427. Inflation Revisions, Refinancing Decisions: $78B in Hard Maturities, Negative Leverage, & a $508M Retail Bet

0:05Welcome to the TREP Wire podcast, the show where commercial real estate meets data and insights. This is our Week in Review for the week ending October 9th, 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. We're recording a little earlier this week, so today we'll be connecting the latest headlines to a question running through commercial real estate. What do higher financing costs mean for borrowers and investors? On the macro side, September payrolls increased by just 29 ,000, while unemployment stood at 4.2%.

0:49But softer hiring didn't deliver lasting relief in the bond market, with the 10-year Treasury trading around 5.3 % in Friday's update. Manufacturing continued to expand, and its prices index moved higher, keeping inflation in the conversation. And in digging through the data, we'll examine roughly$78 billion of private label CMBS hard maturities over the next five quarters, including where low debt yields could make refinancing particularly challenging. And as a tie-in to our refinancing theme, we'll also revisit positive and negative leverage, how debt can affect an investment's total return differently from its current cash distributions, and why the mortgage constant matters alongside the interest rate.

1:33And in commercial real estate, we'll discuss lenders' warnings about refinancing pressure and a large multifamily construction loan takeout. So, Stephen, let's start with the financing environment. We talked a lot last week about where rates have moved. What does that actually mean now for borrowers trying to refinance? Well, fortunately, we can boil it down to something fairly simple. For borrowers, it comes down to how much debt the property can support today. not under yesterday's conditions, but today. And higher financing costs can reduce refinancing proceeds even when occupancy and income are improving.

2:10And we've seen that over the last couple of episodes with some properties having occupancy in the low to mid 90s, but still struggling materially with their DSCR. So if the new loan falls short of the existing balance, the borrower needs additional equity, a sale or another resolution. And that becomes especially pressing at these hard maturities that we talk about when contractual extension options have been exhausted. So for investors, we need to distinguish the return over the full holding period from the cash distributed along the way. Debt can increase an investment's equity IRR or reducing its current cash on cash return.

2:51This is a really uncomfortable place to live within the leverage universe, right? When your levered return can be increased, but you're doing it at the cost of today's cash yield, that's a very precarious position of positive overall leverage, but negative cash on cash leverage. And one thing that helps bridge this difference is, well, amortization. That helps explain why we sometimes will see these differences. Because principal payments are used as cash today to reduce the loan balance, And that reduces the amount of debt you owe at sale and increases the equity distribution. So especially when you have amortization introduced into the structure, that's an exceptionally common case when you can enter that positive overall leverage, but negative cash on cash leverage.

3:41So we'll work through some examples showing when financing improves return, but when it also can become a drag and why comparing the cap rate with the interest rate alone can miss part of the story. Because that is an incredibly common misconception you'll see out there on social media when people talk about negative leverage. They're only looking at the cap rate and they're only looking at the loan interest rate. They're missing a number of different factors. And so we're going to try and unpack these terms, what they mean, and walk through the various scenarios that you can encounter within the levered Siri universe.

4:17So let's revisit some of the big macro headlines that have hit recently and walk through what they've meant for bond yields, because that's tying into today's theme of, well, financing costs, what it means for CRE. I would say one of the biggest news items that hit last week was the Friday payrolls number. Now, we didn't have that one recorded last week. September payrolls increased by 29 ,000 following a revised gain of 133 ,000 in August. July's previously reported 21 ,000 increase was revised to a 10 ,000 decline. Together, the July and August revisions reduced employment gains by 60 ,000, reinforcing the picture of modest hiring.

5:02Now, unemployment maybe was the more important number that impacted trading. It should say treasury trading. Unemployment stood at 4.2 % within that 4.1 to 4.3 % range recorded since March. But here's where it gets interesting. Labor force participation was 61.8 % and the employment to population ratio was 59.2%. Now, it says neither material changed, but really when you dig beneath the numbers, The labor force participation has really been what's driving the upward pressure on unemployment. So if we back out the folks that came into the labor force, the unemployment rate would have gone to the high 3.9s to just about 4%.

5:47So really, if you look at what happened with the treasury yields, it started declining a little bit on the heels of this, what seemed like softer data release. But after the fact, when folks kind of dug in beneath the surface and saw that labor force participation rate change, you started getting a little bit more pressure added back to treasury yields. And then early in this current week, the week ending October 9th, that treasury yields started basically with upward pressure again. More treasury selling, more upward pressure on yields, pushing into kind of like the low 5.3%. So like 5.32 to 5.34 % on the 10 year.

6:32So the funny part about where we stand right now with treasury yields and the longer end of the curve, It's like, unless there's a reason to buy, folks are selling. It's very much a technical game right now. Now, getting back to the employment numbers, hiring showed little change across the major industries. Healthcare added 17 ,000, construction added 11 ,000, manufacturing added 9 ,000. Average hourly earnings increased 0.1 % for the month and 3 % over the year, while the average workweek remained at 34.4 hours. So Lonnie, the broad takeaway is that compared to what we were saying at the end of last week, low hire, low fire, materially no change.

7:12The only augment to that, I would add, is that on the fringe, there's maybe even a little bit more positive news to the labor story, right? Nothing showing breaking, nothing negative, nothing on the fringes to the negative. So that just incrementally positive news cycle is putting that additional upward pressure on yields. Yeah, I mean, I think you've hit it on the head here. And again, it kind of goes to our mantra for this year of digging a little bit behind the headlines just to see where the nuance is. And I think you've laid out a really strong case for, you know, if you want to find it or call it a silver lining in the data, I think we're seeing it here.

7:51I guess my question for you, Stephen, would be now that the 10-year has eclipsed 5 and now has eclipsed 5.2, does unemployment become a new trigger for the markets to really focus on? So like if 4.2 becomes 4.4 or 4.5, is there an inflection point or a push-pull here where this becomes extremely problematic for the markets? Or is the 10-year still what people are going to be focused on? because to me, I mean, I'm as surprised, I think, as anyone that at 5.29 or whatever, I think the high watermark was last week, that the market still seemed to be functioning. Like I was at multiple events last week and I can tell you the CRE mindset from folks that I interacted with was not that they're going to stop deploying capital or they're going to stop doing deals.

8:41This is a nuisance. This is going to make the cost of capital more prohibitive for certain properties and certain markets. But generally, the sentiment was still, I think, surprisingly positive. I love this question. The short answer is over the short run, inside six months, I don't see the labor equation being the driving force behind yield moves. I think it is much more dominated by inflationary pressures and fiscal deficit. And importantly, we can't discount this one, global pressures, right? The talk about Eurozone debt pressure, specifically related to France, some of what's going on in Japan, right?

9:21Those global pressures combined with the inflationary backdrop have led to some fairly bearish trend calls on longer term treasure yield movements. So specifically, one I wanted to call out was somebody at a C-suite over at BMO this week said they see the 30-year yield eclipsing 6%. They don't see anything that's going to stop that train. That's absolutely wild to me. That's another 35 basis points of additional pressure relative to where we are now. And if the yield slope holds at right about 50, that's going to put the 10-year at about the five and a half mark, which is 10 past where the current resistance point sits according to a very basic pivot point analysis.

10:04So, I mean, that's a lot of additional fundamental and technical pressure on the long end. I'm interested to see if it plays out. But over the next six months, I don't see the labor force playing a stronger role and contributing either to the positive or negative on yields. Now, that being said, over say like the nine to 12 month horizon, that's where maybe the labor force will start coming back in if things start to break or it could go the other way. The wage growth cycle tends to be a very lagging force. And so if we start getting a tailwind on the labor side, because of some underlying strength and fundamentals and productivity, yeah, that wage inflation could be really, really bad for the Fed because they'll be late to the game and correcting for it.

10:51Right now, I don't see a lot of chatter that gives me confidence that's going to play out. I think it's more just persistent consumer strength, a little bit of inflation pressure on the margin, and now we're kicking the can further down the road before anything breaks consumer spending-wise. But keep in mind, consumer spending growth has been negative in real terms, right? Wage growth has not outpaced inflation. So in real terms, like folks are eating into their savings, they're eating into their credits, they're spending and they're spending really strong, but they're doing it at the cost of future income, at least according to today's numbers.

11:29That can only persist for so long. But over the next six months, I don't really see that that train stopping like maybe once we hit the turn of the year by about March maybe around the next Easter spending spike if that comes in softer sure maybe we'll revisit the the softer labor side and concerns about things breaking just to give a quick analogy to these increased gas prices and people running on fumes the consumer has to be running on empty I mean it's like when your gas light turns on and it says you know if you're in a newer car it actually tells you how many miles you have left in the tank.

12:04And once it drops below about 50 miles, it just says low fuel. It doesn't even give you a reading anymore. And it feels like the consumer has been gliding on low fuel for quite some time. I'm hoping that it continues and the things don't break. But look, I'm thankful that we have a forum where we can talk through this. I'm very excited about the fact that we get to meet with so many people in the market and see the different strategies to kind of navigate this part of the cycle. And I think to this point, it's been really remarkable just to see how resilient things have been across the spectrum.

12:37But I just feel like something's going to break at some point. I mean, like all of these things together for so long have just been able to we've been able to kind of figure out a way to make things work. It's going to start breaking at some point. I mean, we see it. And I know in the CMBS world, people have argued that delinquency is a lagging indicator and all these things. but it's not been top of mind for everyone at the same level that it was coming out of COVID. But Steven, like our headline number this month, I mean, we're over 8 % delinquency. The distress is real. The unresolved issues are starting to really pile up.

13:12Multifamily is front running the overall delinquency rate this month. And it's, I just, I don't know, I'm maybe a little nervous that we're going to see some wheels start to fall off at some point over the next couple of quarters. I agree. There's some things that are really concerning out there and are not sustainable and are the conditions under which things break. And I heard a report this morning about a farmer who's burning through one to$2 ,000 a day in diesel for harvesting. That is not sustainable. That breaks the economics of farming. I don't see how this continues. And honestly, I don't know where oil's going.

13:51Like I'm a pedestrian. I'm a beginner in that market, right? On the one side, we see reports of transit through the Strait of Hormuz being back to like 95 % to pre-war levels, you know, certainly past 75%. And alternative routes for crude oil, right, have helped bridge some of this gap. So between increased straight traffic, alternative routes, we have some downward pressure. But at the same time, over the weekend, we had Houthi claims of attacks on Saudi Aramco sites. Right. So there's this concern that, yeah, we might see oil prices decline. But as the Iranian economy takes all of this pain, there's going to be that increased potential for that asymmetric warfare to come back in.

14:43And you have attack on oil infrastructure. And all of a sudden, oil is back up 5 % to 10%. Yeah, I mean, this is rollercoaster economy right now because everything is short-lived, good and bad. But the risk of persistent increasing price is very real. And I think it's, you know, I'm with you. Like, I don't know that we all understand the strategy behind this, but to the farmer example, you know, like I think if you play that out, some point the government intervenes there. They provide a subsidy or an offset or a tax credit or something to try to keep that part of the economy moving. But again, that's just kind of a bandaid on something that probably needs stitches.

15:22And can we make that work for a while? Probably. but it's just another example of at best we're kicking a can down the road at worse we're setting ourselves up on a foundation of cards that at some point comes crumbling down now to flip back to the positive one of the really good positive macro prints we had was on manufacturing pmi which registered at 54.5 slightly below august's 54.6 reading but marking the ninth consecutive month of expansion that headline suggests continued growth with little change in the overall pace. So strong, persistent manufacturing momentum. Now, importantly, demand indicators strengthened.

16:02So new orders rose to 55.3 from 53.7, and the backlog increased to 56.4 from 51.8. Production continued expanding, although the index declined to 56.7 from 58.3. So really the most relevant financing headline for us was the prices index increased to 77.9 from 71.1. I mean, gosh, talk about a straight through read on the impact of higher diesel costs. And you're just seeing these headlines like Wall Street Journal, truckers pulling out all the stops. You know, whatever trick they have up their sleeve to try and lower transportation costs, they're using it right now. But at some point, your sleeves are going to be empty.

16:52Yeah. Well, at what point do we start seeing this pressure translate into the goods and services that are being provided, right? So like right now, the focus is on the actual transportation costs. But as we know, those things eventually work their way into the cost of the goods, you know? And so, I mean, I think for me, we spent two years talking about tariffs and this broad rollout of tariff inflation. And I don't know that it ever materialized, at least at the level that people expected. But in this instance, I don't see any path forward where those costs aren't passed on or the goods and services don't get delivered at a scale or the reach that they have before.

17:28And so then you have a shortage of certain things, which puts price pressure. So I think for me, that's to me, that's the most kind of like glaring question of just once these truckers, you know, let's just say this continues for another six weeks. Where does the pricing actually start to shift? I mean, they're going to have to increase their billings to deliver these goods, which then increases the cost of production, which then eventually passes on to the consumer. And does that cycle kind of counteract what you laid out earlier about this continued resilient consumer? I mean, it feels like there's just a much more realistic path to pressure here than what we saw maybe with some of the broader base tariff discussion we've had over the last couple of years.

18:10Yeah, it's going to be interesting how we read the consumer spending numbers from October, November, December. I suspect there's going to be a little bit of pull forward on demand because of that forward price pressure concern from consumers. So in other words, if I buy it today, there's a good chance it's going to cost less than if I buy it tomorrow. So I'm going to start my holiday shopping sooner. I fully anticipate some of that mindset to go on this season, which is going to cause a little bit of noise in our year over year, quarter over quarter, month over month numbers. But what I'll be particularly interested in seeing is the nominal and real growth numbers, right?

18:51Nominal could look perfectly fine, but real could show some weakness beneath the surface. It might be at the end of the day, both look strong because we're going to pull out the plastic come holiday season and plow on like usual. So let's talk about a headline here that's directly tied to commercial real estate and really aligned with our theme today. BizNow hosted a conference recently, the National CRE Finance Event, where they talked to lenders and investors who are already seeing borrowers face lower leverage, more conservative underwriting, and in some cases, requests for additional equity.

19:28So let's talk about some of the findings from their event and what some of these leaders across the industry had to say. Yes, I love hearing feedback from our conference and everybody else's conference in real time because it's giving you the read on sentiment. And we have to combine that sentiment with the hard data to make sure everything aligns. But obviously, the sentiment often tends to precede the hard data. So at BizNow's National Series Finance events, lenders and investors described how the rapid increase in treasury yields was disrupting transactions, underwriting expectations for property values.

20:05So one of the speakers, KeyBank's Joshua Mayers, anticipated lower leverage and more conservative underwriting, emphasizing the need to consider the eventual refinancing of new loans. Other participants said appraisals had yet to fully reflect the changed financing environment. That statement right there, I love that that was brought in because this is one of the persistent headaches for both industry and academic researchers is the persistent lag you have in appraisals. and the need to kind of, I don't know, sanity check the appraisals in real time and think, okay, what would I change if I was doing this appraisal today?

20:42Now, another one of the participants argued that borrowers increasingly need to refinance or sell using current pricing assumptions and banks requiring additional borrower equity in exchange for modifications on troubled loans. So all things that we've been talking about for weeks, for months. One speaker from Rialto said borrowers in the acquired signature bank portfolio had sought extensions when lenders had expected refinancing at lower rates. So he described notices of forthcoming rate increases prompting some borrowers to repay. So that was an interesting one where basically they sent letters out to borrowers saying, hey, rates are going to be higher.

21:17And what ended up happening was a prepay wave or just a pull forward on prepayments or refinancings. Another participant argued for stronger lender protections, potentially including interest reserves and equity funding guarantees. These comments represent participants' assessments and expectations rather than hard evidence that extensions are universally ending. So the bottom line is that, at least my takeaway, the sentiment is that broadly we should see a little bit more conservative underwriting, deal structuring, and as we've seen in so many cases, a little bit more equity needs to be brought to the table to support the refinance.

21:56So Stephen, when we say things like conservative underwriting or more conservative underwriting, it's kind of like fingernails on a chalkboard for me at some level, because it's like as a fiduciary, right, of whether it's taking other people's money and spending it or as a lender and lending it out. Isn't that inherent in the job? Like, aren't you always going to be underwriting something from a perspective of making sure it pencils. Like I don't like, okay, interest rates are up. Does that mean fundamentally you change how you underwrite? I mean, like mathematically, it means that proceeds are down.

22:29It means that sales prices probably get impaired at some level or at least the equity component becomes a greater overall part of the composition. But it's just, it's interesting to me when we hear things like we're going to take a more conservative approach to underwriting or whatever. Like I would argue that that's inherent in the job. Like every deal should be underwritten on the merits of that deal, which includes what type of cash flow it generates, what type of rents it can command, what type of operator you have and what the cost of capital and the, you know, the structure of the capital and the debt stack look like.

23:01I don't know that this inherently changes that. So to me, it's like maybe a deal that was on the fringe doesn't pencil today, but I don't think it's because of a change in underwriting. It's just a change in the math, you know? And so if they're just now adjusting for higher rates, what have they been doing since 2022, mid-year, when rates started going crazy? And so I think some of this is looking for a story at some level relative to what the markets and practitioners are actually going to do in practice. I still am convinced that if a deal penciled six weeks ago before the Fed raised rates 25 basis points, it should probably still pencil today or it was a deal that was fringed to begin with.

23:42So all of this discussion today is actually a pretty perfect setup for our digging through the data segment this week. Last week, if you caught the episode, which if you haven't, go check that out now. But we looked at specifically October's hard maturities. This week, we wanted to widen that lens. So Lonnie, take us through what that looks like over the next five quarters. And then Stephen, you'll actually get to put some numbers around that. Well, I love that Stephen mentioned this on last week's pod. And I think we already had some people reach out saying, hey, we'd like to see a broader look at this.

24:16So then Stephen worked some magic and we pulled some data together to kind of go through that on this week's podcast. So we are incredibly responsive to our listeners' requests. So shout out to Stephen and the team for pulling this together. But to your point, Haley, if we widen this out, you know, the number gets pretty big pretty quickly. We've got about$78 billion of private label CMBS reaching hard maturities between now and the end of 27. And about$22 billion of that has a debt yield at or below, get this, Stephen, at 8%. As a quick reminder, when we say hard maturity, and again, we've kind of harped on this over the last couple of episodes, that it's important to understand this.

24:53A hard maturity is basically where the mortgage is at the end of its contractual road. They've exhausted any and all extension options or any other caveats that would potentially get them an extension beyond the stated maturity day. So a hard maturity is, by definition, the end of the road. And so at this point, it really forces the borrower to figure out how they're going to resolve the loan. You know, when something has a soft maturity and they have two or three 12-month extension options, there's certainly some pressure for them to get to a resolution or extend the loan using one of their options.

25:27In this case, the only option is either sell the property and pay off the loan, refinance the loan, or at some level, pray that the servicer will give you an additional extension that's not contractually allowed or accounted for. So if we look at$78 billion number, that by itself isn't the story. I mean, what we care about here is how much of that existing debt can actually refinance or be supported in today's financing environment. So this kind of goes back to what Stephen had been talking about earlier with lenders now looking at refinancing and interest rates and other things through a slightly different lens.

26:04This is a pretty big number relative to have to resolve in a short period of time with this new higher interest rate environment. That's where the$22 billion below the 8 % debt yield really gets interesting. It doesn't mean that these loans by definition are automatically going to default. fault it's really just a screen that tells us you know these are the ones we want to look more closely at the cash flow the value and ultimately you know how much the lender is willing to give them because at an eight percent or less debt yield you're really falling outside of that box that we just spoke about in terms of the lender's preference so if you look at two loans in particular coming due in the exact same month they can have completely different outcomes if you have one at a 12 debt yield and one at an eight you're probably going to get a different response from the lender there.

26:51If you have tenant rollover exposures or other things, short term, weighted average, lease term versus long term, all of these factors a lender considers. So, Stephen, I want to give this back to you. So let's put some numbers around that 22 billion talking about 8 % debt yield. You know, what kind of refinancing gap does that really generate in terms of real dollars? So I hate to answer with this, but it depends. Again, to give a quick shout out back to Dr. debt yields. He brought this up in recent weeks about the debt yields not being necessarily the only or major constraint these days, but DSCR has mattered a lot more over the last couple of months, at least for deals he's been looking at.

27:32So debt yield is NOI divided by the outstanding loan balance. It measures cashflow relative to debt, importantly, independent of the loan's interest rate. The loan's interest rate does not factor into debt yield anywhere. So a new lender will also consider the debt service coverage as well, though. So it's kind of a dual test. Does it meet the debt yields requirement? Does it meet the DSCR requirement as well? Higher financing costs can increase the debt service per dollar borrowed, which reduces the loan amount the same level of NOI can support. So let's look at an illustrative example. A property with an$8 million NOI and a$100 million loan has an 8 % debt yield.

28:12At a 7 % interest-only rate, replacing the full$100 million produces$7 million of annual debt service and approximately a coverage of 1.14 times coverage. So if the new lender requires a one and a quarter times coverage, those assumptions only support a$91.4 million loan, leaving approximately$8.6 million to fund through equity or another source before fees and other constraints. And that's an IO structure. So if this is only a partial term IO structure, then amortization is going to further increase those annual debt service burdens and likely reduce the amount of debt the borrower can obtain.

28:56So value, lender leverage limits, reserves and capital needs are additional constraints that we have to factor in. So the main point here is that a borrower can remain current on its existing loan and still face a refinancing gap at maturity. So that 8 % threshold directs attention. It does not predict default. We have to look at both factors in parallel. OK, Stephen, so let's talk more in depth about the calendar and where timing and property types especially can cause more challenges. Walk us through which months and property types deserve the closest attention here. Well, as much as I would love it to be some other property sector, for better or worse, once again, Office leads the 2027 exposure.

29:45$22.2 billion, or approximately 36 % of the year's hard maturities, are accounted for by Office. Office also accounts for$7.7 billion, or 46 % of the year's balance, with a debt yield at or below 8%. So office is going to dominate that hard maturity narrative. And in terms of calendar timing, we have some varying points in the calendar to note. So first, let me just point out that in terms of the overall dollar amounts, the hard maturities over Q4 26, Q1 and Q2 27 have the largest dollar amount with a debt yield less than or equal to 8%. So you have like 5.4 billion in Q4, 5.2 billion in Q1, and 6.1 billion in Q2 27 with a debt yield less than or equal to 8%.

30:38So that's basically to say over the next call, it first half of up to the first half of 27 is where most of the pressure is going to lie. Now, month specific here, May and June are going to be some of the bigger months here. May has$6.4 billion coming due with$3.3 billion or 51 % in that lower debt yield group. June has nearly$10 billion coming due, but only about$2.6 billion or 26 % of that group is in the low debt yield concentration. So May is going to be a big pressure point likely unless we see anything change as those income statements get updated. Now, nearer term, November 2026 has approximately$3 billion in the lower debt yields group, including$1.6 billion of industrial exposure.

31:26January 27 has$2.9 billion, including$2.2 billion in that fun other category that tends to be dominated by self-storage is one of the larger property types included in that other property type group. Now, again, these are balance weighted figures. So when we're talking about any given month or any given quarter, the pressure points vary. But in terms of dollar amounts, as I mentioned earlier, through the first half of 2027 is really where the largest dollar pressure is going to come for lower debt yield loans hitting their hard maturity. So why don't you put some actual properties behind these numbers, Stephen?

32:07Because the calendar tells us when the debt comes due, but not necessarily how hard that maturity is going to be. So walk us through some of the examples you mapped out. Sure. So October, we talked about this already, but two of the large office properties that are topping the list here, 60 Madison Avenue and 667 Madison Avenue. So 60 Madison Avenue, it's a$100 million loan transferred to special service in July for an anticipated maturity default, reported occupancy of 58%, and 2025 NOI of approximately 5.7 million, implying a 5.7 % debt yield. The borrower requested a short extension while they're pursuing refinancing.

32:47667 Madison Avenue is a$254 million debt stack. The loan is still current. The borrower is expecting to refinance or pay off at their maturity. The property is approximately 80 % occupied with a 6.6 % NOI debt yield and second quarter net cashflow had a DSCR of 1.06 times. So from an occupancy standpoint, the property is still performing relatively well, but debt service coverage shows a little bit more pressure. However, the comments do give me some comfort and that the borrower seems to have some level of confidence that they'll be able to refinance this debt. Now, moving forward to May of next year.

33:26One of those out there is a$2.875 billion floating rate interest-only mortgage with contractual extension options that will be exhausted. This is a 2022 SASB deal on a life science portfolio. Occupancy declined from 94 % at securitization to 70.8%. Debt yield is below 7 % with DSCR based on net cashflow of 1.05 times coverage. Rating agency analysis points to a valuation that is below the mortgage balance. And at securitization, the largest amount of lease roll, the lease expiration pressure was going to hit at 2027 and 2028, representing 33.1 % of base rent. that's looking like it's going to be a very, very tough loan to roll.

34:21We'll see what happens with that one. Now, moving forward to June of next year, 245 Park Avenue. This is an interesting one. We have a timely news update on this one. The property is approximately 97 % occupied. Its net cash flow DSCR is 1.93 times, and we're seeing improved NOI. But where this loan starts to look full is on the debt stack. There's a$1.2 billion mortgage that sits within a broader capital stack that includes$568 million of mezzanine financing that brings the total debt stack to $1.768 billion. So this is an interesting one, but the timely news that I mention is that our friend Arrest just let me know that there was an ABS-15G filed for NYC 2026 245 part.

35:13In other words, SL Green said it would be refinancing the property. We have regulatory papers filed indicating this is going to get refied. Fantastic sign because that is a lot of subordinate debt out there. This is a large debt stack. So obviously SL Green is tackling this one. And this is another sign of positive momentum, positive trajectory for Manhattan office in prime locations. Yeah, I mean, I think this is great news, especially amidst what we just laid out here. I mean, it maybe shows that there is some hope for these. I was going to actually ask you, Stephen, just as a gut check, I mean, have we seen any indications of how lenders are going to treat these loans that are at hard maturity with debt yields maybe less than eight?

35:58I mean, do we have a track record over the last couple of years where X percent of these deals do resolve? Or I know when you were looking at some of the hard maturity data, I think you put a paper out at the early part of this year, you know, there was a pretty large percentage of properties that were still just kind of out there in no man's land. Is that still the result we're seeing most predominantly, or is there actually a path forward that maybe someone has figured out how to effectively deal with these on a go forward basis? There's a couple different factors that play into this unresolved or modified extended population.

36:36So one that'll hit first is that one of the main drivers of the extension and kick the can, extended pretend, whatever you want to call it, one of the big factors driving that trend was the band of uncertainty in valuations. We had no idea what the floor was going to look like for office demand, what the floor was going to be for office valuations. And we had an incredibly wide bid ask gap in just transactions. So that has narrowed substantially. And certainly for say NYC office, we can see that bottoms hits, we have a much tighter band of uncertainty, or I should say not as wide of a band of uncertainty, call it just flat out narrow for prime office.

37:23And so as we go down the spectrum, that band still continues to be wide from a historic standpoint. So to the extent we still don't have a great handle on how low values will go, modifications will continue to be viable because servicers will say, well, when we model this out on the downside scenario, what we're going to get on liquidation doesn't give us a lot of confidence to press forward with foreclosure and liquidation today. If the borrower is willing to contribute capital, we'll continue to extend this thing and look for positive signs of leasing momentum. And the fact that the borrower is contributing cash is reason enough to think that there might be something more positive than our modeled downside scenario.

38:05Now, that being said, I think we've seen enough markets bottom out that it's going to be hard for some borrowers to justify putting in that additional capital where the leasing traction has not happened, right? It's too far gone. There's been too much cash sunk or we can't justify sinking more cash, it's time to walk away. So that's what I'll be looking for in 2027 is the resolutions one way or another, positive or negative. But I think it's about time to call an end to some of these extensions. Yeah. I mean, that's what I've been calling for for the last several years is a resetting basis is what's required.

38:43I mean, how much longer can we wait for that to happen? Like that's the requirement for these markets, for these buildings, for some of these, you know, locations to reset is that reset in basis. And I know it means someone's going to have to take the loss, but at some point that loss is inevitable. And I think what we've seen here is extensions and modifications. I think it's good. Like at some level, like all of this stuff coming due and the forcing function that it creates, I think is kind of what's needed to maybe tilt the scale a little bit in favor of like the rubber meeting the road here.

39:15But it's it's I understand that it's not without some pain for people that, you know, maybe went into some of these investments with really good plans and market shift and the numbers are unforgiving at some level and we'll see if they can work it out. But I'm I'm ready for the markets to just face that reality of here are some really good assets in great locations that just need a reset and basis and allow somebody else to come in and reinvest in them. Okay, so I want us to get into our 101 educational segment of the week here. We've been talking about leverage from the borrower's perspective, but let's flip it around to the investor side, because there's another phrase we use constantly, negative leverage.

39:58Stephen, when somebody says, I'm buying at a 6.5 cap and my debt costs 7%, so that's negative leverage, is that actually enough information? No. Ultimately, no. It comes down to what your overall return is going to be on the property. I need to know overall unlevered IRR before I can make any assessments. So for our listeners out there who are not familiar with some of these terms, let me try and break it down as quick and simply as I can. When we talk about overall return, typically we're talking about the overall unlevered return on a property, so the unlevered IRR. And then we talk about positive or negative leverage, technically that should be looking at the unlevered IRR relative to your cost of debt, not your mortgage constant, but the interest rate on your debt.

40:50And assuming that you can borrow for less than what the unlevered yield is going to be, you have positive leverage. But what happens in certain cases is, well, folks will have the cap rates and they'll look at that relative to say the loan interest rates or what they should be looking at is more appropriately the mortgage constant. Mortgage constant factors in if you're having to pay any principal on the loan as well. So your cap rate is effectively your property dividend yield. And your mortgage constant is the cost of debt accounting for any principal payments you might have to make on the loan.

41:25So basically how much in dollar terms are you having to sweep to pay down that loan in relative terms. So to have negative cash on cash leverage means that your mortgage constant is higher than your cap rates, right? Your property's dividend yield is lower than what you're having to pay to your lender. But if you're paying down your loan balance over time at the exits of this deal, either it's five or 10 years in the future, hopefully you've reduced that outstanding loan balance. And when you go to sell that property, your overall unlevered yields will be high enough to ultimately capture back some of that equity, right?

42:05You're going to capture it on the exit. So that's what we have to factor in really all of the information to know, do you have positive or negative leverage? Do you have positive or negative cash on cash leverage? So let's walk through some numerical examples that will really, I think, help make this crystal clear. So let's suppose you buy a property, an 8 % cap rate, and the property produces$800 ,000 of annual NOI. With no debt, that's an 8 % current cash yield. Interest-only debt at 7.25 % costs$435 ,000 a year. That leaves$365 ,000 for the$4 million equity investment, or about a 9.1 % cash-on-cash yield.

42:44So borrowing is increasing your cash yield. So your cash-on-cash leverage is positive. Now, for simplicity's sake, let's assume that NOI stays flat and we sell at the same cap rate that we bought the deal at. Using monthly cash flows, the property's annualized IRR is 8.3 % and the equity IRR is about 9.5%. So total return leverage is positive as well. The 7.25 % quoted coupon on this deal corresponds to roughly a 7.5 % effective annual borrowing cost with monthly payments. So if you go from monthly compounding to an annual effective rate, that's where you get from the 7.25 % to a 7.5 % yield. So that's why we keep the coupon and effective costs separate in this calculation or in this model.

43:33So Lonnie, what happens if we introduce amortization? Just wanted our listeners to know that Stephen loves this stuff so much. I think he did those calculations in his head. He doesn't even need a calculator or a spreadsheet at this point. You know, it is interesting, Stephen, we talk about amortization because it does change the equation. So if you keep the same coupon and loan amount, but use monthly payments on a 30-year amortization schedule, your annual debt service increases to about$491 ,000. So remember before on interest only, you're at$435 ,000. The mortgage constant is now approximately 8.19 % above our 8 % cap rate.

44:08Cash available to equity falls to about$309 ,000, and your cash-on-cash yield falls to 7.72. Newsflash, that's the negative cash-on-cash leverage, even though the coupon is still below the cap rate. But principal repayment rebuilds equity. So the pay down of about$58 ,000 in the first year and the loan balance at the five-year sale falls to roughly$5.66 million. The equity IRR is still about$9.45 above the unlevered$8.3. So this investment has positive total return leverage and negative cash on cash leverage. Amortization uses cash today and reduces the eventual payoff. It isn't an additional interest charge.

44:51So, I mean, I think that's a very great example of this kind of nuanced reality that people probably don't take into account when they look at just the cap rate and the cost of the capital. Let's take this one step further. So we're really building on this now. So what happens if you have a lower cap rate with growth and what happens if you have a lower cap rate without growth? Yes, this gets to some of our 2021 to 2023 deals. I would say 21 to 22 deals, right? some of those properties that required at a low cap rate, they were expecting strong NOI growth. What happens if that does materialize?

45:28What happens if it doesn't materialize? And the cap rates we're using here are a good bit higher than what they would have been for many of these deals back in 21 and 22. So to stay consistent with our assumptions that we've used thus far, let's change the cap rate to a 6.5 % cap with the same interest-only loan. NOI starts at$650 ,000. After$435 ,000 of interest, equity receives$215 ,000, a 5.38 % cash yield versus 6.5 % without debt. So cash-on-cash leverage is negative. The property still generates positive cash after debt service, negative cash leverage means borrowing lowered the yield. Now, let's assume that NOI grows 4 % annually and the exit cap stays at 6.5%.

46:18The model produces an unlevered IRR of approximately 10.8 % and an equity IRR of approximately 15%. Growth supports positive total return leverage despite the initial cash drag. That's a hypothetical growth assumption, not a forecast. So you can see just how critically important that bottom line cash flow growth can be and how strong it can be, especially if you can end up with a strong exit cap rate. Obviously, these numbers shift a lot if your exit cap rate ends up being higher than your going in cap rate. We're trying to keep as many of these factors constant as we can so that we can isolate the impact of various factors on the overall return structure.

47:03So if we remove that growth and keep the same exit cap, the unlevered IRR falls to about 6.7 % and the equity IRR falls to about 5.5%. So under that no growth scenario, borrowing now reduces both current cash yield and total return. The initial cap rate in both of these examples was the same. The future operating performance was what was drastically different and changed the conclusion. So let's bring this lesson back to refinancing. The template includes the reverse example. Our 8 % entry cap in IO structure still produces positive initial cash leverage, but a much higher exit cap reduces the sale value enough that borrowing hurts the holding period return.

47:47Current income can't tell us the whole investment story. When someone says negative leverage, ask which measure they mean. Compare current cash yields with the mortgage constant for the income question. Compare the unlevered IRR with effective borrowing cost for the total return screen. Then calculate the actual equity IRR. Include fees, capital needs when moving beyond these simplified examples. Obviously, the more complex the deal, the sharper your pencil and the better your modeling skills should be because it's very easy to screw things up as we get more complicated and grounded in the real.

48:29And to tie that back to the hard maturities, a borrower may believe future growth justifies the investment while refinancing, but the lender still needs cashflow today as a requirement. So a promising IRR doesn't automatically close the proceeds gap at maturity. And that's so often one of the difficulties we're seeing in today's environment and will either help explain why you see equity brought to the table to deleverage a deal or to extend a loan or why the borrower says, I cannot justify this based on cash flow growth assumptions today. And I'm putting those keys in the mail. You're going to have some jingle mail coming your way.

49:09So we have two stories here in our deals and data segment of the week. Let's start in multifamily. And this headline here from the Commercial Observer is about our friends at Madison Realty Capital. The headline said they provided$127 million construction takeout for Arcadian. So walk us through this one, Lonnie. Shout out to our friends at Madison Realty Capital. They're always doing great deals. Close this one out,$127 million construction takeout loan. This was a newly completed 502-unit multifamily development located in Fort Lauderdale, as you mentioned, Haley Arcadian. Developed by Fuse Group and KERA Development, The property received a temporary CO earlier this year.

49:50It's continuing to lease up and move towards stabilization. The financing replaces the$84.5 million construction loan, which had originally been issued by Centennial Bank in 2024. Bercadia represented the sponsors in arranging the transaction. This is located in the Sistrunk District. The development comprises two eight-story buildings, approximately 15 ,000 square foot of ground floor retail, and 629-space parking garage. It also includes 151 apartments designated for households earning 100 to 120 percent of area median income. Fort Lauderdale's redevelopment agency provided$10 million in funding, including an$8 million forgivable loan.

50:29Completing construction and achieving stabilized cash flow are two separate milestones. During lease up, the investment's expected return can depend heavily on future income growth, as we all know this, while current distributions remain limited. the larger new loan. So, Stephen, look, I mean, I know that when we had Samir on our panel at our truck connective and he was saying how they were looking for any and all ways to deploy their capital and funds. And this is a great market. I mean, Fort Lauderdale has been in the news for a lot of positive stories. This is a new construction project that maybe even has taken, with it taking a little longer to lease up, still provides long-term prospects that are very positive.

51:06So shout out to Madison. Love seeing these hundred plus million dollar deals get done. Yeah, with a redevelopment agency providing that$10 million funding with$8 million forgivable debt, that's a major part of that capital stack makes the deal really interesting. And another story here is in the retail sector. Talk to us about why Federal Realty acquiring Birmingham's Summit for$508 million caught your eye, Stephen. Yeah, this was a sizable deal. I mean, you don't see many Birmingham, Alabama deals, single asset deals that hit this kind of mark. So it's a$508 million acquisition or$498 million on a net basis.

51:48This transaction marks the property's first sale by its original developer. The open-air center spans approximately 870 ,000 square feet on 100 acres and is 92 % occupied. The company says signed leases will increase occupancy over the coming months. Their property has more than 110 tenants, including Apple, Trader Joe's, RH, Nordstrom Rack, Sephora, and North Italia. More than 30 tenants operate their only Alabama location there. That speaks volumes. Federal Realty characterized the acquisition as immediately accretive to FFO per share and identified opportunities to bring rents toward market levels over the next five years.

52:28Those are management's expectations. Planned long-term funding combines asset sale proceeds, free cash flow, and recently issued convertible note proceeds. That funding mix makes the transaction different from a purchase funded entirely by equity and a property-level mortgage. So this is a really interesting deal, both in its unique position within the Birmingham, Alabama metro, but also with respect to its funding structure. So as a reminder, we recorded this episode on a Monday because we have our company-wide kickoff this week in Nashville. But somehow, even when we record on a Monday, we have a lot to cover.

53:11So more from us this week. Make sure you caught up on our Tripwire newsletter, the CRE rundown newsletter, our blogs, our research, and we will see you next week. A few quick programming notes for us before we close. We just finished a TREP CRE targeted training and we're already launching our next edition. This, as a reminder, is a training series that we host monthly for our TREP CRE clients. So on Tuesday, October 20th at 2 p.m. Eastern, we'll dig into our new enhancement called Monitoring Reports that is designed to deliver deeper visibility into your portfolio risk, exposure, and overall performance.

53:53If you're curious to see our latest enhancements or if you're not a client and would like to know what we've built, send an email to podcast at trep.com and we'll get in touch. Turning to shout outs, Tim R. loves lending spreads and asked questions of our lending team. And he also let our colleague Andy B. know that he's a big, big fan of the show and thinks of us as CRE royalty. So thank you so much, Tim, for working with us and for the kind words there. Anthony J. saw the September delinquency numbers crossed 8 % and was interested in the full report and the detail on the loans that moved that headline rate.

54:34As a reminder, if you don't have a copy of that report yet, reach out to us at podcasts.trep.com and we'll make sure you have access. Robert M. loves the show and also wanted access to the September report. Jeff D. really enjoyed Stephen's latest Sources and Uses report. He thought it was interesting to see cash out refinancing coming back. So we'll have to do a plug for that research piece on an upcoming show, Stephen. Mark P. said great research on the refinancing recovery and was looking for some of the underlying breakdown by property type. Tyler B. is a huge fan and said he got to see us in the audience at the Western States Cref Conference, and it was great to see us.

55:16So he wanted to know if he could get a copy of the slide deck from that episode. Sean H. also was interested in some of the slides from the Western States Conference. Tom B. works in the lending part of commercial real estate and has been following what we're doing with AI. He loves our show and would be interested in seeing a demo of our TREP AI tools. So Tom, we will definitely be in touch. And Peter C. told us we're part of his Friday morning listening routine and was interested in some of our recent research on office values and appraisals. So thank you as always to all our listeners. we'll see you next week 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 at trep.com and subscribe to the Trepwire podcast with your favorite provider thank you for listening and stay well alright