1 00:00:10,080 --> 00:00:14,160 Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast. 2 00:00:14,240 --> 00:00:18,240 Speaker 1: I'm Joe Wisenthal and I'm Tracy Alway. Tracy, there's two 3 00:00:18,800 --> 00:00:20,759 Speaker 1: things that people well, there's all kinds that thinks people 4 00:00:20,800 --> 00:00:24,040 Speaker 1: are like very attuned to these days. But I would 5 00:00:24,079 --> 00:00:27,600 Speaker 1: say what's going on with regional banks has obviously become 6 00:00:27,640 --> 00:00:30,040 Speaker 1: a huge focus, you know, with the collapse of Silicon 7 00:00:30,120 --> 00:00:33,519 Speaker 1: Valley Bank. And then what is going on with a 8 00:00:33,680 --> 00:00:36,960 Speaker 1: commercial real estate We talked about that recently, and everyone 9 00:00:37,000 --> 00:00:39,960 Speaker 1: knows like the office woes that are hitting major cities 10 00:00:40,080 --> 00:00:43,040 Speaker 1: like New York. Two things that are like top of 11 00:00:43,040 --> 00:00:46,479 Speaker 1: mind for many people. Well, and I think they started 12 00:00:46,479 --> 00:00:49,600 Speaker 1: out sort of separate to each other because there were 13 00:00:49,640 --> 00:00:54,720 Speaker 1: concerns about commercial real estate even before Silicon Valley Bank 14 00:00:54,800 --> 00:00:57,880 Speaker 1: went bust. But since then, and since we've had the 15 00:00:58,000 --> 00:01:01,640 Speaker 1: turmoil in the banking sector, the posit flight, there is 16 00:01:01,640 --> 00:01:04,880 Speaker 1: a concern that that is going to also start affecting 17 00:01:05,040 --> 00:01:10,080 Speaker 1: the CRI outlook. And basically these two things are impacting 18 00:01:10,120 --> 00:01:12,480 Speaker 1: each other and compounding each other at the same time, 19 00:01:12,720 --> 00:01:17,160 Speaker 1: because of course regional banks have quite substantial exposure to 20 00:01:17,240 --> 00:01:20,119 Speaker 1: commercial real estate, right so that was the interesting thing 21 00:01:20,120 --> 00:01:24,399 Speaker 1: about SVB specifically, which is that there seemed to be 22 00:01:24,440 --> 00:01:27,360 Speaker 1: many problems there, but one thing it was not. It 23 00:01:27,400 --> 00:01:29,959 Speaker 1: did not really seem to be about the credit quality 24 00:01:30,200 --> 00:01:32,920 Speaker 1: of the assets. Is a rate story, is a deposit 25 00:01:33,040 --> 00:01:35,760 Speaker 1: concentration story, but it wasn't about like, oh, they have 26 00:01:35,959 --> 00:01:39,320 Speaker 1: some sort of like asset side exposure, just something troubled. 27 00:01:39,680 --> 00:01:42,839 Speaker 1: But then, as you point out correctly in the immediate way, 28 00:01:43,040 --> 00:01:44,640 Speaker 1: a bunch of people like sort of stuck up their 29 00:01:44,640 --> 00:01:46,839 Speaker 1: fingers like, oh, by the way, guys like these regional 30 00:01:46,840 --> 00:01:49,240 Speaker 1: banks you're right about, they also are like sort of 31 00:01:49,240 --> 00:01:52,920 Speaker 1: like disproportionately the funders of Yeah, well this is it. 32 00:01:53,000 --> 00:01:55,960 Speaker 1: So there's two things here. So one, there's concern about 33 00:01:56,120 --> 00:01:58,880 Speaker 1: the commercial real estate loans that some of these smaller 34 00:01:58,920 --> 00:02:02,960 Speaker 1: regional banks hold. Are those actually going to default? Are 35 00:02:03,000 --> 00:02:05,200 Speaker 1: they going to come distressed in some way? Are they 36 00:02:05,240 --> 00:02:08,240 Speaker 1: going to be able to refinance them in the current environment. 37 00:02:08,639 --> 00:02:11,680 Speaker 1: And then secondly, as you get the stress in the 38 00:02:11,720 --> 00:02:15,760 Speaker 1: banking system as you see deposits pulled from smaller banks, 39 00:02:16,200 --> 00:02:19,000 Speaker 1: are they still going to be able to pour money 40 00:02:19,080 --> 00:02:21,520 Speaker 1: into that sector? And those two things are sort of 41 00:02:21,560 --> 00:02:24,560 Speaker 1: impacting each other. They go in both directions. As you 42 00:02:24,680 --> 00:02:26,280 Speaker 1: as you sort of clarify there. And I think the 43 00:02:26,280 --> 00:02:29,919 Speaker 1: other thing too, is like, you know, people like doom. 44 00:02:30,440 --> 00:02:32,040 Speaker 1: I mean I don't, but you know what I'm saying, 45 00:02:32,080 --> 00:02:34,720 Speaker 1: Like people still like this is the exact type of 46 00:02:34,840 --> 00:02:37,600 Speaker 1: thing that gets people going, and people post all these 47 00:02:37,680 --> 00:02:40,680 Speaker 1: charts that most people you know, like don't aren't really 48 00:02:40,720 --> 00:02:43,679 Speaker 1: an equipped to understand, including myself, Like, I don't really know. 49 00:02:43,720 --> 00:02:46,040 Speaker 1: I'm a novice on this stuff, and so I think 50 00:02:46,080 --> 00:02:48,760 Speaker 1: it's kind of important, like let's sort of get real, 51 00:02:48,840 --> 00:02:50,840 Speaker 1: let's put some numbers and like how big of a 52 00:02:50,880 --> 00:02:53,560 Speaker 1: deal is this? Because there is a lot of like, oh, 53 00:02:53,600 --> 00:02:58,680 Speaker 1: you know people, right, and I think people here, this 54 00:02:58,760 --> 00:03:01,119 Speaker 1: is a twenty trillion dollar market and they think, oh, 55 00:03:01,160 --> 00:03:03,160 Speaker 1: this is a very big deal. But of course, as 56 00:03:03,200 --> 00:03:06,959 Speaker 1: we spoke about in a relatively recent episode with Rich Hill, 57 00:03:07,440 --> 00:03:11,720 Speaker 1: it's not a monolithic market and a multi family you know, 58 00:03:12,040 --> 00:03:17,000 Speaker 1: residential development is different to an office building in downtown 59 00:03:17,040 --> 00:03:19,480 Speaker 1: New York that might be empty now. And also, you know, 60 00:03:19,560 --> 00:03:22,640 Speaker 1: a big bank is going to have a different risk 61 00:03:22,760 --> 00:03:25,919 Speaker 1: profile to the sector than a smaller regional bank. So yeah, 62 00:03:26,120 --> 00:03:29,040 Speaker 1: it's important to dive into the details. Yeah, totally. And 63 00:03:29,080 --> 00:03:31,440 Speaker 1: you know there's office which we all know, because you 64 00:03:31,480 --> 00:03:33,200 Speaker 1: could just pull up like a chart of like a 65 00:03:33,200 --> 00:03:35,880 Speaker 1: big office rate like a tornado or something, and then 66 00:03:35,880 --> 00:03:39,360 Speaker 1: there's medical would probably fine, and there's all the different categories. 67 00:03:39,360 --> 00:03:41,800 Speaker 1: So we really need to give in the interest. We 68 00:03:41,800 --> 00:03:45,080 Speaker 1: really need to dive sort of like deeper into like, 69 00:03:45,080 --> 00:03:47,120 Speaker 1: all right, let's talk about some of these exposures, let's 70 00:03:47,120 --> 00:03:50,000 Speaker 1: talk about these relationships. Let's get some real numbers rather 71 00:03:50,040 --> 00:03:53,920 Speaker 1: than just let's get granular, baby, let's get granular. All right, Well, 72 00:03:53,960 --> 00:03:57,720 Speaker 1: we have the perfect guest to speak about this. We're 73 00:03:57,720 --> 00:04:01,120 Speaker 1: going to be speaking to Jim Castillo, chief economist over 74 00:04:01,200 --> 00:04:04,160 Speaker 1: at msci's real Assets team. He was recommended to us 75 00:04:04,240 --> 00:04:06,480 Speaker 1: by our recent guest, Ben Carlos type, and he said, 76 00:04:06,520 --> 00:04:08,520 Speaker 1: this is the guy you wanted to talk about. That 77 00:04:08,640 --> 00:04:11,000 Speaker 1: was a really good episode on New York City Residential. 78 00:04:11,400 --> 00:04:14,720 Speaker 1: So I always love it when the guest recommends another guest, 79 00:04:14,960 --> 00:04:17,240 Speaker 1: so that's usually a good sign. Jim, thank you so 80 00:04:17,360 --> 00:04:20,159 Speaker 1: much for coming on. Odd Lots. Hey, great to be here. 81 00:04:21,040 --> 00:04:24,799 Speaker 1: Let's just start with the sort of like key question 82 00:04:24,920 --> 00:04:29,400 Speaker 1: that I see frequently asserted, which is that regional banks 83 00:04:29,880 --> 00:04:33,040 Speaker 1: have more exposure to commercial real estate as a share 84 00:04:33,040 --> 00:04:36,320 Speaker 1: of their assets than the big banks. Is this just like, 85 00:04:36,480 --> 00:04:39,240 Speaker 1: is this a fact? And what does that mean? The 86 00:04:39,240 --> 00:04:42,520 Speaker 1: thing that people have been highlighting is the fact that 87 00:04:43,000 --> 00:04:46,400 Speaker 1: regional banks are a bigger share of bank lending to 88 00:04:46,600 --> 00:04:49,680 Speaker 1: commercial real estate, and they've been taking that as a 89 00:04:49,760 --> 00:04:52,520 Speaker 1: sign that maybe these regional banks are more of a 90 00:04:52,560 --> 00:04:55,760 Speaker 1: problem for commercial real estate than anything else. The challenges 91 00:04:55,760 --> 00:04:57,960 Speaker 1: People are looking at the FED flow of funds number 92 00:04:58,080 --> 00:05:00,360 Speaker 1: in a funny way, the FED flow of funds date dabase. 93 00:05:00,640 --> 00:05:03,320 Speaker 1: It's a fantastic thing. There's a lot to dig into there, 94 00:05:03,680 --> 00:05:05,599 Speaker 1: but if you're not careful, you can look at the 95 00:05:05,680 --> 00:05:08,520 Speaker 1: wrong figures and people get hung up on the bank lending. 96 00:05:09,320 --> 00:05:12,080 Speaker 1: But banks are not everything in the commercial real estate 97 00:05:12,160 --> 00:05:16,279 Speaker 1: lending world. Banks we have our own approach to getting 98 00:05:16,320 --> 00:05:19,080 Speaker 1: at the lending universe, kind of working from the ground up, 99 00:05:19,120 --> 00:05:22,400 Speaker 1: from every transaction and every building that's sold and figuring 100 00:05:22,400 --> 00:05:25,880 Speaker 1: out who made the loan. From twenty fifteen to twenty nineteen, 101 00:05:25,960 --> 00:05:28,719 Speaker 1: about forty eight percent of all commercial real estate loans 102 00:05:29,360 --> 00:05:31,680 Speaker 1: in the university properties two point five million and greater 103 00:05:32,560 --> 00:05:36,440 Speaker 1: that was in the banking realm, So already forty eight 104 00:05:36,480 --> 00:05:40,080 Speaker 1: percent in the banking realm, and of that maybe sixty 105 00:05:40,120 --> 00:05:43,760 Speaker 1: percent was the local and regional banks. Now there's a 106 00:05:43,760 --> 00:05:47,039 Speaker 1: difference there ten percent and sixty percent and seventy percent. 107 00:05:47,080 --> 00:05:49,239 Speaker 1: There's a ten percent difference. And part of that comes 108 00:05:49,279 --> 00:05:52,640 Speaker 1: into we're only tracking everything two point five million up 109 00:05:52,680 --> 00:05:56,360 Speaker 1: the institutional universe. If you have a former gas station 110 00:05:56,400 --> 00:05:59,599 Speaker 1: and two below Mississippi that's been converted to a barbecue shack, 111 00:06:00,200 --> 00:06:04,000 Speaker 1: we're not tracking that. Okay, no institutional investor is really 112 00:06:04,000 --> 00:06:07,080 Speaker 1: interested in that kind of property. The FED from a 113 00:06:07,120 --> 00:06:09,760 Speaker 1: regulatory standpoint, they have to think about all capital flows, 114 00:06:10,279 --> 00:06:13,760 Speaker 1: so they're looking at everything that goes in there. But 115 00:06:13,960 --> 00:06:15,880 Speaker 1: the key point is you can't just look at the banks. 116 00:06:15,920 --> 00:06:17,800 Speaker 1: You have to look at the life insurance companies. You 117 00:06:17,800 --> 00:06:20,039 Speaker 1: have to look at the debt funds, you have to 118 00:06:20,040 --> 00:06:23,800 Speaker 1: look at the CMBs, market clos everything. Right, So just 119 00:06:23,920 --> 00:06:25,640 Speaker 1: on this point, maybe we can back up a bit 120 00:06:25,680 --> 00:06:29,560 Speaker 1: and talk about what exactly the concern is here, because 121 00:06:29,600 --> 00:06:33,320 Speaker 1: my impression is before the collapse of SVB, a lot 122 00:06:33,400 --> 00:06:36,600 Speaker 1: of it was, well, these commercial real estate loans, you know, 123 00:06:36,839 --> 00:06:41,400 Speaker 1: whether they're unsecured or secured via CMBs, there's a concern 124 00:06:41,440 --> 00:06:43,039 Speaker 1: that they're going to be in trouble. They aren't going 125 00:06:43,080 --> 00:06:46,200 Speaker 1: to be able to refinance, they might default banks. I'd 126 00:06:46,240 --> 00:06:48,960 Speaker 1: take your point about life insurers and other big investors, 127 00:06:49,000 --> 00:06:51,440 Speaker 1: but there are a lot of banks who are heavily 128 00:06:51,440 --> 00:06:55,599 Speaker 1: invested in CMBs. And then at the same time, now 129 00:06:55,640 --> 00:06:59,240 Speaker 1: the concern seems to be that with the recent turmoil 130 00:06:59,360 --> 00:07:03,560 Speaker 1: in deposits its, maybe banks start to tighten their lending standards. 131 00:07:03,600 --> 00:07:06,920 Speaker 1: Maybe that cuts off some financing for commercial real estate. 132 00:07:06,960 --> 00:07:09,120 Speaker 1: And so you have that aspect of it too. But 133 00:07:09,320 --> 00:07:13,120 Speaker 1: what exactly is the worry here? Yeah, and banks have 134 00:07:13,200 --> 00:07:16,400 Speaker 1: been tightening their standards over the last three quarters. You 135 00:07:16,400 --> 00:07:19,720 Speaker 1: look at the Fed's survey of senior loan officers, they're 136 00:07:19,720 --> 00:07:23,360 Speaker 1: all getting more cautious even before the news NSCUB hit. 137 00:07:23,960 --> 00:07:27,720 Speaker 1: And you know, Jay Pal's been saying that with this event, 138 00:07:28,160 --> 00:07:31,040 Speaker 1: maybe they don't need to tighten as much because this 139 00:07:31,160 --> 00:07:35,280 Speaker 1: is this turmoil is creating a little bit more constraint 140 00:07:35,320 --> 00:07:39,080 Speaker 1: in the credit markets. That is helping them to limit 141 00:07:39,240 --> 00:07:41,720 Speaker 1: the kind of exhumert activity that was underway. Banks. We'll 142 00:07:41,720 --> 00:07:45,520 Speaker 1: do it naturally, right, right, But it's a circular issue. 143 00:07:46,320 --> 00:07:49,240 Speaker 1: If and the issue that we faced during the financial 144 00:07:49,240 --> 00:07:53,280 Speaker 1: crisis was that you had cashline assets that couldn't get 145 00:07:53,280 --> 00:07:58,400 Speaker 1: refinanced because lenders were afraid to issue a new loan, 146 00:07:59,280 --> 00:08:01,720 Speaker 1: and so if somebody had to buy it, it was 147 00:08:01,800 --> 00:08:04,960 Speaker 1: now available in a much lower price, which then got 148 00:08:04,960 --> 00:08:07,280 Speaker 1: into the market data, and then the lenders see, oh well, 149 00:08:07,320 --> 00:08:09,520 Speaker 1: prices are falling out want to be even more restrictive. 150 00:08:09,920 --> 00:08:14,120 Speaker 1: And it was a vicious downward spiral until all the 151 00:08:14,160 --> 00:08:17,400 Speaker 1: federal regulators stepped in and put a floor under that 152 00:08:17,560 --> 00:08:20,560 Speaker 1: negative decline. So that was the safety net that to 153 00:08:20,600 --> 00:08:23,600 Speaker 1: put a floor under prices. But this time you have 154 00:08:23,680 --> 00:08:27,920 Speaker 1: that dynamic and play to some degree with pressure on 155 00:08:28,080 --> 00:08:31,840 Speaker 1: prices to fall. They have been falling recently, and it 156 00:08:31,960 --> 00:08:35,800 Speaker 1: lenders becoming more restrictive when they do originate alane. It's 157 00:08:35,840 --> 00:08:39,520 Speaker 1: at lower LTVs than before, at higher interest rates. So 158 00:08:39,720 --> 00:08:41,520 Speaker 1: you're not able to get the same kind of return 159 00:08:41,760 --> 00:08:44,280 Speaker 1: expectation out of investment if you do that, which limits 160 00:08:44,320 --> 00:08:48,800 Speaker 1: deal activity, which pushes volume down. So it is a 161 00:08:48,840 --> 00:08:51,240 Speaker 1: little bit different than the two thousand and eight situation though, 162 00:08:51,240 --> 00:08:54,800 Speaker 1: and this is the key thing every downturn that I've 163 00:08:54,800 --> 00:08:58,120 Speaker 1: been working through. There's this human behavior to always try 164 00:08:58,160 --> 00:09:00,880 Speaker 1: and fight the last war, look at the last bad event, 165 00:09:01,559 --> 00:09:03,360 Speaker 1: and you're looking at it that well, here's what happened. 166 00:09:03,400 --> 00:09:05,480 Speaker 1: So I got to look out for those same things here, 167 00:09:05,960 --> 00:09:08,520 Speaker 1: but conversely not just look out for the same bad things. 168 00:09:08,559 --> 00:09:10,199 Speaker 1: A lot of the the estate people I talked to are 169 00:09:10,240 --> 00:09:13,200 Speaker 1: looking for the best opportunities that come out of it. 170 00:09:13,480 --> 00:09:16,640 Speaker 1: Out of every downturn, everybody's always tried to use the 171 00:09:16,640 --> 00:09:20,400 Speaker 1: playbook of the person who made money in the last downturn, 172 00:09:20,440 --> 00:09:22,079 Speaker 1: and everybody wanted to be sam'zell for a bit, but 173 00:09:22,120 --> 00:09:25,360 Speaker 1: there's only one Sam's Ll everybody wanted. At the beginning 174 00:09:25,360 --> 00:09:28,160 Speaker 1: of the COVID crisis, they thought that we would have 175 00:09:28,200 --> 00:09:31,560 Speaker 1: another downturn, just like the global financial crisis, and so 176 00:09:31,679 --> 00:09:33,920 Speaker 1: buying all the distress debt like before was exactly the 177 00:09:33,920 --> 00:09:35,920 Speaker 1: same way to make money. They were wrong then, too, 178 00:09:35,920 --> 00:09:38,880 Speaker 1: because there was different factors at play this time. There 179 00:09:38,920 --> 00:09:43,200 Speaker 1: are some things at rhyme with the financial crisis, but 180 00:09:43,360 --> 00:09:46,480 Speaker 1: going in we're in a much healthier place. We had 181 00:09:46,800 --> 00:09:50,920 Speaker 1: loans that were being originated at more conservative terms than before. 182 00:09:51,960 --> 00:09:53,520 Speaker 1: You know, it's not like, you know, you have all 183 00:09:53,520 --> 00:09:57,160 Speaker 1: these toxic loans that were being made. The only challenge 184 00:09:57,240 --> 00:09:59,760 Speaker 1: is that rates have gone up so much that things 185 00:10:00,000 --> 00:10:02,559 Speaker 1: we're able to finance before they're going to have to 186 00:10:02,600 --> 00:10:22,280 Speaker 1: do something else when it comes up for refinancing. All right, 187 00:10:22,360 --> 00:10:25,400 Speaker 1: I have a ton of questions, but to start off, 188 00:10:25,520 --> 00:10:29,480 Speaker 1: like when it comes to the financing of commercial real estate, 189 00:10:29,520 --> 00:10:31,840 Speaker 1: and I want to get into like the breadth that 190 00:10:32,000 --> 00:10:34,200 Speaker 1: is commercial real estate and that it's not just like 191 00:10:34,320 --> 00:10:36,360 Speaker 1: office buildings in New York City. But when it comes 192 00:10:36,360 --> 00:10:39,120 Speaker 1: to the financing of commercial real estate generally, is there 193 00:10:39,280 --> 00:10:44,280 Speaker 1: something about the business model of the small slash regional 194 00:10:44,360 --> 00:10:49,200 Speaker 1: banks that makes them more natural sources of financing to 195 00:10:49,320 --> 00:10:52,560 Speaker 1: these projects than some of the you know, the really 196 00:10:52,600 --> 00:10:55,920 Speaker 1: big two big to fail banks. There is regulatory shopping 197 00:10:56,360 --> 00:11:01,160 Speaker 1: in the financial world, Okay. You have groups like the 198 00:11:01,200 --> 00:11:04,600 Speaker 1: debt funds that they're really only regulated at the level 199 00:11:04,600 --> 00:11:07,600 Speaker 1: of the sec when they're raising capital. You know, they're 200 00:11:07,600 --> 00:11:11,600 Speaker 1: making a private loan. There's no state bank regulator, no 201 00:11:11,679 --> 00:11:15,360 Speaker 1: insurance regulator. You know, they're just doing their own thing. 202 00:11:15,880 --> 00:11:18,680 Speaker 1: The local banks they don't have the same kind of 203 00:11:18,679 --> 00:11:23,120 Speaker 1: restrictions placed on them as the large national banks. And 204 00:11:23,679 --> 00:11:26,760 Speaker 1: over time some of the restrictions have been eased a bit. Yeah, 205 00:11:26,800 --> 00:11:29,839 Speaker 1: I know some banks have explicitly tried to keep their 206 00:11:29,840 --> 00:11:33,080 Speaker 1: book a business below a certain levels so they don't 207 00:11:33,080 --> 00:11:36,959 Speaker 1: get that regulatory burden because you know then there's extra 208 00:11:37,040 --> 00:11:40,839 Speaker 1: costs that go into it, and just the administrative cost 209 00:11:41,040 --> 00:11:44,280 Speaker 1: starts to rise at an exponential pace once you get 210 00:11:44,280 --> 00:11:48,480 Speaker 1: above a certain threshold level for those regulatory burdens. And 211 00:11:48,720 --> 00:11:51,680 Speaker 1: really since around twenty fifteen when there were some tightening 212 00:11:51,760 --> 00:11:54,760 Speaker 1: up of those standards and for the larger banks, the 213 00:11:54,840 --> 00:11:57,520 Speaker 1: smaller banks started to gain more share of all the 214 00:11:57,559 --> 00:12:01,120 Speaker 1: bank lending activity. There's a slight I've version, but I 215 00:12:01,160 --> 00:12:04,360 Speaker 1: actually am really curious about those administrative costs. You says 216 00:12:04,480 --> 00:12:07,800 Speaker 1: they rise exponentially, and so I am curious, like what 217 00:12:08,000 --> 00:12:11,840 Speaker 1: happened when a bank flips over to that larger size 218 00:12:12,200 --> 00:12:14,800 Speaker 1: and they all want to avoid it and SVB tried 219 00:12:14,840 --> 00:12:18,120 Speaker 1: to avoid getting these sort of larger designations, etc. But 220 00:12:18,280 --> 00:12:21,360 Speaker 1: like what actually does happen internally in terms of the 221 00:12:21,480 --> 00:12:24,959 Speaker 1: regulatory obligations and how that sort of changes the way 222 00:12:24,960 --> 00:12:27,360 Speaker 1: the bank must operate at that point they have to 223 00:12:27,440 --> 00:12:30,640 Speaker 1: hire a lot more risk management people and do a 224 00:12:30,640 --> 00:12:34,600 Speaker 1: lot more work on scenario planning around what happens to 225 00:12:34,640 --> 00:12:37,880 Speaker 1: different FED scenarios that the FED will publish around the 226 00:12:38,000 --> 00:12:42,040 Speaker 1: economy and potential changes to asset prices, not just in 227 00:12:42,080 --> 00:12:46,240 Speaker 1: real estate, but other sectors, and it's a big administrative burden. 228 00:12:46,800 --> 00:12:49,480 Speaker 1: Some of the bank managers that I talked to, the 229 00:12:49,520 --> 00:12:52,240 Speaker 1: presidents of some of these small local banks, you know, 230 00:12:52,280 --> 00:12:57,360 Speaker 1: they've noted that when they were hiring during the aftermath 231 00:12:57,360 --> 00:12:59,400 Speaker 1: of the financial crisis, they felt bad that they were 232 00:12:59,480 --> 00:13:03,480 Speaker 1: hiring more were administrative workers then loan officers, not the 233 00:13:03,480 --> 00:13:05,240 Speaker 1: folks who are going out and producing money for them. 234 00:13:05,920 --> 00:13:09,240 Speaker 1: And their worry was, if I go above that threshold, 235 00:13:09,280 --> 00:13:11,920 Speaker 1: I'm gonna have to hire a lot more administrative folks 236 00:13:11,960 --> 00:13:14,360 Speaker 1: to do all the CCR testing that they were talking 237 00:13:14,360 --> 00:13:16,920 Speaker 1: about back in the day and run all these different 238 00:13:16,920 --> 00:13:20,120 Speaker 1: scenarios and just more compliance people. Got it. And so 239 00:13:20,240 --> 00:13:22,040 Speaker 1: if you're hiring a third of your people were in 240 00:13:22,120 --> 00:13:25,360 Speaker 1: compliance and not income producing, you're going to try and 241 00:13:25,360 --> 00:13:28,000 Speaker 1: avoid that. Also, if you get really big, I think 242 00:13:28,000 --> 00:13:30,880 Speaker 1: you start to get regulators who are situated on site 243 00:13:31,080 --> 00:13:33,840 Speaker 1: in your bank right just to kind of monitor how 244 00:13:33,880 --> 00:13:37,000 Speaker 1: things are going. You know, I don't know about that. 245 00:13:37,040 --> 00:13:39,480 Speaker 1: I do know I was visiting one client once and 246 00:13:39,520 --> 00:13:42,080 Speaker 1: all of a sudden, regulators came in sort of an 247 00:13:42,080 --> 00:13:45,439 Speaker 1: announcement that morning they were coming in, and the atmosphere 248 00:13:45,720 --> 00:13:49,400 Speaker 1: in the place was suddenly very tense. So just on 249 00:13:49,559 --> 00:13:54,320 Speaker 1: this regulation, no shit, It is true that commercial real 250 00:13:54,480 --> 00:13:59,120 Speaker 1: estate has been on regulators radars collective radars as a 251 00:13:59,120 --> 00:14:02,880 Speaker 1: source of potential risk for some time. What exactly was 252 00:14:02,880 --> 00:14:04,960 Speaker 1: the concern there and can you kind of give us 253 00:14:05,280 --> 00:14:09,480 Speaker 1: a quick synopsis of how that regulation has changed over 254 00:14:09,520 --> 00:14:13,240 Speaker 1: the past few years. Well, in twenty fifteen, that was 255 00:14:13,240 --> 00:14:16,920 Speaker 1: a watershed for certain types of loans. The high volatility 256 00:14:16,920 --> 00:14:22,280 Speaker 1: Commercial real Estate regulations came in HVC, so that the 257 00:14:22,320 --> 00:14:26,280 Speaker 1: loans with shorter terms lenders had to hold more capital 258 00:14:26,320 --> 00:14:30,479 Speaker 1: and reserve. So suddenly it became more expensive to originate 259 00:14:30,560 --> 00:14:34,480 Speaker 1: loans like that. Construction lending was dead center for that 260 00:14:34,560 --> 00:14:37,960 Speaker 1: activity because those are typically short term loans that just 261 00:14:38,120 --> 00:14:41,480 Speaker 1: pay out very quickly once the construction projects done. And 262 00:14:41,560 --> 00:14:45,920 Speaker 1: we saw a distinct move in construction financing there. It 263 00:14:46,080 --> 00:14:49,760 Speaker 1: used to be something like seventy percent of construction financing 264 00:14:50,000 --> 00:14:55,040 Speaker 1: was bank driven, and that really declined to debt funds 265 00:14:55,240 --> 00:14:58,080 Speaker 1: who didn't face any of that kind of regulatory burden. 266 00:14:58,640 --> 00:15:02,880 Speaker 1: They really stepped into that and started originating more construction loans. 267 00:15:03,360 --> 00:15:05,520 Speaker 1: Banks are still the question number too. Yeah, Like so 268 00:15:05,560 --> 00:15:09,200 Speaker 1: it was seventy percent what's it done too, it's my recollection. 269 00:15:09,480 --> 00:15:12,320 Speaker 1: It was like fifty two percent recently, so it's still 270 00:15:12,320 --> 00:15:16,040 Speaker 1: a majority bank financing. But the debt funds really aid 271 00:15:16,120 --> 00:15:19,360 Speaker 1: into that business. And they know. Some of these lenders. 272 00:15:19,360 --> 00:15:22,120 Speaker 1: When I talk with them, they complained about their competitors, 273 00:15:22,120 --> 00:15:24,120 Speaker 1: how they're just so aggressive compared to them. And they 274 00:15:24,160 --> 00:15:27,760 Speaker 1: kind of lifted the market in this period from twenty 275 00:15:27,840 --> 00:15:32,400 Speaker 1: fifteen to twenty nineteen because they were originating loans at 276 00:15:32,600 --> 00:15:37,560 Speaker 1: much higher LTVs, much lower interest rates, and with very 277 00:15:37,600 --> 00:15:41,040 Speaker 1: few covenants out there, because they were underwriting differently than 278 00:15:41,080 --> 00:15:46,400 Speaker 1: banks banks. They underwrite a loan wanting to avoid in 279 00:15:46,880 --> 00:15:49,520 Speaker 1: a foreclosure situation. They want to avoid what you call 280 00:15:49,560 --> 00:15:52,080 Speaker 1: in the industry r EO, not the band, but you 281 00:15:52,080 --> 00:15:55,560 Speaker 1: know r EO the real estate owned situation. They want 282 00:15:55,560 --> 00:15:58,160 Speaker 1: to avoid that because you know, if I'm a big bank, 283 00:15:58,520 --> 00:16:00,680 Speaker 1: what do I know about running an apart building? What 284 00:16:01,280 --> 00:16:04,480 Speaker 1: do I know about managing an office building? I'd rather 285 00:16:05,240 --> 00:16:08,040 Speaker 1: have the experts take care of that and I just 286 00:16:08,040 --> 00:16:10,560 Speaker 1: collect a nice, stable yield. So I want to underwright 287 00:16:10,600 --> 00:16:12,840 Speaker 1: to avoid that. So I'll put covenants in there to 288 00:16:12,880 --> 00:16:16,560 Speaker 1: make sure that if occupancy flow falls below a certain level, 289 00:16:16,720 --> 00:16:20,200 Speaker 1: that there are scrapes of any revenue, so I make 290 00:16:20,200 --> 00:16:22,440 Speaker 1: sure that I'm whole. So they put those kind of 291 00:16:22,440 --> 00:16:24,440 Speaker 1: things in there. The debt funds they didn't do any 292 00:16:24,440 --> 00:16:27,200 Speaker 1: of that because the debt funds a lot of them 293 00:16:27,240 --> 00:16:30,600 Speaker 1: started as equity shops that have their own investments and 294 00:16:30,640 --> 00:16:33,800 Speaker 1: own management in place, and you know, they viewed it 295 00:16:33,800 --> 00:16:37,480 Speaker 1: as an opportunity. It might be a situation where I 296 00:16:37,600 --> 00:16:40,800 Speaker 1: have either any stable yield and I can help my 297 00:16:40,840 --> 00:16:43,880 Speaker 1: investors that way. But if I had the tell situation 298 00:16:43,960 --> 00:16:47,000 Speaker 1: where there's a foreclosure, I have this equity management shop 299 00:16:47,000 --> 00:16:48,640 Speaker 1: on the side. I can just take the property to 300 00:16:48,720 --> 00:16:51,120 Speaker 1: lower basis than before, and I know how to run 301 00:16:51,120 --> 00:16:52,680 Speaker 1: a property and I could probably do it better than 302 00:16:52,720 --> 00:16:54,640 Speaker 1: those people who were coming to me for a loan. 303 00:16:54,680 --> 00:16:57,080 Speaker 1: So I'll put it into that shop and raise some 304 00:16:57,120 --> 00:16:59,560 Speaker 1: capital to stabilize that and I'll be good. So it's 305 00:16:59,560 --> 00:17:02,880 Speaker 1: a different behavior, and it's you know, those were the 306 00:17:02,920 --> 00:17:05,920 Speaker 1: folks who are the most aggressive and did some of 307 00:17:05,960 --> 00:17:10,280 Speaker 1: the larger loans in that period of twenty twenty twenty 308 00:17:10,280 --> 00:17:13,520 Speaker 1: twenty one when interest rates for so low, and typically 309 00:17:13,560 --> 00:17:16,000 Speaker 1: they had short terms as well, So we have a 310 00:17:16,080 --> 00:17:19,840 Speaker 1: wall of maturities coming in twenty twenty three through twenty 311 00:17:19,880 --> 00:17:23,280 Speaker 1: twenty five, and those aggressive loans are the ones that 312 00:17:23,280 --> 00:17:25,840 Speaker 1: I think are going to see the most attention. This 313 00:17:25,960 --> 00:17:28,600 Speaker 1: was exactly what my next question was going to be. 314 00:17:28,640 --> 00:17:31,520 Speaker 1: But talk to us about what the maturity wall actually 315 00:17:31,560 --> 00:17:33,680 Speaker 1: looks like at this point in time, because again, this 316 00:17:33,720 --> 00:17:35,840 Speaker 1: is where a lot of the worry is stemming from, 317 00:17:35,920 --> 00:17:39,200 Speaker 1: this idea that you have the sort of frontloaded wall 318 00:17:39,280 --> 00:17:41,800 Speaker 1: that is coming due in the next year or two. 319 00:17:41,880 --> 00:17:46,200 Speaker 1: And how are banks slash private investors to your point, 320 00:17:46,520 --> 00:17:49,679 Speaker 1: going to actually be able to refinance those loans. The 321 00:17:49,720 --> 00:17:54,040 Speaker 1: originators of loans for them, their ability to refinance, you know, 322 00:17:54,080 --> 00:17:56,960 Speaker 1: they have a certain cost of capital. They'll offer a 323 00:17:57,040 --> 00:18:00,560 Speaker 1: bour Okay, we can refinance a loan, but it's at 324 00:18:00,600 --> 00:18:04,480 Speaker 1: a lower LTV than before. The rate is higher. And 325 00:18:04,600 --> 00:18:07,639 Speaker 1: if somebody bought a property back in twenty thirteen and 326 00:18:07,720 --> 00:18:10,800 Speaker 1: the loan matures in twenty twenty three, you've had a 327 00:18:10,800 --> 00:18:13,119 Speaker 1: tremendous amount of price growth along the way. Even though 328 00:18:13,119 --> 00:18:16,160 Speaker 1: we've had some price declines recently, there's probably still enough 329 00:18:16,280 --> 00:18:19,040 Speaker 1: that they might be able to refinance that at a 330 00:18:19,119 --> 00:18:23,840 Speaker 1: higher rate and keep that alive, assuming that you don't 331 00:18:23,840 --> 00:18:25,440 Speaker 1: have a problem on income. I'm gonna put that to 332 00:18:25,480 --> 00:18:28,000 Speaker 1: the side for the moment because that's another challenge. But 333 00:18:28,480 --> 00:18:30,600 Speaker 1: just dealing with one challenge at a time here. Yeah, So, 334 00:18:30,920 --> 00:18:33,320 Speaker 1: if you had a long term loan you're refinancing, Yeah, 335 00:18:33,359 --> 00:18:35,440 Speaker 1: maybe you're not going to get the same proceeds as before, 336 00:18:35,920 --> 00:18:40,320 Speaker 1: but you might be okay. But if you had a 337 00:18:40,320 --> 00:18:44,520 Speaker 1: loan that was originated in twenty twenty one, when we 338 00:18:44,560 --> 00:18:47,960 Speaker 1: saw a record low interest rate environment and you had 339 00:18:47,960 --> 00:18:52,080 Speaker 1: a very high LTV and a record low interest rate 340 00:18:52,200 --> 00:18:55,480 Speaker 1: thinking that game would continue forever, you may have a 341 00:18:55,520 --> 00:18:58,200 Speaker 1: bad day as you try to get that refinance because 342 00:18:58,200 --> 00:18:59,920 Speaker 1: you're going to go to a lender who will offer 343 00:19:00,080 --> 00:19:03,280 Speaker 1: you money, but it's going to be in a very 344 00:19:03,400 --> 00:19:07,880 Speaker 1: low LTV comparative before and with a mortgage rate closer 345 00:19:07,880 --> 00:19:09,960 Speaker 1: to a seven percent than a three and a half percent, 346 00:19:10,600 --> 00:19:13,080 Speaker 1: and so the numbers may not work for those folks 347 00:19:13,080 --> 00:19:15,160 Speaker 1: and they're gonna have to have You know, there's three 348 00:19:15,240 --> 00:19:17,359 Speaker 1: options for some of these folks. Maybe it could do 349 00:19:17,400 --> 00:19:21,520 Speaker 1: a cash in refinancing where they bring more equity to 350 00:19:21,560 --> 00:19:24,520 Speaker 1: the table themselves in their own pocket, and they might 351 00:19:24,640 --> 00:19:26,560 Speaker 1: want to do that just so they don't end up 352 00:19:26,560 --> 00:19:29,480 Speaker 1: in a default situation if the property, if they still 353 00:19:29,480 --> 00:19:32,680 Speaker 1: have an expectation of price growth ahead or income growth, 354 00:19:32,800 --> 00:19:35,719 Speaker 1: or there's still some fees that make them whole and 355 00:19:35,920 --> 00:19:37,439 Speaker 1: you know, they think of as a brand new investment 356 00:19:37,480 --> 00:19:40,880 Speaker 1: at that point, or maybe they get some outside investor 357 00:19:40,920 --> 00:19:43,879 Speaker 1: to bring that cash in a preferred equity situation and 358 00:19:44,000 --> 00:19:47,000 Speaker 1: that person gets some of the upside of the project 359 00:19:47,040 --> 00:19:49,720 Speaker 1: moving forward, so that you the investor can at least 360 00:19:49,720 --> 00:19:52,919 Speaker 1: still collect some fees on the project. And then another 361 00:19:52,920 --> 00:19:56,600 Speaker 1: opportunity is to literally hand the keys over to the 362 00:19:56,680 --> 00:20:00,320 Speaker 1: lender a jingle mail. I know we're making the point 363 00:20:00,320 --> 00:20:02,640 Speaker 1: about how this might not be two thousand and eight, 364 00:20:02,760 --> 00:20:06,080 Speaker 1: but these are all very oh eight type terms real 365 00:20:06,240 --> 00:20:09,399 Speaker 1: estate owned and jingle Yeah, just in a different context. 366 00:20:09,400 --> 00:20:12,399 Speaker 1: But I wanted to you know, you mentioned setting aside 367 00:20:12,840 --> 00:20:15,040 Speaker 1: the income question because we've been talking about raids, we've 368 00:20:15,040 --> 00:20:19,280 Speaker 1: been talking about price appreciation. Can you break down like 369 00:20:20,240 --> 00:20:23,160 Speaker 1: where is their income stress? Where is there not income 370 00:20:23,280 --> 00:20:26,640 Speaker 1: stress within the commercial real estate world, and how are 371 00:20:26,640 --> 00:20:30,520 Speaker 1: you thinking about that particular aspect of it right now? Yeah, 372 00:20:30,600 --> 00:20:32,919 Speaker 1: the income stress is a bit of a challenge and 373 00:20:33,000 --> 00:20:35,600 Speaker 1: there still is a lot of uncertainty around it. Let's 374 00:20:35,640 --> 00:20:39,680 Speaker 1: start with offices. You're saying earlier, Hey, everything's not Manhattan's offices, 375 00:20:39,760 --> 00:20:43,119 Speaker 1: but let's talk about Manhattan. Okay, yeah, please. It's Wednesday 376 00:20:43,200 --> 00:20:46,120 Speaker 1: today when we happen to be recording walking around the city. 377 00:20:46,280 --> 00:20:48,360 Speaker 1: There's more people out today because it's a Wednesday, that's 378 00:20:48,359 --> 00:20:50,439 Speaker 1: when more people are around. But if you're around on 379 00:20:50,440 --> 00:20:54,480 Speaker 1: a Monday or Friday, it's usually pretty empty. And you know, 380 00:20:54,560 --> 00:20:56,440 Speaker 1: so people see that and they see that, hey, there 381 00:20:56,440 --> 00:20:59,040 Speaker 1: are less people coming in. The subway ridership is at 382 00:20:59,080 --> 00:21:02,080 Speaker 1: like sixty five per sent to the previous peak levels, 383 00:21:02,160 --> 00:21:07,720 Speaker 1: so obviously the space is being utilized less. That said, 384 00:21:08,119 --> 00:21:10,800 Speaker 1: the fiscal side of it, you know, the fiscal occupancy, 385 00:21:10,840 --> 00:21:13,199 Speaker 1: the tenants who are still on the hook for the space. 386 00:21:14,040 --> 00:21:17,280 Speaker 1: There still is some good occupancy in that direction. You know, 387 00:21:17,320 --> 00:21:19,359 Speaker 1: there's a lot of sublet space where firms are signaling 388 00:21:19,400 --> 00:21:21,520 Speaker 1: that they want to get rid of it, but they 389 00:21:21,560 --> 00:21:24,360 Speaker 1: still are pain and so there's a short term challenge 390 00:21:24,720 --> 00:21:28,000 Speaker 1: that everyone knows that there's going to be a reduction 391 00:21:28,000 --> 00:21:31,639 Speaker 1: to demand eventually, but right now there's still some income 392 00:21:31,680 --> 00:21:34,720 Speaker 1: coming in, and so there's that there's a term in 393 00:21:34,720 --> 00:21:39,960 Speaker 1: the industry walt weighted average least term and if you 394 00:21:40,040 --> 00:21:42,359 Speaker 1: have a property that has a very long least term ahead, 395 00:21:42,720 --> 00:21:44,560 Speaker 1: even if people aren't using it as much. If you 396 00:21:44,600 --> 00:21:47,760 Speaker 1: have some high quality tenants who are unlikely to default, 397 00:21:48,400 --> 00:21:50,920 Speaker 1: that might seem like a safe investment. But if I've 398 00:21:50,960 --> 00:21:54,000 Speaker 1: got a tenant who has one year left on the 399 00:21:54,080 --> 00:21:58,160 Speaker 1: lease and I see that the building is half empty 400 00:21:58,240 --> 00:22:01,280 Speaker 1: most days, I'm going to be concerned about what happens 401 00:22:01,560 --> 00:22:05,440 Speaker 1: to income. They're moving forward, so it's a slow motion thing. 402 00:22:06,400 --> 00:22:10,000 Speaker 1: You know, everybody sees the direction it's going. That's one 403 00:22:10,000 --> 00:22:11,960 Speaker 1: of the things about real estate forget about you know, 404 00:22:12,000 --> 00:22:14,200 Speaker 1: I used to work with a bunch of economists in Boston. 405 00:22:14,280 --> 00:22:16,760 Speaker 1: There's a lot of complex math we did, but forget 406 00:22:16,800 --> 00:22:19,520 Speaker 1: about it all that the real estate market, there's all 407 00:22:19,560 --> 00:22:21,920 Speaker 1: these sticky things. You just count the number of cranes 408 00:22:21,920 --> 00:22:23,399 Speaker 1: and you can see whether you're going to have some 409 00:22:23,440 --> 00:22:26,080 Speaker 1: construction challenges ahead. You just look at the number of 410 00:22:26,080 --> 00:22:27,920 Speaker 1: people walking into a building and you can just get 411 00:22:27,960 --> 00:22:31,240 Speaker 1: a sense of what the potential demand is. All those 412 00:22:31,359 --> 00:22:34,399 Speaker 1: kind of rule of thumb measures have been telling people 413 00:22:34,400 --> 00:22:36,640 Speaker 1: that there's going to be some sort of reduction in demand, 414 00:22:37,200 --> 00:22:40,760 Speaker 1: and we know that's coming, but nobody's really been able 415 00:22:40,760 --> 00:22:42,760 Speaker 1: to fully quantify it yet it's something we just have 416 00:22:42,840 --> 00:22:46,159 Speaker 1: to live through over the next few years before we 417 00:22:46,200 --> 00:22:48,639 Speaker 1: see all the leases burn off. All right, but that 418 00:22:48,800 --> 00:22:53,320 Speaker 1: was great. But what about the non Manhattan office? Yeah? 419 00:22:53,359 --> 00:22:56,080 Speaker 1: And two, I guess sort of two interrelated questions. But 420 00:22:56,160 --> 00:22:58,720 Speaker 1: like Ridge Hill, the number he'side was twenty trillion. But 421 00:22:58,760 --> 00:23:01,399 Speaker 1: when we think about that twenty and how much is 422 00:23:01,520 --> 00:23:03,879 Speaker 1: this sort of like prime city office that might not 423 00:23:04,040 --> 00:23:07,879 Speaker 1: ever come back to pre COVID levels. And then can 424 00:23:07,920 --> 00:23:09,600 Speaker 1: you talk a little bit more about like are there 425 00:23:09,720 --> 00:23:13,440 Speaker 1: other these other areas, medical, etc. Are they doing fine 426 00:23:13,440 --> 00:23:16,879 Speaker 1: in terms of like income and income expectations. There's a 427 00:23:16,880 --> 00:23:19,320 Speaker 1: couple of things that are digests there. Yeah, the office market, 428 00:23:20,560 --> 00:23:24,040 Speaker 1: most of the US office market is a suburban market, Okay, 429 00:23:24,040 --> 00:23:26,240 Speaker 1: And that goes back to the nineteen seventies and nineteen 430 00:23:26,280 --> 00:23:30,200 Speaker 1: eighties when we saw a surge in construction in those areas. 431 00:23:30,680 --> 00:23:33,720 Speaker 1: And it's not just suburban New York. A lot of 432 00:23:33,720 --> 00:23:36,119 Speaker 1: it is the development of the sun Belt states and 433 00:23:36,359 --> 00:23:38,760 Speaker 1: as they entered the modern economy in that time and 434 00:23:38,880 --> 00:23:43,120 Speaker 1: became service sector economies as opposed to agriculture and manufacturing, 435 00:23:44,000 --> 00:23:47,440 Speaker 1: those office buildings in those areas they do constitute a 436 00:23:47,520 --> 00:23:51,600 Speaker 1: large part of the office market Manhattan off top of head, 437 00:23:51,600 --> 00:23:53,840 Speaker 1: I think it's about forty percent of all CBD office 438 00:23:53,880 --> 00:23:55,800 Speaker 1: based in the United States. So that's why people like 439 00:23:55,840 --> 00:23:58,000 Speaker 1: to focus someone Happen because it's pretty significant. It's an 440 00:23:58,040 --> 00:24:01,159 Speaker 1: indicator of where the whole c D office market is 441 00:24:01,160 --> 00:24:04,119 Speaker 1: going nationally. But you know, that suburban market is a 442 00:24:04,160 --> 00:24:07,800 Speaker 1: bigger market overall, and it's been bigger in terms of 443 00:24:07,840 --> 00:24:11,119 Speaker 1: the deal vium recently, the last really since twenty fifteen, 444 00:24:11,760 --> 00:24:16,080 Speaker 1: when the Chinese investors pulled back from investing in the 445 00:24:16,200 --> 00:24:19,760 Speaker 1: US deal. Vilume fell off for the CBD locations, and 446 00:24:19,800 --> 00:24:21,879 Speaker 1: the past had always been sort of half and half. 447 00:24:21,920 --> 00:24:24,040 Speaker 1: Half of all investment was in suburbs, half of all 448 00:24:24,040 --> 00:24:26,960 Speaker 1: investment was in CBD locations, and that really started to 449 00:24:26,960 --> 00:24:30,840 Speaker 1: turn a corner then when the prices hit a record low, 450 00:24:31,280 --> 00:24:33,880 Speaker 1: and you know, there was just a very little upside left. 451 00:24:34,240 --> 00:24:36,399 Speaker 1: So there's been a lot less transaction activity than the 452 00:24:36,400 --> 00:24:41,920 Speaker 1: CBD locations even before all the central business essentially yeah sorry, yeah, 453 00:24:41,960 --> 00:24:44,720 Speaker 1: and so there's been a decline ever since. So it's 454 00:24:45,200 --> 00:24:48,360 Speaker 1: it has been important, but it had been priced perfection 455 00:24:48,400 --> 00:24:50,960 Speaker 1: back around twenty fifteen, so there Wasn't you know that 456 00:24:50,960 --> 00:24:54,080 Speaker 1: that same push to continue to invest in it as 457 00:24:54,080 --> 00:25:13,320 Speaker 1: there had been for more suburban locations. I want to 458 00:25:13,320 --> 00:25:15,280 Speaker 1: go back to what you were talking about when it 459 00:25:15,280 --> 00:25:19,679 Speaker 1: comes to income deterioration and waltz, so you know, the 460 00:25:19,720 --> 00:25:23,240 Speaker 1: weighted average lease terms and things like that, is the 461 00:25:23,320 --> 00:25:27,919 Speaker 1: implication that the old extended pretend strategy, which you know, 462 00:25:28,000 --> 00:25:30,600 Speaker 1: another blast from the past from two thousand and eight 463 00:25:30,640 --> 00:25:32,960 Speaker 1: and the years after that, is the implication that that 464 00:25:33,280 --> 00:25:36,399 Speaker 1: just won't work in the current environment, that at some 465 00:25:36,520 --> 00:25:38,680 Speaker 1: point you're not going to be able to refinance, or 466 00:25:38,720 --> 00:25:41,000 Speaker 1: there will be some sort of catalyst on the income 467 00:25:41,440 --> 00:25:46,000 Speaker 1: side that makes it impossible. Yeah, that is a good distinction. 468 00:25:46,200 --> 00:25:49,840 Speaker 1: The extended pretend it worked for a simple reason. Everybody 469 00:25:49,920 --> 00:25:53,000 Speaker 1: understood it was a temporary credit market challenge. You had 470 00:25:53,200 --> 00:25:57,399 Speaker 1: otherwise cash flown properties, and if you know, the credit 471 00:25:57,440 --> 00:26:01,440 Speaker 1: markets simply stabilized. Given that the some high quality cash flow, 472 00:26:01,480 --> 00:26:04,760 Speaker 1: you'd be able to refinance at reasonable rates. In fact, 473 00:26:04,800 --> 00:26:06,720 Speaker 1: the folks who made a lot of money into the 474 00:26:06,800 --> 00:26:09,760 Speaker 1: recovery period where folks who came in took buildings that 475 00:26:09,800 --> 00:26:13,959 Speaker 1: were otherwise cash flowing, just with bad debt situations reposition 476 00:26:14,040 --> 00:26:17,040 Speaker 1: the debt, put an appropriate debt structure in there, and 477 00:26:17,040 --> 00:26:20,000 Speaker 1: then ride the wave of recovery as a debt market stabilized. 478 00:26:20,840 --> 00:26:25,160 Speaker 1: This time through, you don't have that same opportunity of 479 00:26:25,680 --> 00:26:31,240 Speaker 1: healthy cash flowing properties. You see properties that have uncertainty 480 00:26:31,320 --> 00:26:35,199 Speaker 1: around the income moving forward. So it's just not going 481 00:26:35,280 --> 00:26:39,360 Speaker 1: to work out the same way we track distressed asset cells, 482 00:26:39,400 --> 00:26:43,040 Speaker 1: and we don't have a lot of distressed asset cells yet. Again, 483 00:26:43,440 --> 00:26:45,879 Speaker 1: everybody kind of sees this coming, but it's a slow moving, 484 00:26:45,960 --> 00:26:50,160 Speaker 1: sticky market, and everybody knows there's some distress cells coming, 485 00:26:50,200 --> 00:26:53,280 Speaker 1: but it hasn't hit in a meaningful way yet. But 486 00:26:53,480 --> 00:26:56,679 Speaker 1: when we do see some of the distress cells, when 487 00:26:56,720 --> 00:27:00,840 Speaker 1: we disaggregate who was buying, it's a different type of 488 00:27:00,880 --> 00:27:03,800 Speaker 1: buyer of the distress we've seen so far compared to 489 00:27:03,800 --> 00:27:06,600 Speaker 1: the aftermath of the financial crisis. The aftermath of the 490 00:27:06,600 --> 00:27:09,000 Speaker 1: financial crisis, there's a bunch of suits from New York, 491 00:27:09,040 --> 00:27:11,760 Speaker 1: from private equity firms flying out to cities across the 492 00:27:11,840 --> 00:27:14,800 Speaker 1: United States buying up these cash flowing assets, you know, 493 00:27:14,840 --> 00:27:17,800 Speaker 1: repositioning the debt and flying home and just you know, 494 00:27:17,880 --> 00:27:22,880 Speaker 1: collecting a big get. Absolutely, and everybody sees that and thinks, Hey, 495 00:27:23,320 --> 00:27:25,760 Speaker 1: I'm gonna be just like those folks this cycle. But 496 00:27:25,960 --> 00:27:29,960 Speaker 1: the folks who have been buying these properties so far 497 00:27:30,600 --> 00:27:35,040 Speaker 1: are local developer, owner operator types. It's people know how 498 00:27:35,080 --> 00:27:37,679 Speaker 1: to swing a hammer. And that tells me that the 499 00:27:37,760 --> 00:27:41,200 Speaker 1: distress is really more fundamental distress. It's not a cash 500 00:27:41,200 --> 00:27:45,560 Speaker 1: flowing building in Nashville with a high quality credit tenant. 501 00:27:46,200 --> 00:27:50,679 Speaker 1: It's a dead mall outside of Columbus with burnt orange 502 00:27:50,680 --> 00:27:53,639 Speaker 1: tile and brown carpet from the seventies. And you know, 503 00:27:53,760 --> 00:27:57,120 Speaker 1: somebody has to reposition that, and it's going to take 504 00:27:57,160 --> 00:28:03,399 Speaker 1: somebody who has relationships with local regulators. Every zoning board 505 00:28:03,440 --> 00:28:05,600 Speaker 1: wants to get their hands involved in that to be 506 00:28:05,640 --> 00:28:07,960 Speaker 1: able to change the use and bring it into the 507 00:28:08,040 --> 00:28:11,639 Speaker 1: modern economy again. And so that takes a lot of 508 00:28:11,640 --> 00:28:15,520 Speaker 1: elbow grease, both literally from the physical side and then 509 00:28:15,560 --> 00:28:19,080 Speaker 1: figuratively just talking with local zoning boards and getting changes 510 00:28:19,119 --> 00:28:22,960 Speaker 1: and entitlements and land use regulation. There's a cre guy 511 00:28:23,000 --> 00:28:26,080 Speaker 1: I follow on Twitter who goes by the handle repositioning play. 512 00:28:26,160 --> 00:28:28,000 Speaker 1: That's what that means. It just clicked to me that 513 00:28:28,200 --> 00:28:30,760 Speaker 1: that's what that means. That it's like some malls like, oh, 514 00:28:30,880 --> 00:28:34,400 Speaker 1: maybe this could be like residential or maybe this could 515 00:28:34,440 --> 00:28:37,439 Speaker 1: be like a big paintball sort of like thing. But 516 00:28:37,480 --> 00:28:39,640 Speaker 1: that's what that means that you have to identify the 517 00:28:39,680 --> 00:28:42,720 Speaker 1: opportunity to like make it something other than it was. Yeah, 518 00:28:42,800 --> 00:28:46,440 Speaker 1: and with those malls, a lot of malls that are 519 00:28:46,520 --> 00:28:51,400 Speaker 1: positioned well relative to transit opportunities, yeah, for highways, and 520 00:28:51,400 --> 00:28:54,480 Speaker 1: so some of them would be great for logistics and 521 00:28:54,600 --> 00:28:58,360 Speaker 1: local distribution activity. However, that flies in the face of 522 00:28:58,520 --> 00:29:03,120 Speaker 1: local zoning issues where you know, local city leaders feel 523 00:29:03,160 --> 00:29:06,280 Speaker 1: that it's too beneath them. It's not bougie, it's not 524 00:29:06,400 --> 00:29:09,520 Speaker 1: a consumption area. Plus, you know, we're not a low 525 00:29:09,560 --> 00:29:12,360 Speaker 1: class industrial town. We want them all we want, we 526 00:29:12,400 --> 00:29:15,080 Speaker 1: want blooming deals because you know, we're high end. But 527 00:29:15,840 --> 00:29:18,800 Speaker 1: they you know, the reality is the market doesn't believe that, 528 00:29:18,840 --> 00:29:21,959 Speaker 1: and it's going to take a long time to get 529 00:29:22,000 --> 00:29:25,240 Speaker 1: some local city leaders to kind of understand where they 530 00:29:25,280 --> 00:29:29,520 Speaker 1: really sit. But there's another issue that in many states 531 00:29:29,600 --> 00:29:33,360 Speaker 1: we have that those local city leaders want the retail 532 00:29:33,440 --> 00:29:37,320 Speaker 1: because it generates more tax revenue without them having to 533 00:29:37,440 --> 00:29:40,320 Speaker 1: tax residents as much. And so that that's the other 534 00:29:40,360 --> 00:29:44,440 Speaker 1: reason that it's a sticky issue keeping the market from 535 00:29:44,440 --> 00:29:46,320 Speaker 1: converting the space to what it really needs to be. 536 00:29:46,520 --> 00:29:49,080 Speaker 1: So this is really fascinating, just this idea that the 537 00:29:49,160 --> 00:29:51,360 Speaker 1: buyers we're seeing show up in some of these distressed 538 00:29:51,480 --> 00:29:53,760 Speaker 1: is not the people who just know how to like, 539 00:29:54,360 --> 00:29:57,600 Speaker 1: you know, do a spridge. Yeah, that people who actually 540 00:29:57,680 --> 00:29:59,920 Speaker 1: have to under have these sort of are sort of 541 00:30:00,120 --> 00:30:03,000 Speaker 1: like concrete connections. But I want to get back to 542 00:30:03,560 --> 00:30:07,479 Speaker 1: some of the specific bank questions and specifically, like you know, 543 00:30:07,560 --> 00:30:11,280 Speaker 1: let's say we talk about CBD office some of these 544 00:30:11,280 --> 00:30:14,800 Speaker 1: areas that are income stressed, Like of the debt out there, 545 00:30:14,960 --> 00:30:17,000 Speaker 1: how solid are the numbers in terms of like how 546 00:30:17,080 --> 00:30:20,000 Speaker 1: much is bank how much is private credit funds? Like 547 00:30:20,080 --> 00:30:24,320 Speaker 1: how is that broken down? I mean the originations we're 548 00:30:24,360 --> 00:30:27,360 Speaker 1: tracking originations. Okay, we don't have a good measure of 549 00:30:27,400 --> 00:30:30,400 Speaker 1: the stock. We have some estimate some maturities. You know, 550 00:30:30,480 --> 00:30:32,760 Speaker 1: given when we know all the loans were originated and 551 00:30:32,760 --> 00:30:35,720 Speaker 1: the kind of terms that were in place, measures of 552 00:30:35,800 --> 00:30:39,320 Speaker 1: stock gets get they get tricky because some loans, you know, 553 00:30:39,360 --> 00:30:41,600 Speaker 1: it might default and we're not going to hear about that. 554 00:30:42,080 --> 00:30:44,400 Speaker 1: So you know, I can give a perspective on on 555 00:30:44,520 --> 00:30:49,840 Speaker 1: the share of originations. And in the boom period when 556 00:30:49,880 --> 00:30:53,480 Speaker 1: interest rates were so low and everyone was excited about 557 00:30:53,520 --> 00:30:55,240 Speaker 1: the fact that there were some yield on offer and 558 00:30:55,280 --> 00:30:58,400 Speaker 1: commercial real estate. Those debt funds were around thirteen percent 559 00:30:58,440 --> 00:31:03,000 Speaker 1: of originations, and given that they had typically short term 560 00:31:03,000 --> 00:31:06,120 Speaker 1: short terms associated with those loans, you know that's going 561 00:31:06,160 --> 00:31:09,920 Speaker 1: to be a significant component of the maturities in the 562 00:31:10,040 --> 00:31:13,240 Speaker 1: near term. Thirteen percent of the market was high LTV, 563 00:31:13,560 --> 00:31:17,640 Speaker 1: low interest rate and a very few covenants from these 564 00:31:17,680 --> 00:31:21,640 Speaker 1: aggressive lenders. Could be an interesting situation with those with 565 00:31:21,680 --> 00:31:24,880 Speaker 1: those deals. So, just on this topic, how do you 566 00:31:24,920 --> 00:31:32,480 Speaker 1: see banks and private investors actually hedging their CRE exposure 567 00:31:32,640 --> 00:31:34,640 Speaker 1: at this moment in time, if they're doing it at all, 568 00:31:34,680 --> 00:31:37,400 Speaker 1: Because my impression of the space was it was always 569 00:31:37,480 --> 00:31:41,000 Speaker 1: kind of a difficult one to hedge or go short. 570 00:31:41,120 --> 00:31:45,640 Speaker 1: And you do have synthetic instruments like the CMBX, which 571 00:31:45,680 --> 00:31:49,960 Speaker 1: is a derivatives index tied to not that many CMBs properties, 572 00:31:50,000 --> 00:31:52,920 Speaker 1: I think, which makes it, you know, sometimes a not 573 00:31:53,480 --> 00:31:57,200 Speaker 1: perfect one for one hedge for this kind of exposure. Yeah, 574 00:31:57,320 --> 00:32:01,360 Speaker 1: hedging the commercial estate market has been it's been the 575 00:32:01,400 --> 00:32:04,520 Speaker 1: white whale for many folks in the industry over the 576 00:32:04,600 --> 00:32:07,920 Speaker 1: last fifteen years. The firm I'm with now, they bought 577 00:32:07,960 --> 00:32:11,400 Speaker 1: this company, Real Capital Analytics back in twenty twenty one, 578 00:32:12,000 --> 00:32:15,560 Speaker 1: and Real Capital Analytics had been one of the folks 579 00:32:15,600 --> 00:32:18,840 Speaker 1: trying to get a real estate DRIVTIS index going based 580 00:32:18,840 --> 00:32:21,560 Speaker 1: on our commercial Property Price Index. We had licensed it 581 00:32:21,560 --> 00:32:23,240 Speaker 1: out to a third party that was trying to get 582 00:32:23,240 --> 00:32:24,600 Speaker 1: that going. There a few of the folks trying to 583 00:32:24,600 --> 00:32:27,840 Speaker 1: get that going, the trade organization Nate Creef, some folks 584 00:32:27,880 --> 00:32:30,360 Speaker 1: are trying to trade routives on that. So there are 585 00:32:30,360 --> 00:32:31,600 Speaker 1: a lot of folks trying to get that going, but 586 00:32:31,640 --> 00:32:34,040 Speaker 1: it never really took off, and just they couldn't get 587 00:32:34,120 --> 00:32:36,840 Speaker 1: enough buyers and sellers on opposite sides of a transaction 588 00:32:37,120 --> 00:32:40,320 Speaker 1: to make any of that work. Again, the market is 589 00:32:40,640 --> 00:32:44,040 Speaker 1: highly predictable because there's so many sticky elements in the 590 00:32:44,040 --> 00:32:46,400 Speaker 1: performance of the market that you know, if you just 591 00:32:47,120 --> 00:32:50,640 Speaker 1: again forget about econometrics and forecasting, just very simple things 592 00:32:50,680 --> 00:32:54,000 Speaker 1: talking to leasing brokers. Any deal that's going to be 593 00:32:54,000 --> 00:32:55,960 Speaker 1: done in the next six months, they're working on it 594 00:32:56,080 --> 00:32:57,880 Speaker 1: right now, and so you can get a sense of 595 00:32:57,920 --> 00:33:01,280 Speaker 1: just future demand that way. So those kind of challenges. 596 00:33:01,800 --> 00:33:04,280 Speaker 1: Everybody saw that, so it's just been hard to make 597 00:33:04,840 --> 00:33:07,160 Speaker 1: you know, a product like that, Wait, can I just 598 00:33:07,240 --> 00:33:10,880 Speaker 1: press you on that point because since we're this is 599 00:33:10,920 --> 00:33:12,600 Speaker 1: a fun episode for me because it's bringing up a 600 00:33:12,600 --> 00:33:14,640 Speaker 1: lot of two thousand and eight flashbacks. But you know, 601 00:33:14,920 --> 00:33:18,560 Speaker 1: if you wanted to go short residential real estate pre 602 00:33:18,720 --> 00:33:22,480 Speaker 1: two thousand and eight, you use the ABX. Why is 603 00:33:22,600 --> 00:33:26,800 Speaker 1: the commercial real estate market so different from the residential 604 00:33:26,800 --> 00:33:30,560 Speaker 1: market that putting on that big commercial real estate short 605 00:33:30,640 --> 00:33:33,760 Speaker 1: seems to be much more difficult. Yeah, you know, I 606 00:33:33,800 --> 00:33:37,320 Speaker 1: haven't gotten into that as much, the comparison in that direction. 607 00:33:37,400 --> 00:33:40,880 Speaker 1: There are fundamental differences in the two product types. You know, 608 00:33:40,960 --> 00:33:44,800 Speaker 1: there's much more of a subsized finance side on the 609 00:33:44,960 --> 00:33:50,640 Speaker 1: residential market. The residential market is vastly larger than the 610 00:33:51,000 --> 00:33:54,000 Speaker 1: commercial market. There's many more single family homes out there, 611 00:33:54,440 --> 00:33:59,000 Speaker 1: So just more information availability becomes an issue. You can 612 00:33:59,080 --> 00:34:01,760 Speaker 1: do a lot more. You go in the academic literature. 613 00:34:02,000 --> 00:34:04,920 Speaker 1: There's all kinds of folks doing stuff on residential real 614 00:34:05,040 --> 00:34:08,200 Speaker 1: estate because that's where the data is. There's fewer folks 615 00:34:08,280 --> 00:34:10,520 Speaker 1: doing work on commercial estate because it's just harder to 616 00:34:10,520 --> 00:34:13,680 Speaker 1: get information. Interesting, Okay, I've been working in this sector 617 00:34:13,719 --> 00:34:18,560 Speaker 1: since nineteen ninety six trying to help generate more transparency, 618 00:34:18,719 --> 00:34:23,480 Speaker 1: more information, just better data sets for the sector, and 619 00:34:23,800 --> 00:34:27,480 Speaker 1: as much as we've improved since that time. When I 620 00:34:27,520 --> 00:34:30,400 Speaker 1: talk to my public markets colleagues over at MSc EI, 621 00:34:30,440 --> 00:34:34,920 Speaker 1: they're like, well, you guys are doing okay, well, all right, 622 00:34:35,080 --> 00:34:38,080 Speaker 1: So again on this sort of like bank question. Part 623 00:34:38,080 --> 00:34:40,960 Speaker 1: of the reason we're even having this discussion again is 624 00:34:41,000 --> 00:34:44,239 Speaker 1: because in the wake of SVB, people are like, what 625 00:34:44,400 --> 00:34:47,879 Speaker 1: are what are the landmines? I guess maybe that these 626 00:34:47,880 --> 00:34:50,520 Speaker 1: banks could be stepping out or something. What's lurking on 627 00:34:50,560 --> 00:34:53,600 Speaker 1: the asset side of the bank balance sheets? And so 628 00:34:53,719 --> 00:34:56,040 Speaker 1: when we sort of like, and I imagine there's no 629 00:34:56,239 --> 00:34:59,840 Speaker 1: one model bank, obviously they're all going to be different. 630 00:35:00,239 --> 00:35:02,239 Speaker 1: But when it comes to the various things that a 631 00:35:02,320 --> 00:35:06,680 Speaker 1: theoretical bank could have on its balance sheet, you know, treasuries, 632 00:35:07,120 --> 00:35:11,200 Speaker 1: agency mbs, you know, some sort of whatever, it is like, 633 00:35:11,640 --> 00:35:16,520 Speaker 1: how significant is this really in terms of percentage of 634 00:35:16,560 --> 00:35:20,160 Speaker 1: their own exposure to commercial real estate? Or how do 635 00:35:20,200 --> 00:35:22,200 Speaker 1: you think about answering that question, or how do you 636 00:35:22,200 --> 00:35:26,400 Speaker 1: think about trying to dive into where this lives diving 637 00:35:26,480 --> 00:35:30,319 Speaker 1: into that. The FDSC call sheets have a lot of 638 00:35:30,320 --> 00:35:32,920 Speaker 1: information about some of the exposure sort of the stock 639 00:35:33,360 --> 00:35:37,239 Speaker 1: of loans of different entities, and my colleague Tama up 640 00:35:37,239 --> 00:35:39,560 Speaker 1: at Columbia. He did a study I think it was 641 00:35:39,600 --> 00:35:43,000 Speaker 1: released on marks thirteenth of all days, and estimated that 642 00:35:43,040 --> 00:35:46,080 Speaker 1: maybe two hundred banks face some challenges in that direction. 643 00:35:46,480 --> 00:35:48,600 Speaker 1: But what do we mean, like, because that's arrange it 644 00:35:48,640 --> 00:35:51,279 Speaker 1: things right, It's like they're gonna like take losses, They're 645 00:35:51,320 --> 00:35:53,879 Speaker 1: gonna have write down as verses like people are worried 646 00:35:53,880 --> 00:35:58,440 Speaker 1: about like insolvencies, etc. So like, how seriously do you 647 00:35:58,560 --> 00:36:01,840 Speaker 1: view the stress not to the commercial real estate market, 648 00:36:01,880 --> 00:36:05,200 Speaker 1: but to the banking system from the exposure that they have. Sorry, 649 00:36:05,239 --> 00:36:06,880 Speaker 1: can I just tack on to the end of that, 650 00:36:06,920 --> 00:36:10,479 Speaker 1: wouldn loan loss provisions actually look like for CR because 651 00:36:10,480 --> 00:36:12,839 Speaker 1: you would expect that. You know, again, this has been 652 00:36:12,880 --> 00:36:16,680 Speaker 1: sort of on people's radar for some time. Yeah, I'm 653 00:36:16,719 --> 00:36:19,359 Speaker 1: not sure what the loan loss provisions were. I don't 654 00:36:19,400 --> 00:36:21,680 Speaker 1: have insight to that. I just know when they made 655 00:36:21,680 --> 00:36:25,239 Speaker 1: the loan sort of the high the terms there. This 656 00:36:25,320 --> 00:36:28,120 Speaker 1: is a challenge that is out there for the sector. 657 00:36:28,560 --> 00:36:32,120 Speaker 1: You know, as much as we've tried, there are still 658 00:36:32,200 --> 00:36:36,080 Speaker 1: many things that are known unknowns. It's still an opaque sector. 659 00:36:36,080 --> 00:36:39,520 Speaker 1: On performance, I'm in the office every day and part 660 00:36:39,520 --> 00:36:42,120 Speaker 1: of that is every day. I use it as a 661 00:36:42,120 --> 00:36:45,080 Speaker 1: base of operations, and I'm going around the city. You'll 662 00:36:45,080 --> 00:36:47,960 Speaker 1: have a few meetings every week just talking to people 663 00:36:48,000 --> 00:36:50,960 Speaker 1: because you pick up so much information that's not in 664 00:36:51,000 --> 00:36:54,279 Speaker 1: a database, that's not easily accessible. Because you just have 665 00:36:54,320 --> 00:36:57,000 Speaker 1: a conversation with somebody, you get a few observations in 666 00:36:57,120 --> 00:37:00,720 Speaker 1: sort of a sense of direction. Momentum is a challenging 667 00:37:00,760 --> 00:37:04,479 Speaker 1: sector in that direction, and just in terms of like 668 00:37:04,760 --> 00:37:10,239 Speaker 1: the seriousness that a CIRI weakness poses two banks themselves, Like, 669 00:37:10,440 --> 00:37:14,320 Speaker 1: what is your judgment on that. Everybody saw what happened 670 00:37:14,320 --> 00:37:16,080 Speaker 1: with Silicon Valley Bank. You know they had all this 671 00:37:16,360 --> 00:37:18,279 Speaker 1: rmbs on their balance sheet. You know it was a 672 00:37:18,719 --> 00:37:21,200 Speaker 1: it seemed like a safe product. You know it was 673 00:37:21,280 --> 00:37:24,840 Speaker 1: thrown off yield. But in a rising interest rate environment, 674 00:37:25,040 --> 00:37:27,200 Speaker 1: you know, the acid value needs to be written down. 675 00:37:27,800 --> 00:37:30,880 Speaker 1: Other entities have the same kind of thing on their 676 00:37:30,880 --> 00:37:34,160 Speaker 1: balance sheet. The question that I would be digging into 677 00:37:34,440 --> 00:37:37,040 Speaker 1: is how many of them have actually taken those write 678 00:37:37,040 --> 00:37:40,800 Speaker 1: downs so far and have they been able to replace 679 00:37:40,840 --> 00:37:44,640 Speaker 1: that capital in other ways. Before the bank runs started SVB, 680 00:37:45,160 --> 00:37:47,319 Speaker 1: they were trying to bring in other assets. They were 681 00:37:47,320 --> 00:37:49,839 Speaker 1: trying to raise capital to shore up their balance sheet. 682 00:37:50,320 --> 00:37:53,279 Speaker 1: What I'd be looking at is have other banks been 683 00:37:53,320 --> 00:37:55,600 Speaker 1: ahead of the curve there? Have they been able to 684 00:37:55,640 --> 00:37:58,200 Speaker 1: start to step that up, and you know where do 685 00:37:58,239 --> 00:38:02,000 Speaker 1: they stand. That's what I would be looking for, because 686 00:38:02,080 --> 00:38:07,000 Speaker 1: anybody who held those kind of securities realistically, if they're 687 00:38:07,040 --> 00:38:10,000 Speaker 1: marketing it to market, they're not worth what they were 688 00:38:10,560 --> 00:38:13,400 Speaker 1: back when interest rates were so low. And this is 689 00:38:13,400 --> 00:38:17,640 Speaker 1: the challenge of the medicine that the FED has to 690 00:38:18,040 --> 00:38:21,239 Speaker 1: deal with inflation. The last time the FED raised the 691 00:38:21,280 --> 00:38:24,000 Speaker 1: FED funds rate at such a rapid pace was in 692 00:38:24,040 --> 00:38:27,000 Speaker 1: the early nineteen seventies. You know, they's just they had 693 00:38:27,040 --> 00:38:29,680 Speaker 1: to put the pedal to the medal here to fight inflation. 694 00:38:30,280 --> 00:38:33,320 Speaker 1: But it had unintended consequences. You know, back in the seventies, 695 00:38:33,880 --> 00:38:37,640 Speaker 1: you didn't have these complicated structured products like rmbs. It 696 00:38:37,760 --> 00:38:41,520 Speaker 1: just it wasn't something that banks held, and the financial 697 00:38:41,600 --> 00:38:45,920 Speaker 1: environment was largely a bank and a life company market. 698 00:38:46,040 --> 00:38:49,640 Speaker 1: You didn't have debt funds in the United States. They 699 00:38:49,640 --> 00:38:51,200 Speaker 1: had a structure like that in the UK, but not 700 00:38:51,320 --> 00:38:54,720 Speaker 1: here as much, and you didn't have CMBs didn't exist 701 00:38:54,719 --> 00:38:57,680 Speaker 1: at all, So you didn't have complicated products on the 702 00:38:57,680 --> 00:39:00,560 Speaker 1: balance sheet. So when rates were raised, you know, you 703 00:39:00,640 --> 00:39:04,759 Speaker 1: didn't have as much of an immediate shock to the 704 00:39:04,800 --> 00:39:08,440 Speaker 1: banks this time through. I don't know if they were 705 00:39:08,480 --> 00:39:10,839 Speaker 1: thinking about the fact that you have a more complicated 706 00:39:11,239 --> 00:39:15,160 Speaker 1: financial environment today than the early nineteen seventies, with more 707 00:39:15,239 --> 00:39:19,560 Speaker 1: unintended consequences. What are you hearing from the banks themselves? 708 00:39:19,600 --> 00:39:22,400 Speaker 1: I mean, give us some color, because as you pointed 709 00:39:22,400 --> 00:39:25,440 Speaker 1: out multiple times, this is a very opaque market. It 710 00:39:25,560 --> 00:39:27,560 Speaker 1: is difficult to get a handle on whether or not 711 00:39:27,600 --> 00:39:31,400 Speaker 1: people are writing stuff down what the capitulation point actually is. 712 00:39:32,239 --> 00:39:34,839 Speaker 1: That is something that I always like, like I knowed 713 00:39:35,120 --> 00:39:37,760 Speaker 1: walking around the city, just go visit clients, talk to people. 714 00:39:37,880 --> 00:39:41,480 Speaker 1: You pick up a lot that way. Yeah. Since mid March, 715 00:39:42,160 --> 00:39:47,120 Speaker 1: it's been very quiet, no meetings and just no conversations 716 00:39:47,160 --> 00:39:51,040 Speaker 1: with our clients there or with the regulators either, Not 717 00:39:51,120 --> 00:39:52,759 Speaker 1: that I didn't want to talk with them, it's just 718 00:39:52,800 --> 00:39:56,200 Speaker 1: they've been busy elsewhere. Interesting. Yeah, one of my favorite 719 00:39:56,200 --> 00:39:58,359 Speaker 1: forms of cell side research is when they send all 720 00:39:58,360 --> 00:40:01,239 Speaker 1: the analysts to go shopping like a mall. Yeah, but 721 00:40:01,280 --> 00:40:02,960 Speaker 1: now it's going to be when they send analysts to 722 00:40:03,160 --> 00:40:05,719 Speaker 1: just walk around downtown New York and observe how many 723 00:40:05,719 --> 00:40:08,360 Speaker 1: people are going in and out of office buildings, you're like, 724 00:40:08,400 --> 00:40:11,080 Speaker 1: how many people are in line at a Starbucks or 725 00:40:11,400 --> 00:40:13,680 Speaker 1: just like those charts which I would share, like and 726 00:40:13,760 --> 00:40:17,439 Speaker 1: everybody's still monitoring those like MTA usage. I just want 727 00:40:17,440 --> 00:40:20,960 Speaker 1: to go back again, and I think outside of you know, 728 00:40:21,000 --> 00:40:24,800 Speaker 1: this sort of non office, non central business district real estate, 729 00:40:25,600 --> 00:40:29,040 Speaker 1: I guess malls, there's some issues, but by and large, 730 00:40:29,200 --> 00:40:32,640 Speaker 1: is this still more about like a rate pressure than 731 00:40:32,640 --> 00:40:36,080 Speaker 1: it is an income pressure, Like is there income stress 732 00:40:36,120 --> 00:40:39,040 Speaker 1: showing up in other parts? Yeah, the income stress has 733 00:40:39,120 --> 00:40:43,680 Speaker 1: mostly been a story of properties where the previous economic 734 00:40:43,840 --> 00:40:48,200 Speaker 1: justification from is evaporating. Okay, Malls we've been dealing with 735 00:40:48,360 --> 00:40:50,480 Speaker 1: for a long time, right, Like that's a pre COVID 736 00:40:50,560 --> 00:40:52,719 Speaker 1: story for a long time. An office is now are 737 00:40:52,800 --> 00:40:55,520 Speaker 1: kind of where malls used to be, where everybody saw 738 00:40:55,560 --> 00:40:57,480 Speaker 1: there was a change. They weren't sure how long it 739 00:40:57,520 --> 00:40:59,439 Speaker 1: was going to take, but it's going to be there. 740 00:41:00,040 --> 00:41:03,120 Speaker 1: Offices today are in some cases much like the malls 741 00:41:03,120 --> 00:41:06,040 Speaker 1: in the past, But you know, the other property types, 742 00:41:06,239 --> 00:41:09,239 Speaker 1: it's not as extreme on sort of the income and 743 00:41:09,280 --> 00:41:14,680 Speaker 1: certainty some elements of hotels, with some of the convention 744 00:41:14,760 --> 00:41:21,000 Speaker 1: center locations still not where they were in expensive urban 745 00:41:21,080 --> 00:41:23,719 Speaker 1: markets you don't see as much activity and some of 746 00:41:23,760 --> 00:41:27,239 Speaker 1: those although the nature of it has changed much more 747 00:41:27,280 --> 00:41:30,680 Speaker 1: tourism and talking with hotel experts, there's sort of been 748 00:41:30,719 --> 00:41:34,440 Speaker 1: a change in the patterns of daily room rates because 749 00:41:34,840 --> 00:41:37,960 Speaker 1: there's many more folks who are not doing the come 750 00:41:38,040 --> 00:41:39,640 Speaker 1: in the middle of week for a conference or to 751 00:41:39,680 --> 00:41:42,560 Speaker 1: see clients. It's many more tourists, So it's changed in 752 00:41:42,719 --> 00:41:45,799 Speaker 1: nature of some of those hotels, but you know, it's 753 00:41:45,920 --> 00:41:50,520 Speaker 1: largely all about the change in the economic justification of 754 00:41:50,320 --> 00:41:54,080 Speaker 1: some of the some of the assets. Jim Castello, thank 755 00:41:54,080 --> 00:41:56,759 Speaker 1: you so much for coming in. This is like such 756 00:41:56,760 --> 00:41:59,359 Speaker 1: a big topic and this was so helpful in terms 757 00:41:59,400 --> 00:42:02,759 Speaker 1: of sort of understanding the various dynamics out there. So, yeah, 758 00:42:02,800 --> 00:42:05,040 Speaker 1: that was really great. Thanks for coming out, Old One. Yeah, 759 00:42:05,120 --> 00:42:20,640 Speaker 1: great to be here, Tracy, I thought that was really great. 760 00:42:20,680 --> 00:42:23,920 Speaker 1: Obviously a lot there, but this idea that like for 761 00:42:23,960 --> 00:42:26,960 Speaker 1: the most part, and this it speaks to why we 762 00:42:27,000 --> 00:42:29,200 Speaker 1: really need to do a sort of like office to 763 00:42:29,320 --> 00:42:32,279 Speaker 1: Resie episode turn and the challenges there that this is 764 00:42:32,360 --> 00:42:34,640 Speaker 1: not going to be a situation which the money is 765 00:42:34,680 --> 00:42:37,520 Speaker 1: accrued to like people who know how to like read 766 00:42:37,520 --> 00:42:41,000 Speaker 1: a spreadsheet or enter numbers, into a model and sit 767 00:42:41,040 --> 00:42:43,480 Speaker 1: behind a computer in New York. But someone who knows 768 00:42:43,520 --> 00:42:47,600 Speaker 1: about like actual construction and zoning and relationships, I think 769 00:42:47,600 --> 00:42:50,759 Speaker 1: it's like a really interesting Yeah, this is not the 770 00:42:50,800 --> 00:42:54,440 Speaker 1: least absolutely, And also the parallels between where shopping malls 771 00:42:54,480 --> 00:42:57,720 Speaker 1: were in say twenty fifteen, and I mean I remember 772 00:42:57,760 --> 00:43:00,279 Speaker 1: writing those stories from a CMBs perspective of you know, 773 00:43:00,320 --> 00:43:01,680 Speaker 1: what are we going to do with all the shopping 774 00:43:01,680 --> 00:43:03,319 Speaker 1: malls and some of them are going to become like 775 00:43:03,480 --> 00:43:07,200 Speaker 1: multi family living centers and things like that. Yeah, and 776 00:43:07,280 --> 00:43:10,560 Speaker 1: the parallels with the office space now. And the other 777 00:43:10,560 --> 00:43:12,719 Speaker 1: thing I thought was really interesting was this idea and 778 00:43:12,840 --> 00:43:15,399 Speaker 1: I'd never thought of it before, but the idea that 779 00:43:15,560 --> 00:43:18,840 Speaker 1: the local authorities might want to hold out for you know, 780 00:43:18,920 --> 00:43:22,160 Speaker 1: retail because they get higher tax income than for resie. 781 00:43:22,360 --> 00:43:25,799 Speaker 1: That was really interesting to me. And then also just 782 00:43:25,880 --> 00:43:31,359 Speaker 1: the point about why extend and pretend won't work in 783 00:43:31,400 --> 00:43:34,200 Speaker 1: that environment, In an environment where you know, the cash 784 00:43:34,239 --> 00:43:38,319 Speaker 1: flow the income is actually in doubt, it's not just 785 00:43:38,400 --> 00:43:42,600 Speaker 1: a matter of refinancing again, you know, I think obviously 786 00:43:43,239 --> 00:43:47,719 Speaker 1: for understandable reasons, there are these concerns about regional bank 787 00:43:47,760 --> 00:43:50,399 Speaker 1: exposure to this space. But I do think that like 788 00:43:50,800 --> 00:43:53,359 Speaker 1: people need to remember that there is like a diversity 789 00:43:53,440 --> 00:43:57,040 Speaker 1: of what's meant by commercial real estate, and that like 790 00:43:57,160 --> 00:44:00,480 Speaker 1: a lot of like the risky stuff, like the sort 791 00:44:00,520 --> 00:44:03,440 Speaker 1: of like fast money, the riskiest stuff, especially in this 792 00:44:03,560 --> 00:44:06,480 Speaker 1: sort of like low interest rate period with like the 793 00:44:06,520 --> 00:44:10,279 Speaker 1: worst covenants or the sort of like the worst investor protections. 794 00:44:10,640 --> 00:44:14,040 Speaker 1: The fastest time to REFI was by the sort of 795 00:44:14,040 --> 00:44:16,799 Speaker 1: like private debt funds. Was a really interesting point. Yeah, 796 00:44:16,880 --> 00:44:20,480 Speaker 1: and like the older people who have money invested in 797 00:44:20,520 --> 00:44:23,560 Speaker 1: those private debt funds, like they're probably not going to 798 00:44:23,640 --> 00:44:25,960 Speaker 1: do great. I would assume they're gonna like take some heads, 799 00:44:26,280 --> 00:44:30,080 Speaker 1: but like that seems better than like having all those 800 00:44:30,200 --> 00:44:33,000 Speaker 1: like losses be borne by like the banks themselves. I 801 00:44:33,160 --> 00:44:35,480 Speaker 1: have these like sort of like key infrastructure groups. Well, 802 00:44:35,520 --> 00:44:38,360 Speaker 1: I mean the good news is, to some extent, that's 803 00:44:38,360 --> 00:44:42,880 Speaker 1: what a lot of the recent regulation was trying to encourage, 804 00:44:43,000 --> 00:44:46,640 Speaker 1: which was, you know, banks are more conservative on risky CRI, 805 00:44:46,800 --> 00:44:49,520 Speaker 1: and there was a lot of recognition that was an 806 00:44:49,520 --> 00:44:52,440 Speaker 1: area of worry in recent years and that some of 807 00:44:52,480 --> 00:44:55,719 Speaker 1: that risk would be pushed out into non banking entities 808 00:44:55,760 --> 00:44:57,880 Speaker 1: such as large debt funds. But I guess now we 809 00:44:57,960 --> 00:45:00,919 Speaker 1: get to see well whether or not that was a strategy. Yeah, 810 00:45:00,960 --> 00:45:03,919 Speaker 1: and then still the point that like part of the 811 00:45:03,960 --> 00:45:07,160 Speaker 1: reason the regional banks have this exposure is because of 812 00:45:07,160 --> 00:45:10,640 Speaker 1: the Yeah, they're less less burdened than the large banks 813 00:45:10,640 --> 00:45:13,080 Speaker 1: in terms of the types of risks that they can take. 814 00:45:13,520 --> 00:45:17,880 Speaker 1: So clearly still risks out there for multiple parties. I 815 00:45:17,920 --> 00:45:20,480 Speaker 1: do want to do an episode though, on why commercial 816 00:45:20,480 --> 00:45:23,520 Speaker 1: real estate seems to be so difficult to short or 817 00:45:23,600 --> 00:45:25,440 Speaker 1: to hedge, Oh, because this has been a sort of 818 00:45:25,680 --> 00:45:28,480 Speaker 1: it's a little geeky or wonky, but this has been 819 00:45:28,520 --> 00:45:31,480 Speaker 1: a perennial talking point in the industry at various points 820 00:45:31,480 --> 00:45:34,000 Speaker 1: in time. You see people come out with very creative 821 00:45:34,040 --> 00:45:38,640 Speaker 1: ways of going short, but there hasn't been an obvious 822 00:45:38,680 --> 00:45:42,520 Speaker 1: industry standard other than CMBX, which is definitely not a 823 00:45:42,560 --> 00:45:44,400 Speaker 1: perfect hedge for a long time. So we should do 824 00:45:44,400 --> 00:45:46,799 Speaker 1: an episode on that. Yeah, that is interesting because I 825 00:45:46,800 --> 00:45:49,040 Speaker 1: think people just sort of imagine that, like and I 826 00:45:49,080 --> 00:45:51,080 Speaker 1: remember these even go back take two thousand and two 827 00:45:51,080 --> 00:45:53,600 Speaker 1: thousand and nine, like just with like credit default two. Yeah, 828 00:45:53,600 --> 00:45:56,359 Speaker 1: and people like imagine you just like go like log 829 00:45:56,400 --> 00:45:58,920 Speaker 1: into your brokerage, right and like by a CDs or 830 00:45:59,000 --> 00:46:01,120 Speaker 1: like whatever as if like it's like buying a stock. 831 00:46:01,160 --> 00:46:03,239 Speaker 1: It's like, why don't you put on a hedge? It's like, well, 832 00:46:03,239 --> 00:46:07,880 Speaker 1: it was someone willing to sell you a hedge for this, yeah, yo, sided. 833 00:46:08,040 --> 00:46:10,239 Speaker 1: It's sort of this idea that like there is just 834 00:46:10,280 --> 00:46:12,600 Speaker 1: that always a hedge out there that someone could have bought, 835 00:46:12,880 --> 00:46:15,640 Speaker 1: sort of like this sort of naive fantasy about how 836 00:46:15,680 --> 00:46:18,399 Speaker 1: these markets work, right, or the idea that everyone has 837 00:46:18,480 --> 00:46:21,399 Speaker 1: like an ista agreement up there sleeve. Yeah, okay, shall 838 00:46:21,400 --> 00:46:23,359 Speaker 1: we leave it there? Let's leave it there. This has 839 00:46:23,400 --> 00:46:26,880 Speaker 1: been another episode of the Old Thoughts podcast. I'm Tracy Alloway. 840 00:46:26,960 --> 00:46:29,400 Speaker 1: You can follow me on Twitter at Tracy Alloway. And 841 00:46:29,480 --> 00:46:32,239 Speaker 1: I'm Joe Wisenthal. You can follow me on Twitter at 842 00:46:32,239 --> 00:46:35,760 Speaker 1: the Stalwart. Follow our guest Jim Costello. He's at Jim 843 00:46:35,840 --> 00:46:40,800 Speaker 1: Costello cr E. Follow our producers Carmen Rodriguez at Carmen 844 00:46:41,000 --> 00:46:44,239 Speaker 1: Arman and Dash Bennett at Dashbot. Follow all of the 845 00:46:44,239 --> 00:46:47,879 Speaker 1: Bloomberg podcasts under the handle at podcasts, and for more 846 00:46:47,920 --> 00:46:51,000 Speaker 1: odd Lots content, go to Bloomberg dot com slash odd Lots. 847 00:46:51,280 --> 00:46:54,000 Speaker 1: We have transcripts a blog. Tracy can have a newsletter 848 00:46:54,239 --> 00:46:58,000 Speaker 1: and hang out with other listeners on the odd loads Discord. 849 00:46:58,040 --> 00:47:00,200 Speaker 1: It's really fun. I'm spending more on word time there. 850 00:47:00,200 --> 00:47:02,919 Speaker 1: People talk about all the topics we discussed on the show. 851 00:47:03,360 --> 00:47:07,080 Speaker 1: Go to Discord dot gg slash odd LODs Yeah, twenty 852 00:47:07,120 --> 00:47:09,760 Speaker 1: four seven odd LODs chat what could be better? Thanks 853 00:47:09,760 --> 00:47:10,200 Speaker 1: for listening.