411. Play the Ball? Bonds Threw a Curve: New York CRE Shakeups & What Super Regional Bank Earnings Mean for CRE

0:02Welcome to the Trepwire podcast, the show where commercial real estate meets data and insights. This is our Week in Review for the week ending July 31, 2026. I'm Haley 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 Stephen Bushbaum, Head of Applied Research and Analytics. The Federal Reserve stood still this week, but the bond market definitely did not. The Fed held rates steady, although three officials voted for an increase, revealing a meaningful split over how aggressively the central bank should respond to persistent inflation.

0:38Chairman Kevin Warsh reiterated that the Fed remains committed to its 2 % target, but investors appeared less convinced that another hike is imminent. Shorter-term Treasury yields fell following the press conference, while the 10-year moved higher and the 30-year climbed to levels not seen since 2007. That left markets with a complicated message, less confidence in a near-term Fed hike, but growing concern about inflation and longer-term borrowing costs. Overseas, AI anxiety helped trigger an extraordinary sell-off in South Korea, where both major stock indexes hit circuit breakers for a second consecutive session.

1:16The episode provided a warning about market concentration, leverage, and just how much global growth optimism has become tied to the AI investment cycle. Also on today's show, we'll take a walk through several major New York property stories, from additional stop work orders at Office to Resi conversions, to a major change at Macy's Herald Square flagship, and the latest chapter for the Flatiron Building. We'll also dig through super regional bank earnings to assess what they mean for CRE availability and cover even more data center news involving power constraints, tenant credit risk, and another enormous development announcement.

1:54A lot to cover this week. So, Stephen, let's start from the top. What did you make of the Fed decision and particularly the bond market's reaction? Well, like you said, Haley, you put it beautifully. The Fed's announcement was not a surprise, but the press conference and the bond market reaction definitely indicated there was some surprise in play. And this wasn't the fun kind of surprise you get when you see like a Tiffany blue box. This was the kind of surprise you get when you park under, say, a group of pigeons' favorite tree, right? This was not, I repeat, I do not think the Fed wanted to see this type of market reaction.

2:34Front end of the yield curve dipped a little bit lower, saying, we don't believe you that you're actually going to hike rates and you're committed to the inflation target. And again, that longer end said, we're really concerned about inflation. And by the way, if this keeps going on, yields could go higher from here. So it was really interesting. One of the comments or the quotes that got repeated a couple of times throughout this press conference was, well, we want markets to learn to play the ball and not the referee. So I'm sure we're going to hear that probably ad nauseum over the coming weeks.

3:07So yeah, that 10-year treasury market response, the two and the five-year yield specifically, fell roughly eight to 10 basis points from their earlier levels intraday on Wednesday. So that suggests investors are less convicted that the Fed will actually follow through with that near-term height, despite Warsh's tough language on inflation. So this was the really confusing part of the press conference. And if any of you out there watched it and importantly listened to the tone and the questions coming out of the journalists there, I mean, this was a lot to unpack. And market commentary coming out of that press conference was equally confused and harsh.

3:45And just, I mean, there was a lot to digest here. So the long end of the treasury curve delivered the opposite message. A 10-year yield and importantly, the 30-year rose sharply. I mean, that's a major move, Lottie, right? Like to see that 30-year press up to levels that we haven't seen since 2007, we're in a completely different environment, very different here, very different inflationary pressures. But that is a warning shot in my book, right? I mean, that the CapEx spend and the inflationary pressures AI is passing throughout the economy are difficult to digest, along with oil prices from this war.

4:17And if I step back from this, plug my ears and just say, la, la, la, la, la, let me think about this for a minute, right? I agree with the Fed's decision. Holding steady was the right response. How it was messaged, perhaps, and after the fact, maybe could have been better formed. The Fed really wasn't articulate about why they decided to hold steady. So getting back to my view of it, I look at this and say, OK, if the Fed raises rates, that's designed to tighten financial conditions and correct that inflation, right? Bring inflation down. But where is the inflation coming from? And Warsh did discuss this.

4:50He mentioned it a good bit, that there was a healthy debate about the source of inflation throughout the economy and really whether the Fed raising interest rates could correct it. So in a way, it would have been better for him to just come out and say, look, we're not convicted right now that if us raising rates will actually correct the inflation in the economy, because where it's coming from is really more of a supply side pressure. Right. But there's also the other side of the argument say, well, yeah, it may be supply side driven. But if you raise interest rates just by that little 25 basis points, let's see what the demand side shifts to.

5:20And if maybe we do get a little bit cooler inflation, we're not going to break the economy with just a 25 basis point move. So Lonnie, how do you feel coming out of this? I mean, this has been a wild day in bond markets on Wednesday, yields all over the place. Yeah, I mean, I think you gave a really nice overview of kind of where we're at and what the signals are. And I think, look, we've been used to Powell and the press conferences and the cadence and the guidance and all the stuff that he brought to the table, kind of commanded the room and created the narrative, stuck to the narrative. You know, it was very crafty and kind of playing chess at some level with how and what he said, when he said it, in the tone that he said it, etc.

5:58I think for Warsh, like we've got to give him a little bit of time. I think this is his second meeting. He's kind of in a very tough spot where you could argue very strongly for either a 25 basis point rate hike and I think have data to support your position. And I think you could argue very strongly for them to hold steady, as they did, because of some of the reasons that he listed on the supply side of inflation, et cetera, et cetera. Either of those options were going to make the other half of the equation frustrated. And I think that's where he's found himself. And, you know, I will give him credit in the sense that, you know, he has to expect some of the market reaction, given the fact that he's removed the forward guidance component to the equation.

6:41And I think he's trying to create a narrative or kind of drift, you know, focus away from the broad narrative talking points by saying we want the markets to play the ball and not the ref. But that's not an easy thing to do. And the system is built on looking at what the guidance is. the press conference in some cases were almost more indicative than what the vote was and the guidance and the, you know, dot plots and everything that came out were sometimes more impactful than what was even said. So it's, you know, you got all these things converging at once. It's almost like, you know, in my race car, you don't want to make four or five changes simultaneous to the car because then if it doesn't work or if it does, you don't really know which one of those things worked.

7:23And it may be as frustrating because you know that you want it to go faster. or it's not going as straight as it needs to or whatever the case may be, but you have to make change kind of systematically so you can look at the data and then make another adjustment. So I'm supportive of Warsh in a sense of saying, like, if you want to change the way the markets view this process, you're going to have to take the headache at first until things kind of reset, supposing that they will reset. And that's the part I'm not sure of. I don't know if the pressure will get to him and we'll see some reversion back to providing guidance because the markets are just all over the place without it.

7:58I think the Iran stuff and the oil, that will ebb and flow until the election, until people feel like they can't play the political back and forth anymore. And so we're going to just have to live with that at this point. And, you know, it's interesting. I've seen a lot of stuff online this week, Stephen, about inflation just generally. And we've talked about this for a while of the way inflation is measured is just antiquated. But there's been a lot of people posting, you know, like the cost of combo meal at McDonald's just over the last 18 months or so, or the cost of, you know, you name it. It's crazy.

8:29So that little blue Tiffany box that you mentioned, you got to be making some real dough to afford that in today's economy because the pressure is very real. And what's crazy to me is there's so many of those little Tiffany blue boxes still getting purchased by that 1%, 5%, 10 % of the economy that really doesn't care. I mean, they're really price insensitive. They want what they want and they can afford it. And the reality is a big chunk of the US demographic now is kind of reaching that age point, the collective wealth, in large part because of the stock market gains to be able to withstand some of those price pressures.

9:05So, yeah, the models of years past probably don't fit very well the current environment. And that's a little bit of what Warsh and markets are trying to play out here is I think, at least from my perspective, Warsh seems more of like a model free type person. He made a comment. It was a really subtle one there. I don't know how many people caught this one, but he made a comment in that press conference basically saying like referencing, I think it was a 2011 paper maybe, is it 2011 academic paper? They basically was arguing along the lines of, yeah, when you're going to make a policy change, you shouldn't be using historical data and models based on the historical data to try and gauge the forward impact because this is a circular problem of sorts.

9:45You kind of have to go based on faith and best judgment. So yeah, this is absolutely a calibration issue right now for the markets versus Warsh. And ultimately, I get to sit back at some degree and just kind of laugh at it and say, you know, this seems a little bit familiar. When I tell my kids, no, you're not going to watch more Bluey on TV because your behavior sucks afterward. And the market wants forward guidance. And Warsh is saying, look, I'm not going to give you the forward guidance because your reaction after the fact is biased. If you can handle it, we're going to have more volatility, but the reaction is going to be more honest and true to the data rather than playing off the comments we make.

10:27So I'm interested to see how these next couple of weeks play out. Importantly, I'm curious to see how much of a market response we get after you start hearing some of the interviews and press conferences that the FOMC members will take part in over the next two, three weeks. Right. Maybe some conversations that wouldn't have used to be market moving carry a little bit more weight now because that's the itty bitty tidbit of forward guidance. Maybe we're teasing out, though. Hilarity of it is it still may prove to be flash in the pan, you know, a drop in the ocean because it's still warship the helm.

11:00And, well, that just could end up being another dissenter in the end for the future hold. Well, I think that's that's an interesting point is I already had three people. You mentioned it when you did the lead-in. It was Cleveland Fed President Beth Hammock, Minneapolis Fed President Neil Kashkari. It's not good to see him making his name known again. We hadn't heard from him in a while. And then Dallas Fed President Lori Logan. Those were the three that were in favor of the quarter-point increase. So, yeah, we'll just see what happens. I mean, listen, it's intriguing, I guess, if you're interested in this type of stuff.

11:29I mean, probably 99.7 % of the world's population, at least in the U.S., couldn't care less about this today. Like, it's just not on their radar. But for those of us that live in this world, it's intrigue. You know, we should probably play some background music as we're talking about this. It's suspenseful. I do think we'll still end up, and you mentioned this, I think, last time they had a meeting, Stephen, that we probably get one rate hike in September timeframe. I'm with you on that. And I think that probably still holds true. And we'll see how Warsh handles this. I mean, it's a coveted job until you get there, you know.

12:01And then it's pretty tough. It's a pretty tough gig because you're second-guessed and questioned and the market's reaction is magnified every time you're in front of a microphone or behind a microphone, etc. It's really, really tough. So let's pivot here to the other story that seemed pretty market-moving this week. We haven't really been able to have a macro session of this podcast without talking about AI and data centers. And we saw some headlines this week spilling over into the global market over in South Korea. Walk us through this story, Stephen. Yeah, this is wild and not something that would typically be on our radar.

12:38Just in general, what we focus on, right? US commercial real estate and real estate finance. This is tangential, but critically important. South Korea's PropSy and Kostak indices, that's the KOSPI and KOSDAQ, it's the abbreviations. These both triggered market-wide circuit breakers on Tuesday and Wednesday, the first time both exchanges have been halted for two consecutive sessions since the system was introduced in 1996. The COPCI closed down Wednesday down 6 % after falling as much as 12.6 % intraday, while the COSTAC finished 6.1 % lower. So what's important to recognize here is that these indices are heavily, heavily levered to really just two companies, Samsung Electronics and SK Hynix.

13:24They account for most of these fund outflows that we saw this week. foreign investors sold more than 18 trillion won of Korean shares during July. And so investors are increasingly questioning the profitability and durability of global AI spending, while advances in China's domestic semiconductor industry have raised concerns about intensifying competition specifically for Korean shipmakers. So the broad takeaway here is that this sell-off is highlighting South Korea's concentrated exposure to semiconductor and AI investment, and it's made its equity market unusually sensitive to changes in technology sentiment.

14:01But this also illustrates how leverage and crowded positioning can turn concerns about future AI returns into a much broader market event. Something that, well, certainly if you're following along with Steve Burry's commentary and what he thinks is going to play out, this is right up his alley for what he thinks will play out with the circular AI trade and specifically companies like Cisco systems and open AI and NVIDIA, perhaps having a little bit too much overlap in their funding and projected return profiles. In other words, NVIDIA is taking stakes in and financing companies, which could be inflating demand and inflating future forecasts of revenue growth and returns.

14:45You know, I guess the question here, Stephen, is just, is this kind of a canary in the coal mine? is this kind of a one-off because there's definitely for all of the people that view AI as stable and, you know, resilient and long-term and the spending and the R &D and all this stuff is going to be, you know, continuing as we go down this evolution. There's a growing number of people that are saying this is not the case and it's a circular, you know, kind of money spend and it's all benefiting from each other. And, you know, listen, I think I'm getting more and more thinking that that's a very real possibility here.

15:18So hopefully this is just kind of a one-off thing and this doesn't spread. But people that are definitely in the doomer camp are going to be looking at this and pontificating about how this is indicative of the broader bubble across the markets. Yeah. I mean, the really painful thing when you get wrapped up in stories like this is you think, should I move part of my retirement nest egg that's maybe in a diversified stock index fund? Should I move it into stable value? But then you have to look back over history and recognize if I had taken this view last year, which would have seemed very rational at times, I would have missed out on 10, 20, 50, or 60 % returns, depending on what level of the risk spectrum you're invested in.

15:57Generally speaking, you would have missed out on, I'm going to say it's probably 17 to 20 % return over that time period for when these risks would have first started surfacing or triggering that behavioral response to move into a low or no risk investment product. So we have a lot of headlines that we were tracking in New York this week. And I feel like we're talking about office to resi more and more and not for new developments, but they've become a recurring topic. Over the past few weeks, we covered a project that ran into structural issues. And this week, there were actually several developments along this same topic across Manhattan.

16:37The latest involved 222 Broadway in Lower Manhattan, where the city halted construction after learning that cracked concrete beams weren't reported to the Department of Buildings when they occurred. So walk us through this story and then let's take a trip across New York and some of the other headlines we saw this week. Yeah, this first one that the Wall Street Journal highlighted this week has to do with construction being halted at 222 Broadway in Lower Manhattan. When the story broke, this was the second office-to-resi conversion that was shut down over the prior month due to structural concerns.

17:13GFP Real Estate is converting the former Bank of America and WeWork office into a 32-story residential tower with nearly 800 apartments along with a rooftop pool, spa, and co-working space. The stop work order was issued after inspectors learned that two concrete beams on the newly added top floor had cracked in March, but were not promptly reported to the Department of Buildings. GFP said the beams were quickly repaired, the building remained stable, and the shutdown reflects a reporting timeline dispute rather than an ongoing safety problem. But still, this incident follows the far more serious structural failure at Metroloft's conversion of the former Pfizer headquarters, where those two columns buckled and temporarily place the building at risk of a partial collapse.

17:59Both projects involve adding new floors or amenities and adding additional weight to existing office structures, highlighting the engineering complexity and execution risk associated with more ambitious conversions. So it doesn't look like this project will be set back too dramatically, and GFP still expects to complete the projects within the next year. Leasing has already begun with rents ranging from$4 ,000 to$10 ,000 per month. Now, this wasn't the only story we had that broke this week about construction being halted. The New York City's Department of Buildings ordered SL Green to stop structural steelwork on the ninth floor and above at 753rd Avenue, a midtown office tower being converted into apartments.

18:42Inspectors found that steel welding at the project did not match plans filed with the city. The contractor must submit an engineering report confirming the building's structural stability before work can resume. The building's department said the condition does not present a danger to the public and that the building has shown no signs of structural distress. The developer described the issue as on-site condition that became visible during preparation work and deferred from the submitted plans. It's seeking to have the order rescinded. So this is a very, very different situation than the other two stop work orders and really just highlights the level of scrutiny and attention that's being put on these office to resi conversions.

19:24I mean, this is basically playing out exactly how we would have expected based on the city's response and saying, wow, now we're going to be really sensitive to these projects and put an even closer eye to make sure we don't have another one of these situations play out or heaven forbid, something far worse happened down the road because we failed to do our job or follow the set protocols. You know, after seeing these stories this week, Stephen, I was kind of, when the Pfizer building was first, you know, brought on the news and it was a topic, I was like, there's no way that the engineering reports were wrong.

20:00This had to just be some sort of construction issue where they didn't do the support beams or whatever. But I think I've changed my opinion here to say, like, it's become pretty apparent that at least at some level, the complexities that are required for these when there's being new floors added maybe is not appropriately being considered or the constraints that are being created are not adequate from an engineering perspective. And so I'm interested in this from a couple of reasons. Like one, obviously, safety has to be a primary concern. So I'm actually, you know, fine with the city kind of shutting some of these projects down, even if the developers and others are going to argue it's a technicality or it's a timing issue or it's not safety related.

20:42I'd rather be safe than sorry. The second component, though, is, I mean, this is creating a potential for pretty significant psychological stigma with these buildings. And so especially if you had already put down a deposit or rented one of these units, like how comfortable or confident are you going to be in moving into those buildings now? And potentially any of these other conversions that maybe haven't had any issues, does that create some sort of systemic risk premium that they're going to have to overcome when they're trying to lease these units? I mean, I think there's a really strong demand.

21:15Some people don't have housing. Like, that's the reason they're making these conversions. Like, I think on the whole, it probably is, you know, just a blip on the radar. It doesn't really materially change anything. But if we have a couple more of these, I do think that it maybe raises to a level where people are going to start questioning the safety of some of these buildings, whether it's warranted truly or not. You know, I think this comes on the heels a couple of years ago of the condo collapse in Florida. And we've seen what's happened to the condo market there because they've implemented pretty significant changes to how they deal with CapEx and how they have to maintain reserves and make sure the buildings are up to code, et cetera.

21:51These haven't even got off the ground relative in terms of having people move in yet. So I'm a little nervous about this because I think this was a subset of the industry that was somewhat unproven and had a lot of naysayers from the beginning. And this doesn't help with that narrative. But at the same time, like SL Green and these other firms, like these are professional, best-in-class type of owner-operators. Like they'll get it figured out. They'll get the technicalities. They'll clear up these, you know, disputes. And I think we'll come out of this, you know, fairly unscathed. But it definitely puts a little bit of doubt in my mind.

22:28Yeah, I think I mentioned it when we covered that initial story, the fallout of the Champlain Towers collapse, the Surfside Towers in Miami that you mentioned. The repercussions of that collapse have taken down the developer who tried to rebuild at that site. The psychological damage is there. It's real and it's financially massively damaging. So yeah, to your point, Lonnie, I question if we're going to see some of those similar effects come to play out, especially if we keep getting any more of these stories come out and they have anything to do with actual structural deficiencies that have been found or worse.

23:05If it just is like the SL Green story, that's fairly benign. The market will brush that off. I'm fairly sure. But yeah, if they're structural in nature, things could get a little bit dicey for these conversions. You know, I think the margin on these are so tight that speed is a required component. They don't have the luxury of taking their time. I mean, the reality is these are very tight because it's very costly to convert these buildings. And so they're trying to move as expediently as possible. But with that comes the risk of these increased challenges where things get rushed through and they don't maybe meet the standard.

23:40And so, you know, we'll be tracking this. I'm hopeful, selfishly, I'm hopeful that this is just kind of a couple of random occurrences that just happened to happen, you know, a couple of weeks apart. But in practice, these are just, you know, non-events. And thankfully, they were able to get both of them addressed, the structural sides of these, before anyone was actually there. But, you know, it just kind of goes back, Stephen. New York and Manhattan in particular, just modern marvel. I mean, the fact that these buildings are so tall and so close to each other and like we haven't had any major issues.

24:13I mean, it's just it's a it's a feat of engineering that this is even possible. And, you know, people are capable of making these things safe. It's just time, value of money and opportunity cost for every day that things don't get leased that, you know, it's competing interest. But hopefully safety, you know, continues to be front and center from a prioritization perspective. So I have to ask you guys about this one, because I think anyone who's ever visited New York City has seen this, or even if you haven't visited the city, but you watch the Macy's Thanksgiving Day Parade, you're probably aware of this building.

24:46So Macy's is taking down its giant shopping bag sign at the Herald Square location after more than 60 years. So my reaction was, why? Is this a cosmetic change or is this something bigger? I'd love to hear your thoughts. Well, the sentimental side of me is really sad about this story. But the part of my brain that's activated by really cool, forward-thinking, flashy marketing, I mean, much like the Trump marketing team puts on. So, I mean, I've gotten spoiled here. I got to say that part of me is excited to see what's coming next. After 60 years, 60 plus years, Macy's is removing the giant red and white shopping bag billboard.

25:28It's overlooked its Herald Square flagship for more than six decades. I mean, that's nuts. It's been there for over six decades, Lonnie. That four-story aluminum sign that's occupied the corner of Broadway and West 34th Street since 1963. 1963. It's the most recognizable in the Midtown Retail District. It's going away. It's actively being dismantled. And that removal work began in June and it's accelerated. And much of one side of that shopping bag is now completely gone. The company said the removal is part of a broader modernization project and that a new display will eventually replace the familiar sign.

26:05So I just have to think and believe in my heart what they're going to put back will do this store justice. but this is a pretty iconic change. You're probably a little more optimistic than I am, Stephen. I mean, listen, we talked last week about the Cracker Barrel stuff and the nostalgia of changing the logos, and then their CEO steps down this week. These are the kind of things that people associate certain aspects of their life with. I mean, like watching the Macy's Thanksgiving Day Parade, it's like that's part of the deal. And, you know, I will say at some level I kind of laugh because if you watch any professional sports at this point in your life, whether it's basketball, NFL, NBA, they have digital overlay sponsorship logos on the courts, on the pitcher's mound, behind home plate.

26:48Like if you're at the game, you see a certain image because that's what they paid for, like the real version. But then they overlay them with these digital ads during the games on TV. So maybe, just maybe, for the parade, for everyone watching at home, they're going to see the old nostalgia. They'll probably have some option to turn that on. You know, look, progress is that things come down and new things go up. And, you know, we wouldn't be in the real estate business if we weren't supporters of progress because you would never build anything new. Fun fact here, for those that didn't know, Macy's never owned the five-story building that actually supported the billboard.

27:21They just secured the advertising rights and used the location to reinforce the flagship store's identity. So kind of a fun fact there. I'll be supportive when I see the new thing. I'm sure it'll be like anything else. It'll grow on you, but I am definitely a little bit sad here. So just one more thing here, because this was pretty cool. I don't know how accurate I'm going to describe this World Cup advertising technology. I could be totally wrong because this is a little bit of hearsay. I haven't had time to fully read up on this technology. But, you know, during the World Cup, those signs that were along the side of the field.

27:52Well, supposedly those signs were operating at something like 240 hertz. And what they could do is basically have like five or half a dozen different languages shown at the same time on the same screen. and depending on what country is being broadcast to, all they had to do was dial in to whatever that frame rate frequency was and it would just instantaneously change it to the different sign. And if you were looking at it from the side, it just looked as some kind of like gray washout or it wasn't obvious advertising. It was like, wow, we have come a long, long way from the fabric banners were placed along the side of the field to now like hyper-synced technology broadcasting in different languages simultaneously.

28:33obviously i mean listen they do that in nba like crazy i mean you go you watch the next game and when jalen brunson's dribbling the ball up the floor if you're watching on tv on the court there's a digital logo that looks like it's on the court like physically but it's not it's just it's an overlay and they can change those real time and they can sell multiple versions for each game i mean it's i will give these marketers credit i mean they they figure out a way to try to get you know money for every inch of the floor or every second of the game and with fifa i mean those those folks have mastered that game it is funny here in dallas steven as soon as the world cup was over jerry jones had people like on top of at &t stadium like as soon as they could like one second past the required time they were ripping the tarps off of those covers and they were getting it back to uh to jerry world it was pretty interesting to see that play itself out real time too which oh by the way the cowboys have opened up training camp which means that i'm optimistic that we're to win the Super Bowl for at least another like three and a half weeks until we actually start, you know, getting close to the season and reality starts to set in.

29:37You're placing your prediction already. I like it. False hope, unfortunately. Well, we still have to talk about New York here. Sorry, Cowboys. We have one more story or a few more stories. And this one is another adaptive reuse project. The Flatiron building is nearing completion of its transformation from office space into 36 luxury condos with prices reaching nearly$60 million. It's not just luxury, Haley. It's ultra-luxured. It's smooth. I mean, this is a gorgeous building. Our own arrest at CRE Direct, I mean, this is his favorite building, if I'm not mistaken. He absolutely just loves the history of this building.

30:21It's a 24-story building that had operated exclusively as office space since opening in 1902, but it became vacant after Macmillan Publishing moved out in 2019 and subsequently sat idle amid years of ownership disputes. The Broad Sky organization, GFP Real Estate, and Sorgente Group began the conversion in 2023 with residences priced from approximately$11 million for a three-bedroom unit to$58.5 million for a full floor five bedroom condo that is already under contract. That New York City pied-a-terre tax, obviously not a problem here. Hopefully just to do this unit justice, I hope it is owner occupied like primary residence because I mean, this is a really, really cool building in my opinion.

31:08The conversion required the developers to work around the building's distinctive triangular configuration, which narrows to roughly six feet at its prow. The new layouts include a mix of half-floor and full-floor residences. The project also includes a 60-foot swimming pool, wellness center, a billiards room, and piano lounge, while more than 1 ,000 windows were replaced to improve energy efficiency and reduce street noise. The building's historic facade was extensively restored, including thousands of limestone, brick, and terracotta elements. Developers also preserved or repurposed several architectural features and artifacts discovered during construction.

31:46Residents are expected to move in over the next several months with all units and amenities scheduled for completion in early 2027. The exterior scaffolding is expected to be removed by the end of this summer. So this is a super, super high-end conversion, definitely not your median or typical that's being delivered in New York. I mean, ultra luxury, starting points of 11 million plus. Wow. I can't wait to see the interior pictures once this thing is done. I'm actually surprised, Stephen, that this isn't completely pre-sold out because 24 residents, I mean, 36 residences, it's not that many. And this is an iconic building.

32:27You know that there's going to be some very wealthy folks that want to have a piece of this in their portfolio, whether it be their primary residence or not. It is interesting when you see these things and you see them touting amenities like a 60-foot swimming pool or a wellness center or a billiards room, it actually feels a little anticlimactic given the price point. You know, you would want something more than just like your typical swimming pool, billiards area, and piano lounge if I'm paying$11 to$60 million for something. But we'll see what this is. This is a pretty cool deal. I'm supportive of this conversion because I think it keeps the distinctive, iconic exterior in place, but this actually adapts it to a more modern frame where I think it actually builds on the legacy and the history of this building, even though it has forever been just an office building.

33:13I think this is one of those conversions that, you know, the markets come to, you know, really enjoy over the next, you know, 50 or 100 years. Well, Lenny, it's funny you mentioned that you're surprised that this project wasn't sold out. Perhaps our next story had maybe a little bit of impact on its sellout, though I got to say my guess is that the pre-sale period predated this new tax. So I'm sure our listeners will remember we talked about the new New York City pied -à-terre tax. Well, the mayor has made a few waves. Over this past week, the administration published a searchable Department of Finance database containing the names and addresses of property owners who could be subject to the New York City's new pied -à-terre tax.

33:57Now, the tax is intended to cover unoccupied non-primary residences valued at either$1 million or$5 million or above. I believe it's 5 million or above for one to three family homes, and then 1 million or above for condos and co-ops. So it depends on what category you fall under. So here's where things get a little bit interesting politically. Initially, the number of residences that they thought would be taxed and that the governor of New York said was, well, it was about like 10 to 30 ,000, I think. Well, Lonnie, how many residences do you think were in this initial post? Was it 10 to 30 ,000?

34:32Or were there a couple more, at least like one more zero to that? Listen, if you're going to make a splash, right, you're probably okay with a clerical error potentially that adds another zero and a comma or something like that to the list. Because nothing makes a wave better than a really large list of supposed super wealthy, non-primary residential type of New Yorkers. When your base that's elected you, it's significantly against those folks, right? So, yeah, I would imagine the list was a little bit more than, say, 10 or 30 ,000. Well, the New York Post counted more than 960 ,000. I mean, let's just round it up to a million at this point.

35:13It's almost a million. Now, here's where, I mean, we talked about this on the podcast a while ago. The initial projection was that the tax will generate approximately 500 million annually. Well, now the comptroller is projecting closer to$340 to$380 million. I'm guessing it's going to continue going down from there and that this new tax really won't make that big of a dent in New York City's budget shortfall. Yes, it will raise some revenue. It's also going to piss a lot of people off. And potentially, we could see some more folks invest elsewhere. Namely, well, you know who, who's gone down to Miami.

35:50Listen, I think there's going to be some exodus from this, obviously. I'm with you, though. I mean, we saw this in California with the mansion tax. All of these taxes get support by throwing huge numbers of revenue generation out against them. But then in practice, they usually miss the mark by, you know, plus or minus 90%. So if they say$500 million, you know, this probably maybe reaches, you know,$50 million or something in total revenue, in my opinion. Like this is the story here is not the actual tax or the implementation, the revenue. It's just the political nonsense that comes along with it.

36:25But I will say the mayor has mastered it. And listen, the guy is running a master class on how to energize your base and how to really frustrate those that don't support you in a way where they can't really do anything about it. I mean, what are these people going to do? Their name and addresses are already out there. They can say publicly that they're frustrated or mad or whatever about this. that they're going to leave. But in his mind and practice, who cares if half of them leave? It doesn't really it's not going to change what New York is. It's not going to change anything except for actually give him another way to go to his base and say, look, we got rid of all these folks that were not paying their fair share.

37:02And so it's a genius move on his part. It's kind of how I think politics play in today's market with leveraging social media and the amplification that comes with it when something like this happens, where it just gets viral and it goes on every outlet and it's top of the page or it's top of the, you know, the Twitter messages, et cetera. So we'll see how this plays out. This is certainly not a revenue play. The numbers will continue to come down, as you mentioned, but from a PR perspective, I got to give them five stars for this one. Now we had one more New York story that I'm not going to walk through the full details, but I thought it was worth at least mentioning here since it did have to do with New York city real estate and particularly rent regulated exposure, Cerebris Capital Management acquired a$1.3 billion multifamily loan portfolio from Ocean First Financial at approximately 92 cents in the dollar, applying an 8 % discount to the loan's outstanding balance and approximately 736 million or 57 % of the portfolio is backed by New York City rent regulated apartments.

38:04So really to get an 8 % discount or to get 92 cents a dollar seems like pretty decent price considering some of the performance metrics we've seen for securitized rent regulated New York City multifamily. Namely, we've seen that delinquency rate creep up for a lot of those pre-1974 apartments. So all in all, this seems like a fairly good transaction from ocean first. I'm going to take it one step further, Stephen. If people think they can extrapolate this across the market and take an 8 % write down, every single institution that's holding these will take it. I can't believe that they were able to get 92 cents on the dollar.

38:38This is, it's interesting. I don't know what the plan is here for the new ownership group and kind of what the strategy is, but I don't think this is an accurate mark to market given what we know about the rent regulated component of the portfolio. So let's turn to our digging through the data segment. On this week's show, we wanted to talk about bank earnings. And what we're noticing about earnings season is that every bank seems to be telling a slightly different story. Some are growing their books again, others are still shrinking their CRE exposure, and the metrics aren't moving in the same direction either.

39:14So we went through 11 super regional bank earnings reports. Why don't you walk us through some of the findings, Stephen? Yes. At a broad, high-level basis, the data are telling us kind of the same thing we've been talking in the podcast in different settings, that it's a selective reopening and not a return to the risk appetite of 2021. The Financial Foundation approved. Net interest income increased sequentially at all 11 banks. Net interest margins expanded at 6 and were flat at 2. Provisions declined at 10. And net charge-off ratios improved at 8. Those may sound like ordinary earning statistics, but for CRE borrowers, they matter a lot.

39:55Strong earnings and lower credit costs give banks more capacity and confidence to originate and refinance commercial loans. CRE balances increased at 8 banks with comparable data, although the headline overstates the amount of genuine new lending. Huntington's 13 % increase was largely acquisition-related, and acquisitions also impacted Fifth Third and PNC. Some growth reflects extensions or modifications of maturing loans, while some comes from higher utilization of existing facilities. M &T offers the clearest picture of what is actually happening. Its CRI portfolio grew for the first time since 2021, led by multifamily and industrial, while criticized balances declined for a ninth consecutive quarter.

40:36That is not a contradiction. Banks are managing two CRE books at once. The front book consists of newly originated loans to strong sponsors, generally at lower leverage and concentrated in multifamily and industrial. The back book contains more of the 21, 22 vintage loans that are higher leverage, floating rate debt, value-add business plans originated when valuations and credit conditions were much more aggressive. Banks are willing to finance the first group while continuing to modify, resolve, or runoff the second. Office remains largely a runoff and resolution story. Citizens continued shrinking its general office portfolio, maintained allowance coverage of 9.5%, while regions said its business office exposure was down from a year earlier.

41:18Banks may consider select office transactions again, but their overall office portfolios are still contracting. Aggregate Siri credit improved, although the details were mixed. Citizens' Siri charge-off rate fell to 0.36%. P &C reduced total non-performing loans by 10%, largely through CRE resolutions, and M &T's non-accrual ratio declined to 0.84%. But CRE non-performers rose at KeyCorp, Truist, and U.S. Bancorp. Key's CRE non-performing loans increased from$190 million to$256 million, while U.S. Bancorp's rose 9 % during the quarter. The immediate warning signal is therefore migration into non-performing or criticized status, not realized losses.

42:00Texas multifamily is where the two books may begin to touch. Banks are again lending on multifamily, but regions acknowledged modest softness in a couple of Texas markets, while TREP's securitized loan data show elevated watchlist activity that is not yet translated into comparable special servicing or delinquency rates. The question is whether conservative new underwriting can remain insulated from stress and peak vintage loans. CNI was actually the larger commercial growth engine. PNC said virtually all of its loan growth came from CNI. U.S. Bank Corp's commercial balances increased 14.1 % year-over-year, and several banks reported higher utilization, higher line utilization.

42:40Banks appear to be reclaiming some relationship lending from private credit for CRE borrowers that creates more bank competition, but it also means real estate is competing with renewed corporate loan demand for the same balance sheet capacity. The bottom line is that super regionals are not retreating from Siri. They're rebuilding their books while working through the last cycle. Financing conditions should improve for well-capitalized sponsors, moderate leverage multifamily and industrial deals, and borrowers that can bring deposits or broader relationships. Peak vintage transitional and office loans will still face a much narrower refinancing market.

43:17So if you visit TREP's website or reach out to us at podcast.trep.com, You can find our three-part series on bank earnings. We've released the CNI version already. And if you don't see the others on CRE or stress testing, reach out to us and we'll make sure you get a copy of those when they go live on our TREP Talk blog. And speaking of TREP research, I think we have some breaking news here on our podcast. We're recording on July 29th, which means we are just getting in our CMBS delinquency data for the month. So let's give away that headline number. And then if you want to see the full report, you'll have to reach out to us at podcast.trep.com to see the property type breakdown or to learn more about any of the loans that moved this rate.

44:03Yes. The TREP Commercial Mortgage-Backed Security or CMBS delinquency rate increased by 51 basis points to 7.86 % in July. This was led by a group of very large loans whose status moved to non-performing matured balloon or foreclosure status this month. So there is a lot shifting onto the surface and a lot of nuance that you'll want to read about in this report to understand all of what's going on here. So as we mentioned at the top, we can't have a podcast without talking about AI. So I want us to turn here to our property type segment and specifically talk about data centers, of course. There were several headlines that caught our attention this week.

44:42The first was in a Bloomberg story, and we saw that NextEra Energy and Brookfield are partnering on a privately funded investment of more than$100 billion to redevelop a shuttered uranium enrichment facility in Kentucky into a large-scale data center and power campus. Lonnie, walk us through this story. Listen, nothing sounds more exciting than shuttered uranium facility converted to a data center. We're all about the conversions today. It's funny, Stephen, we've been talking about these deals and just how the markets have shifted so much. What used to be a big deal at 10 million and 100 million and a billion.

45:20Now we're talking about$100 billion opportunities. So, Salie mentioned NextEra Energy in Brookfield. This is a privately funded investment of more than 100 billion. It's located in Paducah, Kentucky. We'll see what happens here. Brookfield is going to develop and operate a 1.8 gigawatt data center campus across portions of the 3 ,500 plus acre energy department property. As Haley mentioned, uranium enrichment operations ceased back in 2013. Construction of this new project is scheduled for completion in 2031. It's going to include approximately 2 gigawatts of natural gas fire generation, as much as 2.6 gigawatts of battery storage capacity, effectively pairing the data center development with dedicated energy infrastructure.

46:01Expected to create roughly 8 ,000 construction jobs and 600 permanent positions. Local electric cooperatives are also going to participate in the project. This project does support the Trump administration's effort to use federal land and private investment to expand domestic AI infrastructure, while requiring technology companies and developers to bear the cost of the additional power capacity they need. So maybe this is a model that we see start taking off if something like this is successful. Data center development model is really trying to shift towards these fully integrated power campuses.

46:31And this is, I think, the, you know, the crux issue, Stephen, is not so much water at this point. I think they figured out the water challenge. It's just the power. And if this works, this could be a new framework that we see. There was an article this week, too, talking about data centers being synonymous with the old oil and gas wildcatters, where folks are actually going out, getting the land, putting together the power packages and so forth to lure these data centers in. So I'm kind of intrigued by this one. I think this one, it's got a cool headline. You know, it's got a cool story. If they can make this work, I think this could catch on.

47:03You know, as soon as you said uranium, I couldn't help but think about Blinky, the three-eyed fish from The Simpsons that Marge serves up to Mr. Burns. So I wonder if we'll have our equivalent of Blinky, the three-eyed fish here. You know, it's funny. There's more data center stories, Stephen, and there's more. BlackRock finances a$12 billion meta data center. So this was, you know, executed approximately$57 billion worth of data center transactions this week. BlackRock did. growing significant role as a major financier of AI infrastructure, both as an owner and developer, leading a$12 billion debt financing for the Meta data center, which is going to be in El Paso, Texas.

47:42JPMorgan Chase and Morgan Stanley are also expected to anchor the debt placement and bring in additional investors. As we've talked about, and maybe we can do a little bit of a walkthrough here, Stephen, the size of these deals require effectively multiple lenders. You just can't have one concentrated here. Nearly one gigawatt campus is owned through a joint venture in which BlackRock holds an 80 % interest and Meta owns 20%. It resembles Meta's structure with their Louisiana mega campus, which was a partnership with Blue Owl. And this is one we covered about six or eight months ago, where we highlighted that they raised$27 billion worth of debt for that center.

48:15BlackRock purchased more than$3 billion of those bonds. So there are major players here. Separately, BlackRock's global infrastructure partners and Abu Dhabi-based MGX closed their $40 billion acquisition of Aligned data centers and plan to invest another$5 billion into its expansion. Aligned operates 51 campuses, primarily in major U.S. markets, with more than 6.1 gigawatts of operating and planned capacity. Meta has reportedly agreed to lease space at one planned Pennsylvania campus. So BlackRock is assembling an integrated data center platform, spanning ownership, development, and private credit.

48:49Transactions also illustrate the extraordinary amount of institutional capital required to fund the AI build-out. Now, I got to give BlackRock credit here, Stephen. I mean, they were keen on this infrastructure play long before it was making major headlines. I mean, they were first movers in the market of making sure they were ready for these types of centers, not just from the real estate perspective, not just from a financing perspective, but holistically from an infrastructure, you know, the power, the water, the permitting, all of the stuff like BlackRock has been very instrumental. And I think some of the rapid acceleration of these data centers is evidenced with this story.

49:27Yeah. I mean, any desk that was heavy in private placement or private credit infrastructure plays on things like hydro and nuclear power, generally they're going to be the best position to play in this arena because they already understand the legal complexities and nuances that come with these types of infrastructure plays. So this is just a natural fit for something they were already doing well. So there's just two more data center stories that we don't have time to dig into the full details today, but we'd be remiss if we didn't mention them because I think they are very, very critical to understanding kind of the full scope of risks that are out there in the data center environment right now.

50:05The first is data center power supplies are imperiled by a crunch in a top US grid. We've talked about this grid operator before. PJM Interconnection operates the largest U.S. power grid across a major part of the U.S. and serves Northern Virginia's data center alley. And they warned that data centers without sufficient contracted generation could face involuntary power cuts beginning as early as mid-2027. And so this is something that is going to continue playing it over the next coming months because they did have an auction, a power auction that failed to secure enough supply to cover the projected shortfall of nearly seven gigawatts beginning in June of 2028.

50:50And so this is a story that's going to come back around probably a couple of times in the next couple of months. So we're going to keep our eye on this one because the role of PJM's position in the broader data center ecosystem is very, very important given the power constraints at hand. Now, the second story was about a potential WeWork 2.0 moment from a booming AI startup corner of the space. AI-focused cloud providers known as NeoClouds, these include CoreWeave, CoreScientific, N-Scale, and Lambda, are becoming a major source of data center demand. The segment's revenue increased 223 % year-over-year in the fourth quarter, but most of its more than 190 operators are startups without investment-grade credit.

51:32And the reason why some executives have compared this to the WeWork model and call it the WeWork 2.0 moment is that NeoCloud is that NeoCloud's often signed 15-year leases for data center capacity while renting computing power to customers by the hour, month, or under contracts lasting only one to three years. So that duration mismatch creates rollover risk, AI demand weakens. So as a reminder, if you heard anything interesting on this week's episode and you want to learn more, reach out to us at podcast.trep.com and we'd be happy to give you more insights, have our team get on a call with you and walk you through our data or share any of the reports and analysis that we've built.

52:16Turning to shout outs, a listener shared with us an interesting story that involves multiple apartments that are securitized and that we actually have data on. residents at 11 apartment complexes in the Tulsa metro and Bartlesville area are caught in the middle of an ownership dispute. That's a juicy one. And thank you for passing that along because those properties are in various stages of stress, or I should say de-stress because they're listed as foreclosure, non-performing, or 30, 60, 90 plus days. So this is a delinquency event that's going to continue to play out. And well, just judging from the delinquency status evolution, it's going to take a while to resolve.

52:58Jacob R. reached out to us and requested a copy of the Back Leverage 101 piece that we talked about on a recent episode. Jeff W., who's a loyal listener, gave us a shout out and said that we had a really great discussion on the differences between large data center deals. And he enjoyed that we dove into the ARD structure and lease rights. Cortland B. reached out on LinkedIn and said he's an avid listener of the Tripwire podcast and was also honored to be recognized as a TREP Future CRE leader. He's a recent graduate working in CMBS Special Servicing. So we're so glad you reached out, Cortland, and congrats on being named a future leader.

53:38And we're so glad you're already in the industry and working in CMBS. Pooja S. thanked us for the invite to the MarketPost webinar and said she really enjoys listening to the podcast. Jerry L. thanked us for the continuous content. He's a new listener and is excited to go back and catch up on previous shows. Ayana E. gave us a shout out for some of the insights and narratives shared on our episode with Marty Allen of Grand Bridge Real Estate Capital. This was a really interesting episode with Marty. If you haven't heard it yet, please go check it out. And thank you, Ayana, for sharing your takeaways.

54:16Chris L. really enjoyed last week's episode and was interested in the back leverage one-on-one piece as well. He wants to share it with a few people on his team. Anthony P said, great episode as always, and was interested in the multifamily research that we've referenced. Steve H loves the podcast and saw us posting about TREP AI and was hoping to learn more about how AI can be used in his existing TREP access and how he can get it into his models and tools. So we will reach out to you. And Kevin D said, it's their first time reaching out, but has been listening every Friday for the past year and really appreciates the educational content.

54:55So thanks, Kevin, and great to hear from you. Haley, I have one this week. Last week, I was actually invited to speak at the Dallas Country Club at the Counselors of Real Estate quarterly meeting. And so I want to give a shout out to Glenn S. and Doug P. for the invite. It was great. We had about 30 people there. Incredible time at the DCC and always fun to catch up with folks that are doing deals and, you know, giving that boots on the ground perspective from the marketplace. And so So I'm very appreciative of the opportunity and looking forward to doing it again. And somehow it's basically August, and that means we're getting closer to the fall, which means it's conference season and we'll be on the road at many other conferences, trade shows, roundtables.

55:37So if you are attending conferences in the fall or winter and want to see if we'll be there, reach out to us at podcast.trep.com. We'd love to see you or if you're hosting an event and need an economic update or a keynote speaker or a CRE or CMPS market expert, reach out to us. We'd love to see if we can chat with you at your event. So with that, we'll close. Thanks to our producer, Carly Cento. Join us next week as we look at what's happened during the week and how it may be impacting you. If you have a question or just a comment, send an email to podcast at trip.com and subscribe to the Tripwire podcast with your favorite provider.

56:13Thank you for listening and stay well. All right.