421. Beyond the Headlines: Office Distress, a $30.6B Multifamily Maturity Test, & Western CRE’s Mixed Signals | LIVE at California MBA's WSCREF

0:05Welcome to the Trepwire podcast, the show where commercial real estate meets data and insights. This is a special edition of our Week in Review for the week ending September 11, 2026. I'm Haley Keen 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. This week, we're bringing you a special edition of the show, which we recorded live at the California MBA Western States Cref Conference in Las Vegas. We took the stage for a conversation called Beyond the Headlines, What the data really says about Western CRE.

0:42We looked at why some of the signals in commercial real estate seem to contradict each other right now, then dug into what the data is showing across Western office, life sciences, multifamily, and self-storage. We also got into the maturity wall ahead, why the story can change pretty dramatically from one market to the next, and two individual deals that show just how differently property performance, financing, and credit can play out. So for this week's episode, we're bringing you that full live conversation. Let's get into the show. The Trapwire team.

1:16Thank you so much, Cody. And thank you to the entire organization here at the California NBA for having us. We're so excited to do a live version of our show here. What we're doing right now is we're actually recording with these mics and we'll release it across our channels tonight. So we started our podcast, like Cody said, back in March 2020. It's a weekly show just to try to make sense of the news and how it's impacting commercial real estate. We didn't think we'd have so much to talk about every week, but six plus years later, we're still going. And that's why we kind of want to jump in right away here.

1:50We have a lot to cover. If you're a listener, you know we try to squeeze a lot into an almost hour-long episode, but we want to make it interesting. We want to share some data and tidbits and really give a behind-the-scenes look at commercial real estate. So we call today's session Beyond the Headlines because, as you all know, you're following the commercial real estate markets every day. The topics, the headlines, even the individual data points that you may see can sometimes contradict one another. Leasing can be improving while credit conditions are deteriorating. Capital can come back before fundamentals fully recover at the property.

2:28And sometimes a property with weakening fundamentals can refinance when a stronger one can't. So we've been trying to make sense of why all of this is occurring at once. And Stephen, you have a pretty useful framework for looking at this. Why don't you kick us off here and walk us through it? Love to. So when we read through the headlines, we get this mixture of positive and negative at the same time. And trying to come up with a framework to digest it is what brought us to this idea of a three-clock system. You have the property clock that deals with your leasing and occupancy, your property income statement.

3:05So basically, the property fundamentals. Then you have the capital clock that's dealing with capital market conditions. So what's your underlying coupon on the loan? What do broader refinancing conditions look like in the market and your cost of capital? And then, well, your loan structure. When is your refinancing pressure going to come up? Then you have your credit clock. So are you just on the watch list? You're still current on payments. You're not yet delinquent, but there's clearly some concerns that have crept up. Or have you progressed to, say, payment default? Or, I mean, it goes this way.

3:38It's oftentimes. A receiver gets put in place, and it looks like it's headed toward foreclosure. Or maybe you're staving that off, and you're working through toward a modification outcome. So we have these three clocks. The property, the capital, and the credit clock. And what we've seen over the last couple of years is that maturity is the great synchronization event. That's what forces all of these clocks to come into sync and is the lenses through which we'll look at the headlines, the data, and try and understand why sometimes things look out of sync or alternatively when they're going to synchronize and will result in either a positive or a negative outcome.

4:16Yeah, so Stephen, we've been saying for a while that you can have contradictory things being true at the same time. And your clock framework highlights that because the market doesn't move as one. And we're seeing this more and more today than ever before. We live in an interconnected world. But we tried to, you know, for this episode, we're going to try to bring things from a macro to a micro to a property level just so that we can kind of track. We kind of brought in a couple of narratives here. The four I's and the four T's we'll get to in just a second. We think the four I's that really dominate the market today is interest rate, inflation, Iran, and the oil, and insurance at the property level.

4:53And so we won't belabor these. I think we're all pretty well aware of what's happening. I mean, the 10-year treasury, I think today was over 4.9. For us, it feels like the push-pull for the market is around 5. If we get to 5%, I think things are going to really slow down. 4.85, 4.92, wherever it falls out today, not ideal. but the market has recalibrated, and we'll talk a little bit about that. Inflation, obviously, is problematic. It's persistent. What started off as transitory has proven to be a pretty long transitory event at this point. And I think Iran is the part where we've had tariffs and we've had this overarching inflation discussion, but the oil prices and correspondingly the gas prices and energy costs are being felt very real time.

5:39So I'm in Texas. If you can't tell by the accent, that's where I live. We're at$6 a gallon on diesel fuel now. And it was just a couple of months ago, it was less than$4 a gallon. That definitely has an impact. And then on the insurance side, insurance has been a pesky problem for CRE. And we are starting to see some relief. But on the whole, it's been problematic from an underwriting perspective. And so we look through our data. There's about$1.4 trillion worth of outstanding mortgage debt that has extreme wildfire or some other type of extreme weather event related pressure on it, which is persistent here in the western states, which Stephen will outline, is really driving the narrative around insurance.

6:24As Stephen talked about the maturities being what synchronizes the clocks, there's about$2.74 billion worth of hard maturities in September in the securitized data that we track. And when we say hard maturities, that means they've exhausted any and all extension options available to them. So this is where the rubber meets the road. Of that sample, about 50 % have debt yields less than 8%. To just put that in perspective, not ideal from a lender perspective. And if you look at the breakdown, about 50-plus percent of that is office. And so we're going to talk a lot today about office and just where there's divergent, bifurcation, whatever you want to call it.

6:58not great news on the whole when 50 % of 2.7 billion is office, because I can tell you, when you get behind the headlines, the office is not rosy everywhere. And if you look at that office cohort, about 37 % are already in special servicing. So using your framework, Stephen, we're giving you a pretty good example here in the data of where things sit across the spectrum. And I know you want to talk to us a little bit about the insurance and some of the differences between maybe the Sunbelt and the Western states? Yes, so what we've used here is the multifamily market is, to me, a really excellent sector to look at when you're pricing insurance inflation.

7:37Now, I'm going to kind of bastardize the term inflation here because we're not tracking it at the same property level. What we're harvesting here is really the largest spectrum of data possible. So this is an all-property sample looking at the median year-over-year insurance cost increase, or in some cases decreases, but we're looking at the median by metro. So what you see here when we compare the Western markets versus the Sunbelt and Texas, well, let's start with the Sunbelt plus Texas. The Sunbelt and Texas goes up to 50 % because of those Florida markets that saw dramatic repricing in 2023.

8:14the median year-over-year increase in insurance cost was pushing almost 50 % in some of your major Florida markets. And fortunately, that cost pressure has decreased a lot. We needed it to, but that basically means that your absolute level of insurance cost has increased dramatically and your profit margin has eroded fairly significantly. But fortunately in 2025, we have seen at the median a cost decrease across both Sunbelt and Texas markets in that insurance cost. Contrast that to Western MSAs, and you're seeing much more persistent insurance inflation in large part because of that wildfire risk.

8:52Wildfire risk is an incredibly expensive hazard to insure because of the geographic scope it's going to hit at once and the amount of claims you're having to digest. And so you're seeing that at the median. Insurers are clearly having to recapitalize themselves and recalibrate. And that's causing a more persistent, a much more stickier insurance inflation across Western markets, at least for multifamily, which is very, very prone to that wildfire risk. But that basically means that you have to be very diligent in how you're underwriting these properties. And long gone are the days of we can just say, oh, we're just going to price in OPEX inflation at 3%.

9:28No, no, no. That's gone. Now, hopefully we'll get back to some stability, but gosh, things just continue to come out of the woodwork and blindside us. So for right now, it's very, very property and very market specific in how we're underwriting this. So those are our eyes that really help us map out what's actually driving the market right now. Next, we wanted to talk about the T's, which walk us through kind of where that backdrop starts affecting actual CRE decision making. So let's talk about treasuries, taxes, tenants, and transactions. Yeah, so these are the four Ts that we're highlighting today.

10:03And I think I mentioned earlier on the Treasury, I mean, 4.85 when we put the slide deck together, 4.9 this morning. That has direct consequence for the lending market. It has direct consequence for valuation. It has direct consequence on transaction velocity and volumes. I think that we've seen that the markets have accepted this higher for longer narrative becoming the higher for longer reality. but I don't know how much higher it can go before it really starts impairing the market. If you look at taxes, it's not just property taxes. Sometimes it's regulatory or statutory. If you have transfer taxes in California that get introduced, or you have other types of regulation that just adds an additional expense to the transaction market or the operating market, it negatively impacts people's appetite.

10:48And what we've seen over the last few years, I think post-COVID, is this really strong correlation between political, we'll call it stewardship or nonsense, depending on where you're at, kind of driving capital flows. I mean, people used to look at politics generally from a CRE perspective as kind of hands-off, and I think now we're getting a lot more local emphasis. People want to know who is the mayor at some of these locations because that can really change the thesis of the investment. If you look at tenants, you know, this is really interesting. 32.7 % have in the Western office market have below 80 % occupancy.

11:23So, you know, there's been a lot of leasing activity in San Francisco in the office market. AI has driven that. But outside of that, there's not really a catalyst across some of these other markets that's driving new activity. You look at Seattle, and we're going to talk about some of the other California markets. Look at Denver as another example. I mean, leasing has pretty much fallen off the table. And then transactions, if you look right now at what's taking place as a percentage of, you know, refinance versus sales transactions, it's heavily weighted towards refinance. So about seven and a half times more refinance than we're seeing new origination on sales.

11:55And then if you look at the transmission mechanism here, it's really just liquidity. Median coupons as of year to date, 2026, we're sitting at about 6.44%. But if you contrast that against stuff that has fixed rate debt in place that refinanced in 2019 or 2020, they might be sitting something with a three or four handle. So regardless of how strong the operations are going from a 3 % mortgage to 7 % changes the economics of that deal. And I won't belabor the rest of these, but if you look at it, it's just really interesting. Depending on which side of the table you sit on, you can make a very strong and compelling case to be like, the market's back, they've recalibrated, volumes are good, we're seeing things get done, liquidity's available, capital's available, everything's good.

12:40You could take a very strong opposing position there to say, yeah, but it's very selective and it's bifurcated where the class A stuff gets the money and they get the deals and everything else is kind of left to fend for themselves. Those dueling narratives are playing out real time across the US. So speaking of dueling narratives, we wanted to jump into a property type here. And of course, we wanted to start with office. As we all know, for the past several years, office originations, capital allocation, distress, and headlines have been on a roller coaster. But in the last 18 months or so, the office narrative has really turned a bit more positive.

13:19Leasing is improving, deals are getting done, and capital is not only showing up again, but being put to work. But Stephen, when we say office is recovering, whose office recovery are we actually talking about? Well, we put out a piece recently that was looking at year-to-date office loan origination and issuance across the U.S. in Securitize space. And what you saw was, well, in aggregate, oh my gosh, it looks great. Office origination volume is back. We have all of this debt that's been originated. But then when you narrow down to what markets it's getting originated in, it's heavily New York biased.

13:56I mean, yes, New York is doing great. But anytime we've come back and have been in the midst of a recovery, what market typically recovers first? The flight to liquidity, the flight to quality. And that typically means New York leads the way. and they have once again this time. Now, when we break down and look at, okay, how does the Western U.S. sit relative to just even New York, this is absolutely wild to me that New York still has so much more office origination volume, or sorry, I should say office outstanding loan volume than the Western U.S. It's 43%. New York is 43 % of the overall market, and that's 1.8 times the entire Western market.

14:371.8 times the entire Western U.S. That's just absolutely wild to me. That tells you where the CMBS liquidity in capital is comfortable pricing. Yes, it's comfortable pricing the best of the best in the best market. And we look at the Western U.S., how it's performing. The median occupancy actually still looks fairly well. So on an overall numbers basis, your median occupancy is mid-90s. But on a weighted average basis, weighted by loan balance, it drops 10 points. So that tells you the properties that are showing up in the headlines with the stress, or more importantly, the distress, that's the large trophy urban office that's bringing down that weighted average.

15:13But on just a pure numbers basis, it actually doesn't look quite as bad. Still, you have a lot on the watch list over, I should say, almost about a third of the balances on the watch list, and you have a lot maturing. Now, we mentioned hard maturities. The amount that's maturing over the next two years, this is the soft maturity number. You have a little bit over half of the total balance of office debt is set to mature, but that's the soft numbers. What's important to keep in mind here is though, even though you might have some extension options, most of these loans are pretty far into their term.

15:44So there might only be one or two one-year extension options left. So by and large, we're going to be pretty much be running through a full refinancing cycle over the next couple of years. And San Francisco clearly is the big market to watch, but this is a good example of where the clocks are out of sync, right? Your credit clock is maybe half past midnight at San Francisco. You have a lot of loans in default that are working through the credit issues, but then at the same time, we've seen record leasing velocity and absorption. And so your property clock looks maybe at, I don't know, three, four, five o 'clock.

16:18It looks much, much better versus, say, Seattle. It doesn't look quite as bad. You don't have as much maturing, and your weighted average occupancy is higher. But when I dig through the loans that are going to be coming due, or that have leases rolling, I can see that, yeah, they're actually pushing closer to midnight on the property clock with these leases that are rolling in a market that still doesn't look that strong. So this is really interesting how markets look today is not how they're going to look tomorrow that lets us rank these. Yeah. So Stephen, before we look at the chart, like if you look at Seattle as an example, they have the Selig portfolio, they have a lot of corporate campus with Microsoft and other things.

16:55Some of those occupancy numbers are somewhat inflated in the sense that they're reported that they may be paying the mortgage, but are they really utilizing the space at a level that they were pre-COVID? And the answer is probably no. And there's not a huge catalyst there in the AI space like you're seeing in San Francisco. So while that one maybe looks less risky to me, I think when you dig beneath the numbers, it actually maybe has a stronger case for having some risk. Now we've gone beyond just occupancy here and we give you a really nice matrix color coded. And for those of us, for those of our listeners that are not here at the event today, you can email us at podcast.trep.com and we'll send you the slide deck so you can follow along.

17:32But we've really gone through and looked at occupancy. We looked at occupancy in a bifurcation or stratification here to say below 80 % as a threshold, debt service coverage less than one, what percentage of the outstanding balance is on the watch list, delinquent, and what is the percentage of maturing loans between 26 and 28, and then we've derived a risk score. So it's interesting here, if you look at San Francisco, it shows to have the highest risk, justifiably so. If you look at the occupancy, it's at 80%. Below 80%, there's 51 % of the sample there. And debt service coverage less than one is about 23%.

18:07And they have a ton of maturities coming up. Maybe the flip side of that, though, is there's a really good opportunity to reposition some of these offices with some of the AI boom that we've seen. You mentioned leasing velocity. I wanted to get your take here, Stephen. It's really interesting. It seems like AI stuff has not necessarily benefited some of the really large urban towers. It's really more of the kind of second-gen type office space that can be creative or whatever. I see here that we have San Francisco rated as the highest risk, but I actually think that it also provides the most upside.

18:39100 % agree. Because that AI leasing velocity, while it has mainly spread out, it's not as much in the large towers, The economies of scale, the economies of agglomeration, more importantly, that you get from all of this technology advancement, that will spread out, that will broaden out in the economy. So I have much more confidence that we'll continue to see positive momentum, that the political climate has shifted as well. So there's a lot moving in the right direction. And that's what makes me think we have to be at least half past midnight and moving quickly in a strong, positive direction.

19:13Seattle is interesting because while there were a number of properties that I flagged and I looked at and said, well, these are fairly risky. Some of the loans that concerned me most, say 12 to 18 months ago, have actually started to get a little bit of a positive spin. So Microsoft had, it was like a million square feet that they put out for sublease at one of these properties. And while they brought everybody back to the office and they realized, gosh, we don't really have any space available. So you know what? We're actually going to bring them back to this campus and we're going to sign a two, three year extension on our lease.

19:44And maybe this actually breaks back to the positive. So some of these loans are not a foregone conclusion that they'll end up, say, going into default and foreclosure. But it still is a lot of road left to plow. I mean, we have a number of innings left to play to see which way this is going to break. You just made an innings reference on a panel presentation. I'm sorry. I'm not a baseball person. In 2019, it was required. Like if you moderated a panel, you had to say, what inning are we in? And I would always say like the seventh inning of a doubleheader. But in 2026, I haven't heard that reference in a while.

20:14Very good. Well, I didn't want to overplay the clock. I mean, I have a couple left in my pocket. All right. Maybe we'll get to a shot clock reference later. There are a lot of dad jokes on this podcast, if you can't tell. So I want us to keep on the theme of headlines and narratives. And this is a sector where the narrative may have changed even faster. And that's life sciences. A few years ago, the demand for lab space, I don't think we all could keep up with it. The market couldn't build enough lab space. But now we're looking at vacancy around 30 % in some of the biggest markets. So let's answer this question.

20:49Has the life science bubble finally burst? It looks like it. Yeah, it's popped. It's over. Life science was, I think, what we are now experiencing with data centers. But data centers is maybe like, you know, to the hundredth power more. But coming out of COVID, life science was like there was this insatiable demand for lab space, life science. And then all of a sudden it was just like, yeah, I don't need that anymore. And that's kind of where we're at. Yeah. Well, we've dialed back a lot of the stimulus. And it doesn't look quite as bleak from a general vaccine and public health standpoint. We still have a lot of need out there in life science.

21:28But this is a really volatile sector. So when we look at space that's out there and vacant, ready to be leased, across major markets, I mean, it is significant. I mean, you basically have about 30 % vacancy out there in markets. But at the same time, you still have some very, very strong property stories. We have an interesting one here that we pulled up, Genesis Towers. Now, this is one where you can clearly see the clocks are out of sync. From the credit clock or say property clock standpoint, we look at the DSCR, 3.11 times coverage or current LTV, 44.2%. You look at that and say, well, that looks pretty good.

22:05But then this other part of your property clock on your income statement says, well, yeah, but NOI just dropped by a quarter. So we still have really strong coverage. NOI just dropped significantly. We're okay. Things don't look too bad. But then if we look out over the next couple of years, you have a ton of space set to roll. Your current occupancy is 73%. Your lease roll within the next 12 months, I believe it was like 21%. 13 to 24 months out is 9%. So you have a third, almost a third of the building set to roll in two years, and you're already at 73 % occupancy. The saving grace for this loan, it was 10 years IO maturing in 2030, had a fixed coupon of just over 2.6%.

22:44It doesn't get much better than that for locking in long-term debt. So the question here is, will the life sciences market come back? And, well, will we have demand for the space? Will we be able to refi it in 2030? Or are we still going to be talking about the pain in life sciences, say, four or five years out? This is when I put my narrator voice on and say, this is not going to make it. If you look at the vacancy, 30 plus percent in the Bay Area, I mean, even if they can convince the 24 percent of tenants that are rolling to stay, hey, there's going to be a dramatic reset in rents, and it's not going to be favorable for the owner in this case.

23:18And so you see 25 % NOI decline. I know this is one building. You don't extrapolate this across the market, but when you look at those broader market factors like the vacancy rates, I think this is a sector that's just going to struggle for a while. I mean, we need something else to drive a demand on this to make it come back because the supply side ramped up so quickly. It's just, it's not going to be absorbed in my opinion. I'm going to take the over, but it's going to get really dark. Why? I'm going to say this thing will make it. You're going to have dramatic need for life sciences space. And the why is the bioweapons that will be developed because of AI.

23:51Told you it was going to get dark. All right. So let's talk about multifamily here. We do a segment every week called Digging Through the Data. And if you didn't think we were just digging through the data, we have even more for you here in multifamily. We wanted to look at the West compared to the Sun Belt. And at first glance, the West actually looks pretty healthy. but Lonnie what jumped out to you when we looked at the two side by side? Yeah so it's interesting and for for the listeners that again don't have the slides we know this is a little data intensive we're happy to provide those for you but for those in attendance here today we try to do a comparison as we did with the other sectors here west western states to the the non-western sunbelt states and what's really interesting here is if you look at this at first glance the western states are outperforming pretty much across every metric for multifamily.

24:37You know, 95 % median occupancy in the West compared to 93 % for the Sunbelt. If you look at the balanced weighted occupancy, still better. Median DSCRs, 159 to 149 respectively. You go down the list and it looks like the Western states are outperforming. I'm going to take a little contrarian take here and say I think the West is propped up at some level because of the high barriers to entry. The supply side in the West was much more constrained compared to the Sun Belt over the last five, six, seven years. And I would actually say, despite all of the supply and the concessions and all of the downward pressure that we've seen in the Sun Belt, for it to be performing reasonably the same as the West, I think is a really bullish position for the Sun Belt to be.

25:22Clearly, the West is performing better, but I think the upside bet here is to the Sun Belt. Yeah, and it's going to be very market-specific, as we'll see in just a little bit, but we were having this debate last night about, well, would you rather have, say, 90, 91 % occupied in Sunbelt or 93, 94 % in Western markets? And I think maybe the answer is both, right? Yeah. I mean, if you look, Camden just sold all of their California holdings. They decided they didn't want to deal with the political nonsense and move their operations out. But somebody bought that because they think that the barriers to entry make this a really compelling market.

25:59So I agree with you, depending on what the time horizon is for the capital and what the return metrics are, you can make a very strong case for the West outperforming. And I know you mentioned some of the markets, so let's give us a breakdown here of these different markets and the performance metrics for each. Yes, so we're looking at the relative amount of debt that's coming due within the next two years by MSA, as well as the amount of debt service coverage cash flow pressure. So the percentage of loans with a debt service coverage ratio less than 1.25 times. So if you look at, say, San Diego has a lot coming due, but fortunately, not a lot of current cash flow pressure.

26:39Well, let's jump down to say San Francisco. This is the complete opposite of where the bars are stacking up. You have over 37 % coming due in the next two years, but it looks like you have a massive amount of cash flow pressure, almost 50 % of multifamily loans with a DSCR less than 1.25 times. Now, Lonnie, you pointed out something earlier that I think we need to cover for the audience. What's driving a lot of that San Francisco pressure? Park Merced. Boom. There's not actually all that much delinquency in San Francisco in general. And so you have this one massive, absolutely massive multifamily property that skews a lot of the metrics in San Francisco, So even when you're using a private label CMBS plus Freddie Mac Universe, which is what we're looking at here.

27:24If you're looking at private label only, it gets even more dramatic. But we've ballasted this out with Freddie Mac Universe loans as well. Now, the market that gives me more concern that we'll highlight on the next slide is Denver. It has a fairly large amount of debt coming due and a lot of cash flow pressure. Over 42 % of loans with a DSCR less than one and a quarter times coverage. Seattle doesn't look too bad, but of all the markets, Los Angeles honestly looks the best. Not a lot of debt coming due and even less with DSCR less than one and a quarter times. Yeah, I think the Denver market we're going to highlight here on this really nice colorful chart.

28:03This is the number one risk rated marketplace for the multifamily space. And if you look at it, you know, performance metrics across the spectrum are just not as strong. And I think that's interesting. We haven't really talked about the connectedness yet, but you look at the Denver office market and you look at Denver retail and you look at Denver multifamily, they're all struggling. That's a market that's struggling. It's not really a property sector specific challenge. It's more of just a market challenge. They've had a lot of homelessness. They've had a lot of life safety. Some of the same stuff that San Francisco had a few years ago that are negatively impacting Denver.

28:36San Francisco's found its way out. Obviously, the AI catalyst is a huge help there, but they've also kind of cleaned things up to a level that retailers are coming back, etc. I don't know what's going to change the trajectory for Denver. I mean, there's been a lot of offices acquired at pennies on the dollar. There's tons of new supply in the multifamily space. I mean, I did a presentation in Denver about 12 months ago, and at that time they were offering like 8 to 12 weeks concessions on a 12-month lease and like no end in sight just because there was so much new supply. So, you know, I'll be curious from the audience if there's anyone maybe at the end that wants to opine on Denver and maybe share some boots on the ground perspective.

29:11But from my perspective, Denver is a market that is just really challenged. And, you know, I contrast that with maybe Phoenix, which if you had asked me 18 or 24 months ago, which of these markets in multi would be most challenged, I would have said Phoenix just because of the huge expansion of supply, crazy pricing relative to historical norms, etc. But they've actually done a pretty good job of managing their way through that. They have. They only stand at 1.2 % delinquency right now, which is fairly low. Watchlist is still elevated, 18%. That's not horrible, but it's not great either. DSCR, less than 1.25 times for Phoenix.

29:47It's almost 21%. But if you look at the median DSCR, you're almost one and a half times coverage with balance weighted occupancy at almost 92%. So it's holding in there. It's clearly telling you that owner-operators, while they might have some cash flow stress right now, they're not throwing in the towel early. The assets are still cash flowing. So once again, the maturity will be the synchronization event that forces, well, some sort of rolling reconciliation in that market. I think that's a common theme that we see throughout is it's a rolling reconciliation, right? What's going to fix Denver?

30:21Time. Time. Well, I wanted to go in maybe a little bit on the synchronization concept, Stephen, because what we've seen is while hard maturities by definition mean that there's no additional extension options available to the borrower, we're seeing a lot of maturity defaults and we're seeing a lot of lenders not take the property back. So what's your position? Maybe give the audience some perspective on how does this actually finally play itself out? Do we see additional extension options offered? Do we see additional capital being brought in, fresh equity? Like, what are we seeing? And maybe you parlay that back into the multifamily market.

30:55Well, so long as you have conviction that you will see rent growth between three and five years out, your expense side hasn't gotten out of control, and the operator, importantly, has liquidity. They have capital. I mean, that's maybe the number one prereq here is that the owner is liquid. They have capital. If you don't have capital to bring to the table, the servicer, a lot of time, is going going to look at the borrower, going to look at the loan and say, well, if you can't bring anything to the table, why do we still need you? If you've defaulted here, we'll just plow this thing through foreclosure and sell it or do a note sale.

31:28But if you're not bringing capital to the table, it's hard for us to even start this negotiation. But fortunately, what we've seen a lot of is the owner-operator say, okay, well, I can pay down the loan$2 million. We'll fund maybe one and a half into reserves, and we'll buy ourselves another, say, two, three-year extension. And we do have conviction that we will grow our way out of this problem. It's just taking longer to absorb the stock. And as we see time and time again is underwritten assumptions on absorption were too optimistic. And it's taking another one, two, in some cases, three years to stabilize assets or to ultimately realize the growth that you had underwritten.

32:05Yeah. And I agree with you. I think in multifamily, it's probably easier than any of the other property classes because it's just a supply issue in most markets. They just got oversupplied. It was cheap money. Developers built like crazy. They underwrote aggressive rent growth, which hasn't materialized. But if you look at the construction pipeline for 26, the rest of this year through say 28 or 29, it's really subdued compared to historical norms. And so there's just timing. It's just getting those units absorbed. And quite honestly, if you look at our scorecard here for the Western markets, still at 93.4 % balanced weighted occupancy.

32:39I mean, like that's not terrible. Obviously you want to see that 94, 95 % as an owner, but even the Sunbelt states that were at 90 plus percent. You know, it's kind of like office delinquency, you know, all things considered. We've seen record high delinquency across the office sector in the CMBS market. But on the whole, about 89 percent of the buildings have paid their mortgage every month on time. And so all things considered, what we think is a catastrophic record-breaking pace really isn't dramatically shifting the needle for the market. And I think multi is very similar in that regard. There's a lot of cracks.

33:10There's a lot of people saying multi-family is about to start seeing some real distress. But if you look at the numbers, really to me, it's just more of a supply issue, it's timing, and it's just getting that synchronization. 100%. Supply was record levels, highest we've seen since the 80s. And then it's just fallen off a cliff. So when permits and starts drop to the levels that you're at today, as an operator, that gives you fairly strong confidence that markets will return. We'll work through this, but it still is a weak economy for that lower part of the K-shape. And well, it's just going to take time.

33:44So as long as the economy continues on its trajectory, it's painful, it's not great, but nothing has broken to a significant degree. So it really is just a patience game. The business decisions you make today define the results you see tomorrow. Your organization deserves more than advice. It deserves strategic guidance from a fully invested team. As a leading global advisory firm, Eisner Amper tailored solutions that drive growth, mitigate risk, and navigate transactions across assurance, tax, advisory, outsourcing, and wealth management. Backed by innovative technology and a compliance-driven mindset, we help you move confidently at every step.

34:24Get ready for what's next at EisnerAmper.com. So let's turn our attention here to self-storage. We didn't choose this property type just because there's another conference going on in this very hotel. But as we were digging through multifamily, it actually got us thinking whether storage could tell us something about what's happening about households and household mobility. So maybe start by setting the stage for what's going on in the self-storage market and then what we found in our data. So self-storage is an interesting market. You have, from the cash flow side, what looks like really weak or even negative cash flow growth, both at the top line on total revenue and at the bottom line, your NOI.

35:05It's been flat to maybe minus one, minus two percent, both nationally, Sunbelt, Western. I mean, the pain's universal because you have had a lot of stock come online. And, well, consumers have tightened their belts. And you're just not seeing, obviously, enough household transaction volumes to do this sector justice. So it's been a difficult slog for self-storage. But the amazing part is, for securitized self-storage loans, delinquency is 0 % for major metros. Nothing's delinquent. It's performing. It's doing so well. I mean, your cash flow growth is not great. You're not knocking it out of the park, but you're also not defaulting.

35:45So that's just absolutely wild to me. This is obviously not a universal truth. If you look at, say, self-storage loans on bank balance sheets, especially if it's newer stock, That's probably not going to be performing nearly as well as some of these securitized self-storage loans are. A lot of times these are the refis. We have a case study for you in a bit that shows I love this case study because it shows that the long-term capital, the patience, and ultimately how it pays off. But this is a bit of a different universe than, say, if we were to zoom out and cover every single self-storage loan out there.

36:20Yeah, I mean, self-storage is an interesting property sector because up until a few years ago, it was always kind of viewed as an alternative asset class. It really didn't get the major institutional capital flows and wasn't really viewed as something that was like part of the major food group categories. But COVID really kind of created this, you know, groundswell of interest in self-storage, which has been positive and negative for the sector. There was definitely some arbitrage for those that got in early that bought a lot of the mom and pop stuff that were real, you know, rent rolls on the yellow tab paper.

36:48And they were like, they didn't really have a system in place. And they capitalized on that. But now you're starting to see these things are now operated effectively like apartments at scale. And it's kind of treading water, but it's still been a pretty productive asset class. And so just to kind of give some perspective here, if you look at a couple of the markets we pulled out, San Francisco, San Diego, and Portland, 35 % of the outstanding balance in San Francisco is on a watch list, 44.7 % maturing. San Diego has 85 % matures between now and 2028. And then Portland, which for those that maybe haven't listened to our show outside of today, we're pretty negative on Portland.

37:27I think Portland's not going to come back for a while. It's got some real issues there. But this is a property sector that's actually performing above the standard here, 91 % occupancy. If you look nationally, stabilized occupancy for self-storage is somewhere in that 85 to 87 range. So Portland, for all of its challenges, is actually outperforming in the self-storage. Yeah, I mean, 91 % is fantastic. But as U.S. consumers, a lot of us know, it's hard for us to let go of our stuff. As funny as it is, we will pay so much to store it when maybe economically we should let it go and buy it back later.

38:03But it's just a funny phenomenon in the U.S. I question, does that change at some point? With the silver tsunami and the transition of assets, will we see a little bit of a change? Or does the silver tsunami create an even greater need for self-storage? I mean, I could argue it either way. And if I was going to call which way it breaks, I'd probably still play it to the bullish side. I think the silver tsunami has been predicted for like 27 years now. We're still waiting on the silver tsunami. And I would say like I'll probably take the negative sign of that in the sense that most people, like if their parents wanted to store stuff because they wanted it, like when something happens to them, they're just going to sell the stuff.

38:38I mean, like we see it every day with portfolios. Someone works 50 years and acquires 200 units in multifamily. And as soon as something happens to them, their kids can't sell it fast enough. I think it'll multiply that by some factor, and that's how fast they'll sell the family heirlooms that's been sitting in a self-storage unit. But my question, will they sell it all? All it takes is 5%. All it takes is a little bit. Yeah, I get it. Look, I like self-storage because I think mechanically it operates like multi, and the benefit is that you're not locked into 12-month leases. You don't have people living there on purpose, or the lease doesn't allow for it.

39:11There are obviously some people trying to sneak in there, but it doesn't have some of the same operating pressures on an expense side that you would see in multi. And when markets are strong, you get to push the rent every month effectively. So we saw that at scale during COVID, where every month you're seeing$7,$10,$15,$20 a month increases. They've had to pull that back some because it softened some. But we wanted to give you just the same perspective here on the risk score ranking by market. No shocker, Denver leads the risk categories here. pretty much takes the number one spot. Number two is San Diego.

39:44But all in all, I think relative to the other property sectors we've talked about today, self-storage is one where the numbers actually paint a pretty compelling positive picture. Yeah. When we created these risk scores, they're bucketed by the three clocks, the property, capital, and credit. So at the property level, the occupancy, or if we have multiple occupancy variables, the occupancy variables are going into that clock. The watch list or delinquency, that would go into your credit clock. And the balance maturing would go into your capital clock. And so we have one third weight across each of those clocks, and the variables are normalized and go into each of those.

40:18I won't get into the math because it's really not that interesting. The result is the interesting part, that you get this ordinal ranking across metros. And so if we look at, say, just that median DSCR column, To Lonnie's point here, in red, we have shaded 1.7 times debt coverage. That's not a true red. That's still performing very, very well. So this is a relative ranking by asset class and for these geographies. So the markets that have been performing the best for securitized self-storage, you have Los Angeles, Las Vegas, and Portland. The ones right in the middle of the pack, you have San Francisco, Seattle, and Phoenix.

40:54And then at the riskiest end of the spectrum, not to say there's any delinquency, but at the riskier end, you have Denver and San Diego. But still, no delinquency. Mind-blowing. Yeah, for those that didn't know, Stephen is a PhD. If you're ever bored on a Friday night, like say 10 p.m., and you want to talk about quantitative calculations or formulas or whatever, he is your guy. He will be ready. So we've covered a lot today. We wanted to close here with two case studies that really helped to make all of these dynamics that we've been talking about feel more tangible. So Stephen, start us off with an office portfolio.

41:27where the story really revealed that distress and recovery can coexist. This is an interesting one. This was the Columbia Property Trust transaction that was a take private, financed with CMBS debt, and the loan was originated in 2021. Almost one and three quarters billion floating rate loan on about a two and a quarter billion appraised value. One year later, Elon Musk, man, he's a disruptor, all right. just stops paying his rent on the Twitter lease or the X lease. And unfortunately, X had a significant portion. I think that was the largest tenant across this entire nationwide office portfolio.

42:09And so that one tenant stopped paying rent. At the same time, rates are now getting hiked. That's a lot of pain on a floating rate portfolio that all of a sudden just got turned upside down. It just got turned on its head in no time at all. So by 2024, this loan had its first modification that extended the maturity to July 2025. And within the last 45 days, we've had our second modification on this portfolio. It's taken a long time to work through the stress, but now we're starting to kind of see what the end game is looking like. So interestingly, on this most recent, the second modification, the MES debt was extinguished.

42:47It was basically just written off, set aside, and this clears the path for an orderly liquidation. So we started out with almost a two and a quarter billion dollar valuation. Loan, 1.7 billion, but now valuation sits at 1.3. So obviously, huge gap. We're underwater, and this is a 41 % portfolio value decline. The MEZ is underwater. It's been blown out. So now that we have the MEZ set aside, we can see ultimately what has changed with this modification. And by the way, this is truly breaking news. I had to go download the modification report for this to actually see what it changed because when I read the servicer comments, it said, well, just go see the modification file.

43:27I'm like, well, you couldn't just provide it for me? So I'd actually go dig this one up, but it was worthwhile. So again, the MEZ was written off, 100 % of borrower equity pledged, but more importantly, you have a guarantor aspect. So you have 20 million guarantor liability per building. What it's basically saying is that the borrower is not going to get in the way of transfer of deed, right? This is the orderly liquidation part of it. And interestingly, one of the properties, 201 California, was sold for$75 million, worked out to about$275 per square foot. And essentially what's going to happen here is this was a note sale and the note buyer is going to take over and foreclose.

44:10At 650 California Street, this has moved into a bit of a repositioning play. You have a receiver that stepped into place that's going to operate it and basically try and get the property as leased up as they can so it can be liquidated. But this is effectively an orderly liquidation modification as it stands today. It doesn't look like there's much daylight at the end of the tunnel for the borrower, but I would say of all the possible outcomes, this is kind of the most positive or constructive that you tend to see in this sort of a situation. If we were to extrapolate this across the broader markets, because we didn't get into detail because of time today, But, you know, call it 60, 70 percent of the new office origination was New York.

44:48The rest was across the U.S. The cream of the crop, double A, you know, golf simulator, awesome, you know, sauna, spa, whatever type of amenities. Those office buildings are getting preference. That's a small subset of the overall office market. Like the predominant office inventory or stock is that 1980s, vintage, class B, maybe even predate 1980s. Do you see a lot of these? I mean, when you see values go from 2.23 billion to 1.3 billion. Is this the canary in the coal mine for like the path forward? Is that you're basically going to see 40, 50, 60, 70 % value erosion in order for these things to actually work themselves out?

45:23I think yes. They are going to need more capital to reposition. That capital doesn't make sense at yesterday's basis. The basis has to reset. And what we don't want is an expensive legal battle that basically turns everybody off of the asset and just lets it continue to deteriorate. Because we know from a leasing perspective, when there's like an owner-lender battle going on, tenants don't want to lease space in that building, right? The tenants want certainty of execution. They want the comfort of knowing that they'll be taken care of in that property. And so the quicker we can resolve these, the more we can kind of find the middle ground and just work as fast as we can toward a resolution, the better.

46:02Yeah, and I think we're at that point where the markets are ready for these to be resolved. And at 275 a foot or 300 a foot on a building that probably traded at 600 or 650 in the previous trade, I think the opportunity is there for some of these to have some value-add reposition type of narratives. So I wanted to give you one other case study here. This is the Bermuda Dunes, Palm Desert. And this is the one where Stephen said it's really kind of cool to see the historical timeline of just how the property itself, the valuation, the loan-to-value has evolved over time. So this is a property that we actually tracked all the way back to 1997 in our data set.

46:38So it's been securitized in 97, 06, 16, and now 26. And it's just really interesting. For those of us that have been in the business for a while, I mean, I'm about 24 so years into this. 1997 valuation on this was$3 million. Loan balance was$2 million. This was probably a pretty aggressive deal back in 97, like a$3 million deal seemed pretty big. Contrast that to the most recent transaction in 26, same property. $27 million valuation,$17 million loan. And you see the really big jump from 2016 to 2026, value effectively doubled. And it's really interesting, just this paradigm that we're in now where we had that zero interest rate period, now rates have reset.

47:19But if you look at some of the data, values are still climbing. People are still optimistic on the future. LTV on this deal was 71 % and it is an original origination in 97. On paper, it's 60%. But if you look at the loan balances like we talked about. The numbers have just grown astronomically. What's interesting here is we didn't put the data in, but if you looked at the property performance, it's actually gone the wrong way. NOI has been compressed, occupancy has been compressed. And on this most recent refinance, they cashed out about 8.3 million in cash out. So, you know, we were seeing those all day in 2019, not a whole lot of cash out refis in today's market.

47:57Yeah. I mean, you've lost about a couple hundred thousand in NOI, right? Your NOI peaked in 2022 at 1.87 million. It's come down to about 1.5. Occupancy had peaked at 95, 96%. It's dropped significantly. I mean, you're back down in the 80s. But the thing is, this thing still works just fine. And importantly, location matters. This is in the Coachella Valley. So obviously, land value, location, you're probably not going to see a lot of supply out there in this market. And so this, yeah, maybe looks like a story of cap rate compression and maybe a little bit more risk than what it appears on paper, but it's probably still going to be fine at the end of the day.

48:37But importantly, I always look at sources and uses because that tells you how much skin is left in the game. And you had 8.3 million of equity extracted on this deal. Good for them. This was almost like an institutional grade family office that had owned and operated this asset for over 30 years. And so finally they said, well, look, I mean, we've had a good run of it. Let's cash out, take the equity out. But that will make for maybe an interesting next time around on the next refinance if this property doesn't see continued growth. Yeah, I think that's where the risk is here is that you might have started the slippery slope here where the refi upon the next renewal is a valuation less than$27 million and they might actually have to start putting some capital back into the deal.

49:20So let's wrap up here. I want us to go back to where we started and look across the property types that we dug into today. Maybe you guys can answer which of the three clocks do you think is most out of sync right now? Credit. For me, credit. Credit versus property. Now, it's also market dependent. We didn't make this joke, so I'll make it now. There's time zones for these clocks, right? Depending on what market you're in. So in California, maybe the property and credit clock and office in San Francisco are the most out of sync. Maybe New York for property and credit is the most in sync for office.

49:58So it's very time zone specific and market specific. Yeah, I agree with you. I think the maturity, you know, we don't call it a maturity wall or maturity wave or anything like that anymore. There's been so much backlash of the maturity wave that seems to get resolved on its own. But I think that we're going to face that reconciliation, synchronization that we've mentioned sooner versus later. I mean, I thought at this point in 2026, we would have seen a lot more of these distressed deals work their way through and get resolved. We're still kind of kicking the can, although I don't think we're kicking it as far.

50:32I think the reality is for lenders holding these notes, they're going to have to come to terms with the property there is or isn't going to make. We're going to have to get it off the book. And that should, in my free market-like mind of how I think the market should operate should create opportunity for people to come in and buy some of these assets that don't pencil at the current basis, but will pencil at a reset basis and actually help become a catalyst for rejuvenation in some of these markets. Like 1980s office is not going away. Conversion to multifamily is not a solution at scale. And so the only thing that can solve this is resetting the basis to something where you can operate a 1980s office at 70 % occupancy and still cash flow.

51:15And if we can get to that stage of the market cycle, I think we'll see a lot different narrative around office broadly. So leave our audience with one final thought about Western commercial real estate, maybe a narrative we should focus on or question over the next year. Well, for me, it's the macro backdrop and rates. Are we fully comfortable with a 5 % treasury where we're at in the K-shaped economy? Or are we going to see something finally break? I don't think there's any reason to think that the economy is going to break right now. So can we keep chugging on and kind of grow out of this painful bottom end of the K-shape?

51:55I hope so. There's like 40 trillion in debt. Maybe that breaks the economy. I think the economy is broken, but it's still producing. And I hope that it continues, at least for my kids and their kids and their kids, right? I think two things I'll leave with. One, I love that we do these overviews and we talk about the headlines and we dig beneath the headlines. But I think at its core, real estate by definition is a local and sometimes hyper-local endeavor. Two buildings on the same street can have completely different outcomes. And I think we can't lose sight of that despite all of the headline fodder and all of the talk track.

52:27You got to underwrite every building. You got to visit every building. You got to know who the sponsor is. You got to know who the tenants are. And that's really what drives success or failure in the market is not the headlines. And so I think that's more important today to just recognize and realize that narratives are great and the data supports certain narratives one way or the other. But it's at the building level, like what is happening at that property in that market. And I think if we can get people to understand that, we'll see some better results. I mean, we didn't talk about hospitality at all today, but that's a sector, I think, broadly, where if you look at the numbers, RevPAR, ADR, occupancy, all up over the last four or five years.

53:01But if you actually go visit some of the hotels, incredibly tired, run down, not renovated. And I think somewhere along the road, it's going to have to kind of balance itself out. So hyperlocal endeavor. And listen, it's been really resilient. All things considered, if we had polled the audience or we had polled ourselves heading into COVID and post-COVID, where do we see the markets at? I don't think any of us would have expected them to be as resilient as they have been across the U.S. And I think the Western states have held up incredibly well. And I think they're going to continue to do so.

53:31Well, I think importantly, too, one thing we'll be watching over the next one, two years is what happens with these first round modifications that are going to be coming due. That'll tell us a lot about how things have evolved and really what kind of work is left to do. We see a positive resolution. We see kick the can down the road a little bit further. Or are we just going to say enough is enough and we just need to foreclose, liquidate, move on and reset the basis? So we're over time and I think this is a great place to leave it. Thank you, Lonnie and Steven. Thanks to Cody, Paul and the California NBA team for having us here today.

54:06With that, we'll close. All right. All right. All right.

54:17So with that, we'll close. A big thank you again to the California NBA team for having us at Western States Cref. And to everyone who joined us for the live recording, we are making the slides from our presentation available in our show notes. If you want to dig into any of the data we discussed, or as always reach out to us at podcast at trep.com and we'll make sure you get access. Thanks to our producers, Carly Cento and Mariana Sobrana. 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 trep.com and subscribe to the TrepWire podcast with your favorite provider.

54:54Thank you for listening and stay well. All right.