"Credit Shock" In Commercial Real Estate | John Toohig, Victor Calanog, and Thomas LaSalvia

Sep 5, 2023

Guest

Victor Calanog

Guest

Thomas LaSalvia

Guest

John Toohig

John Toohig, Thomas LaSalvia, and Victor Calanog discuss the challenges and opportunities in commercial real estate (CRE) due to the recent interest rate shock. They analyze the decline in CRE prices, the uncertainty in the office sector, low payoff rate in CMBS universe, importance of loan-to-value ratios and cash flow, and hedging interest rate risk. They also discuss the state of the multi-family market and rising insurance costs, along with uncertainties and struggles in investing and banking.

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Episode notes

Introduction

00:00 • 2min

Analyzing the Decline in Commercial Real Estate Prices

01:32 • 12min

Uncertainty and Distress in the Office Sector of Commercial Real Estate

13:26 • 2min

Low Payoff Rate for August Maturity in CMBS Universe

15:08 • 9min

Real Estate Market Convergence and Introduction to Blockfills

24:15 • 2min

Potential Trajectory of Interest Rates

25:52 • 9min

The Importance of Loan-to-Value Ratios and Cash Flow in Commercial Real Estate

34:59 • 11min

Hedging Interest Rate Risk in Commercial Real Estate

45:35 • 7min

The State of the Multi-Family Real Estate Market

52:39 • 15min

Rising Insurance Costs in Multifamily Real Estate

01:07:31 • 13min

Uncertainties and Struggles in Investing and Banking

01:20:06 • 7min

Today’s interview is a deep-dive into commercial real estate (CRE), an asset class which includes office, multifamily housing (apartments), hotels, data centers, malls, and more.

Jack welcomes John Toohig, Head of Whole Loan Trading at Raymond James, Thomas LaSalvia, Head of Commercial Real Estate Economics at Moody's Analytics, and Victor Calanog, Manulife’s Managing Director & Global Head of Research and Strategy, Real Estate Private Markets, for a wide-ranging discussions on the challenges and opportunities within CRE, with a focus on how the recent interest rate shock has impacted property values, cash flows, interest expense, and other key metrics in the CRE world. Filmed on August 30, 2023.

Follow John Toohig on Twitter https://twitter.com/RJWholeLoans

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

Follow Forward Guidance on Twitter https://twitter.com/ForwardGuidance

Follow Blockworks on Twitter https://twitter.com/Blockworks_

Follow “Let’s Talk Loans” on LinkedIn: https://www.linkedin.com/feed/update/urn:li:activity:7103476860633718784/

Follow Moody’s CRE Insights: https://cre.moodysanalytics.com/insights/

Moody’s CRE piece on CMBS Office Loan Maturity: https://cre.moodysanalytics.com/insights/cre-news/ma-cre-office-loan-maturity-monitor-office-payoffs-significantly-lag-other-property-types/

Timecodes:

(00:00) Introduction

(08:15) Payment Shock For Real Estate Funded With Debt Before The Fed Raised Rates

(11:02 Maturity Defaults Are On The Rise

(13:25) Office Sector Is By Far Facing The Biggest Challenges Vs. Other CRE Compenents

(19:22) Who Owns The Equity In These CRE Deals?

(22:25) Gap Between Private Valuations and Public Valuations

(25:51) Higher For Longer Is Exponentially Increasing Debt Costs For Real Estate

(30:03) State Of The Secondary Market For Real Estate Loans

(35:14) Cash Flows Matter More Than "Loan-To-Value"

(40:08) There's A Hesitation Right Now For Institutions To Take Losses

(42:27) Odds Of A True Recessions vs. A "Slow-Cession" (and Soft Landing & No Landing)

(45:35) How Common Is Interest Rate Hedging Among Leveraged Real Estate Investors?

(48:01) Slowdown In New Originations For CRE Loans

(52:46) Fundamnetals Of Multifamily (Apartment Buildings)

(01:01:05) Negative Leverage In The MultiFamily Market

(01:07:31) Insurance Costs Are Skyrocketing

(01:10:54) Retail (example: Malls) And Hospitality (example: Hotels)

(01:16:45) China

(01:20:28) Closing Thoughts On U.S. Banking System

(01:22:52) Conclusion

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.