← The TreppWire Podcast: A Commercial Real Estate Show
The TreppWire Podcast: A Commercial Real Estate Show
353. From Dot Plot to Deal Flow: Unpacking the Fed's Cut, Retail Data Stays Strong, Paramount’s $1.6B Play, Special Servicing Rates Fall
00:51:27
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- [00:06]
A
Welcome to the Tripwire podcast, the show where commercial real estate meets data and insights. This is our week in review for the week ending September 19, 2025. I'm Hailey Keen with Trep, a data modeling and analytics firm for the CMBS Commercial Real Estate and CLO Markets. I'm with Lonnie Hendry, Chief Product Officer and Steven Bushbaum, Research Director. So let's dive right into it. This week we know that all eyes were on the Federal Open Market Committee meeting and as many expected, the Fed delivered a 25 basis point rate cut. Investors are now focused on the updated dot plot and the pace of future cuts amid signs of labor market cooling and anchored long term inflation expectations. So Stephen, does 25 basis points mean everything for CRE and the market is fixed?
- [01:00]
B
That's a good one. I like it. Gosh, I guess my answer would be this. Hear that silence? That's the death of forward guidance. This was an absolutely just bizarre like Twilight Zone type rate cut. So the 25 basis points, exactly what we all expected. You know, know there was one person pushing for a 50 basis point cut this meeting. So one to center. And funny enough, it was the new joiner, Stephen Myron. And with that, you know, the updated summary of economic projections or the SEP got provided with this meeting. And I gotta say, the September SEP really shook things up in a big way. The dot plot is where I'll start. So the dot plot in June had a fair bit of consensus to it with what seemed to be a general linear glide path down in the forward Fed Funds rate. In other words, there was broad consensus about how much we would be cutting and when. With this current meeting in September, it's like a taffy pull on the dot plot. And my favorite is the 2025 dots. You have this cluster that ranges between, let's say around that, you know, four and an eighth, down to three and three, three and three eighths, roughly. So there's a wide consensus about how much more we should be cutting in 2025. But this dot stands below all the others. I mean, it's below 3%. And I'm not the only one who thinks this. I was listening to a lot of commentary over the last couple of hours following the Fed release and there's broad consensus that believes that that is Stephen Myron's dot. And so going forward we have this stretch of where Fed officials think rates will end up. So, okay, we're all over the map there. Weak central tendency and wide central tendency. But then the really curious thing for me is if you look at what happened with all of the macro data points going from June to September, it looks like largely the forecast for gdp, unemployment and PCE is either unchanged to maybe slightly rosier. And yet the forward guidance for rate cuts, generally speaking indicates lower Fed funds rate in September going forward. So more rate cuts, but unchanged to maybe slightly stronger economic activity. Real head scratcher. And then in the press conference, Powell basically said that the risks have shifted to the labor market, as we expected, but that essentially there's a lot of noise. So all of this taken together, the forward guidance is practically non existent. And let's keep in mind we'll be getting a new Fed share. So I don't know, I guess that just leaves us in this holding pattern wondering what's going to come next, you know, is it one more rate cut, is it three more rate cuts, is it five? And who will be leading the charge? And will they be independent or have some political bias? I don't know, it's, it's a wild, wild mix of party nuts here. I'm curious to hear what your, your take on all this was, Lonnie.
- [04:26]
C
You know, you hit on a bunch of stuff there. I'll try to go through a few of these items. Like one, the independence part. Nothing is truly independent, full stop, fair. Right? I mean, there's always going to be political pressure depending on where you're at, where you're, you know, where you think your motivations are. People are going to pressure the Fed Chair, they're going to pressure everyone that they think that they can reap some benefit from. Like that's just inherent in the process, right? So I mean, obviously it's, it's in today's day and age where social media and everything, it's a lot more prevalent in terms of people knowing about those things. But I think we'd all be naive if we thought that previous administrations behind the scenes weren't putting pressure to try to get what they thought would be favorable results for their re election or their campaign strategy or whatever the case may be. So I think that's just inherent in the job. I think Powell's done a really great job of kind of toeing the line and keeping the perception of independence at a level that people feel like he's doing what he thinks is best. And I think he even subtly kind of spoke to that today. I mean, he was pretty adamant that I think his quote was no widespread support for a larger 50 basis point cut. So he was effectively, you know, subtly pushing back against the Political pressure saying, like, yeah, you're going to see this one vote that doesn't speak for the committee. And there's no widespread support for that. And I think, you know, as you mentioned, the pivot to the labor market was predictable. I mean, we saw the revision, we've seen the jobs numbers, know, basically slowing down about 29,000amonth over the last quarter. He's got to give some consideration to that. But inflation is still above target. And so, I mean, he, he can't use that as a crutch. So he pivots a little bit to the, to the employment labor side. I don't think anyone was surprised by that. You know, I do think, you know, a couple of interesting takeaways here was Powell made it clear that the aggressive moves are not currently on the table. And so he, two or three times in the press conference, I think, made commentary around the Fed's independence and growing political tension, effectively saying the Fed is not going to be bullied into slashing rates, but acknowledge that political pressure is mounting. And, you know, I thought it was kind of interesting we've used the term, I think we've said we're not going to say this anymore of the cautiously optimistic. I think if I were to frame today's meeting in terms of forward guidance, it's cautiously dovish. And, you know, the dot plot tells the story of caution. I think the Fed wants some flexibility. They don't want to race to zero. And so if you look at what they're saying, you know, two more cuts in 25, but if you look out to 26, only one rate cut was projected and possibly one in 27. So really this is more of a slow and deliberate easing cycle and not really like a rapid unwind. So I think today's meeting went about as well as you could have expected in the sense that they didn't really create havoc for the markets. I think everyone had pretty much priced in 25 basis points. He acknowledged some of the increasing pressure with the new appointee. He talked it away, and he kind of anchored to the softening labor market, which I think all of us generally think is, is a real occurrence. So all in all, I think he accomplished his objective. To Haley's point, I don't think 25 basis points fixes the market, but I do think that it'll give some people some talking points and maybe a psychological boost. I don't know what it'll mean for commercial real estate in the short term. I don't think it changes anything dramatically.
- [07:56]
B
The market Reaction speaks volumes about how just sideways and cross eyed this whole release was. The June. Let me toss out the SEP data first. The June projection for Fed funds in the 2025 was 3.9%. That was the median midpoint. Now it's at 3.6. So face value you're thinking, okay, the rate cuts continue and we'll get more rate relief here to come through the rest of this year. So in the roughly 20, 30 minutes after the release and maybe it's compressed more like 15 to 20 minutes after the release, both the 2 year and the 10 year declined about 3 basis points on the day, about 5 maybe from where they were at peak. And then as the press conference wore on and more digestion of the data and these comments happened. Now on the day we're up about 5 basis points on both twos and tens. So we've done call it about an 8 basis point round trip here. Clearly the market is sitting here thinking, you know, we are probably a little bit too optimistic on what we were thinking going into this meeting. And while there is downside risk to the labor market, inflation is running hotter. And honestly the way I take all of this is that maybe on the margin we've lost a little bit more Fed credibility due to the lack of forward guidance and the possibility that our star and really what we think will be sustainable long run inflation will run slightly hotter because we're five years into this and we're still a good ways off from hitting 2% inflation and it doesn't look like we're going to hit 2% anytime soon. Now, speaking of disruptions, we had a question come into the podcast last week that it seems like this is a good enough part of the segment to address the question and it was specifically on sofr. So the question was highlighting the fact that the SOFR rate has been elevated over the past week, which is seems somewhat odd given the current environment, and that everybody knows the Fed will be cutting rates. So you know, basically what's causing this upward pressure on SOFR rate. So essentially what I think has been behind a lot of this move in the SOFR rate has to do with what's happening in treasury auctions and settlements. So let me just go through a quick couple of terms here. One of the factors that's part of this equation is the interest rate on reserve balances or iorb. So this is the rate the Fed pays to banks if they leave money sitting risk free at the Fed. Think of it as a safe floor for what a bank is willing to accept on its cash, then the secured overnight financing rate, or sofr. Just as a quick reminder of what that is, it's the overnight cost of borrowing cash using Treasuries as collateral. Now, the SOFR rate usually trades at or below the IORB rate because, well, why would a bank lend cash out and repo for less than what they can earn parking it at the Fed? So when SOFR goes above the IORB rate, which has been at right about 4.4% recently, so we had SOFR spike above that earlier this week. So that means that cash lenders are suddenly willing to pay more to borrow against Treasuries than they could earn risk free at the Fed. In other words, there's an unusual short term demand for cash secured by Treasuries. Now the reason why this happens is that when the treasury issues a lot of new bonds, dealers have to finance them right away. So that causes a spike in demand for repo funding to hold those Treasuries. So repo rates and therefore SOFR can temporarily pop above that iorb. And that happened earlier this week. We hit, I want to say about 10 basis points above SOFR, I believe, if memory serves me correct. But now we've normalized back to about where we've been trading, maybe still slightly above. But the bottom line is that by and large this is a short term cash need that is really not a sign of broader systematic risks.
- [12:15]
C
So Stephen, as you mentioned, there are some reasons for this to feel a little bit counterintuitive. I mean, so for tends to realign with the federal funds target after the cut, you know, so these short term spikes are common during periods of uncertainty. So I would expect you to see SOFR kind of realign at this point now that everyone knows what's going on. So no immediate cause for concern. I appreciate the technical kind of background on like where we're at, but this is a little bit more volatile, especially around quarter end or during heavy treasury assurance. And so it can be explained. But I think things should calm down now that the Fed has moved its rate.
- [12:53]
B
Yeah, exactly. At the end of the day, these kind of moves, while they're not terribly common, it's really just a sign of proper market function that the essentially shock absorbers are doing what they're intended to do. And if anything, I'd be concerned if we didn't see those spikes, given how much treasury issuance we've had to digest. It's probably also worth mentioning here that part of what's also driving the size of the spike is the balance sheet runoff from the Fed. So if you recall, part of the Fed's activity right now is quantitative tightening, letting their balance sheets run down. And so that does tend to exacerbate the size of those SOFR pops that you get around these heavy issuance and settlement dates.
- [13:41]
A
So let's stick on the idea of loan spreads. I want us to talk about our Trep I spreads, which is a collection of weekly spreads from nationwide CRE balance sheet lenders that Trep manages across loan to value buckets and property types. So we offer a weekly spread survey that provides insights into capital availability and underwriting trends. And we have data going back to 2010. So we released a new analysis this week looking at what's happening to our spreads data. Maybe you guys can give a little preview of that. And if you're listening and you want to learn more about the spreads data or see this analysis, reach out to.
- [14:21]
C
Us@Podcastrep.Com yeah, so this data that we put in the report looks at amortizing loans that are in that 50 to 59% LTV strata. And it's interesting week to week spread movements, they've been really consistent and measured when you compare to the the week to week movements of the spreads prior to the tariffs. So this really demonstrates the resiliency between borrowers and lenders. Lenders appear to be more comfortable that low leverage loans will perform in spite of a variety of potential economic outcomes. So a couple of just highlights here and again if you want to see the full post, Hayley said how you could you can get access to that multifamily spreads. This is for the week ending September 12th. Multifamily spreads tightened almost 2 basis points, making borrowing sliding cheaper. Spreads are now 8 basis points above the February 2022 record tightness. The other property types were unchanged for the week. So we do break this down by the four major food groups, industrial, multifamily, office and retail. And what's interesting here is we have this across different loan to value stratification. So again this report looks at the 50 to 59% but but we actually have stuff that looks at the slightly higher leverage points as well. So you can kind of see what the appetite is from a spread perspective across the spectrum of property types and different loan to value.
- [15:41]
A
So I know I said the Fed meeting was the only thing that people were watching this week, but we did also see retail sales data come in. With the latest numbers increasing more than expected in August as consumers bought a range of goods and dined out. But we know a weakening labor market and rising prices are going to continue to pose a downside risk. So what's happening with the retail sales market?
- [16:06]
B
Yeah, this report came in a good bit stronger than what economists were expecting. So the headline retail sales number came in at an increase of 6, 10 on the month. Economists were expecting a 2, 10 increase. So that's a pretty strong beat, three times stronger than what was expected on a month over month basis. Now, the retail control group, this is the one that strips out everything that doesn't feed into the GDP number. So in other words, the retail control group will give a good sense of what we should see feed into the GDP numbers here coming out for the third quarter. And the retail control group increased even more. It increased by 7, 10 compared to an expectation of an 4, 10 increase. And now just to give some reference point here, for the prior month, the headline basically stayed the same at a 6, 10 increase relative to the prior month. And the retail control group was an acceleration relative to the prior month. That was half a point increase in the prior month. So bottom line is that this came in significantly stronger than what we were expecting. We thought we'd see a little bit more retail weakness and cracks starting to form given the weakness we've seen in the labor market. In fairness though, we probably should have been expecting this sort of a rise because if you looked at the, the credit card data put out by bank of America, that August report showed a lot of strength. Now, it did highlight a growing gap between high earners and lower earners. But essentially this is business as usual in retail sales and as we've joked in the podcast, don't stand between a US Consumer and the Register?
- [17:47]
C
Yeah, I mean, that has proven itself to be true, Stephen. It seems like the economists, broadly, you know, they're interpreting this macro data, they're trying to incorporate the tariffs, they're trying to look at all these things holistically. They've been a little bit bearish across all the major metrics. It feels like lately it feels like everything is surprising to the upside. Do you think that they have just increased awareness of what the tariffs might do and some of these other programmatic things that the economy is going to be facing might do, and they're just maybe a little bit off in the timing, or do you think that they're just overestimating some of those impacts based off of, you know, an academic approach to this, Whereas consumer behavior, sentiment, et cetera, is, is still bullish when, when, you know, generally speaking, technically, some of these things might create more of a bearish consumer. It feels like to me, most of the economists we've talked with, and even Rachel on our team, it's, you know, they're very nervous about what's coming with the tariffs, but it feels like everything at this point hasn't really materialized in the timeframe in which they thought maybe it would.
- [18:51]
B
Yeah, I mean, I think it's largely that, that the pass through of price increases, the timing of that and the expectation of exactly when and if we'll see that pullback occur. It's been really difficult to pin down. Let's keep in mind that this retail sales data is essentially that the back to school peak season for shopping at the end of summer. And so essentially what this tells me is that the US consumer was really not sacrificing on much, if anything in getting kids back to school. You look at all the categories that relate to that back to school shopping and they're incredibly strong. So yeah, whatever price increases have materialized, consumers were willing to absorb those and not trading down as much as what we would have expected.
- [19:38]
C
And do you think maybe some of the Fed stuff, when they're looking at the forward guidance, they maybe are looking at things that we're not considering today and maybe saying over the next quarter or two we might start seeing some real pullback here? I mean, is that maybe why you're seeing some of these future cuts kind of baked in maybe, or the, the dot plot suggesting them? It's, it kind of is setting up like I, I trust what the economists are looking at. Again, I think it's more of a timing issue than anything else, but it's almost, it feels like we could be setting ourselves up for everything's fine, you know, dot dot dot, until it's not. And it's like everything's good and then just this avalanche of bad news, economic news and everything else that just kind of comes pouring down on us. Do you think we're setting ourselves up for some of that with, you know, these continued kind of column beats on the retail side?
- [20:27]
B
I mean, I would say yes, if we could point to what's going to break. But at this point it's really just this miraculous coincidence of threading the needle until something breaks, until we start seeing mass layoffs or a rise in defaults, until we see something that's concrete evidence of a material deceleration in the economy and breaking in the consumer front, the jobs front, it's business as usual. I suppose it is concerning about what you're seeing in the labor force dynamics, the fact that you have a lot less migration and immigrant labor, but at the same time we're kind of maintaining that full employment. So yeah, we're not hiring, but we're not firing either. And what's going to cause us to accelerate firing? Well, it's going to have to be a pullback in spending that hasn't occurred yet. And we also haven't seen a dramatic tick up, at least to a concerning degree and retail defaults, or we should say retail delinquencies.
- [21:28]
C
So let me throw a word out there, Steven, and get your thoughts on this. Performative. It feels like more and more things in life are performative. And at some level I would make the case that even some of the market activity is performative in the sense that the fundamentals just don't support it. I mean, how do we explain gold being an all time high, stocks being all time high, consumer resilience, all time high, retail earnings, great beating expectations extend and pretend kind of bailing out the real estate markets? Like all of these things can't be true at the same time and continue in the path that they are. Like, it just. Maybe I'm not smart enough to understand how that works and maybe we can, but it just seems to me like there are so many mixed signals, There are so many crossings of things that historically, if one thing is true, this other thing can't be true. That just now, like all of that stuff just fundamentally is out the window. And it's kind of like everything, to your point, nothing has broken. But I would almost argue that everything is broken, that none of this makes sense and it's kind of just a performative economy where the wheels that are in motion are staying in motion. The things that have to be done to kind of keep things propped up are being done, but it's just unsustainable. I mean, if you look at the debt, if you look at all the things that we have, like, I just don't know how this, how much longer this goes like this. And maybe I'm just too stupid. And if I hope that's the case and that, you know, you can explain it to me or someone else can explain it to me, but I just get the sense that a lot of this is just. It is, there's no denying it. But you can't support why things are going, you know, like this. You're saying this threading the needle or soft landing or whatever we're calling it today. I don't know how and why that's Going the way that it is, it just doesn't seem to line up for me.
- [23:19]
B
I feel you because we haven't seen a situation like this where you have this very precarious balance of the dual mandate, stable prices and full employment. And now that the scales are starting to tip, I can't help but wonder, okay, what happens if all of a sudden we see a material reset and forward expectations for AI outlays? Or what happens if we have a material shock and supply chain and prices spike and consumers pull back in a material way? All it's going to take is pulling out of one single card in the house of cards and snap. All of a sudden we are in a downward spiral that is very concerning. But until that happens, we just chug along naively and that's. Don't take this the wrong way. Are not in a 2007 situation. But okay, let's think back to 07. We did have a little bit of that similar scenario going into there where we could borrow 100% LTV on a home loan and close our eyes and think everything will be okay.
- [24:27]
C
Yeah, if I were going to draw some synergies between the two or similarities, it would be replace the single family residential market of 2007 with AI today. Because I mean all of the AI compute costs, everything's being subsidized by VCs at this point. Like the business model does not work as it's currently constituted. Like we haven't hit pay dirt yet. We're one of these companies has emerged as like the dominant player and they're at scale and this financially makes sense for them. Their valuations are off the charts, but there's just so much capital being thrown in them without regard to profitability or anything else at this point. It just, I'm a full believer in the AI stuff and like we're, we're a trip like all in on that. But I would say that's the one thing that kind of gives me a little bit of pause is I do think we're kind of entering a little bit of a bubble with the AI concept. Maybe not to the same level that we were with the housing market in 2007, but I, I wouldn't be surprised if you see some of this stuff really pull back and if you back that out, what happens to just overall strength of the market, gdp, et cetera? It seems like investment, spending, all this stuff around AI has really spurred a lot of the growth in the, in the broader economy.
- [25:38]
B
Did you see the article earlier this week about the collapse in bankruptcy of Tricolor, the subprime auto lender. Ooh.
- [25:47]
C
Oh, yeah, I did. Yeah, I did. I did see that. Yeah, I did see that.
- [25:50]
B
Yeah, that, that is a very eerie similarity to what we saw in 2008. I mean, some of the lower rated tranches that are the first to take losses in the event that cash runs short. Those bonds were trading at more than a hundred cents on the dollar at the start of the month, now as little as 12 cents on the dollar for any CMBS bond traders out there. You'll remember we saw the exact same thing happen with the junior and mezzanine tranches of CMBS. Those went from trading at either side of par 98 to 102, down to like 10 to 13 for the juniors and anywhere between 15 and 35 for the mezzanines.
- [26:32]
C
Yeah, I mean, to your point, it just takes one or two cards in the house of cards for it to all come crashing down.
- [26:39]
B
This, this discussion has me thinking about that meme where the dog is sitting in that room that's all on fire saying everything is okay.
- [26:47]
C
Everything is okay right now.
- [26:49]
B
The room is not on fire. It's just a. It's like a fire in the trash can.
- [26:55]
A
This episode is brought to you by Resilience Insurance analytics, insurance risk consulting and transaction management services designed to close the deal as the go to advisor for commercial real estate lenders, Resilience provides tailored solutions and supports over 100 of the nation's largest lending institutions with expert insight into structural risk, insurance costs and market expectations. Drawing on insights from 200,000 successful closings, resilience Insurance analytics consultants turn complexity into confidence so you can close every loan. Learn more and connect with a consultant today at resil-ins.com that's resil inside. So let's turn to some of the big stories of the week that touch commercial real estate. We saw an article in the Wall Street Journal that Rhythm Capital has announced plans to acquire paramount group for $1.6 billion.
- [28:01]
B
Yes, rhythm will be acquiring Paramount Group, a real estate investment trust with holdings in New York City and San Francisco, in a deal valued at 1.6 billion. According to a report this week by Nicholas G. Miller, Paramount shareholders will receive $6.60 per share. The purchase will be funded through a mix of cash and co investor participation. The companies expect the deal to be finalized in the fourth quarter of this year. So what's fun about this particular acquisition is Rhythm's chief executive Michael Nirenberg highlights that the Paramount portfolio is situated in cities where Rhythm has strong conviction in the recovery of the office market fundamentals, including improving rent rolls and a more favorable interest rate environment and increasing demand. So in other words, they like these metros and are looking for a good bit of appreciation in this recovery as it continues to play out over the coming years. So right in line with what we've been talking about on the TruckWire podcast and what's been happening with New York and San Francisco over the last six months.
- [29:10]
C
Yeah, so a couple of other tidbits here, Stephen. 13.1 million square feet of class A space. So I think it's important to say this is class A office. The portfolio is about 85 and a half percent leased. And they're calling this a generational opportunity, you know, to expand their real estate and asset management platform. And as you mentioned, if you want to look for the upside here, Rhythm's acquiring the assets at a 40% discount from the pre pandemic levels.
- [29:38]
B
Love it.
- [29:39]
C
Some interesting, interesting tidbits on this deal, Stephen. If someone's wondering why Paramount would be looking to offload and sell, they had been exploring a sale due to some SEC investigations into executive compensation and related party transactions. So I think this is one of those things where there's not been any concrete findings at this point, but there was enough probably concern that they were marketing themselves for sale. So great opportunity for Rhythm. And Rhythm's cool. It's got a cool spelling to it. You know, it's like very AI ish tech focused. So good luck to them. Good portfolio, good size, great going in basis, and I think they're going to see some upside here.
- [30:26]
B
Yeah, I'll be interested to see how many more of these acquisitions we could get here in the coming six to 12 months because there's at least, in my opinion, I think plenty more room for consolidation in the space.
- [30:39]
C
Stephen, I've been on a couple of these webinars and podcasts over the last couple weeks. Outside of Trep. The question I keep finding myself asking the attendees is how many of you are willing to bet against New York, San Francisco, Louisiana, Chicago over the next five years? Five years ago, it was a pretty large number of people that were just not sure that the urban, dense city life was going to come back to what it was. But at this point, there's enough evidence. I can't see myself taking the under on that. You got to be bullish on those cities, even with the challenges. To me, that's indicative of us hitting the inflection point and saying we're on the upswing of this market cycle is that I can't look at any of those cities. Even Chicago, which has probably been a little bit less than LA and Chicago, probably the ones that are dragging along. San Francisco has been bolstered with the AI office leasing and some transactions. New York has been, as we've documented, on fire this year. But if I put it in that context of who's taking the under on those four cities, I don't think people are taking the under on. I think people have finally come to terms with the fact that these cities are here to stay. And you're going to see a resurgence.
- [31:49]
B
Yeah, I mean, I think if you're going to take the under, it has to be a very targeted and specific under.
- [31:55]
C
Right.
- [31:56]
B
Not metro wide as a whole. But class B in some of those metros is materially weaker than in others. So I think if you are going to be shorting or have a pessimistic view, it's probably limited to a specific subset and maybe even know geographic by subtype subset.
- [32:15]
A
And we saw some news this week that is very close to our trapped New York City headquarters. In articles by the Wall Street Journal and some coverage in the Real Deal and others, we saw that Brookfield Asset Management has successfully turned around the office tower at 665th Ave. Following a $1.7 billion investment. And we saw this in an article from the Wall Street Journal written by our friend Peter Grant. So let's get into this. What the move means for New York City, Brookfield, and also the tenant that will be taking over this space.
- [32:50]
B
Yes, I think part of this turnaround, at least in my opinion, knowing and having traded some bonds behind this building, I gotta say, part of it is removing the superstition around its original address. The building was once known as 666 Fifth Avenue. For any of you superstitious folks out there, Trace says that's really not a great address. So they have changed it. It's now 665th Avenue. And this turnaround follows Brookfield's $1.7 billion investment. So this property has long struggled with financial troubles and political controversy under its previous owners. Since rebranding the property, Brookfield has brought in high profile tenants, capitalizing on Manhattan's recovering office market and renewed demand for top tier space. So with Scotiabank recently signing on for 200,000 square feet, Brookfield now says the entire 39 story tower is fully leased.
- [33:54]
C
Yeah, this is a great story, Stephen. And for a little bit of history here, Brookfield bought the 99 year lease in 2018, you know, put 400 million into renovations. Now, as you mentioned, $1.7 billion investment. This was a high stakes redevelopment or, you know, repositioning. And I think they've really knocked it out of the park here. If you look at some of the major tenants now, Citadel, Scotiabank, I mean, there's, there's some top tier tenants that, that use this building here. And so it'll be interesting to see how long they can, you know, keep that occupancy and everything in the way that it is. If you go all the way back to 2007, Kushner Companies bought the building for 1.8 billion and at that time was the highest price ever for a single building just before the financial crisis. Talk about bad timing. You know, you talk a little bit about the superstition. I mean, you see this every day. People maybe scoff at it, but if you go to major hotels, a lot of them don't have a 13th floor on the elevator button. Obviously, sometimes you're on the 13th floor, but they call it the 14th. And since I'm a car guy, you know, back in the day, Chevrolet had a car called the Nova. And in Spanish it translated to no go. And so, you know, there's this pretty widely adopted talk track that they had some challenges selling into the, the Spanish speaking communities because the car was basically no go. And so it's interesting how something like an address can really, you know, materially impact the performance of an asset.
- [35:22]
B
With that, that car bit, it reminds me of a quip my cousin made. He would prod one of his buddies that owned a Chevy dealership said, I don't know why in the world you guys have this, this motto, run, Chevy, run. I mean, I'm practically pushing my truck into your shop every time. It should just be roll, Chevy, roll.
- [35:44]
C
Oh, we could have a whole podcast on some funny car trash talk, Steven. I got a bunch of them. Probably not suitable for this podcast, but.
- [35:51]
A
I have a bunch of a lot of Manhattan stories this week. This next one, our sister company, Commercial Real Estate Direct covered a story from Cranes New York about SL Green and PJIM are nearing a 1.4 billion dollar refi of Manhattan's 11 Madison Avenue.
- [36:12]
C
So in a report written by our friend Aaron Elstein at Crane's New York business, SL Green sold a 40% stake in 11 Madison Avenue to PJIM, valuing the Midtown south office tower at 2.6 billion. The deal generated 480 million in cash proceeds, with PJIM holding an option to increase its stake by another 9%. Within a year, SL Green plans to modify the 1.4 billion in mortgage debt tied to the property, which includes pieces spread across six different CMBS deals. If the debt modifications aren't complete within six months, SL Green will buy back the stake at the same $2.6 billion valuation. So it looks like this is, you know, almost a push pull type of deal where it's contingent on the the modifications to the financing. So if you look at the proposed refinancing on this deal, you're looking at about a $1.4 billion loan to replace the existing $1.1 billion CMBS loan. The new terms would be five years, which is half the length of the existing in place mortgage with 10 years. Initially the the market was pricing this at about a 5.8% coupon on the debt, but they actually were able to lock in about 5.5%, which saved the owners over 20 million in borrowing cost over the term. That comes to us from the real deal. If you look at the down payment, 52 and a half million was required by SL Green and PJUM to secure the loan. A couple of interesting tidbits here, Steven. This building is 93% occupied. Major tenants include UBS, Sony, Pinterest, Fidelity, Tempus, AI, William Morris Entertainment. And you know, it's interesting if you look at the lower than expected interest rate, I think it really shows that there's renewed investor confidence in prime Manhattan office. As Haley mentioned, we've had a lot of New York centric stories today, but in locations like Madison Square park there's been a lot of interest and you're starting to see some favorable terms here. As we mentioned, if you look at rental rates for this property, it looks like Pinterest signed a lease for 83,000 square feet back in the middle of this year with asking rent at just over $90 a square foot. And according to the data in our system, it looks like average rents for this building are sitting right around $88 a square foot.
- [38:29]
B
And a real positive about that Pinterest relocation is, is that they were moving from 225 Park Avenue south, which is also in the Gramercy park area of Manhattan. And it looks like this would have been an upsize in space for them. They had 40,000 square feet at 225 Park Avenue South. So they've been upsized to 83,000 square feet, which is really, really nice to see in a city that's seen a lot of lease downsizing over the last three to five years.
- [39:00]
A
And I think one more office story for us here. We had a lot of trading alerts this week. As a reminder for our clients, check your inbox. Usually around this time of the month, we start getting a lot of data in and we get updates on all of the loans that are moving to Special servicing or having changes in their appraisal values. So lots of content. We'll give a quick overview of one of the stories here. We wrote that a huge Manhattan office loan was sent to Special Servicing according to our September data.
- [39:33]
C
Yeah. So unfortunately we can't just have really positive office stories. In New York this week we did have this trading alert that we put out. It's $425 million loan at 32 Avenue of the Americas, as Haley mentioned, was transferred to Special servicer. And this is for imminent balloon and maturity default, which Stephen, you're going to give us a nice overview of here in just a second. As of September, the loan still remains current, has never been delinquent during its life. It hits maturity this November with special service or commentary indicating the files are currently under review to determine workout strategies. The loan collateral is comprised of 1.2 million square feet in the Tribeca neighborhood of lower Manhattan and New York City. Was built in 1932. Last renovation was 1999. Top two tenants at this location are Telex and CenturyLink with 13 and 6% of the square footage respectively. The former's lease expires in 2033, while the latter's ends in 2040. If you look at financial performance through 1H25, debt service coverage at net cash flow was 1.15x with 57% occupancy. So unlike the last couple of stories we covered, Stephen, where we were either at 100% or plus or 90 plus percent, this building is having some challenges with occupancy at sub 60. And as Hayley mentioned, we've seen a string of these imminent balloon maturity default stories. Why don't you give our listeners a little primer on what that means?
- [41:04]
B
Sure. So let me break down just a couple of aspects here. Most CMBS loans are structured as a balloon payment structure. So what this means is that the term is usually a short like 5 to 10 years and requires a lump sum balloon payments of the remainder principal balance at maturity. So if it's an IL loan, obviously the full balance will be due. If it's a partially amortizing loan, it'll just be whatever the remaining unamortized balance is. So when the loan hits that maturity date and that balloon balance is outstanding. If the borrower is unable to refinance that balloon maturity and is no longer able to make the debt service payments for its regular monthly payment, then that loan becomes classified as a non performing maturity balloon status. So in other words, that property is no longer generating enough cash flow to meet its regular debt service requirements and the loan has passed its maturity balloon date.
- [42:01]
A
And I mentioned we track changes in value so in the retail market, we had a trading alert about a Florida mall value that was slashed below its loan balance.
- [42:14]
B
Yes, according to September data, the value of the collateral behind the $260 million Pembroke Lakes Mall was slashed by 70% in a recent appraisal. The collateral was valued at 427 million at securitization in 2013, but a June appraisal has revalued the property well below the outstanding loan balance at 127 million. We previously mentioned this loan in an April edition of Tripwire when the loan transferred to Special servicing and its status became non perform matured balloon. Since March, its status has toggled between performing and non performing, with Special Servicer Commentary reporting that it is working with the borrower to resolve the default. So I'm sure there's going to be more to come on the story. The collateral includes nearly 750,000 square feet of a regional mall in Pembroke Pines, Florida within the Miami Fort Lauderdale West Palm Beach, Florida MSA. It was built in 1992 and renovated in 1998. The top tenant is Macy's, which occupies over 40% of the square footage on a lease that runs through January 2028. Other tenants include H&M and Forever 21. The most recent financials are for the full year 2024, when the loan posted a DSCR based on net cash flow of 1.65 times with occupancy at 98%.
- [43:35]
A
And as always, we had a lot more that we wrote about and talked about this week in the CRE Rundown newsletter and in Tripwire, which is a client only newsletter. We also always have content on our social media pages, so make sure you're following us at Tripwire on Twitter OR X and Trep Inc. On LinkedIn and you can catch up on everything you may have missed there and a few more programming notes. Something you may have missed was the release of our August CMBS Special Servicing Report. We found that the rate retreated for the second consecutive month and this was led by improvements in both the lodging and mixed use sectors. But office distress climbed to a new peak so certainly seeing an uneven recovery across the commercial real estate market. If you want to see all of the rates there or understand what's really happening with the office special Servicing rate, send us an email to podcastrup.com and we will get you that report. And then we are hosting our next Market Pulse webinar on Tuesday, September 30th at 2pm Eastern. We will be talking about the borrower's point of view. We'll compare typical loan terms across securitized deal types. We will dig into the CRE mortgage universe. We'll also talk about the CRE mortgage universe, so it's always interesting to track what's happening across lender types. We get a lot of questions looking at the total volume of CRE mortgages outstanding. We'll dig into some industrial sector metrics and then do a deep dive into the latest data from our TREP Property Price Index. So if you want to make sure you're signed up for that webinar, send an email to podcastrep.com and we will get you on the list. We've had hundreds and hundreds of you joining every single month. It's so great to see familiar faces and a lot of new joiners have been tuning in and sharing with their team. So thank you for all of the support there. Turning to shout outs, I'll start with some shout outs for our friends that we saw at the CREI Summit last week. This is hosted by our friend Ken Ashley, so thank you to Ken for putting on another great conference. We saw a lot of friends of TREP and loyal podcast listeners. I have to give a shout out to Mo and Fly who are marketing geniuses and do a lot to support the CRE industry and did a lot to support the conference. I got to reconnect with Kyle I and he even gave us a shout out on X and said you gotta bring home something for the kids, right? And thanked us because we had little trap footballs at the event. I got to talk to a lot of podcast listeners in person so that was so fun. Landon W is a loyal listener. He said he never misses an episode and he actually gave me a quote and I think he said our podcast is the CNBC of cre. He comes to us every week for the news. He wouldn't start his Friday without listening and he said that he leverages the podcast to share stories with clients and prospects, which is exactly what we want you to do. Use us as a resource. Use us as education. We've had people say I listened to your podcast before a job interview so I can be aware of what's happening in the market and sound educated. We love that. So it was so great meeting Landon. We also talked to our friend James Nelson, who is a longtime supporter. He leads an entire team at Avis and Young. He has his own show. He's huge in the industry, but he always makes a point to thank us and talk to us about how much our show means to him. So it was so great seeing you, James. Nima M. Is someone we've known for a long time. It was so cool to meet him in person. He was so excited to chat with us and gave us similar sentiments. He said he would never miss an episode. He actually found the podcast from his CCIM professor, Bo Baron, who is a friend of ours. We've been on his show and he's come on ours. So thank you for spreading the word, Beau and great to meet you, Nima. Someone who I was so excited to meet in real life. And you guys will know this name is Mark Sleeper who is so active on X, every single episode he posts about it. Mark actually created a hashtag just for me keen on Trep and he tweets it almost every week when we release the show. He is such a loyal fan and he's doing great things in the industry and it was so cool to see him in real life. I also got to see another ex fan of ours, Twitter fan of ours, Jonathan P. He does a lot of his own spaces where he hosts meetups on X and he empowers people to just get talking about what they're doing in the business. It was so great. We spent a lot of time together. It's always great to see Jonathan in real life. And then finally I will give a shout out to Heather B. Who is a new friend. She is a professor of real estate at Pepperdine University and she didn't know about Trep or our podcast. But within a day of getting back from this conference, she put out a LinkedIn post and said she's binging the show. She's already told her students they have to listen to it. And we're really excited to collaborate with Heather. And we also got to meet Ray N. She is also a longtime listener. We have gone back and forth with her on LinkedIn. She's always sharing information. She said she loved the show. It's almost like drinking from a fire hose of information, which we are aware of that, but we appreciate that you power through it and you listen every week. So it was so great to meet everyone in real life. And chat with them about the show and what they're doing in the industry. So shout out to everyone we met there. We'll give some more cohesive shout outs to some of the other folks we got to talk with on next week's episode.
- [49:32]
C
So Haley, as you know, I was supposed to be a presenter at that conference. I was actually on the conference planning committee and I was really bummed to have to miss it. We had some cool and exciting things going on here at TREP in New York last week and so I had to make a quick trip up to the city. But I wanted to give a shout out to our very own Andy B. For filling in for me in short notice. Andy had joined trip fairly recently after 20 plus year career at the Chicago Fed and this was his first formal external presentation with Trapp. And he did a really great job. And I know it was tough kind of taking over a presentation that was built midstream where he wasn't really part of the initial process. So Andy, thanks for, thanks for taking one for the team. And I got really positive feedback from everybody that saw you there, including, while they're not Jordans, some really cool running shoes that you, you wore on stage. So thanks for stepping in for me. I appreciate it.
- [50:27]
A
We had a lot of other people send us emails and shout out us on LinkedIn, but I'll save these for next week. And as always, thank you all for listening. A lot more to come from us. We filmed a really interesting episode with another loyal listener, Dr. Debt Yield. You'll find out who that is once we release the episode in a week or so. And we have a lot more coming. So keep listening, like subscribe and share any of your thoughts, comments or criticism. We will take it. With that we'll close. Thanks to our producer, Mariana Sobrana. Join us next week as we look at what's happened during the week and how it may be impacting you. If you have a question or just a comment, send an email to podcastruck.com and subscribe to the Trepwire Podcast with your favorite provider. Thank you for listening and say well, all right.