YouSaid · the spoken record

Dan McNamara

lines on the record: 100
first: 2023-04-12
most recent: 2023-04-12
sittings or episodes: 1
sources: podcast

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“I don't think so. I mean, listen, I think there's parts of the securitizations that you could short at the single A level, the triple B level, there will be losses. But if you talk about AAAs in general, they have 30% credit enhancement, which all that means is that 30% of the deal would have to be wiped out. And that's on loans that are theoretically, let's just call them 55, 60% LTV. So you'd have to see just massive amounts of losses for AAAs. Now, I think what's going to happen is in the AAA market, these 10-year AAA bonds will probably extend. We talk a lot about kind of extend and pretend. And we talked earlier that, you know, we don't just short our view is, you know, we want to pair stuff with these shorts because you never know what the timing is going to be. So the one part of the market we really like in CMBS is interest only securities. So interest-only securities are strips off of the principal bonds, off of your CMBS.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“So you're short, the double B's, and you remain so, despite the fact that you've already had significant price declines. How do you feel about the top part of the capital stack, the single A's, double A's, triple A's sellers who made a lot of money in great financial crisis by getting a credits default swap on a AA, which people no one thought they would ever go bad in. And some of them actually did. But sounds like not this time around, right?”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“So when maturity comes, the loans either pay off, you know, default or get extended. And those are really the only three options. So it's a cleaner way to do it. There's less games being played. But that being said, there's 25 deals in every index. And, you know, there's about 1,200 loans in a lot of these indices. So it's a lot of digging through collateral to kind of come up with your own opinion on what you should be short or what you should be long.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“Points there. But we view this market as we look at the double beast as we're nowhere close to kind of where the terminal value will be with these securities. So if the market doesn't move between now and maturity, we're very happy to keep this on because when the resolution comes, when loans pay down or loans take losses, the fundamental in commercial real estate take over. So if you saw the big short, there was all these complaints about, you know, the broker dealers that were screwing with the marks of the single name CDS and all these other things. And, you know, if you looked at the fundamentals and why aren't I making money on my shorts, this doesn't really exist. It's an index. It trades daily. You know, everyone has a different view, but for the most part, all the dealers put in their prices on a nightly basis and you have a close. It's the only thing in our market that has a nightly close.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, so that's the advantage is, right, if you're shorting a stock theoretically a stock would go to infinity, right? So you have unlimited downside. When you're shorting something in the fixed income market, and if you short something at 70 cents on the dollar and it goes to in CMBX and it goes to 50, you could cover these things trade every day. You could say, okay, I've been short, I own protection on this. It went down. I made money. I want to cover. The other side of the coin is if you believe that the ultimate valuation of this thing at maturity, because these are 10-year loans, the ultimate valuation at maturity will be lower than today. You're not necessarily incentivized to cover. So you don't, what I would say get caught into some of these short squeezes that, I mean, there are short squeezes in every market, but you don't have unlimited downside. Your downside is in reality if you're short something at 70, I guess it could go to par. So you could lose 30.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“On the structure of the trade, people have ever been short something, they short a stock at $70, it goes to $65, they make $5. That's kind of easy to track if you are tracking it, but options are much more complicated and are you just shortened index that, oh, the index is at 75 and it goes to 70. We made five bucks or is it you're saying you're paying five percent a year in premium? Is that the cost to borrow the ABX? Is that the option that you're putting on? Are you being paid off if it all goes to zero when you presumably have gains on credit to fall swaps as the CBX has gone down? CMBX has gone down. Is that because they're increasing the chance that it will go to zero? Sort of walk me through how the trade works.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“You nailed it, right? So you've got losses that come up from the bottom that hit the B piece and the equity and the double B securities first and your paydowns when loans pay off. They pay off the AAAs. So that's how the waterfall works. So the most exposed tranches and why they're rated that way are at the bottom. So that's the structure. The structure of CMBS market in general is pretty simple.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“Right. And if people say, oh, but there's an ETF for commercial mortgage backed securities, as you pointed out on a prior call, that is mostly either agency securities or AAA, maybe AAA stuff. You are short the double B, mostly, maybe AAA BB. I don't know that it was going to get paid last. And the way that these tranches work is if there's income from a building and it goes out to pay a lender, it goes off to pay the loans in the AA, the AAA tranche first. And then if there's extra money, which most of the time there is, there's a double A. Then the single A, then the triple B, then the AE, then the equity tier. So the double B tier and the equity tier get paid last. So the reason it's trading at 60 cents on the dollar now is because there's a risk that, okay, the AAA is going to be fine, but AB, who knows?”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“Which is different than say the high yield market where everything's cleared. So you have to go out and open ISDS with individual banks. So there's really no way for individuals to short CMBX. You have to be institutional investor. And, you know, if you look at where some of the office REITs are trading, you would think that the correlation is difficult, but you would think that there's still some room for these things to go significantly lower.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“Before COVID, there were people that were willing to take the other side of the regional mall trade, and they were very happy to collect their carry in an interest, a zero interest rate environment. Because if you're collecting 5% on something where interest rates are at zero, you're a little more comfortable with the risk because you believe the carry is there and you're not going to take the losses that some people think will come. Now, when you combine T-bills in almost 5%, a little lower now, paying 5% for to get exposure to basically a house that's insurance exposure to a house that's already on fire to me seems like a gift. So we are, we think it's one of the most interesting things in the CMBS market right now. It's definitely a nuanced market. You need an ISDA. You have to be an institutional investor to invest in these things. You can't just go out and, you know, I get that question all the time. Well, how can I do this myself? And you can't, you know, you have to have an ISDA. These are the...”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, so before COVID hit in January 2020, you had a lot of these indices kind of trading around 90 cents on the dollar. They traded down dramatically to about 50 cents on the dollar, sometimes even a little bit lower actually at the depths of COVID. And then most of them are a significant amount, probably like to the mid 70s to mid-80s. And now a lot of them are trading back down to 60. So it's been a bit of a wild ride. We're actually not at the bottom, I would say that a lot of the indices were lower in March of 2020, which tells me, you know, there's still meat on the bone from the short side. I don't think there's a significant amount of liquidity this time around because the one thing that it's hard.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“So, these double B tranches that you were pretty bearish on, where were they trading, let's say, January 2020? Where were they trading March or April 2020 when there was a huge crisis, liquidity crisis? Where were they trading back when there was a resurgence? Oh, everything's going to fine. People are going back to the office. And where are they trading now on cents on the dollar?”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“Defaults, you do have to pay an insurance premium to have this position. So I don't think this is the big short, whereas everything's going to zero. There's a lot of net operating income growth in some of these assets classes. So, you know, I think there will be winners and losers, and I think there will be deals that will pay off, but you don't have to be right on all of them to make money shorting these things and hedging your book with these things. So we pay about 500 basis points a year to have this insurance. And, you know, for us, it just seems like a very asymmetric trade, not too dissimilar from the regional mall trade. The only difference is I think it's going to play out over a longer period of time than the regional mall trade, just given the duration of leases in office.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“And with the regulations on the bank. So basically, right now, the only way to get short CMBS in our market is to use one of these indices. So you've got 16 of them. You've really got 6 through 16 that still trade to because before six was pre-crisis and most of those deals have paid off or taken losses. And we've identified a few tranches in DoubleB Space where we believe that for the most part, there's going to be significant losses. A lot of those are going to be come from office, but not all. You know, there's some other issues in different parts of the market. There's some retail in there that, you know, we're bearish on. But we just believe that either there will be term defaults, which means they'll default before maturity because they no longer can keep up with their building or they realize that the equity is toast and it's not going to come back or there'll be what I think there'll be is more maturity defaults. Now the difference is if we think there's going to be more maturity”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“So it's an index. It's an index of 25 deals. They reference the cash bonds in those deals. And it starts at AAA and it goes all the way down to double B rated securities. Double B is the most levered index we can short, levered tranche we can short. And basically it's a way to hedge or take a bearish position on certain assets in a trust. So we look at traditionally we do look at the double bees. Sometimes the double bees are not traded as much. They usually trade about $5 million up. They are to reference 2008 and the big short. Back then they were using ABX, which was non-agency residential mortgage-backed securities. And they did have a single name CDS back then too. But the Dodd-Frank killed CDS, single name CDS.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“Yep, absolutely. So it's CMBX and it's all fixed rate commercial mortgage-backed security deals. And we get one index a year. Now our most recent is CMBX16. The regional mall shored with CMBX 6 to kind of give you an idea. Those were 2012 loans that matured in 2022.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“You're on the hook for it. The government is not going to bail you out. At least they have no plans on doing it. We'll see. We'll see. But your tranches, specifically the lower, there's AAA, double AA, single A, BB, double B, and then the equity tier. And then also in the big short, a lot of the single A, AA things, they went bust because of some diversification argument that makes sense in theory if people aren't doing mass fraud. But if the same horrible lending practices that happened in Florida are happening in California, then they are correlated. But that's sort of the previous world of the great financial crisis. And I just want to introduce the audience that this is a different world that I'm still learning about and a lot of people who are not experts about this. It's different than the residential mortgage-backed security crisis, but it has similar layers of those sorts of tranches.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, no, so that's the part where, and if you looked at the data across all of their loans, it's kind of similar. You know, they weren't doing any lending. So given that for whatever reason, the regional banks are a very high percentage or hold a very high percentage of their assets in commercial real estate. It's what they know. And even when they buy securities, they'll buy non-agency CMBS or they'll buy some, they're like 50% of the agency CMBS market in 10 to 15% of the non agency market. So not only are they extending all these loans, but they're actually buying the bonds that are securitized too. They're a massive part of the market.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“It's one of these things that the wall of maturity that we all spoke about a lot in the last crisis, the wall of maturity is here, and we need to figure out a way where there's about 4.5 trillion of debt out there in commercial real estate, 1.4 trillion needs to be need to be rolled or refinanced between now and the end of 2025. It's pretty ominous there.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“It's the worst possible timing where you have regional banks that have pulled back. We just saw the data and I don't think it's going to get any better in April because now everyone is just worried about their problems in-house and they're not looking to make them loans. UFCMES issuance that's down dramatically. I mean, year to date, we're down about 90% since of the issuance we did last year. And last year was not a great year. And then you have the shadow banks that are starting to see defaults. We have a little portion of our market that's not so little anymore. It's grown dramatically, but it's called the CRECLO market, which it's loans that are done with a little bit higher leverage. Their floating rate, and they're securitized by these, what I would say shadow banks, all different types of firms do this. But you're starting to see delinquencies rise dramatically there, which shouldn't come to a surprise because you do have higher LTVs.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, no, we've seen it. So the data in the last two weeks in March, commercial real estate lending had the biggest drop in the history since they've been following it. So basically the regional banks weren't lending at all in the last two weeks of March, which I guess is understandable given everything that's gone on. What people don't realize is that 70% of all commercial real estate loans sit at these small banks that have about 250 billion of less or less of an assets. So regional banks are a huge part of the commercial real estate market. They provide a significant amount of loans. So if they're pulling back and they almost pulled back completely in the last two weeks of March, we're going to have some issues on our hands, especially because we're coming into a time where there's about, in the next three years, 1.4 trillion of commercial mortgages that need to be refied.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“Commercial real estate developers, a lot of them do hedge, especially just going through the real estate investment trust. Whereas there are banks, especially regional banks that did not have hedges in place, such as Silicon Valley Bank. And I guess the reasoning is that banks think that they make money. Their net interest income sensitivity goes up because its interest rates rise. They can make loans at higher rates. That's why we heard all the time that rising rates were good for banks last year, a little ironic given everything that happened. All right, so Dan, how severe we set the stage, the fundamental weakness in the area, the fact that rising interest rates were a problem for a lot of developers, the problem that even if they did hedge, they're going to have to put that hedge on at a much higher expensive, not even because the interest rate are higher, but because the volatility they buy like a swap should or something like that. And the move index is absolutely off the charts. It's ridiculous. And I've interviewed the founder of the movex. People can check that out. My interview with Harley Bastman. Dan, okay.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“That a regional banking crisis would start in the middle of March, but it really is the perfect storm for CMBS and CRE because you have all these things as we go into a recession, which is never good for commercial real estate. I'm not a big believer in the whole, oh, well, when we hit a recession, you know, everyone's going to get their butts back in their seat. I don't believe that. I think it's all about efficiency, and people are going to be very happy to cut their office footprint. And people, you know, their best performers, they're most efficient performers. They're going to work from wherever they want. So I hate to be too negative, but it is the perfect storm for a lot of defaults in our market.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“So, a lot of these floating rate loans have extension options that the borrower can actually just say, hey, I want to extend it for a year. This is in the docs. This is fine. But then they have to go out and buy an interest rate cap and they may not be able to afford it because they're upside down on their property anyways. They're not making any more money on their property. And now they got to go out and buy this expensive option to get their extension. And I think that's another way we're going to see stress in the market is these floating rate loans. Even if they were hedged and a lot of them had to be hedged, not everyone. And they bought these interest rate caps. They can't necessarily afford another cap. So that's another problem, you know, 20, I was kind of the way I looked at it is last year was all about interest rates, not to say it's gone away, but that was the focus of the market. We came into this year and for whatever reason, people finally woke up to the office problem earlier on in the year. And I didn't have a my bingo card.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“Unique part of our market. And I would say the shadow lenders are more involved in the floating rate market is traditionally what happens is the shadow lenders would give a loan. They probably give a little higher LTV. The loan would be floating rate. And most lenders would require to buy an interest rate count. Well, when interest rates were low and volatility in interest rates were low, those caps were very cheap. But what's happened now is not only have interest rates risen, but interest rate volatility is close to all time high. So while that does is you're buying an option to protect yourself against higher interest rates. But when you have the combination of higher interest rates and higher volatility, the price of that option for someone to sell you that option is massive.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“Yep, interest rate caps. So you've got two parts in the market, whether it's in CMBS or not. You have floating rate loans and you have fixed rate loans. The fixed rate or loans are simple, right? So you have a lot of mortgages out there that were done at 3%, 4%, maybe 5%. And they are just what they are. They're fixed for the entirety of the loan. So that is not an issue until maturity. The issue is then on a fixed rate loan, when you come to maturity, you need to refinance that. And every single time, so if you had loaned that building for 40 years and you had a 10-year loan on that building, you kept rolling it every single time you came to the market and roll that loan. Not only would you get a lower rate for the most part, but you'd get more proceeds because your building went up. And that's just the effect of a 40-year bull run in interest rates. So fixed rate, you're going to have maturity issues. What's happening right now is in the floating rate market, which is a...”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“Green Street came out and said commercial real estate prices dropped 15% year over year. Even that doesn't tell you the story because when you look under the hood and you look at the different sectors and you look at the different geographics behind that, that number to me sounds low, but again 15% for a multifamily building is probably a lot more than the office next door. And I think that's another interesting angle too. You're going to have a lot of these multifamily buildings that may sit next to an office building. They're going to struggle because maybe you don't need to live as close to the office as you used to now because you're only coming in two or three days a week or maybe you're virtual. So the knock-on to other parts of the commercial real estate market is significant.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“The only reason I bring them up is they have had redemptions for the last six months or so, and they have a cap on their redemptions. Now, that makes sense. It's very smart because they're dealing in commercial real estate, which isn't a liquid asset. And they have investors that can get their money back every month. But every month for the last about six months, more than 2% of their AUM has been asked to redeem. I only bring that up because that's another way that there's going to be price discovery. As redemptions come through in commercial real estate owners need to sell, you're going to get price discovery. And that can come from redemptions. That could come from banks selling loans or banks selling properties. Or that could come from CMBS selling properties.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“When we start to see forced selling, I think that is when it's going to become very difficult because you don't see many institutional accounts or pension funds say, you know what, we'd love to own an office building today. Everyone talks about multi or industrial and valuations have come down a little bit given cap rates are up just based on interest rates, but they believe in that product long term. And right now it's really hard to believe in office space long term. So there needs to be a new buyer base and we need to really reset values and how far that goes is anyone's guess. But you're seeing in the news, you see B-Reet, which owns a lot of different commercial real estate assets. I actually don't believe they're heavy in office.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“Bit of a cascade. And really, price discovery comes from force selling. Right now, a lot of the sellers are looking for yesterday's pricing, hoping that everything comes back, or at least improves a little bit.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“And when a property owner defaults on their mortgage, it goes into what we say special servicing. And the special servicer has to decide whether they're going to, they work, they really work with the owner. They need to decide whether they're going to try to modify this loan or give forbearance, or they're going to foreclose. If you're close, maybe you've thought you got 60, 65 million and a value on a 60 million dollar loan, you may hang on if you don't have to come out of pocket too much. So you may ask for a forbearance. You may ask for an extension for one or two years. But given the pricing and kind of the pricing we're seeing and the valuations coming down so dramatically, I think you're going to see a lot of keys come back to lenders. And that's really when price discovery happens. You know, we're talking about a few prints in different cities that call it down 50%. But you're going to start to see a...”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“Keys go back because, unless you believe that prices are going up between now and the end of your loan, or if you can get an extension now and the extension, that doesn't make any sense to pour more money in the property. So if you get a situation where your equity in the deal, and in that scenario, now your building's worth $50 million, but you have a mortgage of 60, you're most likely giving the keys back unless you believe that something's going to happen down the road, that that building's going to go up in price. You know, everything we're touched on earlier today, it's very unlikely that some of these lower quality buildings are ever going to see kind of the pricing of five, ten years ago. So what's going to happen then is the keys will go back. It could go back to the CMBS trust. It could go back to the shadow lenders. It could go back to the banks. And they're going to have to figure out a way to work out of these assets. And CMBS, we have something called a special servicer.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“That non recourse point you made is really important. It's good news for the developers, but slightly bad news for banks because if a developer wants to step away from the property the most that they could lose is their equity. So the bank can't go after the developer for anything at all. The developer's personal income or the investment fund at all other than the building. They can repossess the building, but that's all the banks can do. So if you said that you think offices in some areas can go down as much as 50%, what does that mean for the banks who are on the hook who've lent to the developers as well as the lenders, the non-bank lenders shadow banking system people like to call it, commercial mortgage-backed security market, the private debt funds as well, and in particular let's talk about just a simple”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“The deepest pockets. So those owners are going to need to make a decision. Do they want to sell? Can they even sell? Because can they sell where, you know, at a basis that, you know, keeps some equity in the game? Or they're going to default and just hand the keys back if they decide that there's no equity left. So it is a little bit of a spiral. The biggest issue is we're overofficed and there's going to need to be something done about it. It doesn't seem like there's an easy answer out of this mess. We've had this constant supply coming in of office space for many, many years. We've had interest rates at zero percent. And now interest rates are going up and we have a fundamental shift in the way we work. So overall, it looks pretty grim out there for every office space except the very best.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“Class A is your highest quality building, and B and C are C's traditionally needs a lot of work. And B somewhere in the middle, you could define it by rent per square foot or whatever, but everyone kind of has their own definition for the most part. But broadly speaking, B and C are going to be the buildings that need the most work to retenant for the most part. So you have a tenant leave and to get a new tenant in, you're going to need to modify that space, whether it's usually not as easy as just slapping some paint on there. You know, you need to configure the building. So it's expensive to retenant. So even if you can find someone to take the space where Google or Amazon is downshifting their space in a certain building and you do have a startup that's going to go in and pay rent, it's expensive. It really is. From that perspective, these are the owners and usually the owners of these buildings aren't necessarily”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“Because that's their business model. You're going to need to be in the nicest building. So we're not just bearish, blindly bearish across all office. I do think there are amazing buildings like the one Vanderbiltz in the world that sit above Grand Central and have the nicest amenities. If you're in there and you're making your employees come in five days a week, your employees are probably okay with that. But if you're in a C building that needs a lot of work and you're on Midtown, Manhattan or unfortunately downtown Manhattan, I think your employees are probably not going to come in five days a week.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“We are always looking for yesterday's pricing, which I understand because in a cyclical market where things go up and down, traditionally if you hold on, you'll eventually get the price you're looking for. But office is not cyclical anymore. It has been for as long as I've been in the business and a lot longer than that. Office basically went one way and it went higher. There were blips on the radar. You know, 2008 was a big blip. 2020 certainly was. And prior to that in the early 90s. The issue now, this is a fundamental shift in the way we work. So just like no one's going to that C mall anymore, these B and C office spaces are really going to struggle. And not to say that super high quality office space won't struggle a little bit, but I still think that, you know, if you are a business owner, if you're JP Morgan or Goldman Sachs who's making their employees come in five days a week.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“Sometimes these strategic defaults are negotiating tactics, and sometimes they are what they are. I mean, RXR came out and said, and they're a very large landlord in New York City, and I believe they said somewhere around they were going to probably hand the keys back on somewhere around 10 to 15% of their office properties. And that's, I believe they're just invested in office. So that's a very strong statement from some prominent landlords in New York City especially, saying that we don't have any equity left. We're not going to throw good money after bad. And we're going to walk away from these buildings if it's in our best interest. And unfortunately, it's going to be the people who own the loans or the bonds that will take the loss because at some point, bid offer, right? I briefly touched on bid offer and why, you know, this is such a slow moving product. The sellers of these buildings.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“Just a slow moving train wreck, right? So you look at the data and all these things are supporting what we're saying, but you know that Office is the longest duration asset in our market. Retail was different pre-COVID. It was a shorter duration asset. Leases were shorter. So you saw some of these stresses come through quicker. But Office takes a very, very long time. And, you know, it's usually starts with institutional players giving the keys back, usually the most sophisticated, because you have to remember CMBS is a non-recourse market. So if the owner of the building believes that their equity, and maybe they thought they had 30% equity in the deal and they had a mortgage that was 70%, call it simplistically, if they believe their equity is wiped out and they have an office building that they need to put in a lot of cash. If they think their equity is zero, then they're going to give the keys back to the lender. And now it's the lender's problem. So that's a very unique thing.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“So occupancy is how many employees are actually in the building. Vacancy is how many rooms and available properties are actually being leased. So the occupancy rates now are much lower than the vacancy rate because people are not in the building, but a lot of people are still paying their rents. So there was a time when the developers could sort of kick the can down the road and okay, the property, we're still receiving our rent, even if you go there and no one's actually there. What has happened recently where you're starting to see a few sort of the dominoes start falling? And you referenced earlier properties being sold at a significant loss. Whether you want to talk about Blackstone sort of intentionally defaulting on the leases, what have we seen recently over the past, let's say, three months? And then what do you expect going forward?”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“Short term roles of leases. Now we're going to be looking for longer term leases, traditional office leases. And when people go and do that, they're going to want a dramatic repricing in their rent. And that's going to filter down. You're talking about a very levered product, the office space, right? So everyone has a mortgage on it. So small drops in NOI net operating income that basically is your rent you're collecting for the most part. Small drops can cause large price drops. And we're seeing that. We're seeing offices trade in San Francisco and LA, but you're seeing prices come down up to 50% in some spots. There's been a few that have been a little bit worse. So our belief is that, you know, kind of 50% down for office properties is probably a baseline. It could get worse. It definitely could. We are vastly oversupplied in office just like we were vastly oversupplied in malls or retail.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“We kind of thought that there was this shift in how we work and that technology has changed and that people like we are right now talking via the computer and people are going to get a lot comfortable more comfortable with that and it's going to be okay to do meetings virtually. But I think that this whole idea that everyone was coming back, it was a little silly. And also a lot of the people that were saying it, they had their interest in everyone coming back to the office full time. So, you know, if you look at the occupancy numbers that Castle puts out on a weekly basis, you're not really breaching 50% in many cities, many main metros that often. I think Austin is usually one of the highest at 60% that they track. So I just think that we're here. The new normal is this 50 to 60% occupancy in the office space. And I think given that and given now that there's not going to be necessarily as many”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, I mean, you bring up a great point vacancy versus occupancy. It's telling you that it's going to take a very long time for this to play out. Occupancy rates drop dramatically, obviously, after COVID, but we didn't really have the vacancies coming for a long time because for the most part, office leases are longer term. You're talking about seven, ten, sometimes longer years on a lease. In the beginning, no one really, no one really came out and said, oh, we're not going to renew our lease or if their lease was due, a lot of people what they did was they extended their lease for a short amount of time. And the sponsors were very happy. The sponsors of those buildings were very happy to get any sort of extension because they believed, and I think a lot of people did, that the world would come back and people would be back in the office five days a week and we just had to get through this. So they even short-term extensions, they were very happy to grant. We kind of believed the opposite of that.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“Oh, the real estate investment trust won't do well because people aren't going into work. But actually, they kind of had a second life going into the middle of 2021 because people were still paying the rent, even if the employees weren't going to the office, people were still paying their rent. And that's the difference between occupancy and vacancy, which how are you ascertaining the health of specifically offices?”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“Buy protection on these securities that they don't just have office in them. The CMBS conduit deals that back these securities. They have all sorts of commercial real estate. But traditionally, or if you look at a lot of the indices, office is usually one of the biggest exposures within these deals. And that's because before COVID, Office was thought of as the safest part of the commercial real estate market. Obviously, COVID turned that idea on its head. And now we're looking at it as it's a four-letter word. It really is. And we're using CMBX to express that position while taking some long positions too. We don't just short. I think it's going to be the next few years. It's going to be a really interesting time in the market because I think there's going to be a massive repricing across all asset classes in commercial real estate. But I think most of the pain is going to be felt in office.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, well, we were just looking at the numbers post COVID, and we weren't real big buyers into the belief that everyone was coming back to the office. You know, Labor Day 2020, everyone was supposed to be back in the office after the holidays 2020, early 2021. Everyone's come back to the office. And as you looked at the data, it didn't feel like we were ever going to go back to where we were prior to COVID. Now it's easy to say, you know, as we're sitting here three years later, we were right about that belief. And, you know, we were testing that nonstop and looking at the data and seeing, you know, maybe we were wrong. Maybe we weren't. But as we kind of got our arms around really our belief that office is forever changed, we started to wade into this short office trade. And we use CMBX, which is a derivative in our CMBS market. We use the double beat tranches primarily, which is the most levered part of the capital stack. And basically, we...”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“So, commercial real estate entails offices, warehouses, industrial space, multifamily. I'm sure I missed a lot there. And what particular were you most skeptical of the most bearish of? Because, you know, you can look at office real estate investment trusts like SL Green or Vornado. Those are down probably 70 or 80%, but that's the equity sort of equity layer of the capital stack. You're shorting the actual credits. The mortgage-backed security is the package debt, which is a lot more complicated. And needless to say, people who are watching this at home should not do it unless they know what they're doing. What made you so skeptical? You're not an inherent short seller. If you want to go, if you think going long is going to make you money, you'll go long, but you've gone quite short. Why did you go so short?”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“Exist at the time is if we could create a CMBS credit only fund, a CMBS only fund that could express some of these views as we saw kind of the commercial real estate market changing and the CMBS credit market changing by way of commercial real estate and be able to express these long and short views because our real big belief was that 2008 was all about residential mortgages, but we believed post-COVID that the heart of distress going forward will probably be in pockets of commercial real estate. So that's kind of how we got here.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“Prior to Popo Capital, I worked at a firm called Matlin Patterson investing in CMBF securities for their internal hedge fund. And we did a lot of different structured products. I focused on CMBS. In 2019, early 2020, we started a regional mall short fund where we used CMBX as an instrument to short these malls, us just believing that kind of the securities were mispriced and that CMBX was an asymmetric way to kind of express this. We launched it in early 2020, COVID hit in March of 2020, and the fund did very well. And as we went through 2020, we kind of got to thinking about how commercial real estate's going to change, not just in retail, but really the focus for us was office. So we thought, you know, what would be interesting, and it didn't really.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“Our belief is that kind of 50 down for office properties is probably a baseline. It could get worse. It definitely could. It is the perfect storm for a lot of defaults in our market.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT