.160 --> 0:01:33.040 Even when the Odd Lots is over, there's always lots more. 0:01:33.440 --> 0:01:39.080 And we really do have the perfect guest. So Rich, 0:01:39.200 --> 0:01:41.959 we had you on basically a year ago talking about 0:01:42.000 --> 0:01:45.520 where stress is in the massive market for commercial real estate. 0:01:45.520 --> 0:01:46.640 What have we seen since then? 0:01:46.760 --> 0:01:48.200 Yeah, well, first of all, it sort of feels like 0:01:48.320 --> 0:01:50.760 dejean vous all over again. For me. There was a 0:01:50.760 --> 0:01:53.400 bunch of three bank failures this time last year. Right 0:01:53.560 --> 0:01:55.520 fast forward a year we didn't have any, and then 0:01:55.520 --> 0:01:59.160 suddenly we have another bank failure or another bank stress test, 0:01:59.200 --> 0:02:01.720 if you will, So look, maybe I'll start with office. 0:02:01.760 --> 0:02:04.640 I think I'm certainly tired of talking about office. I 0:02:04.640 --> 0:02:09.280 think most people understand that office valuations are down rather significantly. 0:02:09.600 --> 0:02:12.359 We think office valuations generically are down around thirty five 0:02:12.360 --> 0:02:14.880 percent or so, and peak to trough that'll probably be 0:02:14.960 --> 0:02:17.560 down closer to fifty percent. So I think most people 0:02:17.680 --> 0:02:20.480 understand that at this point, I do think there's still 0:02:20.520 --> 0:02:22.120 a little bit of debate and a little bit of 0:02:22.160 --> 0:02:25.680 misunderstandings about well, not all office is bad. New clean 0:02:25.720 --> 0:02:28.400 and green office even in New York city's doing exceptionally well. 0:02:28.760 --> 0:02:31.359 And then maybe some of the Sunbell office properties where 0:02:31.360 --> 0:02:34.560 you're seeing strong demographic shifts, those are working working as well. 0:02:34.960 --> 0:02:37.440 But are people willing to step their toes in? Probably not. 0:02:37.600 --> 0:02:39.880 I think they share share your views. 0:02:39.760 --> 0:02:44.160 They share Joe's tendency towards self cavitation. That's a word 0:02:44.240 --> 0:02:46.640 that I just came up with. We're speaking with Rich Hill. 0:02:46.960 --> 0:02:49.440 He is the head of real estate strategy and Research 0:02:49.520 --> 0:02:52.680 over at Cohen and Steers, formerly of Morgan Stanley, which 0:02:52.720 --> 0:02:56.040 is how I met you and read your research for 0:02:56.120 --> 0:02:59.240 a number of years. One thing I wanted to get 0:02:59.280 --> 0:03:02.680 your sense on. We have seen a rally in broad 0:03:03.120 --> 0:03:07.160 cre since sort of November December. How much of that 0:03:07.280 --> 0:03:10.840 is just echoing the expectation for rate cuts? And I 0:03:10.880 --> 0:03:13.600 feel like I feel like I should add a caveat here, 0:03:13.680 --> 0:03:16.440 which is that we're recording this on March twentieth, the 0:03:16.520 --> 0:03:19.560 day of the Fed interest rate decision, so who knows 0:03:19.840 --> 0:03:22.440 what will happen, but the expectation is still for cuts, 0:03:22.440 --> 0:03:25.160 So how much of that is feeding into the rally? 0:03:25.360 --> 0:03:28.200 Yeah, so maybe just a level set. The trough in 0:03:28.320 --> 0:03:31.840 listed rates listed real estate was October twenty fifth of 0:03:31.840 --> 0:03:35.480 twenty twenty three. Since that time, listed reads are up 0:03:35.520 --> 0:03:38.120 more than twenty percent. November was one of the best 0:03:38.160 --> 0:03:41.440 months ever. December was pretty strong as well, top ten 0:03:41.520 --> 0:03:43.680 month ever. So you bring up a good question how 0:03:43.720 --> 0:03:46.800 much of this is just driven by rate cuts? So 0:03:46.920 --> 0:03:48.840 let me let me unpack that a little bit for you. 0:03:49.040 --> 0:03:50.360 And I think I'm going to be a little bit 0:03:50.400 --> 0:03:52.200 wonky here, but I think that's probably that's great. That's 0:03:52.240 --> 0:03:54.880 what we like. First and foremost listed reads do really 0:03:54.920 --> 0:03:58.800 well in the aftermath of the FED stopping hiking interest rates. 0:03:59.120 --> 0:04:01.560 Usually on the next twelve month basis, they put up 0:04:02.400 --> 0:04:05.880 double digit returns. So what we've seen happen is consistent 0:04:05.920 --> 0:04:08.480 with what we've seen happen with history. But I also 0:04:08.560 --> 0:04:11.320 think there's a few other things that are maybe not 0:04:11.440 --> 0:04:13.520 as well understood, where I would say this is not 0:04:13.720 --> 0:04:15.640 all about rate cuts, and I'll come back to that 0:04:15.640 --> 0:04:18.839 in a second. October twenty fifth marked the high for 0:04:18.880 --> 0:04:21.520 the tenure Treasury rate. It peaked a little bit above 0:04:21.560 --> 0:04:24.160 five percent. At that point in time, people were really 0:04:24.200 --> 0:04:26.240 concerned that the tenure Treasury rate was probably going to 0:04:26.279 --> 0:04:29.680 be closer to six percent than four percent. Fast forward, 0:04:29.760 --> 0:04:32.400 in the tenure treasury is now closer to four percent 0:04:32.480 --> 0:04:34.960 than six percent. So I think that took a lot 0:04:35.000 --> 0:04:37.640 of fear off the table. The second thing that we've 0:04:37.640 --> 0:04:42.640 seen is we've actually seen lending conditions not begin to loosen, 0:04:42.760 --> 0:04:45.400 because linding conditions are still tightening, but they're not tightening 0:04:45.400 --> 0:04:47.719 as much as they used to, and so that basically 0:04:47.720 --> 0:04:50.680 means linding conditions, the worst for lending conditions are behind us. 0:04:51.040 --> 0:04:53.640 The second erouder has started to improve. The third point 0:04:53.680 --> 0:04:55.920 I would make to you is that guess what in 0:04:56.000 --> 0:04:59.000 AY growth net operating income growth for real estate is 0:04:59.040 --> 0:05:01.640 holding up really, really well. It's actually one of the 0:05:01.640 --> 0:05:03.680 few sectors of the S and P five hundred where 0:05:03.680 --> 0:05:06.839 you're seeing revisions higher not lower. That's interesting, and there's 0:05:06.839 --> 0:05:08.800 a couple of reasons for that. But I think what 0:05:08.800 --> 0:05:11.040 I would ultimately say here is listed reads are leaning 0:05:11.040 --> 0:05:14.320 indicator in downturns and recoveries, and what I think we're 0:05:14.320 --> 0:05:16.840 starting to see is maybe some of the fear that 0:05:16.920 --> 0:05:20.120 was in the market was it was turning out to 0:05:20.160 --> 0:05:22.000 be not as bad as feared, and that's led to 0:05:22.000 --> 0:05:22.560 a rally. 0:05:22.680 --> 0:05:25.400 So it always helps, even if things are bad, if 0:05:25.400 --> 0:05:27.760 they're going to be less bad because that's helped. 0:05:27.839 --> 0:05:29.320 The direction of travel is good. 0:05:29.440 --> 0:05:33.040 Yeah, the direction of travel is good, better than expectations 0:05:33.400 --> 0:05:35.720 all the worst not being priced in. One of the 0:05:35.720 --> 0:05:39.080 things that's come up in our past CRI episodes just 0:05:39.160 --> 0:05:42.479 this gap between where people think the market might be 0:05:43.000 --> 0:05:44.880 and where the market actually is, which we have a 0:05:44.920 --> 0:05:47.040 hard time knowing because there is just not a lot 0:05:47.080 --> 0:05:49.719 of transaction period. So you can have these models and 0:05:49.760 --> 0:05:52.400 you can have expectations or maybe price something off the 0:05:52.400 --> 0:05:55.400 one building that did move. Are we seeing on the 0:05:55.480 --> 0:05:58.599 non listed side, on the private side, are we seeing 0:05:58.640 --> 0:06:00.919 any sort of pickup in transaction activity. 0:06:00.960 --> 0:06:04.600 Yeah, it's a super fascinating conversation that we're having right now, 0:06:04.640 --> 0:06:06.839 and I think it's the very most important question that 0:06:06.839 --> 0:06:09.240 people can be asking right now. Let me explain how 0:06:09.240 --> 0:06:14.559 the transition mechanism usually works in fire cycles, transaction volumes fall, 0:06:14.880 --> 0:06:18.480 they trough because when they're falling, there's a big spread 0:06:18.480 --> 0:06:20.560 between where sellers want to sell and our buyers want 0:06:20.600 --> 0:06:23.840 to buy. There's no transaction activity. Then as transaction volumes 0:06:23.880 --> 0:06:27.120 trough and begin to rise, property valuations begin to fall. 0:06:27.200 --> 0:06:30.400 Transaction property valuations begin to fall, and then about twelve 0:06:30.440 --> 0:06:34.520 months later, appraisal valuations follow. What we're seeing this cycle 0:06:34.640 --> 0:06:37.800 is dramatically different than that it's actually flipping on its head. 0:06:38.279 --> 0:06:43.880 Appraisals are actually leading transaction volumes significantly right now. You're right, transactions, 0:06:43.920 --> 0:06:46.800 there's very little transparency in the transaction market. I just 0:06:46.920 --> 0:06:50.520 got some updated numbers for February of twenty twenty four, 0:06:50.640 --> 0:06:53.320 and the number of transactions that sold it looks like 0:06:53.400 --> 0:06:56.120 it's back to COVID lows. So there is still a 0:06:56.160 --> 0:07:00.480 pretty big bid asque spread. But appraisals, appraisal valueuas we 0:07:00.560 --> 0:07:03.120 think are down generically around twenty percent right now peak 0:07:03.160 --> 0:07:05.360 to trough. We think they'll be down twenty five to 0:07:05.480 --> 0:07:09.520 thirty once everything goes through. But why are appraisal valuations 0:07:09.600 --> 0:07:12.160 leading right now? What has everything to do with higher 0:07:12.200 --> 0:07:14.960 interest rates and higher discount rates, and appraiser has no 0:07:15.200 --> 0:07:17.520 choice but to deal with that. So this cycle is 0:07:17.520 --> 0:07:20.880 a little bit different where transactions are just now beginning 0:07:20.920 --> 0:07:23.040 to catch up to where appraisals are so. 0:07:23.600 --> 0:07:26.360 We're talking about sales transactions. But the other thing that's 0:07:26.400 --> 0:07:29.200 happened in the market is you've had a lot of 0:07:29.480 --> 0:07:33.320 new financing. So call it what you will extend and 0:07:33.400 --> 0:07:38.280 pretend or amend and extend. There's different names, different pseudonyms 0:07:38.320 --> 0:07:41.080 for this activity, but that feels like it's one of 0:07:41.160 --> 0:07:44.480 the things that has really given the market a little 0:07:44.520 --> 0:07:47.600 bit of breathing room. So it's odd lots tradition to 0:07:47.920 --> 0:07:51.600 talk about the looming maturity wall, but the looming maturity 0:07:51.680 --> 0:07:53.960 wall is not so looming anymore. It's more of a 0:07:54.160 --> 0:07:57.119 three foot privacy shrub. I think I've joked before. 0:07:57.400 --> 0:07:59.000 Yeah, if you guys can see me on the podcast, 0:07:59.000 --> 0:08:00.560 I have a big smile on my face because this 0:08:00.680 --> 0:08:03.480 is one of my favorite topics. First of all, look, 0:08:03.560 --> 0:08:05.840 I push back on the idea of a maturity wall. 0:08:06.040 --> 0:08:08.640 Earlier in my career, I always talked about maturity walls 0:08:08.640 --> 0:08:11.880 because it gets a lot of clicks. But let's be clear. 0:08:12.160 --> 0:08:15.600 Commercial mortgages have a seven year wall that means fifteen 0:08:15.640 --> 0:08:18.440 percent of loans come due on average every single year, 0:08:18.880 --> 0:08:21.000 which means over a three year time period, you should 0:08:21.000 --> 0:08:23.520 expect forty five percent of loans to come due guess what, 0:08:23.680 --> 0:08:25.680 forty two percent of loans are coming due over the 0:08:25.760 --> 0:08:28.400 next three years. Not shocking at all, that's just sort 0:08:28.400 --> 0:08:31.160 of math. Is it great that they're coming due right 0:08:31.240 --> 0:08:34.000 now at this point of distress in the commercial real 0:08:34.080 --> 0:08:36.520 estate market. No, but that was inevitably going to happen 0:08:36.600 --> 0:08:39.240 at some point in the cycle. So that's point number one. 0:08:39.400 --> 0:08:42.000 Point number two is a statistic that's getting a ton 0:08:42.040 --> 0:08:45.120 of headlines right now that there's almost a trillion dollars 0:08:45.160 --> 0:08:47.800 of loans coming due in twenty twenty four. That is 0:08:48.000 --> 0:08:50.600 factually true. But this time last year there was only 0:08:50.640 --> 0:08:52.559 a little bit more than six hundred billion dollars of 0:08:52.640 --> 0:08:55.360 loans coming due in twenty twenty four. Like, you don't 0:08:55.480 --> 0:08:58.000 just make up four hundred billion dollars of loans. Why 0:08:58.040 --> 0:09:01.040 did that increase? Well, loan Behold, a lot of loans 0:09:01.080 --> 0:09:04.120 that were maturing in twenty twenty three were amenda and 0:09:04.240 --> 0:09:08.600 extended into twenty twenty four and beyond. Now, we actually 0:09:08.720 --> 0:09:11.000 think that same strategy is going to play out in 0:09:11.040 --> 0:09:13.640 twenty twenty four as well. But what you're starting to 0:09:13.679 --> 0:09:17.200 see is this prisoner's limb are being solved. Borrowers are 0:09:17.240 --> 0:09:18.920 not in a good position lenders are not in a 0:09:18.960 --> 0:09:21.040 good position. They're sort of forced to work with each 0:09:21.080 --> 0:09:24.040 other right now. And I think your point about you know, 0:09:24.200 --> 0:09:27.079 call it what you will, modifications and extensions, what it's 0:09:27.160 --> 0:09:28.719 doing is that it's providing a little bit of a 0:09:28.800 --> 0:09:32.000 safety net for commercial real estate valuations, where whereby we 0:09:32.080 --> 0:09:33.839 think valuations are going to be down twenty five to 0:09:34.000 --> 0:09:37.240 thirty percent instead of like thirty five to forty like 0:09:37.320 --> 0:09:39.160 we saw during the GFC. And it's because this is 0:09:39.200 --> 0:09:41.600 a little bit more orderly process than what people feared 0:09:41.600 --> 0:09:42.040 a year ago. 0:09:42.480 --> 0:09:44.959 By the way, I just want to say Tracy that 0:09:45.080 --> 0:09:47.439 I'm really glad and thank you rich for saying that 0:09:47.720 --> 0:09:50.000 when you're on the cell side and getting clicks, because 0:09:50.040 --> 0:09:54.720 I've always had this intuition that journalists in cell side 0:09:54.800 --> 0:09:57.319 analysts are basically in the same job, and we sort 0:09:57.360 --> 0:10:00.719 of compete with each other for people's scarce attention. It's 0:10:00.840 --> 0:10:03.319 not that different. In fact, I would say, as I 0:10:03.679 --> 0:10:06.079 progressed in my journalism career, I felt I learned a 0:10:06.160 --> 0:10:08.760 lot from reading cell side research, both in terms of 0:10:08.880 --> 0:10:11.360 content but also in like, yeah, your job is, you know, 0:10:11.400 --> 0:10:13.280 people have a million emails and you want them to 0:10:13.360 --> 0:10:14.959 open yours instead of the next guys. 0:10:15.360 --> 0:10:18.199 So I feel no one will know your research is 0:10:18.240 --> 0:10:19.160 good if they don't read it. 0:10:19.240 --> 0:10:20.839 If they don't read it, yes, you got a in 0:10:20.880 --> 0:10:24.040 a northern around time is spent on titles, and oh yeah. 0:10:23.880 --> 0:10:26.160 I know they're getting really they've got they've gotten so good. 0:10:39.840 --> 0:10:41.880 If I own a building and it's one of these 0:10:42.400 --> 0:10:46.000 not on a B tier offices in New York City 0:10:46.760 --> 0:10:50.559 and I still have a bunch of empty units and 0:10:50.880 --> 0:10:53.800 the people who were my tenants aren't bringing their employees back, 0:10:54.080 --> 0:10:56.480 wish do I want? Do I want them to bring 0:10:56.559 --> 0:10:59.120 their employees back? Or do I want right cuts? 0:10:59.559 --> 0:11:02.760 You want rate cuts first and foremost, first and foremost. 0:11:02.840 --> 0:11:06.240 We had this debate internally at Colin Steers relatively recently. 0:11:06.840 --> 0:11:09.160 What are we rooting for? And I think everyone in 0:11:09.240 --> 0:11:12.040 there in the room said rate cuts. And so let's 0:11:12.160 --> 0:11:15.480 maybe explain what that means. Commercial real estates inherently elevered 0:11:15.480 --> 0:11:19.559 asset class. Yeah, very few people buy commercial real estate 0:11:19.600 --> 0:11:23.040 building and don't put debt on it, so the cost 0:11:23.120 --> 0:11:26.480 of financing actually really matters. I would much prefer right 0:11:26.559 --> 0:11:29.880 now a hard landing scenario, believe it or not, where 0:11:30.040 --> 0:11:32.880 real rates interest rates go much lower and grow slows 0:11:32.880 --> 0:11:36.679 and credit spreads widen than a no landing scenario, whereby 0:11:37.240 --> 0:11:39.199 rates sort of stay where they are in growth and 0:11:39.200 --> 0:11:41.360 credit spreads are just eh. I know, that's weird to 0:11:41.400 --> 0:11:42.000 get your arms. 0:11:41.880 --> 0:11:43.920 Rud No, I believe it, but it still blows my mind. 0:11:44.360 --> 0:11:46.720 It's inherently a level asset class. What matters more than 0:11:46.720 --> 0:11:48.920 anything else is the cost of financing. 0:11:49.120 --> 0:11:50.880 Wait, so, on that note, I want to go back 0:11:50.920 --> 0:11:54.000 to what we were talking about, the refinancing, the amend 0:11:54.240 --> 0:11:57.040 and extend dynamic that we've seen in the market. Who 0:11:57.280 --> 0:12:01.040 is refinancing? Is it the existing finance years Because as 0:12:01.120 --> 0:12:03.920 you mentioned, they basically don't want to take the marks 0:12:04.000 --> 0:12:06.240 on their portfolio or they don't want to have a 0:12:06.280 --> 0:12:09.360 catalyst that causes them to record that loss. Who's actually 0:12:09.440 --> 0:12:09.719 doing it? 0:12:09.960 --> 0:12:11.959 Yeah, So let me first of all give you a 0:12:12.040 --> 0:12:15.160 stat that's I think really remarkable. If you looked at 0:12:15.320 --> 0:12:18.120 commercial mortgage backed securities, the loans that we're maturing in 0:12:18.160 --> 0:12:22.079 twenty twenty three, eighty percent of them paid off at 0:12:22.240 --> 0:12:26.040 or before their maturity date. Eighty percent. Now, some of 0:12:26.080 --> 0:12:29.280 them obviously paid off before their maturity date. You'll hear 0:12:29.440 --> 0:12:31.840 much lower statistic for loans that were still outstanding at 0:12:31.880 --> 0:12:34.280 their maturity date. But those loans still outstanding have inherent 0:12:34.360 --> 0:12:36.360 negative selection. If you didn't pay off your loan prior 0:12:36.360 --> 0:12:38.160 to the maturity date, there's probably something wrong with it. 0:12:38.360 --> 0:12:41.120 So let me answer your question directly though, and I'm 0:12:41.120 --> 0:12:44.160 going to focus on banks first and foremost. Why would 0:12:44.160 --> 0:12:48.679 a bank want to extend a loan, well, particularly. 0:12:48.320 --> 0:12:51.559 After March's banking drama and the expectation that there was 0:12:51.679 --> 0:12:53.559 going to be more pressure in terms of regulation. 0:12:53.760 --> 0:12:56.520 There's two reasons, well three reasons. First of all, they're 0:12:56.559 --> 0:12:59.959 not in the interest of owning properties. That's one number two. 0:13:00.679 --> 0:13:03.319 They actually don't want to sell a distress property into 0:13:03.320 --> 0:13:05.920 a distress market. But there's an even more important point 0:13:06.000 --> 0:13:08.719 here that I don't think people are focusing on the 0:13:08.880 --> 0:13:13.280 capital charges for modifying a loan at a new ninety 0:13:13.320 --> 0:13:16.480 percent LTV or actually lower than owning that property on 0:13:16.559 --> 0:13:20.559 your balance sheet. Oh, they're incentivized, assuming that they have 0:13:20.640 --> 0:13:25.479 appropriate reserves and the borrower has a plan, they're incentivized 0:13:25.559 --> 0:13:27.559 right now to actually extend that loan. I come back 0:13:27.559 --> 0:13:30.120 to the point I made previously. This is like classic 0:13:30.200 --> 0:13:33.200 prisoner's dilemma stuff. The barrower is not in a good spot, 0:13:33.600 --> 0:13:37.320 the lender doesn't want the property back. They're actually coming 0:13:37.400 --> 0:13:39.559 together and finding a solution. And I don't think this 0:13:39.720 --> 0:13:42.199 is necessarily to kick the can down the road like 0:13:42.280 --> 0:13:45.000 we've seen in the past. They're getting some pretty decent paydowns. 0:13:45.360 --> 0:13:47.959 They're actually not increasing their rate too much. It is 0:13:48.000 --> 0:13:48.800 a prisoner's dilemma. 0:13:49.320 --> 0:13:51.839 One thing I've come to realize in my own career 0:13:51.880 --> 0:13:54.199 as a financial journalist is that kicking the can down 0:13:54.240 --> 0:13:57.240 the road has all these terrible connotations, especially since two 0:13:57.240 --> 0:13:59.520 thousand and eight, but actually it kind of worked right. 0:13:59.840 --> 0:14:02.880 We had a bunch of home loan modifications after two 0:14:02.920 --> 0:14:05.959 thousand and eight, and you know, real estate recovered. 0:14:06.200 --> 0:14:09.240 I have come to the conclusion that all of human 0:14:09.400 --> 0:14:11.800 history is just a big hand ticket. We need to 0:14:11.880 --> 0:14:14.920 destigmatize that concept forever. We're just going to be kicking 0:14:15.000 --> 0:14:17.559 the can for thousands of years to come. Put it 0:14:17.640 --> 0:14:19.720 off to the next generation and they'll do the same. 0:14:20.120 --> 0:14:23.240 Your point about there's something wrong if you don't prepay 0:14:23.440 --> 0:14:26.080 your loan like this is because real estate investors are 0:14:26.080 --> 0:14:28.320 allergic to building up equity. The moment they have a 0:14:28.360 --> 0:14:30.520 little bit of equity in the building, they want to 0:14:30.520 --> 0:14:32.080 pull it out and buy the next building. 0:14:32.280 --> 0:14:36.120 That's that's that's not wrong. Yeah, it's constantly refinancing. And 0:14:36.360 --> 0:14:38.400 now some of this is because we've been a secular 0:14:38.400 --> 0:14:40.880 decline in ten your treasure eight since nineteen eighty. You 0:14:41.000 --> 0:14:43.600 could always refinance into a lower and lower and lower 0:14:43.680 --> 0:14:45.840 interest rate month after month after month. 0:14:45.960 --> 0:14:47.920 So someone I was talking to was explain to me, 0:14:48.040 --> 0:14:50.480 like some of the banking issues that we've seen with 0:14:50.600 --> 0:14:53.120 some of the community banks. Part of it, I mean, 0:14:53.520 --> 0:14:55.680 we hit did an episode on Newyor Community Bank and 0:14:55.800 --> 0:14:58.240 the issues that they've had in like the rent regulated 0:14:58.400 --> 0:15:00.840 multifamily area. But the part of it is that a 0:15:00.920 --> 0:15:03.480 lot of these banks just made a bunch of money 0:15:03.600 --> 0:15:06.280 on prepayment penalties. I don't know if they're called penalties, 0:15:06.280 --> 0:15:09.080 but those prepayment fees, and then the moment rates shot 0:15:09.160 --> 0:15:11.280 up shoot up for the first time in forty years, 0:15:11.640 --> 0:15:13.800 you just get that big slow down in Yeah. 0:15:13.920 --> 0:15:16.560 I mean, well, it's probably fairly nuanced, but when you 0:15:16.760 --> 0:15:20.480 prepay a fixed rate loan, you have a prepayment penalty 0:15:20.560 --> 0:15:24.880 which basically compensates the lender for the interest cost that 0:15:24.960 --> 0:15:27.200 they otherwise would have received over the life of the loan. 0:15:27.720 --> 0:15:29.920 So there's a lot of different. There's a lot of 0:15:29.920 --> 0:15:32.360 different reasons. I mean, I think the real issue that 0:15:32.440 --> 0:15:35.320 the market's dealing with is a return to the old normal. 0:15:35.400 --> 0:15:36.960 I get asked all the time, what do you think 0:15:37.000 --> 0:15:40.000 about this new normal environment? It's not new normal environment. 0:15:40.400 --> 0:15:43.080 What was weird was the last ten years where interest 0:15:43.160 --> 0:15:46.920 rates were historically low, inflation was historically low. That created 0:15:47.120 --> 0:15:49.800 a lot of weird dynamics for the commercial real estate market. 0:15:50.040 --> 0:15:52.000 All the markets dealing with is a return to the 0:15:52.080 --> 0:15:54.960 old normal and what that does for valuations. Valuations being 0:15:55.040 --> 0:15:57.520 down twenty five to thirty percent. That's huge on a 0:15:57.560 --> 0:15:59.720 headline basis, but if you actually think about what it 0:15:59.760 --> 0:16:02.680 means in terms of how much valuations have increased over 0:16:02.680 --> 0:16:05.440 the past ten years, it's really nothing. This is just 0:16:05.520 --> 0:16:07.840 a deflating of the balloon that should occur from time 0:16:07.880 --> 0:16:08.160 to time. 0:16:08.320 --> 0:16:10.160 Yeah, And this is where I have to say, like, 0:16:10.320 --> 0:16:13.880 even before the twenty twenty pandemic, there was talk about 0:16:14.040 --> 0:16:19.120 underwriting standards slipping in CRE and CMBs specifically, I wanted 0:16:19.160 --> 0:16:21.600 to ask you one more thing. So one of the 0:16:21.640 --> 0:16:24.480 themes that comes up on all these cre episodes is 0:16:25.080 --> 0:16:28.680 this is not a monolithic asset class. So you obviously 0:16:28.840 --> 0:16:34.000 have office, multifamily retail. So you have that segmentation. But 0:16:34.080 --> 0:16:38.320 then even within those categories there's additional segmentation. So Joe 0:16:38.560 --> 0:16:41.120 mentioned the idea of a Class B office, you would 0:16:41.160 --> 0:16:44.200 also have fancy offices that are Class A. You might 0:16:44.280 --> 0:16:47.520 have a really nice shopping mall and then a zombie 0:16:47.560 --> 0:16:50.640 one that's going out of business. I wanted to ask 0:16:51.480 --> 0:16:54.920 in retail on shopping malls we heard recently in an 0:16:54.920 --> 0:16:58.240 episode we did with Tom McGee from the International Council 0:16:58.280 --> 0:17:01.120 of Shopping Centers, he would I was talking about there's 0:17:01.160 --> 0:17:04.280 sort of a revival of demand for shopping centers and 0:17:04.320 --> 0:17:07.640 that there's a structural lack of supply in certain types 0:17:07.680 --> 0:17:09.880 of shopping centers. Is that something that you've seen as well. 0:17:10.119 --> 0:17:12.680 Yeah, Look, we really like open air shopping centers, and 0:17:12.800 --> 0:17:15.080 we like them for a couple different reasons. First of all, 0:17:15.160 --> 0:17:18.120 we think institutional investors in private real estate are under 0:17:18.200 --> 0:17:19.000 index to them. 0:17:19.520 --> 0:17:21.840 Is that a result of like the shopping mall fears 0:17:21.960 --> 0:17:22.400 of the time. 0:17:22.480 --> 0:17:25.359 Yeah, they're just redline. I mean, no one wanted to 0:17:25.400 --> 0:17:28.680 buy a retail property from twenty ten until twenty twenty 0:17:28.720 --> 0:17:33.080 because it was going through clickbait so called retail apocalypse. 0:17:33.440 --> 0:17:36.520 That's not a great environment. So you've actually seen institutional 0:17:36.600 --> 0:17:40.960 ownership of retail go down, while institutional ownership of multifamily 0:17:41.040 --> 0:17:45.760 industrial has risen significantly. But there's actually something really interesting 0:17:45.800 --> 0:17:48.840 that's happening. Two things in particular, no one was really 0:17:49.000 --> 0:17:51.560 dumb enough to buy to build a new retail property 0:17:52.320 --> 0:17:55.080 host the Great Financial Crisis because there was this big 0:17:55.160 --> 0:17:58.679 shakeout coming, so there's been no new supply of shopping centers. 0:17:58.960 --> 0:18:01.760 At the same time, you had this great Darwinistic event 0:18:01.880 --> 0:18:04.520 that happened in COVID where maybe I'm going to use 0:18:04.560 --> 0:18:06.879 to bold of retirement, but it killed all the stuff 0:18:06.960 --> 0:18:09.560 that wasn't you know, it was cuspy. So now you 0:18:09.680 --> 0:18:12.560 actually have an environment that's right size from a supply 0:18:12.680 --> 0:18:16.359 standpoint at a time that retailers e commerce companies have 0:18:16.440 --> 0:18:18.720 actually realized that they can do micro fulfillment through the 0:18:18.840 --> 0:18:23.320 retail stores. Consumer likes it. So you're actually seeing vacancies 0:18:23.640 --> 0:18:27.440 for things like neighborhood centers, community centers, power centers actually 0:18:27.520 --> 0:18:30.800 near historical lows. We haven't seen an environment like this before, 0:18:31.000 --> 0:18:33.920 so it's actually a really strong asset class that people 0:18:33.960 --> 0:18:35.080 aren't paying enough attention to. 0:18:35.600 --> 0:18:39.000 So I take this key point that Okay, there's been 0:18:39.240 --> 0:18:42.200 part of this story is that there's been this game 0:18:42.280 --> 0:18:46.680 theory cooperation from lenders and borrowers to avoid pain. I 0:18:46.760 --> 0:18:48.400 take this point that there are some in New York 0:18:48.480 --> 0:18:51.440 City even that there are prime offices that are doing 0:18:51.600 --> 0:18:54.760 very well, and that not you know, CIRI and even 0:18:54.880 --> 0:18:57.399 office is not a monolith. On the other hand, it 0:18:57.520 --> 0:19:00.399 does seem as though in many cities that there is 0:19:00.440 --> 0:19:04.920 still just a lot of empty square footage within buildings, 0:19:05.040 --> 0:19:07.159 and I don't think people know what is going to 0:19:07.560 --> 0:19:10.400 happen with it, or whether it's you know, where that's going. 0:19:10.520 --> 0:19:12.960 And there's still you know, obviously there are some fancy 0:19:13.000 --> 0:19:14.840 buildings in New York City, but there's a lot that's 0:19:14.880 --> 0:19:17.800 just done between every block where it's just old and 0:19:17.920 --> 0:19:21.080 shabby and you just see clearly not a lot of activity. 0:19:21.400 --> 0:19:23.560 What is happening with that? And of course in some cities, 0:19:23.600 --> 0:19:26.040 you know, there's this fear of the urban death spiral, 0:19:26.240 --> 0:19:28.760 which would be a very good headline for a research 0:19:28.880 --> 0:19:31.359 piece or for a clickbait piece. But I guess the 0:19:31.480 --> 0:19:34.119 retail apocalypse of the twenty tens has been replaced by 0:19:34.200 --> 0:19:36.840 the urban death spiral that you have people are coming 0:19:36.880 --> 0:19:38.880 back to work, that you have dropped the tax base, 0:19:38.960 --> 0:19:40.800 that the restaurants closed down and people don't want to 0:19:40.840 --> 0:19:42.520