425. The Payoff Problem: Rising Yields, $4.7B in Hard Maturities, & AI’s $4.2T Revenue Gap

0:04Welcome to the Trepwire podcast, the show where commercial real estate meets data and insights. This is our week in review for the week ending October 2nd, 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've had a busy round of economic data, and the signals are mixed. ADP reported a rebound in private sector hiring, with 90 ,000 jobs added in September. while the Jolts report showed fewer job openings in August.

0:44Consumer confidence fell sharply, reflecting growing concerns about jobs and living costs, but actual consumer spending remained strong. Meanwhile, the Fed's preferred inflation measure came in softer than expected, alongside downward revisions to earlier readings. In today's show, we'll discuss what this means for the Fed's next move, especially after John Williams suggested another rate increase could wait. and with long-term treasury yields still elevated. We'll also have a digging through the data segment where we'll look at the$4.7 billion of CMBS loans reaching hard maturity in October. Almost all of that balance is current on payments, but the cashflow metrics and borrowers' payoff plans reveal some substantial refinancing risks.

1:30Stephen, how are you putting this week's numbers together? Well, given that we're going into the most wonderful spending season of the year, Let's start off with consumer confidence. The distinction I make here is between how households feel and what they're actually doing. Now, confidence deteriorated and it deteriorated in a big way. But August spending, the back to school spending, still rose six tenths after inflation. And September's ADP report showed hiring picked up. And then even the numbers that came out for job losses on Thursday and the challenger job cuts, all of that still points to employers holding on to jobs.

2:15So there's clearly still resiliency in the economy. And even as households grow more concerned about their finances and job prospects, nothing is breaking and nothing appears to come close to breaking. And the inflation report gives the Fed some breathing, gives them a little bit of headroom here, but the revisions matter. Headline PCE is now at 3.4%, CORE is at 3%, and with July revised down to those same annual rates. And so part of the improvement relative to what we previously knew comes from revised measurements and inflation remains above the Fed's target. So we're at this really funny area.

2:52And this is where I feel like the next Fed meeting is going to reveal a little bit more about Warsh's hand and where he stands on the hawkish, dovish scale. So I'm really interested to hear the continued string of Fed comments and what happens in this next meeting. So for Siri, a slower pace of Fed hikes would be helpful, but borrowers still have to refinance at today's costs. And those are significantly elevated from where they were just a month ago. Rates are up about half a point. We're also across the curve. So that's the connection to October's hard maturities. Making the monthly payment tells us something about the loan's current status and the property's income, the amount of debt, and whether the borrower can execute a sale or refinancing tells us much more about what happens when the principal comes due.

3:39So it's that idea of the three clocks, the property, the credit, and the capital clocks, and when they synchronize at maturity. Now, I just want to touch on treasury yields for just one moment. Because we joked around last week on the podcast about 5.25 being a resistance point. And according to what we had last week, the second resistance point was going to be right at about 5.29. So I went and re-ran this pivot point resistance analysis for this week, still anchoring back to September 21st. And what's really interesting here is that on Wednesday, the 10-year treasury closed at 5.291%, essentially matching that first resistance level calculated from the prior week pivot point analysis.

4:24And that puts us directly in that 529, 530 resistance zone. And we've come back off of that a little bit. So I refreshed that analysis for our month in market pulse. And what's going to be interesting to watch is if we have a sustained move above 5.3%. That's what I'm looking for. Because now our next two resistance points are 5.39 % and about 5.5%, 5.53%. So where we go from here, we'll tell a lot about the technical and fundamental pressures in the treasury market. So a lot going on this week. It all flows through to refinancing, financing costs, and stress or not stress in the economy. But Lonnie, how are you feeling about treasure yields and the hurdle and how high they might have to go?

5:13I would have been pretty strong in my thoughts around us crossing that 5 % threshold on the 10 year and seeing markets really pull back and stop now that we're closing at almost 5.3%. I mean, just crazy. If you just go back on September 16th, I think is when the Fed actually rose rates. At that point, the 10-year treasury was sitting around five. Yesterday, it was a 5.29, I think, is what it closed, 29 basis points in two weeks. What's really interesting, Stephen, is the Fed didn't make any additional moves. That's just all market. And so when John Williams, you mentioned, if he says, okay, the next rate hike can wait until December, the CME watch tool showed odds of an October move dropped from 70 to 50%.

5:54So I know, you know, we've talked about this at some length over the last several years is that when some of these large news outlets used to have the countdown clock for when the Federal Reserve was meeting, We're not at that point anymore, but the CME FedWatch tool does a pretty good job of kind of keeping track of where things are going from 70 to 50 percent just based on that comment. And the movement in the 10 year, I think it's pretty indicative of where people are. So I don't know that I would say it's relief for CRE borrowers in the sense that, OK, it's like I'd say it's more of a timeout.

6:27Like if the Fed pauses here, it's a timeout. So like the reference would be if it if that happens, it stops play for a minute, you know, like they're doing the replay play review or whatever, but it doesn't change the score. Doesn't stop the clock on a loan that's coming due. And you mentioned that with the maturity stuff. And I think we've gone from maturity wall is this abstract kind of big picture that people started pushing back on. And now it's very much more clearly quantifiable in the sense of the hard maturities. And we're going to do some of that discussion on the podcast today. But, you know, at that point, lenders are going to have to start dealing with this.

7:03We've been seeing this extend and pretend, and it's worked well. But those deals that have been extended are approaching this hard maturity date. I mean, they were underwritten when the 10-year was half of what it is today, and interest rates were more than half below where they are today. And so it'll be very interesting. You know, I mentioned a couple of weeks ago that I think this current phase is shifting from extend and pretend and really turning into resolve and recognize for lenders. And I think that point is becoming even more impactful as the 10 year continues to rise because it just it takes away optionality for these folks.

7:40It's it's forcing their hand at a level that we haven't seen. So we'll see how this plays out. I mean, the consumer spending stuff is interesting. it's kind of like when you have kids at home it's like you know do they do they do what you say or do they do what you do and in this instance the the sentiment is that people are scared but they're still spending money and you know i think that's more impactful at this moment although the storm clouds are on the horizon that maybe they're going to pull back and i think a story that we'll probably round out this year with steven it's going to just be undeniable for us to to not spend more time talking about is just the 2021-2022 vintage deals that are coming up for maturity, the underperformance, the crazy low rates that they were underwritten to, and the reality of just the math becoming less and less favorable day by day as the markets continue to move the direction that they're moving.

8:35So it's going to be very interesting just to see how these get finally resolved because the extensions, and I was on a special servicer at a special servicer event last week that was hosted by Crefsee. And it was really interesting hearing the servicers talk. They were saying that obviously if the borrower has money to put into a deal, they're always willing to listen and try to come to a resolution that's favorable. But it feels like they've hit an inflection point where a lot of these borrowers are tapped out, especially on the multifamily side. These were syndicator raised funds on a deal-by-deal basis.

9:08there's no more capital left. And the rates, the movement in rates has just become untenable for them to really consider additional extensions. And so the rip the bandaid off kind of moment, I think is really, really close. Now, I've been chewing on a question here, Lonnie, for like two weeks. And I feel like now is the perfect time to drop it. This is a fun thought exercise. We broke down the Avalon Bay equity residential merger and the pricing around that. So my question to you is, we price that out. Like on the low end, it was maybe five and a quarter implied cap, maybe on the high ends around five, four, roughly.

9:50I don't think we were touching five, five or five, six. Rates are up easily half a point from where we were back then. So if that deal had to get repriced today, A, would it still get done? I have my thoughts there, pretty strong. The more difficult one is B, would it still price at the same level? Thoughts? Yeah. So, I mean, one, I think the deal still gets done. I think there were motivations outside of basic math and return calculations today relative to this deal. And I think, you know, on these types of transactions, it's very interesting because the time horizon, the hold horizon, their cost of capital relative to just individual borrowers' cost of capital, their ability to engineer financing at a level and structure it at a way like creates flexibility for them that maybe is a little bit different than what you would see in your typical run-of-the-mill transaction in the marketplace.

10:48I think on the pricing question, it's a fair question. I think logically and conventional wisdom would say like, yes, it would have to reprice. in practice, I don't know necessarily that you would see like a direct correlation between like most recent activity and rates and kind of where, because I just think for a deal that size and with parties that large and creating this kind of like mega in entity, the perspective is just completely different. Like, I don't, I don't know that they are representative of the market broadly, but I think it's a, it's a great thought exercise. I'd love to hear from someone on their teams that maybe underwrote this deal that could say, here's how and why we got where we did.

11:28And here's what we think today's market would change for us, if anything. I think it would nominally change maybe, but I don't think you would see like some wholesale repricing or you would see people tapping the brakes and putting the deal off. Yeah, 100 % agree. Timing trumps everything. The timing was ripe for these two to merge. So absolutely, deal still gets done. No question. if and how it reprices, yeah, I'm torn on this one. Because I think that the size, the scale, just the durability of what you're getting here and the opportunity of it matters a lot. So if it were to reprice, my gut is that if it were to reprice, it might only be like 15 basis points.

12:10Like that's maybe the highest pressure I can see. I mean, worst case, maybe a quarter point. I mean, that's a really bad day in the office if it reprices a quarter point higher. definitely not the full 50, but I feel like 10 to 15 is maybe about the right massaging it gets done at. So it's an interesting series of events that's taken place since then. And so if that deal is completely different from everything else in the market, now's where the rubber meets the road and what the Fed is trying to accomplish, right? They're trying to cool the economy on the margin. So those other deals out there that are not like the Avalon Bay equity residential that are in the margin are exactly the kind of deals they're trying to target and cool, right?

12:53And you're seeing this in headlines a ton over the last week, two weeks with IPOs getting delayed, right? So it's definitely the blunt tool of a rate hike is doing its magic. It's working exactly as we would hope. And those lack of IPOs means less cash going into pockets. That means less cash recycling into the economy. And as long as we don't over tighten, the Fed does have a small, narrow, very narrow window to thread the needle and cool the economy. So I'm interested to see how much patience they have and ultimately what it takes. Yeah, look, I'm probably less optimistic about the Fed's ability to deliver in that thread the needle.

13:36Like they don't have Tom Brady at the helm here. You know, they're not they're not getting that pass into double coverage. I think For us, the tale will be, what does transaction activity and volume look like three months from now, four months from now? Because right now, it's almost like the consumer sentiment. If you ask around on the street today to CRE investors, there's a lot of people saying words like scared, nervous, uncertain. Does that actually translate into changed behavior? Do they not do a deal today that they would have done a month ago? we won't know that for a few months just because of the way the the cycle works like these deals don't happen overnight and the closings that we're going to see right now are deals that were already under contract and in the pipeline before the fed action and and the treasuries moved as much as they have so and you know you're you overlaid this a little bit on the you know entering the end of the quarter we talked about this on the market pulse this week it's like september is always a little bit funky but transaction velocity generally slows down organically at the end of the financial year, you know.

14:40So I'm intrigued just to see where this plays out. I'm hopeful that maybe the Fed's got it right. And like the market taking it and put turbocharging treasuries has really put a clamp down on some of these inflationary pressures that we've seen. But I'm a little nervous because I think if it goes the other direction and the markets really do start to slow down, just think how long it's been since we've had like an actual recession or a real pullback. I mean, I think there's potential if we go that direction for this to be pretty severe. So before we move on from the macro and the data of the week, talk to me about consumer confidence this week, Stephen.

15:16What was so interesting to you? Yes, that's the one that really stood out. The ADP and Joltz numbers, that was like just reinforcing low hire, low fire. But the conference board consumer confidence reading that came out on Tuesday, September 29th, fell 6.7 points to 81.9. So this one stood out like a sore thumb. Let's get this, Lonnie. When do you think was the last time that number was that low? I mean, to fall 6.7 points, that's like, that's not within the last six years. No, I mean, unless you, I mean, maybe there was some like abnormal drop during COVID, but I don't know that there was at this level.

15:56I'm going to probably say eight or nine years ago. Yeah, it was. It was April 2014. That's just wild to me. So obviously there's a lot of bias in these surveys. You have to kind of dig beneath the surface, understand how the questions are crafted, if they're prone to any response bias and frame them within the current context. But if you step back from this, ignore some of that nuance, that's a huge drop. So that's going to matter a lot going into November, and spending season and what actually ends up happening at the register. Now, I personally don't think this is going to show through and correlate as highly to what happens at the register.

16:37I feel like we're still going to see ridiculously strong holiday sales and ultimately confidence could come back. Oil needs to come down a good bit and it's looking like we might get that. So this could be a flash in the pan, nothing doing long term, but it's definitely I want just to keep in mind. So speaking of economy and consumer spending, what's been driving the economy right now has been a lot of AI spending as well. And we saw a new analysis this week from a consulting firm, Bain, that said that the data center spree's payoff hinges on$4.2 trillion in AI revenue that doesn't exist yet. 4.2 trillion.

17:23I mean, Lonnie, you joke about how these numbers are just beyond comprehension, hard to fathom. So if I came to you and said, hey, Lonnie, by the way, just an update on this infrastructure buildup plan that we're taking on right now, by the way, projections are that we have a$4.2 trillion revenue gap. How would you respond to that? Well, I can tell you the markets have just shrugged it off. They They seem to just not care about it. It's really crazy. I mean, if you dig through the article here, it says Bain estimates AI will need to generate $6 trillion in annual revenue by 2031 to justify the infrastructure investment.

18:04Existing consumer and enterprise applications can contribute up to$1.8 trillion, which leaves that$4.2 trillion revenue gap that you just mentioned, Stephen. So, I mean, this is, it's just beyond like what I think we can comprehend in today's reality. Like trillion is just so far outside of our realm, especially in the CRE context. It's just crazy. But it's almost like what's a few trillion among friends is the way this is kind of put out there. And how this plays out, right? Part of me goes to the Michael Burry analysis and says, like, wow, if you look at the spend in the timeline, there's a fantastic graphic I saw recently that compared this infrastructure build out to prior ones.

18:43So compared to the fiber optic network buildout of the dot-com period, or say the railroad buildout of the late 1800s, or say the electrification of the world, the electrification of the world and the railroad buildouts took like 20 years, I think, at least for that spend. The dot-com fiber optic network build out and the AI data center build out are a fraction of that time. It was like five years, I think it was, if memory serves me correct. Just absolutely unbelievable how much cash we have to set on fire in a short period of time to get this done. And I feel like the inevitability of the outcome here is that you have to see bankruptcies and a right-sizing of asset values to ultimately move past that infrastructure buildup.

19:33In other words, a lot of people are going to lose some money. We're going to right-size balance sheets and asset values, and then we'll move on and things will be great again. but it seems like there's an inevitable amount of pink and at the massively jagged pill we have to swallow to ultimately finish this cycle. I don't know. I don't see how we close this gap. And we've talked about this a lot, but there's a lot of potential here, but the cost is massive. We have to spend it, but I don't know with confidence that we'll be able to hit that revenue target if this analysis, you know, ultimately holds out and proves true in the long run.

20:10Yeah, I'm right with you. I mean, it's just the cost of progress at some level. But if you look at the math they've put behind this, basically, they say existing applications that are currently in market is insufficient. You know, consumer subscriptions and advertising could generate 400 billion. Enterprise applications could contribute 1.4 trillion through productivity improvements and enhancements. But if you look at closing the gap, they identify potential new revenue. Okay, so these are things that don't exist today. $900 billion from physical AI,$400 billion from autonomous vehicles. So that's starting to trickle in with some of the stuff that Elon's firm is doing and Waymo and other things, but still very early days there.

20:49We don't know how sustainable or scalable that's going to be and what the uptake will be. They also say there's going to be a component of industrial automation and then$200 billion from advertising integrated into AI tools. But if you add all of that up, there's still substantial additional revenue that would have to be created from products that don't exist today. And so, you know, to your point, it's funny that we're talking on this show, Stephen, about real estate properties that are underwater. And we're going to talk about this on some of the hard maturity stuff. You know, they may be current on their payments, but they're underwater and the math isn't favorable for them.

21:24There's going to be some losses. And the same holds true for the say, I bet that you just walked us through, you know, like the infrastructure sure spend is real it's necessary there's no clear payback directly on all of that span like there's going to be losses and it's just the numbers are so large you start putting these things together and it's really it's amazing to me that just things don't derail like the broader economy at this point is such a juggernaut that with these crazy numbers out there and potential losses sitting it's not going to be like it's not going to derail everything it's going to be a you know something people talk about there'll definitely be some pullback in certain markets people will lose money.

21:59But I think the overall economy continues to just chug along. Yeah. I mean, if we were to compare this to say it's still in its infancy, right? The quantum push, the quantum push and the resources that requires, I have a lot more confidence in the payback horizon for that sector. It's not nearly as broad scale. It's extremely focused. And if I'm plowing money into a sector right now, that's probably where I'm going. I'm going to go to say like Santa Barbara, California, and make some very targeted investments for quantum. Because I have supreme confidence in that working out. AI, I have a much more difficult time with.

22:37Again, it's still incredibly targeted. And there are plenty of pockets that will work out just well, but I don't see how we avoid this inevitable revenue gap. If you look at infrastructure spending, it's accelerating. And we've highlighted this on the show. But in the article, they cite full-year capital expenditures for some of the big players. Let me just give you these numbers. and we can move on to the next topic, Stephen. But$205 billion for Google, $220 billion for Amazon, $190 billion for Microsoft. So if you just add up those three players, $615 billion combined just in the last full year.

23:12That makes the world go around quite literally right now. And just one last bit on it. The really interesting part about these projects is how long they take. So long-term, the jobs creation, ultimately payback to the local economy. I mean, it's not great, but short term, you are seeing some really interesting short term gains in terms of jobs and revenue for local economies. And the question that all of us have is, OK, after these get built, then what? Right. Is it just the tax revenue and no jobs or on the margin? We see some jobs. So anyway, plenty more to talk about. So we have another story here, and this is actually a follow up to something we talked about over the summer.

23:52Do you guys remember that huge database New York City put out of properties potentially subject to the new PA to tear tax? Well, apparently there were some issues with how the city went about it because a judge has now ordered them to redo the rollout. I love this. This is just tax and politics at its best. The state judge ordered NYC to redo the luxury second home tax rollout while leaving the tax itself in tax. The surcharge applies to homes worth at least$5 million that aren't their owner's primary residences and condos of a million or more. And that's really what bugged me was that million-dollar threshold in condos because honestly, for anybody who's looked at living in New York City to try and get a two-bedroom, two-bath for under a million that's actually a good property in a location you want to live in, you can't touch it for less than a million.

24:47So you're taxing implicitly the middle class here. So anyway, that bugs me a little bit. So the ruling centers on who must establish residency status. The judge found that the city improperly required homeowners to prove they weren't subject to the tax rather than using available records to determine eligibility. And the order blocks further action on notices sent to approximately 17 ,000 homeowners and requires removal of an online tax roll covering roughly 900 ,000 properties. New notices must explain the city's determination using current tax records and other information. The city plans to appeal.

25:21Officials had already acknowledged some errors, sending a little over 1 ,200 follow-up letters in August telling recipients they had been incorrectly identified as owing the surcharge. Separate lawsuits challenged the tax's constitutionality. One particular suit is alleging discrimination against non-residents and argued that labeling the levy a surcharge improperly circumvents property tax limits. That's a really interesting one. But the immediate ruling concerns administration of the tax. Separate litigation seeks to overturn it entirely. And the bottom line here is, you are nowhere even close to putting this one to bed.

25:59What if I told you, Stephen, that this was never about the actual tax? Now we're talking. Because this was never about the actual tax. This was about political theater. This was about getting people like us, the real deal and others to talk about this. ad nauseum to feed a political base that's hungry for this type of narrative. There was no way that the folks that actually put this together felt like this was going to have any chance of getting approved and passed and allowed in the current form. But they did get that list of however many thousands of people out in the marketplace for everyone else to sort and filter and click through and see names and create a buzz.

26:42And now that it's being pushed back on and said it's not applicable here. Everyone's picking the story back up again, and it's kind of becoming more headline fodder. So I think for me, this is the part where we have to talk about it because it is a story. And I think it's very germane to CRE and it's germane to what's happening in New York City real estate. But it's not something that I think actually the impetus here was not to drive additional tax revenue. The impetus here was to call out a certain cohort of residents in the city that a certain political base feels like are in that 1 % or in some upper echelon that needs to get called out, and they've achieved their objective.

27:24And so it's frustrating at a certain level that this is even something we have to talk through. But I don't think this is going away. They'll certainly come back with a revised proposal. It'll get a whole new cycle on this. But don't get it twisted. This is not about generating an additional revenue line item or surcharge or tax or whatever they want to call it. this is really just political theater at its finest. Now, I've got to say, pretty well done. Let's shift gears here to another headline this week that caught our attention. This is on the development side of the market. We have another story about projects simply not penciling anymore.

28:01Rising material costs, diesel prices, and financing costs are causing more developers to postpone, scale back, or completely scrap projects, as we've been discussing. So let's get into this headline we saw in BizNow and talk about what's driving that and some of the projects that have already been impacted that they mapped out here. Yes, this will be interesting for, say, like mid and longer term. If the development pipeline cools significantly, what that could mean for the ability for some areas of CRE that have been hard hit by supply pressure, say specifically multifamily, it might give them a little bit more runway to push rents over the long term.

28:41So this could actually end up being a good thing for certain sectors, but definitely not a good thing for the construction pipeline in general. Construction-related material prices rose 13.3 % year-over-year, according to Cushman and Wakefield. Aluminum increased nearly 41%, and copper nearly 40%. So materials are increasingly replacing labor as the main driver of cost growth. Diesel exceeds$6.50 a gallon, an all-time high, increasing both equipment operating costs and the expense of transporting construction materials. So what we've seen here is several major projects getting just put on pause or mothballed.

29:19So, for example, Georgia Pacific canceled its Atlanta headquarters conversion, which envisioned 400 apartments and 125 ,000 square feet of retail and entertainment space. In Arlington Redevelopment, proposing more than 700 residential units was abandoned because projected cost exceeded completed value. The Philadelphia Redeveloper replaced plans for a residential tower with a 34 ,000-square-foot retail building. So August construction starts fell approximately 25 % overall and 37.6 % for commercial projects. Dodge cautioned that the decline partly reversed July's surge. So the monthly figures also reflect that normalization.

29:59So how long this continues to play out and ultimately what it means for deliveries over the mid and long term is something we'll want to keep an eye on. Ultimately, this will be good for existing property owner and being able to raise rents for space users. Not so much a good thing because obviously we're going to have to bear the burden of those higher rental costs. Yeah, I think on this one, I would kind of segment this into two different categories. Like the example of the Georgia Pacific canceling its headquarter conversion. I question that one at some level of like, it's just a choice of convenience where now you have these external factors that you can kind of hang your hat on and say, hey, we've decided to hold off.

30:43This doesn't make sense. And here's why. Versus it really being tied to those increased cost as like the impetus as to why they're not doing it. And I think just the construction starts, I mean, look, this is a challenging market. I would just caution people from reading too much into this in the sense that this is on the heels of some incredible construction years. I mean, across the spectrum, even with increased pricing, supply chain issues, labor costs during COVID. I mean, Amazon probably did 25 years worth of construction in five years. If you look at some of these other large industrial players, crazy amounts of industrial space have been added across the U.S.

31:21Multifamily, we don't even have to get into that, but record-setting new construction over the last five years. So, okay, like, yeah, there's going to be a pullback. I don't think this is catastrophic. I don't think this is indicative of some broader long-term challenge. I think this is just part of the cycle. Costs are up. If you have something that you don't have to build today, you probably won't build today. but it doesn't mean that this is going to create some sort of systemic issue in my mind. So let's turn to this week's Digging Through the Data segment. In this edition, we're talking about October's CMBS hard maturities.

31:55There's about$4.7 billion coming due, and almost all of that balance is current on payments. But the underlying cash flow and the borrower's plans for paying off those loans tells us more about what could happen at maturity. So Lonnie, walk us through this and what you see as the biggest pressure points. This is a very interesting digging through the data segment. If you look at October, it's a pretty big step up from September. As you mentioned, Haley, we have about$4.7 billion, which spans across 118 whole loans hitting what we call the hard maturity. That's compared to just$2.7 billion last month.

32:31So for those that are maybe new to the podcast or haven't joined the MarketPulse webinar, When we say hard maturity, we're talking about the end of the road. If there were any extension options built in, they've already been utilized. If there weren't, it's the original maturity date and there's no extension optionality built in. What's interesting, I think, here is that more than 99 % of this outstanding balance is still performing. That means they're current on the mortgage. So on the surface, you look at this and you think, wow, these loans are current. They have a maturity. Things are going to be all right.

33:07This looks pretty good. But then, Stephen, you start looking at the debt yields. And we've spent a lot of time talking about debt yields and what that means for the marketplace from a refinance perspective, et cetera, et cetera. Almost 47 % of that$4.7 billion is below an 8 % debt yield. About 28 % is below a 6 % debt yield. So newsflash, those are not getting refinanced. And newsflash, those are not selling at their last basis. That's the reality. So this is where you start seeing the real refinancing risk. Because you can, making the monthly payments and be current, like you can be doing that as evidence here, 99%, but you can still have a problem when the loan comes due.

33:53So we've got about$1.3 billion coming due with the debt yield below 6%, and 97 % of that$1.3 billion is still current on the mortgage. So the question for me isn't, you know, can they make the payment? They've evidenced they can make the payment. The question really is, can they pay off or can they refinance the loan? And I think the challenge there is that for a lot of these folks, the answer is no. Obviously, rates make that harder. You know, fixed rate loans that are coming due in the sample have an average coupon of about 4%. You know, the recent five-year conduit originations have been closer to 6.8.

34:28So just to give you, there's about 280 basis point arbitrage there to the negative for these borrowers. It's not a perfect apples to apples comparison, but it gives you a pretty good sense of how different the financing environment is today. And then one other thing, Stephen, that I'd point out is it's pretty concentrated. The five largest maturities are about$2 billion of the outstanding balance, 43 % of everything coming due this month. All five are current, none are in a special servicing, and four already have some kind of takeout plan. But as we always say, having a plan and actually being able to execute on that plan, unfortunately, are two very different things.

35:05So, Stephen, can you talk to us about a few of those loans specifically? I think the individual loans really show the difference between current and actually being in a strong position to pay off. Yes, there's a really interesting spectrum this month for the underlying loans. So let's start with the Blackjack portfolio. This is a$569 million multifamily loan that's in a 2021 SASB deal, and it's reaching its fully extended maturity date on October 9th. And the servicer confirms that no extension options remain. The reported debt service coverage ratio is 0.64 times and the debt yield is 5.87%. The loan has already paid down substantially from its original$910 million balance.

35:51Even so, the latest commentary included in our report says the servicer is awaiting the borrower's plans. It's the largest October maturity with a debt yield below 6%. And among the five largest loans, it has the least visibility into how it will be resolved. It's a really interesting one. This is a classic case of a large portfolio, specifically multifamily portfolio that had prepay flexibility. And so obviously the best properties were released and now we're left questioning, was this portfolio adversely selected, which happens a ton, even though you have release prices associated with these.

36:26So it's not like you're paying down dollar for dollar. When you sell off a property, you might have to pay down an additional 10 cents for every dollar of principal. Sometimes that gets to say 15, 20, 25 cents. It really depends on how much risk the lender is trying to structure around. So this loan is paid down substantially, but even with that larger proportional pay down, the remaining collateral still looks like it's fairly cashflow constrained. The second major exposure is the Hyatt Regency Waikiki Beach Resort and Spa, with a$302 million loan also reaching its hard maturity in October. This is a 1 ,230-room Honolulu resort reporting 91 % occupancy.

37:04Fantastic occupancy. While the reported debt service coverage ratio is just 0.17 times with a 5.52 % debt yield. It's another example of why occupancy alone doesn't tell us whether a property can support its debt load. Here, there's a stated path. The borrower is discussing a sale with a potential buyer and intends to close by maturity. So this will be an interesting one. It might take a little bit more time to close, but hopefully this will resolve quickly and fully. The property also suffered more than$6 million and reported storm damage earlier this year. And the latest commentary described unresolved insurance proceeds.

37:39So the sales timing and execution are central to the outcome. And obviously, we also had some recent hurricanes flow through the Pacific. So I'm sitting here questioning if there's been additional issues that have come up, that maybe you're going to put this deal on ice for the near term and might require, say, like a year extension and modification to ultimately buy more runway for this sale to materialize. Now, there are stronger credits among these large maturities as well. The Equus Arizona Industrial Portfolio is the largest. It's about$641 million. It has reported debt service coverage of 1.51 time debt yield and occupancy close to 98%.

38:16The servicer says refinance is underway ahead of its October maturity and there are outstanding life safety maintenance issues at several properties, but for all intents and purposes, On the spectrum of concern, those are super, super low. Those always get resolved for a property like this with minimal friction. There's also the Gurney Mills, the$258 million mall loan that's maturing at the 1st of October. Its coverage is 2.12 times. It's an 8.01 % debt yield. And the borrower has requested a payoff quote and plans to repay in full by maturity. That gives us both stronger coverage and more concrete indication of the intended resolution.

38:53Finally, 667 Madison Avenue has a$254 million loan coming due in October. The borrower expects to pay off the loan, but the coverage declined from 1.34 times coverage at year-end 25 to 1.06 times coverage in the second quarter. Occupancy was 80%. And so there's a stated takeout plan, but less operating cushion than the prior two loans. So for October, it focused on whether those takeouts actually close. the month starts with very little delinquency, but we do have some weak operating performance that we want to keep our finger on the pulse of. So I'm sure we'll be covering these loans again, at least some of these in the coming one to two months.

39:37Yeah, I think, Stephen, just because these are hard maturities and they're out of extension options doesn't mean they're going to be out of the new cycle. These will definitely be things that we continue to monitor because some of these takeout plans may not actually close. There's external factors, as you mentioned, with the hurricanes and other things. Just a quick comment. When you name something the Blackjack portfolio, aren't you kind of going in with a gambler's mindset on the front end? You know, I'm glad you made that joke because I was thinking about that when I was analyzing that loan.

40:04I was like, ooh, I don't gamble. But if I did, I don't know if I'd bet on payoff for this loan. Love the sponsor. Super great. But they're also ruthless and have given back plenty. So in our deals and data segment this week, I think it's pretty good timing because these actually give us some real world examples of all of those different outcomes that we just discussed. Our stories this week talk about new financing getting done, borrowers buying themselves more runway and then loans where the takeout ultimately didn't happen. So let's start here in multifamily where we saw Torchlight lend$238 million against Doral, Florida apartments.

40:43Yes. Torchlight Investors provided$238 million of short-term financing against Landmark South, a 631-unit apartment property in Doral, Florida, near Miami. The loan was arranged by Walker & Dunlop and allowed owner JSB Capital to retire$154.1 million of Freddie Mac financing that was originated in 2023. JSB Capital bought the property for$255 million in 2021, while Pensam Capital subsequently invested$65.8 million of preferred equity in 2023. The new loan is significantly larger than the previous mortgage, providing JL additional capital as it works through its business plan and waits for capital market conditions to evolve.

41:26Well, they're certainly evolving today, aren't they? Landmark South was completed in phases from 2017 and 2021. It has an average unit size of just over a thousand square feet, rents starting at a little over$2 ,000 per month, with units offering up to three bedrooms. The property has a substantial amenity package, including a swimming pool, sauna, two fitness centers, clubhouse, putting green, entertainment lounge, and outdoor courtyards with drilling stations. Its location near the Palmetto Expressway, Dolphin Expressway, and Florida's Turnpike provides access to major transportation routes in the Miami area.

42:00The bigger takeaway is the size of the new loan relative to the existing debt. Torchlight's$238 million financing gives JSB substantially more capital than the$154.1 million Freddie Mac loaner replaces, effectively providing the owner with additional runway while it executes the business plan. I think this is a pretty strong statement here, Stephen. Torchlight saying they have some belief in the path forward here. That number is pretty big,$238 million in financing. But this is a market that I think has shown viability. It's been pretty resistant to some of the downward pressures in the marketplace.

42:36And, you know, some of those amenities, we might have to go check out and do a site visit on this one. We saw an office headline that was pretty interesting. Morgan Stanley is set to invest $684 million in a new regional hub in Dallas. So Lonnie, you want to take this one? Yeah. So Steven, I love that I'm going to take all these Dallas stories recently because we talked about this on the MarketPulse this week, but it's like, I want to hear, I hear that song in the background. All I do is win, win, win, no matter what, because that's what Dallas is doing right now. So Morgan Stanley plans to invest$684 million, as Haley mentioned, in their Dallas regional hub.

43:10So this includes approximately$97 million at its temporary Fountain Place location and$587 million toward its new Uptown campus. So Uptown is literally on fire. I mean, every time you open the newspaper in Dallas, you read a business journal, you read anything around CRE, Uptown is just stealing the limelight for the CRE transaction market, both new construction and existing deals. For this particular deal, the initial footprint is 255 ,000 square foot at its fountain place, which is going to accommodate 1 ,500 employees through 2031. This is a temporary location while the permanent headquarters is built.

43:49Future campus is a 700 ,000 square foot office tower at 2401 McKinney Avenue. Now, another name that we're all very familiar with in the industry, Trammell Crowe, plans to add an additional$650 million investment to construct it. So Morgan Stanley expects a 16-year lease beginning in 2031. And get this, Stephen, they're targeting 3 ,800 employees by the year in 2035. So this is another example in DFW where you're seeing all stakeholders come together. So on this particular deal, public incentives include$18.5 million from the city of Dallas and$43.8 million from the Texas Enterprise Fund, plus a$40 ,000 veteran-created job bonus.

44:34So this is that public-private sector kind of coming together to just continue to build on the momentum that we're seeing in this uptown Dallas market. Project reinforces Dallas' growing financial services cluster. It will sit less than a mile from Goldman Sachs' new 800 ,000-square-foot,$709 million campus, which is scheduled for completion in 2028. And the announcement illustrates substantial demand for new office, you know, in a very specific sub-market. So we talk about this all the time. Location matters, and Uptown is clearly a winner here. Commands the region's highest rents and accounts for nearly 94 % of all North Texas office development pipeline.

45:10So what's really interesting for me, Stephen, is just this concentration in the financial services sector in this uptown market, which, you know, those things don't happen by accident. Like, this is part of a strategic plan that the city has put into place. They're willing to put in some incentives. They're willing to do what's necessary to attract this type of investment. And the benefit here is that all 3 ,800 of those employees are going to live somewhere in or near Dallas. And so sales tax revenue is going to be up. Property tax revenue is going to be up. Private school tuitions are going to be up.

45:44I mean, like there's some real positive knock-on effects here. So love seeing this, love seeing the brand names of some of these firms come into this Dallas market. And I think this is really just the beginning. I think we're going to look back over the next 10 years or so, and we're going to have a hundred of these types of sizable moves across this region. You mentioned, just to tie this back to the earlier AI story about autonomous vehicles, with all of the growth in the DFW area, I'll tell you, of all the metros that would drastically benefit from a dramatic increase in autonomous vehicle adoption, it's going to be DFW in a big way.

46:23So I can only hope that the public gets comfortable with that technology because it's just not going to be possible to scale the Dallas road infrastructure to the level it needs to be increased. But if we have broad-based autonomous vehicle adoption, that'll help out a ton with the kind of traffic that you guys face down there. You mean the Dallas North Tollway is not going to be able to support the current demand load on traffic? I'm with you on that. I mean, listen, it is crazy. Like the traffic levels here, especially in that uptown area, pretty significant increase. And it does negatively impact quality of life.

47:00So I'm bullish on the autonomous vehicle utility here. And I'm hoping that Texas has never adopted mass transit in the traditional form of subways, trains or anything else. But maybe, just maybe, we can get some of these stubborn Texans to buy into this autonomous vehicle use case. Let's talk about a few other office stories. We had a trading alert this week that a Silicon Valley single tenant office loan transferred to special servicing with our latest September remit data. Yes, the$209 million Apple Sunnyvale loan transferred to special servicing due to balloon payment slash maturity default.

47:35Now, we flagged that loan in our recent September upcoming hard maturities reports. And at the time, it was now on the watch list with no borrower plan disclosed ahead of its maturity date. It originally matured in August 2023, and a modification was executed in August of 25 and extended the maturity date while reducing the balance from$215 million to$209 million. The loan collateral is an almost 350 ,000-square-foot single-tenant office campus in Sunnyvale, California, built in 1989, renovated in 2016. The three-building property is fully leased to Apple through July 2030. For the trailing nine-month period through September 24, the most recent statement on file puts the DSCR based on net cash flow at 0.81 times with occupancy of 100%.

48:23DSCR has fallen sharply from 3.01 times at securitization in 21, driven by the loan's floating rate coupon. The collateral was appraised at$330.2 million at securitization. So this will be an interesting one to watch. It obviously hinges completely on Apple's plans at the property. So if there's really no indication of what Apple intends to do here, if they intend to extend or vacate, it's hard to see this loan being able to resolve at all in the near term. I mean, it's very much an issue of single tenancy plans, and it's an unfortunate waiting game. Now, next up, just to round out our office segment, we have a Houston office tower that resolved for a loss this month.

49:06According to our September data, the$80 million, 3 ,000 post-op loan resolved for a loss. The loan collateral was a 441 ,000 square foot single tenant office tower in Houston, Texas. The property was built in 1979 and renovated in 2014 with an adjacent 10-story parking garage. Engineering and construction firm, Betchel Energy, occupied the building for more than two decades before vacating at its October 24 lease expiration, and the property has been fully vacant since, with no leasing activity reported. At liquidation, the loan was split across three 2020 vintage CMBS deals. And we last mentioned that loan in a February 26 edition of Truplire, when the appraised value of the collateral was cut below the outstanding loan balance.

49:49The loan first transferred to special servicing in September of 24 for imminent default, tied to the scheduled expiration of that single-tenant lease. The loan was scheduled mature in March of 25, obviously didn't pay off that time when it was 100 % vacant, and a receiver was not pursued. Instead, the lender took title to the property and was REO effective May 26. The property was marketed for sale and the deal closed earlier this month. At liquidation, the whole loan carried a balance of$74.6 million across all three pieces, down from$80 million at securitization. The sale generated$12.1 million in net proceeds with$2.3 million in liquidation expenses.

50:28The resolution produced a$64.8 million realized loss, corresponding to an almost 81 % loss severity against the securitized balance. Oh, that's a rough one, but you can't say it's all that surprising for single-tenant Houston office. Yeah, I think there's a lot of these binary outcomes in that Houston office market for the reasons you mentioned. I mean, you have a lot of well-established oil and gas companies that take down an entire building. And as the market shifts, business plans change, they vacate. And, you know, it's not like you have a huge list of people wanting to backfill, you know, a property that was built in 1979, even though it was renovated in 2014.

51:10So we'll see, you know, how this, if this is just a building, single building issue, or if this is something that's more pervasive across Houston as the markets continue to fluctuate. This is not anything new. We've seen this multiple times. And so I'm not too concerned about this, but for this particular deal, pretty significant loss severity on this one. So that's just a few of the stories we have this week. As always, we had so many more across our newsletters, our blogs, our research. Reach out to us if you want access to more from TREP, podcast at trep.com. And I have a few other programming notes for us this week.

51:44Before we dive into some of our resources, October is a very busy conference month for us here at TREP. So coming up October 5th through 7th, Lonnie, you'll be at the NAI Global Leadership Summit. And you'll be giving a market update on October 6th at 5 p.m. Our global team will also be in London for Opal's European CLO Summit on October 7th. And then we'll have our larger TREP team down in Miami for ABS East October 18th through 21st. And then another CRE event we have going on is that on October 16th, TREP will also be at the Texas Tech Real Estate and Banking Conference in Lubbock. This event brings together real estate and banking professionals for a full day of discussions around development, capital markets, and the broader economic environment.

52:35So if you're going to be at any of these events, come find the TREP team or reach out to us at podcast.trep.com and we'll make sure we book a meeting with you ahead of the event. We would love to meet or meet your colleagues if they're attending as well. And the next programming note from our end is that we're about to release our September CMBS delinquency report. We didn't get to share those findings here on the podcast, but please reach out to us at podcast.trep.com If you want early access, we can get that to you as early as Friday morning, October 2nd. So we're happy to share some of those details with you, the overall rate, property type rates, or any of the breakdowns.

53:13Turning to shout outs, David S. was interested in getting signed up for our MCP webinar. He's a client and was interested in learning more about our AI capabilities. Paul B. gave us a shout out for our CREI award and said, you guys do a great job. I enjoy your thoughtful insights on the market. So I think we responded back to you, Paul, and said we'd love to have you or a member of your team on our show as a guest. So send us an email. We'd love to connect on that. Kenny H said, in addition to being a regular listener of your podcast, I manage a CRE lending team and would love to look at Trep services.

53:53So thank you for being a listener and reaching out. Lonnie, you did an event last week with our friend and client, Michael D. Cohen at Brighton. And he gave a shout out on LinkedIn and said having real time data on CMBS and debt fund loans is critical to determine best strategies for optimal loan workout solutions for our clients and borrowers. So thanks, Michael, for the shout out. And we're going to get you on the podcast soon, too. So we appreciate all your support. We heard from Ramin I, who said that our show is the best of the best. And congrats. Chris W said, great show, as always, and was interested in our latest coverage of special servicing data, specifically for office and multifamily.

54:36Alex R. has been listening to the podcast for about a year now and said it's become a normal part of their Friday morning routine. Really appreciate how you guys break down the individual loan stories alongside the broader market. So thank you as always to all our listeners. Any on your end this week, Lonnie? I know you had a lot of events, webinars, and in-person travel this week. Yeah, so I'm going to probably miss a few, but I have several. So Justin M, Eric J, and Alex B from Ambridge met them at that special servicing conference where I was on a panel last week, did a fireside chat with our friend Jan S from Bercadia.

55:13I want to give a shout out to Kyle S for help putting that event on. Also got to meet Wally B, runs the real estate program at SMU. So it was great to talk with him. He's a huge fan of the podcast as he has all of his students listen to the podcast. And so I told him we'd give him a shout out. Maybe if he had his students listen, they might be able to get some extra credit if they listened and heard the shout out of their friendly professor, Wally B. So hopefully for them, they get a little extra. We also had Kadar, a friend of ours from PGIM, that was at the event and wanted to get a shout out.

55:47So there you go, buddy. And to the Texas Tech Conference that we're going to be at, I know there's going to be a lot of Texas CRE investors, lenders, appraisers, and everyone else there. Love to catch up at the event. As Haley mentioned, shoot us an email if you're going to be there. But it's incredible what our friend Jared Harrell's put on at Texas Tech. That's turned into a pretty robust conference. So they started off the first couple of years with less than 50 people. And now they're approaching, I think, 600 registrants for that event. So pretty awesome to see it put on the map there in Lubbock, Texas.

56:17And so no shortage of other shout outs. We'll try to get some LinkedIn posts over the next couple of days on some of my travels the last couple of weeks because I've been really busy and have some really great interactions with folks in the market. So, you know, if I didn't get you today, don't worry, we'll try to get you on an upcoming episode or through some of these posts. So appreciate the continued interaction. And 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.trep.com and subscribe to the Trepwire podcast with your favorite provider.

56:52Thank you for listening and stay well.