Dan McNamara, veteran commercial MBS trader and founder of Polpo Capital, joins Forward Guidance to argue that the commercial real estate (CRE) default cycle has only just begun. McNamara notes that the fall of Silicon Valley Bank (SVB) and Signature Bank is causing regional banks to curb lending to commercial real estate projects, and that as a result many property developers will strategically default and walk away from the buildings. McNamara shares why he has been shorting the riskier tranches of CRE loans via the CMBX, and he tells Jack Farley why the cascade of defaults he expects will cause tremendous damage to the securitized market for CRE loans.

Key terms for this interview:

CRE = Commercial Real Estate

CMBS = Commercial Mortgage-Backed Securities

CMBX = a synthetic tradable index referencing a basket of CMBS

CLO = Collateralized Loan Obligation

LTV = Loan-to-value ratio

Filmed on April 11, 2023.

Follow Dan McNamara on Twitter https://twitter.com/danjmcnamara

Follow Jack Farley on Twitter https://twitter.com/JackFarley96

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Disclaimer: Nothing discussed on Forward Guidance should be considered as investment advice. Please always do your own research & speak to a financial advisor before thinking about, thinking about putting your money into these crazy markets.

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Timestamps:

(00:00) Intro

(08:01) Office Properties Could Decline by 50% Or More

(15:25) Defaults WIll Lead To Forced Selling

(20:03) Why Rising Interest Rates Has Imperiled Many Commercial Real Estate Deals

(23:25) Regional Banks Are Curbing Lending After Fall of Silicon Valley Bank (SVB)

(30:01) Differences Between This and The Great Financial Crisis (GFC) And "The Big Short"

(35:03) Shorting Tranches of Commercial Mortgage-Backed Securities (CMBS)

(42:09) Views on Highly-Rated Tranches (AAA- and AA-)

(45:03) Interest Rate Risk (Duration) Of Commercial Mortgage-Backed Securities (CMBS)

(47:45) "We Are Pretty Market Neutral”

(50:17) "We Think The Credit Curve Is Still Too Flat"

(54:44) The "Refinancing Game" Is Over

(01:11:54) If McNamara Is Right About Commercial Real Estate, How Systemic Will This Be?