← The TreppWire Podcast: A Commercial Real Estate Show
The TreppWire Podcast: A Commercial Real Estate Show
406. Challenging CRE Narratives: Mid-Year Reality Check, Office Conversion Risks & Multifamily Mixed Signals
01:02:48
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Foreign.
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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 July 10, 2026. I'm Hailey Keene 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, Head of Applied Research and analytics. Coming back from the 4th of July, markets still had plenty to digest. Services activity remained expansionary but mixed. The trade deficit widened sharply, inflation expectations ticked higher and investors were watching the first FOMC minutes from Kevin Marsh's Fed for clues on how this new regime communicates without traditional forward guidance. On the commercial real estate side, today we're doing a mid year check in on our 2026 predictions. Issuance has stayed strong, single asset, single borrower continues to drive private label volume, five year debt structures remain dominant and CMBS delinquency has been fairly range bound even as stress stays concentrated in specific sectors and markets. Today we'll also cover several stories that highlight where the market is a Manhattan office to resi conversion that underscores the engineering challenges behind adaptive reuse, the Texas Stock Exchange taking another step toward launch and a few multifamily stories that show both sides of the cycle distress at a fund, but also Avalon Bay positioning for the next South Florida upswing. Then in digging through the data, we'll unpack Lonnie's new Midwest versus Sunbelt multifamily piece. And for this week's 101 segment, Stephen will break down back leverage, how it boosts returns, why banks like it, and why it can also amplify downside risk. So Steven, let's start with the macro setup, get into some of the main stories of the week and then onto our mid year predictions. Check in. What stood out to you this week?
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C
Well, this week's data gave markets a familiar but tricky message, and it's one that we've heard ad nauseam so many times before. Growth is holding up, but not in a way that makes the Fed's job easier. I mean, gosh, I'm pretty sure I could just use that every week at this point, just kind of like blindfold myself. Pick a different version of that out of a hat and it would still hold true. But I will say what does have me a little bit worried this week, but also thankful a things haven't deteriorated. So yes, that's a good thing, but there's still some downside risk. The Middle east re escalation intentions with the threat of an end to the US Iranian peace deal, with tensions escalating. Again I will say, like just compared to prior tensions and oil price responses, this one maybe it doesn't have to be interpreted quite so bearish because the oil move was not quite so bearish. I think oil was only up like 2 1/2% on the back of that, at least for one day. And anyway, compared to the moves we saw earlier in this conflict, this doesn't seem to be quite so negative yet. Now on the services side of the economy, yes, we're still expanding, but details were mixed. Inflation expectations, really that's probably the most important thing that we should all be paying attention to right now because that's the most likely factor that's going to play into a Fed hike and those continue to move higher, the trade deficit widens and the Fed minutes will be really, really interesting. If you remember on the day of Kevin Marsh's first FOMC announcement, treasury volatility was fairly significant. And I think that's going to be a continuing theme on the back of well Fed speak and in particular Fed announcements is an increase in treasury yield volatility. And then something just to keep an eye on for the future is I heard a really interesting projection from BMO earlier this week that basically had a fairly bearish tone to it for treasury yield outlook. And in particular the thesis was that you're going to see a lot more corporate corporate issuance on the tech side. So I mean a couple hundred billion dollars across the big tech names that's going to SAP up some of that treasury demand. And then on the international side you have, well, a number of countries that will probably have more demand for internal spending within their country that might trigger some treasury selling. So long short of it is supply side for Treasuries is probably going to be business as usual, but demand side might be marginally weaker. Couple that with higher volatility and that doesn't exactly give me a whole lot of comfort for floating rate debt and floating rate interest cap expenses. So anyway, just something to keep keep in mind out there. Now on the CRE side we have some really interesting mid year updates that I think we're going to have a lot of fun talking to. But let me kick it over to you Lonnie for this week. How are you feeling on the back of July 4th? Are you more or less neutral, unchanged, Feeling marginally more bullish, marginally more bearish, or just flat out heat exhausted? You know, too much humidity, too much heat and it's just time to go dip in the pool.
- [05:29]
A
Well, I mean, at this point, getting in the pool feels like taking a warm bath because it's the pool water's over 90 degrees now. It does feel nice when it's still 104 heat index. So, like, I'm not complaining. But look, I think this weekend and, you know, the start off of this week, my emotions were kind of on a roller coaster. I mean, you had the 4th of July, 250th anniversary. It was incredible. I think there was some real patriotism United, you know, parades and events across the country that was really welcome to see. You had the U.S. team in the World cup that was, like, slated to potentially win, move another round into the World cup and to, you know, territory they've never been before. And so on Sunday, I think everyone was excited and optimistic and it was a great weekend. And we were just waiting on the US Men's team to, like, kick some butt. And then we know what happened there. And so, you know, it kind of brought you back to reality of it was it was a good run. Now we're going to watch someone else win the World cup, which is fine. And I do have a new appreciation for soccer and just how strategy and so forth works in that game. I really had never really paid attention to it until this World cup, so it's been nice. But I think on your, you know, your intro look, it's. It's like you said, a lot of these themes are consistent, persistent, whatever you want to call them, they're. They're not going away. You could effectively roll out the same kind of intro for the last, you know, several months. The Iran stuff feels a little bit interesting in the sense that, to your point, the markets haven't reacted or overreacted like you maybe would have expected. But I think that's just kind of, you know, people have gotten a little callous to this in the sense of like, peace deal. It's kind of like trust but verify. Nobody really believes it because every time we say something like a day or two later or the day of, there's like, more bombings going on. And so the markets have just, you know, built in a buffer for that. If this persists, I think it can get a little bit more dicey, like we saw maybe a few months ago. But I think for now it's going to remain relatively calm. I do think the, the Fed stuff is interesting. I mean, washes, you know, just kind of first meeting and removing forward guidance and just the market's reaction to that. The commentary you had on floating rate debt, like all of that's real. In fact, I mean, like this week was no exception. There were some pretty, you know, seismic news of some multifamily investor capital that was lost and it was pretty much all predominantly floating rate debt. I think that narrative, while it was pretty hot when the Fed started raising rates and interest rate caps became crazy expensive, it faded for the last 18 months or so. That's about to make a roaring comeback. Like people are going to start digging into this floating rate distress that maybe we all suspected would happen earlier. That's now going to start happening. So there's no shortage of things to talk about. I think for me, like the equilibrium is kind of where I'm at. Like I was super stoked on the fourth down on Monday night. Kind of back at it this week with a realization that just the markets keep moving. There's a lot of news, there's a lot of macro, there's a lot of distress, there's a lot of issuance, there's a lot of positivity. All these things together probably pretty much reverting to the mean at some level in terms of my, my feelings.
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So let's talk about a big story here in New York and I think across the globe and country. We mentioned quickly office to resi conversions. And this first story here is a pretty dramatic reminder that even when the market opportunity is there, these projects are anything but straightforward. So we're talking about the major Midtown Manhattan office to residential conversion project that was halted this week after structural issues raised concerns about a potential partial collapse.
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Yes. This project involves the former Pfizer headquarters near the Chrysler Building Nu n with Metro Loft converting the roughly 1.6 million square foot complex into about 1600 apartments. Developer Nathan Bierman said the likely cause was added weight from widening roughly 15 upper floors beginning around the 22nd floor. Two supporting columns on the 21st floor buckled and steel beams began bending. Several nearby floors were also sagging. According to city officials. Nine nearby buildings were evacuated as a precaution and construction workers were cleared from the site. Biermann said the damage appeared limited to a small portion of the addition and did not threaten the broader structural integrity of the building, arguing that 95% of the building remained sound. The city's building commissioner said the project had gone through an extensive Department of Buildings review over the past two years. The conversion plan is unusually ambitious. It includes the 33 story former Pfizer tower and a connected 10 story building dating back to 1910, 5. And a major vertical addition that would add 19 stories atop the older building. I mean, Just envisioning this, 19 stories added onto an existing structure. I don't really have any sort of an engineering background to opine on this one, but from just my good old, like, erector sets and Lego days, I know that when you take on something that ambitious, you have to make sure you know what you're doing. I mean, and when I say know what you're doing, the amount of load that you're adding and the, the construction complexity, I'm sure, increases exponentially with that sort of vertical ad. Now, the article frames the incident as a reminder that office reside conversions are not a simple adaptive reuse project. In some cases, they often require major structural, mechanical, plumbing, light and air and layout changes. Now, I will say this Metro Loft has deep experience in this sector. They are one of the most experienced players in the Manhattan conversion market, with more than a dozen office to resi projects completing over 8,000 apartments. And they've been at this game for, I think about 30 years at this point. The broader market context is that office conversions have gained momentum as office values have fallen, making some buildings cheap enough to justify these really expensive redevelopment projects. There's about two dozen conversion projects currently underway or planned in Manhattan totaling roughly 8.8 million square feet. So this is going to be an interesting one to watch. Lonnie, did you look at any of these pictures? The building, and specifically some of the upper floors of this edition? Like, just eyeballing it, you know, they played it down really, really well, and the press. But when I started looking at the pictures here and eyeballing what had shifted, I'm like, I'm questioning how easy it really is to get this thing back on track. I mean, the developer saying, oh, this, this maybe sets us back a couple of weeks, but it's not, it's not going to be substantial. It'll be business as usual here pretty soon. Sooner than most people think. But when you look at these pictures, I don't know, I just have to ask the question, is it really that straightforward of a fix?
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Well, look, I think it's early. The blame game and finger pointing and everything, like, everyone at this point is jockeying for position here in terms of who's going to get, you know, the blame for why this happened. I. With you, Like, I'm not an engineer, structural or otherwise. My brain doesn't work that well. But I, I have to believe that this all passed protocol stamped approvals, engineering standards. Like my suspicion will be that when this comes out that this was probably some sort of temporary bracing support or some. Something that was an interim solution while they were adding the floors and doing the construction that failed more so than it is like long term structural issues that require significant type of work. And I think that's what the developer's trying to say here is that this is not. It's. It's structural. Obviously, we've seen the pictures. It's structural, but it's not something that's going to derail the project or, or has to be taken back to the drawing board. It just needs to be corrected. You know, I don't know that to be true. Maybe it is much more serious than what I'm implying here, but it just feels like with as many eyeballs on this as there have been, and with the city and everyone else involvement at the level that it has been, I would be hard pressed to think that just all of those licensed professionals just missed this one. It's possible this is a massive project. I mean, I think to that end, Stephen, the ramifications of this will reverberate. And I think for all of the positives and the momentum that this conversion process has garnered over the last couple of years and New York kind of bearing the torch here, just broadly, this sets that back. Because now not only are there the financial obstacles, the implementation operational obstacles, but now there's a stigma that for better or worse is going to be associated with these types of large scale conversion projects.
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See, and that's just it. For me, the real question lies in the future sellout or the future cash flow ability for this project. If you look at the Surfside Champlain towers down in Miami that had that partial Collapse Back in 2021, the new project was targeting super high end, like $15 million starting price for the condos. And it's been a spectacular failure because nobody wants to buy into the development. It has such a stigma around it. They've been really unable to overcome that. That stamp. It's. I mean, to me it's kind of a equivalent of having. What's the, what's the term for a tainted title in automobiles? When you have flood damage? What's that called?
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A bonded title or a salvage title? Yeah, rebuilt title.
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So to me, like this is equivalent to when you have flood damage on a car that just permanently stains the title on the car.
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Right.
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It kind of sticks around forever. I question if you kind of have an equivalent of that in the real estate context. Learning from that Miami project and difficulties, they face. Will there be a permanent stigma around this project going forward and perhaps impair its cash flow ability?
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So we've been talking about the Texas Stock Exchange a lot and y' all street on this podcast and as of this Monday, the Texas Stock Exchange or the TXSE began operating with test trades as part of a stage rollout. Let's talk through this story.
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C
Yeah, this is a fun one. It's been a long time coming. And so to finally hit the week where, well, the exchange goes live and we start executing trades is an awesome mile marker. The goal of the test phase is to make sure the exchanges trading technology works properly before regular live trading begins. The TXSE says live trading is expected to begin Friday with a small group of regular stocks and funds. More securities are expected to be added gradually through the end of July. The Dallas based exchange says more than 50 firms have joined, including banks, brokerages and trading companies. TXSE's longer term goal is to become a Texas based listing venue for companies that want an alternative to the traditional New York centered exchanges, namely the NYSE and NASDAQ. The exchange was first announced in June of 2024, later named its board and received SEC approval to operate in 2025. So remember, this is I think officially being branded Y' All Street. I mean, that might have started out as a joke, but it stuck around and I don't see that changing. Lonnie, are you okay with us calling this Y' All Street?
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Oh, it's just cemented, man. I mean, like, listen, yeah, if I was, if I was in charge of running this organization, that organization, my marketing team would be leaning into that. Like you've not seen, you know, they would be leveraging this. Everything's bigger in Texas. Y' all street will be plastered everywhere, neon lights, cowboy hats, all of the stuff. I mean, I think it's a marketing play that's perfect. And I think, yeah, to your point, it started off as a joke, but it's real. And at this point it's been cemented as a huge hub or draw for corporate relocations and other things as we've documented here. So as it gets closer, as its footing more cemented in the workflow, I think the play on words is going to remain and I think it'll actually become just like the Wall street bull. You know, I mean like that's an iconic component. This is something maybe not to that level at this point, but potentially could be.
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Oh absolutely. I'm imagining like, you know, branded stakes, like you're going to have some famous steakhouse pop up near the stock exchange that all of the major brokers are going to go to. And when those steaks come out of the kitchen, they're getting branded with something, something y' all street related. So this is going to be fun to watch it evolve and importantly watching how the real estate market develops alongside it. Because the number of companies that have relocated or built out a larger footprint in the Dallas area as a result of this exchange, it's going to be significant capital in the long run.
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Agreed.
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So let's get into a check in on our key predictions that we made at the start of 2026. I think we're going to start here with our commercial mortgage backed securities issuance figures. As a reminder, we'll give you some context here. CMBS issuance rebounded to roughly 108 billion in 2024, which was nearing pre GFC levels. And that was driven largely by more than 70 billion in SASB deals. That momentum carried into 2025 with issuance rising to approximately 130 billion on the back of heavy maturities and strong demand for sponsor backed assets. So Steven, walk us through what we predicted for 2026 and then where we are now.
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Yes, we had tossed around a couple numbers, but I think the one we settled on, Lonnie, was we would clear 120, right? But the real question was would we clear 130 billion? And at CREF C, some folks were calling for 140. And you know, I were like, okay, that'd be great if we could hit 140. But 130I feel like is the conservative total target that we'll set initially. Well, thankfully we were not initially on track to break really 130 or come close to that 140 mark over the first four months of the year. When we got into May, things accelerated. But then when June issuance started building up, the pipeline was. The pipeline building was fantastic. I'll say that. I just love checking in every single day, every single week and seeing the trajectory line increase its slope. And so by the time we finally cleared all of the issuance through the first half of 2026, we hit 68.5 billion. So if we annualize that, we're going to get to about 137 billion this year for just conduit large loan and SASB. Now SASB has done most of the heavy lifting so far this year. It's accounted for 76% of volume last year. Through the first half of the year we'd actually only cleared 57. Call it about 57 and a half billion and about 73% of that was SASB. And so on a year over year basis, we're up 19% on first half volume. And if we annualize out to that 137 number, that would put us up 8% on a year over year basis. So it's a really good increase. Conduit, though, has struggled this year. It has not done quite as well as I would have liked to have seen. We only hit 14.2 billion roughly over the first half of 2026 compared to 1H25. We had 15 billion last year. So conduit has only accounted for 21% of volume in 1H26. It was at 26% in 25. So we've lost a little bit of ground there. Now, Lonnie, we've talked about this where we've really made up some volume has been in the cre cielo sector. Over 1H26, we've had a little more than 25 billion across 25 deals, which if you annualize that out, it puts us at more than 50 billion and would clear us at about 50 deals. If we continue on that trajectory, that would put series clo volume up 46% on a year over year basis on just a first half volume. And then if we actually annualize out to that 50 billion number, that would be a 65% increase over last year. So that shows you the seasonality effects.
- [22:23]
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Right?
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I would be honestly, personally, I would be surprised if we can keep this current pace of series clos issuance. But at the same time, some of the chatter that I've heard on the side is that there's, there's still some more players. They're going to come out of the woodworks issuing deals. So I'm excited to see exactly who those are, who is doing some book building in the background and what levels will we hit. But something's for sure this year. Lonnie, our projections are looking good. Volume has been healthy and right now it's just a question of can we keep up the pace.
- [22:58]
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It'll be interesting to see how the second half of the year goes. Stephen, you know, I, I like the seasonality comment. I mean, August is historically a slow month pretty much across the spectrum. December up until last year has been generally a slow month. If those hold true this year, then maybe that puts a little bit of a dent in the the year end numbers. But based on what we've seen so far this year, and based on what we saw last year during some of those typically slow months. I think we're in for a really strong finish to this year. And you know, it was really amazing. You put some slides together for me that I used in a presentation this week. And you know, the part that struck me is when you look back at the issuance over a long time series and in the, in the chart we go back to the early 2000, so you see the, the run up in 05, 06 and 07, which you know, eventually eclipsed over 200 billion in issuance. I never would have thought that we would see anything close to that again for the reasons that, you know, CMBS 2.0, risk retention, the way underwriting standards and pro forma and you know, rent growth and all these like assumptions like were changed in the new regime of, of cmbs. Yet here we are where we're like inching closer and closer towards that 150ish plus type of, of origination. And you know, it's, it's one hand. I'm super stoked about that. Obviously, like we track the market in the CMBS world and so issuance is a great thing for us. On the other hand, it just, you know, makes me wonder like, is it different this time? Are those numbers inflated because property values are inflated? Like, is it real? Because to me, when you look at that chart, the years that jump off the page are 05, 06, 07. And the one thing they have in common is like 150/billion per year issuance. And it had never gotten back anywhere close to that. We're inching closer to that. Does that have any meaning or implication? I don't know, but it makes me a little bit nervous.
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C
Well, if we think about what an inflation adjusted number would look like on an inflation adjusted basis, we're still lagging dramatically. If you inflation adjust those 05 to 07 issuance numbers and put them in today's dollars, whether you do the really simple, really basic CPI or pce. All right, that would be on the conservative side. If you were to use a property value index, I think it would look even worse for where we're lagging today. So I have kind of mixed feelings about this. On the one hand, I'm excited to see the volumes. On the other, I know that we've lost some collateral to the CMBS universe. It's leaked to outside lenders, in other words. And the game today is very different than what the game was back in the day.
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Right?
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Conduits are no longer the bright, shiny vehicle. It's all about SASB's because well, honestly if I'm a trader and I'm looking at the yields you can get on the single A to triple B slices of a SASB deal in a world where yield is scarce, if I can actually get allocations for those credit pieces of the SASB deals I like, it's fantastic, right? It's a very, very different regime today for how you diversify your book through SASB deals and kind of pick and choose your exposures versus just, well, kind of broadly buying across the capital stack in conduit deals back in the old days. So it's really interesting how the game has changed.
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The concern here Steven, is just the proliferation of SASB's just generally. Right. I mean like not just in structured finance, but just in life, you know, when things are in balance, it seems like you get optimum results. When one part of an equation or one part of the scale is tilted dramatically more than the other, things are out of balance and it's easier for things to fall apart. It's just this weird conundrum of sasb. Properties by definition are generally best located, highly amenitized, best tenant roster, best operators, most well capitalized, all of these things that inherently reduce risk. But when they're being issued at the pace and scale that they are now, and the other components of the market, namely conduit, which by structure is supposed to limit risk because of geographic distribution, property type distribution, et cetera, et cetera. It's almost like we had a discussion in maybe 20, 20, latter half of the year when all these AI companies were leasing up office space, say like in Austin, Texas, kind of a second tier market, I mean millions of square feet and it's like, it's great when they're signing the lease, it's terrible when they decide to pull out because not just one of them leaves, they all leave and you have a heavy concentration on it. Is there some of that here? In the structured world where we've over rotated to SASB to a point that when the correction comes it's going to be painful?
- [27:55]
C
Maybe, maybe, but this was kind of a necessary innovation to retain borrowers with conduit deals you do have your hands tied as the lender to some extent on what kind of structuring and flexibility you can offer. With SASB's you don't have that same level of constraint. And so I mean at the end of the day, yeah, if we're in a balanced market to some degree, the borrowers do still hold the Cards and demanding loan structure. And so for trophy assets of this size and borrowers that also want the structure, this was a necessary innovation for the market. Banks post GFC were definitely constrained with what they could do on syndicating loans of this size and weren't really going to be competitive for that product. They never would have been insurance companies of a similar deal. There's going to be a limited appetite to syndicate at that kind of scale that's necessary for this many assets of that size. So CMBS market is well built to place the debt for these assets and at the end of the day, to me it's a structuring issue. Right, the structuring and flexibility issue. So I'm hoping as long as the borrowers have been very diligent about how and why they've structured the debt the way they have for the SASB deals, we should still be in okay territory. But if there's anything systematic that we've missed. Absolutely. There's definitely going to be some ramifications for it. Part of it may lay with the rating agencies and how they're issuing ratings in these deals, but also part of the blame we always know is it's kind of a multi sided equation. The bars will have some role in that as well. So some of the other predictions we had bank lending, bank lending to CRE we thought would grow modestly around 2.5 to 3% so far through the first half of the year. Depending on how you're measuring that. That looks largely on track to hold true now. CMBS delinquency rates we thought would remain near current levels as resolution issuance offset new distress. And that certainly has been more or less the storyline. So let's recap where we were at year end 2025. The delinquency rate was 7.3% at that point in time with office at 11.76%, multifamily at 6.64%, lodging at 6.61%, retail at 6.92% and industrial at 0.80. So let's look at where we ended June 2026. Delinquency well, rate sure enough is right about sideways. We're up 5 basis points compared to year end. We ended June at 7.35% on headline office. This probably would be a surprising one for most folks. You'd think compared to year end 25 we would've probably have expected more office stress. But remember, this rate can churn and new originations will offset some of that increase in the numerator as well. So office has actually decreased relative to year end. Right now we're at 11.57% for office delinquency compared to 11.76 at year end. Multifamily, this is where a lot of the action has been at. Multifamily has increased compared to year end we're at 7.23%. That's relative to 6.64% at year end. Lodging, Lodging, we've decreased relative to year end. We're at 5.22% currently. Relative to that, 6.61% at year end. Retail about sideways, we're at 6.91% currently. We're at 6.92% at year end. And finally, industrial. This one's actually a curious one. I would not have guessed we'd increase relative to year end, but we also were already at relatively historically, historically low levels. So we're at 1.2% currently relative to that year end of 0.80%. So a mixed bag and largely sideways, which is pretty much what we thought would happen. Lonnie?
- [32:01]
A
Yeah, I mean look this, this year has played out, I think pretty much on pace and scale what we thought would happen. It was interesting with the Iran conflict that we weren't sure what was going to happen there with oil prices, CPI and all the stuff that's pretty much moderated or been absorbed. But property performance, issuance, delinquency, all of these things I think are generally playing out how we would imagine. I mean the office number is surprising in the sense that I still to this day am surprised that we peaked out at just over 11%. It feels like it should be higher than that. But to your point, there's obviously been an offset in the, in the origination side of the equation. And quite honestly, like a lot of these buildings have figured out a way to manage and maintain at least a current status. It doesn't mean, you know, I think we should probably emphasize more here what delinquency effectively is. I mean in this case this is something that's past 30 days of missing a payment, right? So within that 30 day window they're in grace period. Once they eclipse 30 days and go into that second month, then they go into delinquency. So delinquency doesn't equal distress in the sense that some of these buildings may still be current on the mortgage, but they're very clearly distressed. But for me, the sideway movement across multiple of those asset classes, office relatively down compared to what we thought would probably happen. I don't Know how you look at this and feel negative about it. I mean, maybe the numbers are slightly subdued because of some of the extensions and modifications and other things that have brought things back to current. But on the whole you have to read this and feel like the market is really moving beyond the distress phase at scale. And the optimistic part of me is starting to take more of a hold. I think the issuance is really driving the conversation and delinquency at this point is just something that has to be tracked and it's indicative at some level of the distress that's still pent up, but it's not moving the needle like it was 18 months ago when there was all of the uncertainty around it.
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C
Something will be a fun stat to pull at say like 2030 when hopefully most of this stress has resolved itself. Is around that time I want to be able to look back and say, for the office loans that passed maturity because they weren't able to refinance out, how long did they stick around in the CMBS universe? Outstanding. I'm really curious to see how long of a right tail we have for these assets that end up staying in the CMBS universe because they couldn't find a home elsewhere for various reasons, but for those reasons that are related to the pandemic demand shift.
- [34:40]
A
Well, you've done some of this analysis on some of the CMBS 1.0 stuff that's still hanging out there. I mean there's, there's definitely going to be office properties from this cohort that are hanging out there. I would hate to say, you know, still there in 2030. But listen, they're going to be there. There won't be a lot of them, but there will be some of them and they'll be rationale and reasons and you know, things behind them that, that lead them to the path that that would entail. But the question for us, Stephen, is this, not so much this, this next quarter, this next half of the year. I mean, are we, are we getting enough momentum here with lenders and others like moving away from some of the extensions and modifications on these non performing properties? It's almost like we're moving away from extend and pretend into a resolve and recognize part of the equation. And I think that is, that's the part where to me that's the most important trigger is like when does that happen? Does that really start happening in earnest in the next quarter or this time next year? Because once you get lenders and you get the market to this resolve and recognize, then I think the bottom across the spectrum happens and things just trade out and the cycle starts back over. We have parts of it. Listen, like you, you and I have been talking about this for a while. Like there's no uniform recovery at this point. There's no uniform metric, there's no uniform version of the CRE market. I mean there are asset specific, there are sector specific, there geography driven, you know, type of recoveries or, or markets that are still struggling. But I think if we can get out of extend and pretend and move into resolve and recognize, then we might actually start seeing some of these things play. Play out.
- [36:24]
C
Yeah, I hope so because a long tail is not good for anyone. That really is just prolonging the inevitable. And in my mind it keeps an asset from really resetting its basis, putting it in the right hands and optimizing its value in the long run. So when these things drag out, it's really not good for anybody except, I don't know, maybe the special servicer because they're getting fees. But that's not to say they actually will maybe get all of their fees because it depends on what your liquidation value ends up being on these assets.
- [36:57]
A
Didn't you do an analysis last year Stephen, where you looked at number of months to resolution? It was across an earlier cohort. But you did some of that analysis, right?
- [37:09]
C
Yes, I've looked at resolutions across vintages. In other words, that's going to get you through cycles and so the time between your first missed payment or that first delinquency and then ultimate foreclosure to reo transition, it's, it's a wide range but it, the median is right about like 19 to 24 months. I want to say like the, the stable average was right about 19 months and that ranges from on the short side about 12 months for GFC assets and it's actually prolonged over time. So it's, it's interesting the, the foreclosure timeline extended over time. The modification timeline decreased dramatically. We've become very efficient at modifying loans in the industry. So that's gone from like 8 to 14 months between delinquency to modification outcome. That dropped to about three to four months. For current cycle we have a couple more predictions. One of the last really big one was on debt structures. We thought that given the term structure of interest rates and where things were headed, that five year debt would really remain the preferred option despite gradual yield curve normalization. That certainly held true in 2026. The five year paper has accounted for 91% of issuance on a loan count basis and 84.5% by loan balance. So it has absolutely dominated, continued to go up and at some point maybe that'll switch. But for right now it doesn't seem like that's going to abate anytime soon. So just one last bit here. We didn't have hard and fast predictions on what would happen with new issue bond spreads, but I did think they were worth bringing up because, well, it paints an interesting picture for how things have played out through the year. So first let me just talk through the general movements and the credit spread curve. This year we reached a low point from year end, right From December year end through really early to mid February, we were on a downward slope for credit spreads and that's where we bottomed out. We bottomed out really in early to mid February on credit spreads. Then when we hit March, March widened out dramatically. On the heels of the Iranian conflict, credit spreads reach their peak right about the end of March. So if you're just kind of trying to visualize this curve as I'm describing it, we get a nice steady tightening in January through the first part of February. Then when the conflict hit at the end of February and through March, we blew out dramatically. But then since the end of March, we've continued to tighten back in on credit spreads. We started out at a spread to treasury of 78 basis points for the AAA bonds, we tightened into 67 basis points on February 11th. We widened out to 83 basis points in March 23rd and then tightened in through July down to 71 basis points. So we're 13 basis points tighter than where we were at the wides in March. But we're still 4 basis points above the tightest point in February. So we still have a little bit more tightening or room to run here. I think if we take February as the lower bound of where we could end up for double A's, we started out at 136, we tightened into 118, widened out to 151 and we're currently sitting at about 130. So we're 21 basis points in from the wides, but we're still 12 basis points above the tight. For single A's, we're 31 basis points in from the highs, but we're still 18 basis points off the lows. As of July, we're sitting at right about 186. For triple DBs, we're currently sitting at 406. That's 34 in from the highs, but still 78 basis points off the low.
- [41:09]
A
Right.
- [41:09]
C
That's the accordion effect you'll hear me talk about sometimes. And then the triple B minus, it's right about the same level as the triple B, so I won't rattle that off. It's not really that meaningful to look at the triple B versus Triple B minus at this. The AAA single A triple B really gives you the best picture here.
- [41:27]
A
I mean, Steven, spreads have been the topic for a while. I mean, Even at our TripConnect event, listening to the lenders talk about how competitive the market is and how it's compressing spreads across the spectrum. And there's no reason to believe that with the issuance volume that we've seen and what we're predicting for the rest of the year that you're going to see any meaningful spread expansion, at least at the higher end of the stack. And so I think that bodes well for borrowers. It makes it tougher for lenders. But this is where we are today, so we'll see how this shifts. It usually does. By this time January of 2027, when we're sitting in Florida listening to the folks at CREF C, maybe we'll be in a slightly different paradigm than we are today. But it feels like this trajectory has been pretty well forecasted and the market is continuing to kind of keep pressure where lenders are having to compete.
- [42:22]
B
So let's get into some of our main stories of the week. We have a big theme of multifamily this week. We mentioned this briefly in the intro, but this week, if you missed it, there were several headlines about S2 Capital dissolving its first multifamily value add fund with investors reportedly expected to receive no return of capital. So walk us through a little bit about this story. Story, Steven and then let's get to some of the other side of the coin with what we're seeing for opportunities in multifamily and different markets that we're tracking.
- [42:56]
C
Absolutely. So this was, this was wild. I feel really bad for S2 Capital because they had been on a really strong run there, but the type of debt structuring they were using was really not kind. It can be very punishing when rates rise as rapidly as they did. And the combination with expense increases plus supply side pressure and downward pressure on rents, it was a very difficult brew to digest. So the fund reported value of about 400 million and closed in September of 22. But they have now had to collapse that fund as a result of, well, overwhelming pressures. So I think that really the best way to sum this up is Pretty simple. It's what S2 outlined in their letter to investors noted that the average increase in expenses was 16% across their portfolio. Interest costs, Lonnie increased 50%. I mean that floating rate debt bites when it bites. And if you're not hedged, if you don't have interest rate caps in place, the unhedged interest expense is going to bite you hard at 50%. It bit hard. And then couple that with the supply side pressures, there was a 24% average drop in rents across the portfolio. So when you put all of that into the blender, it comes out as a very nasty brew. And unfortunately that took down S2's fund in pretty short order.
- [44:27]
A
You know, I'm going to be hard pressed to say I feel bad for S2 at any level in the sense that there are certain things in life that are no knowns, right? Taking out adjustable rate mortgages when rates are zero and then being shocked when rates go up and the cost of rate caps and other things, you know, impairs your ability to operate like that's a known known, you know, and if anything, I feel bad for the LPs here that are just completely wiped. But at some level there's a requirement to do your own due diligence around some of these deals and kind of look at what's taking place. And you know, I think if anything it's just, it's a wake up call for people to understand that creating value, intrinsically creating value as an operator is a very tough proposition. There are not many operators that know how to effectively take a property through their own operations, skills, domain expertise, whatever, create value. And I think what we're realizing here and what we're seeing at scale is for the last part of the better half of this last decade, a lot of people rode the wave when interest rates are 3 or 4% and they go to zero on the federal funds rate. And so correspondingly, interest rates come down, cap rates come down and you know, it's perfect to tell the music stops and there's no chairs for anyone. To me, what I dislike about this most is it's just, it's the bad part of our industry. It's, it's, it's a black eye for the industry. It's, it's a gut punch, whatever you want to call it. And I hope that for people that are in this space and either raising capital, operating properties, doing deals that they take a step back and say, look, there's a lot of different stakeholders that are invested in these, whether it Be retail investors, institutions, pension funds, retirement funds, whatever the case may be. You have to be a fiduciary and you have to do what you think is right. And sometimes deals are not going to work. This is not the first time a fund is dissolved and returned no capital. This is not going to be the last time that this happens. It's an unfortunate part of the business. It's a really hard business to operate in. I hope for people involved that this doesn't create life altering type of ramifications. If that's the case, you shouldn't be investing in these types of investments in the first place. But to me it brings things back to center. And you and I talked about this. You look at markets like Phoenix and others where you had properties that traded at 6 million, 12 million, 24 million in like a three year time period. That's not real, it's not supportable and it's not something that you can maintain. And each time the amount of leverage or the financial engineering through rates, you know, arbitrage or whatever, just increase the price that people are willing to pay. At some point it has to come crashing down. So look, this is something, I don't think we need to get into it any farther. There's plenty of commentary online about this. We're not trying to pick sides or throw punches here or pull punches, but at the same time for our industry, if you're going to be taking other people's money, you have to try your best to avoid the known knowns that can lead to catastrophe.
- [47:35]
C
I got to say, there's a certain irony to this. When you go back and look at how things played out. When you go on a podcast in 2022 saying fixed rate is for suckers. And then, you know, history has told us all of the really smart people out there, the corporations were terming out debt when interest rates were 0. With fixed rate debt, there's a certain irony to that.
- [47:55]
A
You know, it's, it's just, it's, it's interesting. You, you see some of these folks that have been in the business through multiple cycles and if you ever talk to them, like you and I know some of these folks personally. I mean, in the line of business that we're in, we talk to a lot of deal makers and we talk to a lot of operators and there are certain things like core tenants that some of these people that have survived multiple cycles will tell you. And one of them is you get fixed rate debt, you control the things that you can control even if you don't like the rate, fuzzy math and financial engineering. It may work, but the chances of it working are low. And the chances of the negative consequence when it doesn't work is really, really high. And so, you know, I think if he had a chance to do this over again, which I'm not sure he's going to be able to raise capital again, but supposing he does, I would be hard pressed to think that he doesn't assimilate to the fixed rate debt. That side of the equation. Like, that's something you just have to do to be successful, in my opinion. And you put pencils down, you don't invest when it doesn't make sense. I mean, that's the other part. It's not just the fixed rate debt. I mean, like, listen, that's an oversimplification, but you don't put your future in the hands of the Fed or someone else that can dramatically change a trajectory. And you don't buy assets that you know underwriting. Everything has to work exactly how the spreadsheet model portrays. Because in life, nothing works exactly like you hope it works ever. Not sometimes, not most of the time. It never works exactly how you have planned.
- [49:25]
C
There's a reason why I tell my students year after year after year, when we get to the end of the semester, I say, look, I know you want to buy a house, but I'm just telling you you need 20,000 in cash when you buy a house. Because I'm telling you, stuff will break.
- [49:40]
A
You know, was it Murphy's Law, something like that? Old school, you know, it just. It is what it is, man. Like, it's going to be challenging. Life is harder than what you think, you know, like, what do we say? You overestimate what you can do in, you know, a short period of time and underestimate what you can do over a long. You guys can cut that. I don't even know if that even makes sense, but it's like people just fail to plan for the downside. And listen, this is not going to be the last time we talk about a fund failing from 2021. Multifamily investment thesis. This is the tip of the iceberg. And it's unfortunate, but it's going to play itself out, I think, at a broader scale than what we're talking about today.
- [50:20]
C
Well, we have one last multifamily story here. This is a fun opportunity. Side of the coin. Still in the Sunbelt market, Avalon Bay Communities has acquired a full city block. And this is a full city block they plan to develop in South Miami. They paid 22 million and are planning to build 251 apartments. I mean, this is absolutely wild. That works out to 90,000 per planned unit on the land, which this article release says was the highest price per unit price ever paid for a South Miami development site. Wild. Absolutely wild. I mean, you have Avalon Bay in the middle of what will be hopefully a mega merger setting up for what's obviously going to be a very interesting play in South Miami.
- [51:13]
A
I mean, this is just where things start to detach from reality. At some level, Stephen. Like, I know there's support for what they're doing. They have people a lot smarter than me helping run, manage and operate some of these things. But imagine being a real estate investor in that market that was doing deals in the 1980s, that's still doing deals today. We're talking about adding commas to the numbers and sometimes multiple commas. Whether you look at total price per unit per square foot, whatever the case may be. We see this all the time on the mergers and acquisitions that we cover here and the consolidations. A billion dollar deal doesn't mean anything from an M and A perspective at this point. I mean, heck, you can get certain properties that are over a billion dollars just in a single deal. It's just wild times, man.
- [52:01]
C
So this brings us to a fun point where we can do some digging through the data with a recent Trep research report that our own Lonnie Hendry put out here. And this is a fun one. It's looking at the Midwest multifamily market and really kind of pushing back on the narrative that Midwest multifamily is the new safe haven trade as Sunbelt markets have continued to work through their oversupply concessions, vacancy and rent compression. So the central thesis is this. The Midwest story does have real merit, but it needs more context and is not fully complete. The region looks attractive partly because it has not been stress tested by full scale institutional capital for equity investors underwriting a five to seven year hold. The report argues that the Sun Belt still looks better positioned for long term risk adjusted bets, while the Midwest's current edge may be more of a relative pricing artifact than a durable structural advantage. So, Lonnie, do you want to walk us through some of the data shaping and context that you pull together for this report and ultimately what the main takeaways? Hopefully I didn't steal too much of the thunder here, but this is a fun one.
- [53:24]
A
No, I think you did a great job on the intro there of kind of giving people the rationale behind the piece. I mean, look, I would probably frame this more as like a thought leadership piece maybe than just like a pure play research piece in the sense that it does have data and it's supported by the insights from the data. But really it's just a topical, conversational type of piece around this narrative that, oh my gosh, the Midwest is like this. It's like the worst kept secret in cre. Now everyone knows and it's going to be amazing. And I've talked to some folks that own properties in the Midwest and I'll tell you, they don't want institutional capital coming to the Midwest for the reasons that the paper outlines right now. There's a little bit of a price arbitrage that they can take advantage of. There's a little bit of a cap rate arbitrage that they can take advantage of. There's the fact that this is not institutionally managed on a broad scale in the Midwest from a multifamily perspective. Those are all things that they have enjoyed as local investors and have reaped. The benefits of. Those things evaporate pretty quickly as soon as institutional capital flows start coming into this marketplace. And once that happens, you know, then you start looking at, okay, now you actually have to operate these assets. And guess what? So some of these markets are old and electrical and the plumbing and the H vac, like they've not had an institutional cap ex, you know, plan applied to them over the last 20 years. Like a lot of the major markets in the Sunbelt have, where you've had publicly traded REITs or you've had institutional ownership that have methodically kind of kept these products up to snuff in the Midwest, a lot of these truly are owned mom and pop or local type investors. So when you start adding up the capex costs, when you say, okay, well these have grown solid 3 to 5% rent increases every year. We're not getting that from the Sunbelt. That's true. But once you start paying higher prices and cap rates come down and competitive juices start flowing, are you going to be able to sustain the 3% to 5% and that create a cushion or enough of a yield for you to generate the return that you need at the price you just paid? I don't think so. Right. So the Sun Belt has its challenges. It's taken its lumps. It's in the middle of a, of a supply glut in certain markets. It's in the middle of, you know, this 2021 floating rate debt fiasco. A lot of the CRE Cielo debt from the last six years have been concentrated in the Sunbelt. There is some pockets of of distress. My point really is just that if you look at the underlying growth fundamentals over the next five to seven years with y' all street and some of the stuff we talk about on this show every week in Texas and Florida, I'm betting on the Sunbelt. I love the Midwest. I think the Midwest is a great investment market. I think multifamily in the Midwest has been. And for the folks that, you know, are maybe lesser than in, you know, institutional grade, but more than local, they already have really stronghold positions in those markets and they're going to benefit if institutional capital comes in once they trade that portfolio portfolio out. But I just don't think it has the sustainable fundamentals that are needed to support institutional investment at scale for any prolonged period of time, whereas I think the Sun Belt does. So look, the point of this paper, and if you haven't read it, I'd recommend that you download it and give it a read. I'm not taking a hard line position one way or the other. I'm just trying to beg the question of this narrative now of is the Midwest really the better investment play. I don't think it is, but I could be easily convinced that maybe it is. And I've overlooked some things. So if you have some thoughts or opinions, feel free to email us podcastrepp.com we'd love to have a little bit of back and forth on maybe where the paper misses or what it gets right?
- [57:00]
B
So a lot of content from the TREP team this week. We had so much more on our outline that we prepped, but we will have to roll it over to next week because we've had a lot of meat on this episode so far. So thank you guys. And speaking of content and trip alerts, we have some programming notes today. Thank you to everyone who came to our last Marketplace webinar with Lonnie and Steven. We had great attendance and great engagement from all our registrants. Our next webinar will be on Thursday, July 30th at 2pm Eastern. Reach out to us@podcastrep.com if you want early access. We'll be sharing our registration, our invite, and the topics in the next few weeks, but we'd be happy to get our podcast listeners in the queue to get signed up for that. Speaking of the podcast, we've been very busy as a team recording with some really great guests across the industry coming next week we'll have an exclusive interview with the Chief Revenue Officer, Justin Stein of Tanger. He will talk all about Tanger, which is a leading owner and operator of OpenEHR outlet and lifestyle shopping centers. On this episode, Justin walks us through Tanger's evolution from a leader in outlet retail to an operator of open air lifestyle destinations. He walks through how food and beverage experiential retail, data driven leasing and strategic acquisitions are redefining the modern retail experience. This was a really cool one. The following week we will release an episode with Marty Allen, the head of Capital Markets at Grand Bridge Real Estate Capital, which is a truist company. Marty talked to us all about Grambridge newly launched master and special servicing platform, why the firm sees market conditions as ripe for a new entrant. He talks about the move from 10 year to 5 year terms and everything from data and AI to where we sit in the CRE Capital Markets credit cycle and some advice for newcomers to the industry. So this was a really fun episode as well. If you haven't heard our recent guest episodes, we just had David Harrison of Midland Loan Services ON that's episode 404 and we released a special guest episode that was actually live recorded at our Trep Connect conference with Scott Rechler, the CEO of rxr. So go check out those guest episodes if you missed them and stay tuned for some additional guests coming up. Our partner, Eisner Amper released a Mid Year Outlook Report. This was another report that TRAPP and Eisner Amper teamed up on to analyze property level, operating trends, capital market data and regional performance across eight major US Markets. So if you want a copy of this Market Update Outlook Report, please reach out to us@podcastrep.com and and we'll make sure you get it. Turning to shout outs, Eric M was interested in our TRAP alerts and newsletter. He said he always finds those helpful when looking back at properties, bonds and getting daily updates. He's a longtime listener of the POD and says we've come a long way, so thank you. Eric Joffrey said, Great episode last week. As usual, we have the best POD in the business and was interested in any of the reports we shared on the last episode. As an aside, if you're listening to this and you ever are curious about the data that we're talking about or report, reach out to us. We'd be happy to share it with you. Usually we have a data cut, we've released it in a report, or we can walk you through some of the findings on a phone call. Anna K Shared our latest delinquency report on LinkedIn. Damien P loves the show and says he listens first thing every Friday. Friday morning Matt F posted a nice shout out for us on LinkedIn and said as a lender, here are the podcasts I listen to frequently. Brian D. Was interested in our recent report on the 30% acquisition signal and he loves the show. That was another report that we recently discussed on the podcast, the Market Pulse webinar and now we have it in report format. So if you recognize that 30% acquisition signal topic or heard us talk about refi versus acquisition and you want access to this report, please reach out to us. Matthew K. Was interested in our CMBS delinquency reports and Eric B. Said he loves the podcast, he listens on his Friday morning walks and wanted our latest delinquency report Just a couple
- [61:38]
A
quick shout outs Haley this week and mostly driven by the the Midwest Report, our friend Sam T. From Cushion and Wakefield sent me a nice message. We might actually have to have him on a pod to kind of go through some of the thesis here. Eric B, Bill F. And David J. All had reached out as well as Henry L. With their comments around the the article. So thanks for thanks for reading and thanks for taking the time to send a message and appreciate the continued support. We also had some really nice shout outs on LinkedIn over the last couple weeks, you know, folks sharing our stuff and giving us a shout out. So I know we don't always get to respond to every one of those or whatever, but if if you sent us a message or you shared a post and we haven't responded, you know, please take this as our thank you for that because we appreciate the the continued support and the continued promotion of what we're trying to do here on the TrapWire podcast.
- [62:31]
B
Thanks guys for another great episode. With that, we'll close. Thanks to our producer Carly Cento. Join us next week as we look at what's happening during the week and how it may be impacting you. If you have a question or just a comment, send an email to podcastrup.com and subscribe to the Tripwire podcast with your favorite provider. Thank you for listening and stay well.
- [62:51]
C
All right.