431. The Ghost of Hikes to Come: AI Credit Jitters, Haunted CMBS, and a $6.2B Office Bet

0:05Welcome to the Trevwire podcast, the show where commercial real estate meets data and insights. This is our Week in Review for the week ending October 30th, 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. Halloween is almost here, and this week we're checking what's lurking behind the headlines. The Fed held rates steady this week, but two officials wanted another hike as inflation concerns persisted. AI investment remains a major economic driver, even as investors reassess the risks of financing that growth.

0:49In digging through the data today, we're touring a haunted house of CMBS, from widening data center spreads to SASB deals where missing interest has reached the top of the capital stack. Then we'll cover tenant troubles, a stalled property sale, hotel distress, and two major transactions backed by substantial lease commitments. So, Stephen, with the Fed holding after September's hike, what does this pause tell us, and what should the commercial real estate market take away from it? The Fed hold buys some more time to evaluate the economy for Fed officials, but it leaves CRE borrowers facing the same policy rate.

1:33Interestingly, you had Cook and Hammock who wanted another quarter point increase, which is really curious because this is the first time Lisa Cook has dissented from the consensus in I think like four years. Very interesting timing. And the statement that the Fed put out upgraded the growth assessment, at least if you want to read between the lines. So they upgraded that growth assessment even as inflation remained elevated. So my question is, what additional information would justify a December hike that didn't justify acting now? That was a major point of contention and questioning in the press conference, and we really didn't get an answer for it.

2:12Certainly nothing that was satisfactory. Now, if I can just jam on this a little bit more, the closest we came to getting an answer was Warsh saying that a little crack has opened up. You're seeing in the margins some concerns about credit. And basically, Warsh stopped just short of saying that the market was doing some of the work for them. So really, really interesting because this gets back to the same old Fed play. As soon as you see a small credit crack open up in the economy, they say, whoa, whoa, we're taking a pause, we're taking a beat, and we're going to monitor things for a little bit longer.

2:47That's really the only reasonable justification for holding at this meeting that you can use if you want to set political concerns off to the side. Now, there is still a strong case for patience. September's hike is still working through the economy. So if we want to bring in one additional justification, it's that same old adage of this blunt policy tool works with long and variable lags and higher rates can't repair an energy supply disruption. But broader inflation pressure makes it harder to assume that relief at the gas pump will resolve the problem. For CRE, we need to watch both treasury yields and credit spreads.

3:25Last week's treasury rally came alongside wider data center spreads, even though every loan in our 19 SASB data center deal universe remained current. In other words, there are zero current credit concerns with SASB data center deals. Maybe you have a little bit marginally more concern in ABS space, but still we got some noticeable whiting that we're going to walk through on this episode. So our haunted SASB deals show a slightly different stage of risk. Six deals already carry 516 million of unpaid interest. So moving away from data centers, you do have large credit concerns in other parts of the CMBS market that we're going to unpack as well.

4:06So we'll have some fun tying this into the Halloween theme. And finally, our property stories are going to make some of these distinctions very tangible. Tenant losses and weak cash flows are creating problems. Strong lease commitments continue to attract capital. And the underwriting question that's key in today's market is who will pay and whether that income supports the debt. This is just a classic age-old problem that gets brought further under the magnifying glass in this sort of environment. Lenders are very, very discerning, and they don't want to take on major lease roll risk. And if they are, it's going to come with some major strings attached or some very, very strict or creative structuring around that tenant lease role.

4:51So we can talk a little bit more about that as the show goes on. But Lonnie, how are you feeling about this Fed rate hold and all of this Fed speak nonsense that we got or lack of insights? You mean we didn't get any direct answers from someone at the Fed when asked in a press conference when basically took a timeout here? I mean, I think that's what I would call this. Obviously, it's going to be called a pause, but really, I think it's more of a timeout. I don't know that it necessarily changes the Fed's game plan, but I think you hit on the point here is the last raise was in September. I can see where they're saying, listen, we don't want to take another hike action when we haven't actually seen the effects of this take place.

5:35And we have this meeting in December in our back pocket that if we see that we need to do something, then we can do it in December. It's not catastrophic one way or the other, but if they are too aggressive and raise rates subsequent meetings, September and October, and some of this other stuff comes in in a more positive manner, it's hard to undo that. I think I view this as what was expected. I think they were set up for this. Obviously, I think we would all like to hear a little bit more direct of what the strategy is or what the rationale and reasoning was. I mean, the two people that wanted a rate hike, I mean, I think there's a little bit of color there.

6:11I mean, it's not the first time we've seen since Warsh has been here where we've had people wanting to do something different than what they actually did. I think we're going to have to just wait and see. If I were to say, why did they hold today? I think my answer would just be breath. If the next inflation read shows that price pressure is spreading further across the basket, not just the energy, then I think that excuse is gone. And at that point, the Fed wouldn't be responding just to supply shock anymore. It's reacting to something that's more settled into the economy. So I'm not super surprised by the action that they've taken here.

6:48I mean, I think for our CRE folks, though, and you were kind of hitting on the end of the intro is a hold is not a cut. The reality here is if you have floating rate debt, your cost of capital didn't move positive or negative today. It just stayed there. If you're fixed rate debt, I think the Fed's decision matters less than what you talked about, which is the treasury yield and the credit spread on top of it. So those are the two things that I'll be keeping an eye on as we kind of move through the rest of October, November and into December. The market reaction after the Fed announcements and then at the start of the press conference to the end of the press conference to the end of the day, it was like three or four different phases of digesting this information.

7:32And it was a really it was a very muddy market response function. So after the Fed 2 p.m. announcement, you saw maybe a little bit of blip up higher. So a parallel shift higher rates, maybe just a little bit on the margin. Then all of a sudden that faded and it came back a little bit and then continued to fade early in the press conference. Then as it continued going longer, because this press conference did go a little bit longer than the last one. I think the last one was maybe 28 minutes and this one was 35, something like that. So toward the end of it, you started getting more of a twist function in the curve.

8:06So in other words, short-term rates declined, long-term rates increased. But then by the end of the day, the long-term rates settled back down, and it was the two-year yield that had declined by about four or five basis points. And the 10-year ended almost unchanged, maybe up one basis point on the day. So it's hard to really say that we got anything meaningful in the form of information from the market response. We didn't see the large spike in the term premium because the joke of the day was as soon as we kind of made it halfway through the press conference and we realized we weren't going to get anything useful, the analogy of looking out the window came in.

8:44The rest of the audience started looking out the window like, OK, so what are we looking for here? It just kind of went sideways from there. It was great. So I made some of these jokes in my LinkedIn post about what what should we be looking for in the data? but the data is backward looking. So we're looking in the rear view mirror and markets are looking in the side window or the front window. We're in just this really weird, it was a really weird paradigm. We're told to believe that it's a new Fed, but then the actions look like the old Fed. One thing I did want to get your thoughts on, Stephen, was they described the economic growth as strong.

9:17So they upgraded September's assessment and then they continued to characterize inflation as elevated. Do you see anything in that statement that maybe is noteworthy? Not really. I'm actually a little bit surprised they upgraded it to strong, just given the broad backdrop and the fact that, at least from what I've seen, it does feel like we're getting a little bit of cooling in GDP. And certainly the earnings announcements from the major hyperscalers, you're still getting significant CapEx, but in the margin, it does feel like it's been dialed back marginally, which implicitly should mean we're dialing back our GDP forecast, nominally just a little bit.

9:55So I'm curious to see why they changed the language and upgraded strong. At the other hand, I get it because on the show, we keep talking about how resilient consumer spending has been, but I'm still not going to go all in on that for December. Real wage growth has been negative. Nominal wage growth has not outpaced inflation, certainly not with this recent spike in oil. So I'm hard pressed to think that we're going to get through December into January and look back and say, wow, that totally blew away my expectations. It might've been stronger in the margin. I just don't think it's going to blow us away.

10:28I could be wrong though. Does the 2 % target at some level, does that become a little bit of an aberration? Is that like fitting into your college, you know, favorite college t-shirt or your favorite skinny jeans or whatever the case may be? Like it's a goal, but probably not something that you're going to be achieving anytime soon. It's an age old joke. They haven't hit it for five years over the last three years, PCE has been above 3%. We're not getting anywhere closer. In fact, it's showing that we're stubbornly elevated. So yeah, it's a joke, but they can't take their foot off the guess on that message right now.

11:02They have to stay anchored to it. They have to because they need to keep inflation expectations. But if they were really committed to it, I got to say, I'm a little bit surprised that we only got two descents because you had Logan and Kashkari out there who wanted to raise rates in July, along with Hammock. So we had three descents in July from folks wanting to raise rates. So I'm a little bit surprised you didn't see Logan or Kashkari join the group and that we didn't get three, maybe four descents at this meeting. But from the way Warsh described the debate of the last two days, it sounded like it was a very hotly contested topic.

11:42And he described it as like there was a lot of healthy debate and it was a very strong family fight or family debate among Fed officials. That would be an interesting pay-per-view. If you could get access to that, it would be very insightful. Look, I think if they were going to raise rates today, they should have just done 50 basis points back in September. I still think that if they do 25 in December, it's probably not materially going to change anything. I'm with you. It's like a new cover on a book, but the same message inside. We're seeing the same old Fed actions, even though we've been talking about maybe having a new regime in place with a new strategy.

12:21It feels like it's the same old. Yeah. I mean, the Fed is stuck in a very difficult position. So we're all sitting here thinking, okay, the logical part of us says that it doesn't really make sense to hike rates into a supply side shock unless we really think this blunt tool is going to cool the broadening inflation at the margins. That's the best argument you can have for hiking into a supply shock. But the other hand, you say like, but let's get back to the broadening out inflation. That's happened. It's not going away. You should have hiked. And if anything, if you wanted us to believe that this is a new Fed, you had the perfect opportunity to come out there and surprise markets.

12:59So really what I'm wondering at this moment is if we didn't have last week's massive rotation from AI credit back into the safe haven bid into treasury yields. If we didn't have that rotation from last week, would the Fed maybe have acted differently this week? Answer's probably not. That bought them a lot more cover, but yeah, if they wanted us to believe this was a new Fed, they should have hyped. Well, you mentioned some of the spreading of the inflation. So Fitch put out some research from their Fitch Ratings Group this week. And I think the data point that stuck out to me was that in September, 46 % of US CPI components were running above 3 % annual inflation.

13:42So if you compare that, it's 32 % in Canada, 36 % in Europe, and 41 % in Japan. That's the share of the components, not their weight. Okay, so it doesn't tell you that 46 % of what you spend is inflating above 3%. It just tells you how widespread the pressure is, and that widespread pressure is the problem. I think we're getting past the point of just saying, you know, if gas comes down, this is going to fix the issue. Yeah. The argument that the AI CapEx boom is interest rate and I think is less true today, given the significant widening we saw last week, that's showing you that investors will be discerning on the margin.

14:21And we're getting to the point where this continuing capex toward peak is only raising the onus, the burden to show an ROI on this massive capex. Investors want and need to see it to justify the continued strong bid for this paper. I mean, the good news is that when Meta brought their deal this week, I think it was like five times oversubscribed or something like that. So obviously you still have broad-based demand for some of the best names, but if it was CoreWeave, that would definitely not be the case. So let's talk about the consumer side of the equation from this week. We saw a pretty meaningful improvement in confidence this month.

15:03The conference board's index jumped in October, reversing some of the weakness we've seen recently. But what's interesting is that even though consumers are feeling a little bit better about the economy, they're still being cautious about spending. Stephen, how do you reconcile those two things? Oh, man, I'm so glad you went here, Haley. as the conference board jump really had me thinking. I was like, what in the world? Because we dropped down to like the low 80s last month and now we're back up to like, what, 91? And I just can't help but wonder. We know there's some bias in this survey. So I can't help but wonder, is some of this the change in polling ahead of the November election?

15:46I just, I can't help but think it. I have to say it. We know there's some bias in here. Am I wrong, Lenny? I hesitate to go here. We try to stay as apolitical as we can, but I just have to ask where in the world that boost and sentiment come from? Yeah. I mean, the timing here is a little bit suspect. Maybe there's reason for optimism. We're heading into the holiday season. If you took away the gas pressures, there's some opportunity for excitement. I don't know. I mean, I think it's a stretch because if everything we've covered the last two or three weeks, if you look at new home sales, you look at all these things, like all negative.

16:23We've talked about the inflationary pressure. We just did a whole segment on that negative. So consumer confidence jumping up like this is a little bit odd given the timing. But at the same time, like these things do ebb and flow. That's kind of an interesting dynamic. I think people feel better generally, but to your point, like they're still frustrated with how expensive things are. I mean, you can't go anywhere now without feeling like you're just spending way too much and not getting enough back. If you look at retail, and we've had a couple of guest podcasts and others, we talked about this.

16:54It's really being led necessity and experience-driven centers. It's not really big ticket shopping at this point. I think the choosy consumers are still going to buy groceries and go to places that they enjoy. And something that I've talked about for a while now is in lodging. I don't think you can analyze hotels just in one broad bucket, like softer leisure travel outlook hits the resort market very differently than the hotel next to a hospital, et cetera. And you're going to start seeing some pullback. And I've tried to book some travel over the last week or two. This is contra to this increase in consumer confidence, but airfare is ridiculously expensive right now.

17:32I mean, like anywhere, like you need just a quick 45 minute flight. It used to be 175 bucks. It's 350 now for one way, or it's 700 for round trip. It's really, really frustrating. So I'm a little put off by this at some level of just understanding where this optimism is coming from, because if you look at some of these sectors, it's getting pretty daunting as a consumer to have to continue to endure these high prices. Yeah, I'm going to call this conference board jump a dead cat bounce, because I don't feel optimistic when I fill up my truck at the gas pump. I don't feel optimistic when I read this story about one of those long haul cruises that had sold lifetime passes, dumping some of the passengers in Cambodia because the oil spike has made the voyage uneconomical.

18:18Like, in other words, they can't justify continuing to haul these passengers and build back up the cruise ship. That does not make me feel good. And then when you talk to local home mortgage brokers, they're telling you stories of like the 7 % psychological level is real. People are on the sidelines. They're dragging their feet. And yet they're also still spending hundreds of dollars on DoorDash and they could afford the mortgage if they would just change their spending patterns. But all of those things do not make me feel terribly optimistic about the lower part of the K-shaped economy. Then you have a lot of these people saying, now's the time to stock up on water and other things based on some of these global geopolitical events that's happening.

18:57There's a lot of moving parts today. I think it just depends on where you live in the internet and what you read and the cohort of the echo chamber that you listen to. There are some pretty large announced layoffs this week, too. I mean, Microsoft announced a pretty significant layoff. Dropbox announced a pretty significant layoff. It's very interesting, the timing here. We'll see how this plays itself out. I mean, I think after the elections, reality will set in for some folks. We'll see how the holidays go in terms of spending, if people actually take this consumer confidence and turn it into strong retail sales.

19:30We'll see how this plays itself out, Stephen. I'm not optimistic right now. I'm not pessimistic. I mean, I think we're just kind of stuck where we've been. If I were to kind of sum up where I think we are, I think it's just a continuation of where we've been for the last 12 months, something like that. So I thought Microsoft was pitching it as don't call it a layoff, right? They were calling it, was it early retirement opportunity or a life pivot opportunity? Yeah, I don't know how you want to pitch it, but yeah, they were really strong about making sure not to call it a layoff. Yeah, don't let the door hit you on the way out is kind of what they're saying, though.

20:04It is funny how, no offense to our awesome marketing team, but sometimes marketing can turn things that are not so great into feel-good stories. It's funny. If you've ever been on realtor.com, I call this like you have the photo magic where these people take pictures of houses that make them look incredible. And then you pull up in front of the house and you're like, what in the world? This is not even the same property. It's amazing how spend sometimes can just make things feel better. And so, yeah, hopefully these people enjoy their life pivot when their employer decides to send them off into an unemployment line.

20:42All right, so let's pivot here to our digging through the data segment for the week. And since we're heading into Halloween weekend, we have a bit of a fun theme for this episode. We wanted to take our listeners through a haunted house of CMBS, starting with data centers where the underlying loans may be performing just fine, but investors are starting to get a little spooked. So, Stephen, walk us through what's happening with data center bond spreads last week. Sure. So our first stop on this haunted house tour is the data center wing, where last Thursday's semiconductor sell-off rattled the windows of this house.

21:25On October 22nd, the semiconductor index fell 6.7%, while the 10-year treasury yield dropped 17 basis points to 4.96%. That was a massive rotation that happened on the 22nd. So Treasuries rallied, but data center credit spreads widened along with what we saw across the broader market in hyperscalers, neoclouds, and generally semiconductors. So in the week ending October 23rd, the 13 senior AAA data center bonds that were outstanding at the prior year end widened an average of 21 basis points for fixed rate deals and 24 basis points for floaters. The median senior bond and other single asset single borrower or SASB deals and condo deals really didn't move all that much.

22:15Fixed rate spreads are measured over treasuries. Floaters are measured over SOFR. or the secured overnight financing rate. So wider spreads signal greater perceived risk. They don't automatically mean total yields rose when treasure yields were falling. So in other words, you had a bit of an offset here. Treasure yields dropped, credit spreads widened. The overall yield might have stayed relatively static depending on the level of both moves. So here's the first twist. Every loan across the 19 data center SASB deals financing 22 billion of mortgage debt is current. None of these loans is in special servicing.

22:52Investors are hearing footsteps before the servicer data shows a new intruder in this haunted house. One set of footsteps has a very specific, well-known name that rattled markets last week. That's Core Week. And interestingly, this tenant accounts for about 20 % of underwritten rent on a 2025 SASB deal. That deal's senior bonds, get this Lonnie, they widened 71 basis points in one week. I mean, that tells you just how concerned folks are about CoreWeave. They are committed massively. The 71 basis point widening put it to 243 basis points over SOFR. The market is distinguishing exposure to an AI tenant whose financing attracts scrutiny from exposure to the broader data center business.

23:39So before running for the exit though, let's check the foundations. Our longer report that we are putting out on this topic asks whether the spread compensates investors for the risks at their particular level of the capital stack. So in other words, we crunched as much data as we could on the relative risks, the relative pricing, and therefore the relative value in the data center trade. So one of these 2025 data center deals has its senior bonds sitting at 205 basis points over treasuries with a 38 % class A loan to value ratio, which is measured against the appraised value at securitization relative to the class A bond size and a AAA rated tenant to boot.

24:24Now, on the other hand, you have another 2026 data center SASB deal that's offering 38 basis points less spread despite a higher senior leverage point and a longer average life. So it's really interesting how credit spreads are shifting around and evolving in this environment, which is what I love. Like if you've ever traded an asset out there, you know that this is the sort of market that makes things really, really interesting and is where you can make a name for yourself if you're able to tease out and identify the strong relative value plays that you have strong conviction in over the longer term.

25:01So let's consider another deal, another 2026 DFW3 SASB deal. It's 220 over Fredericks, a 33 % Class A LTV, and get this line, a 19.2 % Class A debt yield. That debt yield measures the property NOI against the senior bond claim. So there's protection, but at the flip side, there's also a concentration issue. You have one BBB-rated customer that leases 69 % of capacity. A little bit spooky in this environment. So we've teed up some research that we're putting out in this area. We're showcasing just the depth of data that we have on data center SASB deals and also highlighting the pricing service that TREP offers from our bond desk.

25:46Yeah, some really great insight there, Stephen. And I can't help but picture you running around a haunted house with a chainsaw. Maybe there's some videos of you in your younger days participating in a haunted house as someone super scary. I don't know. My oldest son went to his first haunted house this last week. didn't love it. So we had a couple of other haunted stories we wanted to dig through here. This is our haunted SASB deals. So highest interest shortfall. So now as we climb the stairs, Steven, they're creaking on the way up where the missing interest has become a haunting of its own.

26:21Our Halloween SASB screen covers 87 deals with at least half their loan balance and special servicing 77 carry outstanding interest shortfalls, totaling 1 1 billion. That's no joke. Six deals account for$516 million, or 46 % of the total amount. For those that don't know, a shortfall is cumulative interest owed to bondholders, but not yet paid. Across those 77 deals, 24 have shortfalls, reaching Class A. Among our six featured deals, all have shortfalls at their most senior-issued class. Five call it Class A. CXP 2022, CXP 1 calls it Class E. the vampire is srpt 2014 star the starwood mall portfolio it carries 159 million of shortfalls its remaining loan balance is about 607 million against a 144 million dollar appraisal that's not great and 28.7 million of bond losses have already been realized again not great this is a lot scarier than your story, Stephen.

27:25So the zombie is Destiny USA. We've heard about this one before. Its loans matured in 2022, its forbearance expired in 2024, and the deal is still walking, carrying nearly$58 million of unpaid interest. Then there's the locked room marked current, the Hilton San Francisco Hotels. The loan carries that status, yet property cash flow is negative, and Class A alone has$16.6 million of shortfalls. A current payment code doesn't tell you everything happening inside the waterfall as evidenced. Appraisal reductions can reduce the interest servicers advance to the trust. Servicing costs also consume cash.

28:06That helps explain how distress can climb from the junior classes toward the top of the house. CXP's office portfolio, Philadelphia's 1500 Market Street, and two Portland hotels complete the six. All have spent more than three years in special servicing. Several resolutions involve pending or planned sales, with Portland's sale remaining on hold. Our exit sign is cash flow. Ooh, we're almost to the end here. And the data center wing spreads our repricing risks that have yet to become reported loan distressed. Upstairs, missing interest is already a bondholder problem. Watch the Knicks pricing marks, the Knicks remittance, and the sales proceeds.

28:45So hopefully you've all enjoyed the CMBS haunted house. The takeaway here is that you can inspect the foundations, but you also have to check the waterfall before renting a room in this haunted house. And yes, I'm going to say rented, not buying, because, well, as a bondholder, hopefully you get your money back. If you don't, you're just one in a series of folks that has been haunted. So this was kind of a fun segment today and was a lot of data. But if you want access to the findings or the data points, we are releasing a blog on the SASB side coming up here very quickly. So reach out to us at podcast.trip.com and we'll make sure you have a copy of that.

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30:17Let's turn over to our deals and data segment. We have a pretty interesting mix of stories this week, including some financing and investment activity, but also several properties where tenant issues, declining cash flow, or failed transactions are creating real challenges. And you might notice a common theme running through these stories, which is just how important the strength of the underlying tenant has become. So let's start here in New York with a Manhattan apartment building that was previously operated by Sonder. We've talked about Sonder's bankruptcy before, and now we're seeing the impact on the properties that relied on those leases.

31:00So, Stephen, walk us through what's happening at 2 Washington. Yeah, this is a really, really interesting situation here. 2 Washington Apartments are a building that was once operated as short-term lodging by hospitality firm Sonder, and it's undergone a 25 % appraised value reduction, putting the value at$162.5 million, according to our October data. The property serves as collateral for a$131.5 million financing package that was originated in 2021. The property was originally valued at$217 million at the time of the loan's securitization. We last mentioned this loan in June when it transferred to special servicing due to imminent default stemming from cash flow issues after the borrower terminated Sonder's lease for the property's 345 units.

31:46Sonder, which leased entire apartment property complex from developers, furnished the units and rented them to guests for short-term stays, and they filed for bankruptcy in November 2025. Both the lender and borrower have exchanged term sheets for a possible loan modification, and discussions remain ongoing. Meanwhile, previous servicer watchlist commentary indicated that a cash trap was in process of being activated following a lease sweep event that was triggered by Sonder's bankruptcy filing. The loan was also being monitored because of force place flood insurance. This property is in the financial district.

32:20Like, I'm talking the very bottom southwestern tip of the financial district. So any of you that are familiar with where floods tend to happen in Manhattan know that the financial district tends to be one of those unfortunate locations for flooding events. Full year 25 financials indicate the building was fully leased at that point in time and generated$13.3 million cash flow. However, remember those figures reflect rent payments from Sonder before its bankruptcy. You have these units flagged under a specific occupancy code for short-term rental. That means 30 days or less, which to convert this thing back means that you have to get the units reflagged for longer term apartment usage.

32:57It's not all the units that were flagged that way, but I'm talking a majority of this property was 30 days or less, and most of these are studio apartments. So I'm really interested to see how this one plays out because you also have, a pre-K on the first two levels of this property. So in other words, you have a pre-K in building, which is a pretty nice amenity in Manhattan. So I'll be curious to see how this thing evolves. Do they convert it back to long-term apartment rentals? And what does it end up stabilizing at? Because the borrower took a very, very obvious, very easy path to say, well, I was going to rent this out as apartments.

33:36Sonder came to me with a good offer. I don't have to do anything. I just turn it over to them. But now they have to go back and put in all of that legwork and convert it if they're going to do long-term apartment rentals. So Stephen, maybe a simple question for our listeners out there, but this property here to Washington was not subject to rent control, rent stabilization, right? So I mean, like the conversion process here would be from the short-term rentals into a conventional market rate multifamily, correct? Yeah. I mean, it's pre-1974, but if it had already been removed from that classification, At least my gut tells me that it shouldn't be retroactively reimposed as rent stabilized.

34:13I'm not going to rule anything out, though. We all know what the current affordability environment looks like. So this will be an interesting one to keep our finger on the pulse of. But let's just face it. We know we need more apartment rental units for long-term rental. Just convert it, be done with it, and let's maximize value here. Yeah, that's what I was going to say. If this is conventional, this is a non-story in my mind because there's such a shortage for market rate housing. If it's the other, though, it gets sticky very quickly for everyone involved. So let's balance out some of the distressed stories here with a headline in the office segment.

34:48This week, we saw coverage that 350 Park Avenue has secured a$3.3 billion construction loan. This is an interesting story here, Stephen. I mean, again, these numbers just jump off the page. We're talking about$3.3 billion. That's not the value. That's just a construction loan. So this is the development venture that has been talked about pretty widely involving Citadel founder Ken Griffin. This has Fornado Realty Trust and Rudin all as part of this team. 66-story planned office tower at 350 Park Avenue in Manhattan. Another really tall building. This tower is planned to rise about 1 ,400 feet, has 1.9 million square foot, making it one of the most ambitious office developments in New York.

35:32Griffin's affiliate holds about a 60 % stake in the project. For NATO is about 36%, and Rudin has the remaining 4%. Citadel Enterprise Americas, so this is Griffin's financial firm, which we're all familiar with, has committed to lease approximately 1.05 million square feet, which makes them a major anchor commitment for the development. But remember, this is the deal that was brought into question after the New York mayor outed Ken Griffin and where his super high rise posh apartment was. Roughly 850 ,000 square foot remains to be leased. So they need to secure additional tenants. That's obviously going to be an important part for the project's leasing strategy.

36:12The financing and anchor lease signal continued investment in the premium Manhattan office space. So we've talked about this at length with the haves and the have nots. So as you see elevated vacancies and refinancing pressure across some of the non-class A buildings, these really highly amenitized newer construction projects continue to look really, really strong. This is the part, Stephen, that I wanted to get your thoughts on. Total development budget is estimated at$6.2 billion. So the$3.3 billion, as we referenced as just a construction loan, covers about half of the$6.2 billion in total with the balance funded through equity and other capital contributions.

36:49Now, we've talked about the data centers and just how they're too big for any one institution to take down. Same can be said for this deal. So seven banks have provided construction financing. So Wells Fargo, JP Morgan, Bank of America, BMO, ING Capital, PNC, and Standard Chartered. In order to get this done, Citadel signed a 15-year lease, which gives them that long-term anchor that's required in order to get the financing in place and has some significant public realm commitments. So the developers are contributing a combined$150 million towards maintenance of St. Patrick's Cathedral and St.

37:26Bartholomew's Church through purchases of development rights, plus more than$35 million to New York City's East Midtown Public Realm Improvement Fund. So this is certainly the new world we live in where it's a little bit of pay to play. But I wanted to get your thoughts, Stephen. Are we entering a new paradigm here where we have$6 billion office towers? I don't know if you saw it, but the real deal just put out that J.P. Morgan's new tower at 270 Park is estimated a$6 billion price tag. So what's funny about this is we all know Ken Griffin is not one to shy away from trying to outdo somebody else.

38:02He's like, oh, yeah, well, I'll go with 6.2 billion and fund some churches around. How do you like that? So, yes, I mean, this is just the world we live in, that if you're going to build a trophy asset, you're implicitly all in in New York City. Yeah, I mean, you got to you got to be at this point. It's amazing. It's not just the price tag, but just the size of these. I mean, almost two million square feet of rentable space. And so, look, if you're a long New York office, which I think it's the highly monetized type, it's hard not to be. This is just another example of how the market demand is there and their supply short.

38:34And so this office will hit the ground. And I would be surprised if it's not fully leased up before they actually get too far into the construction of this deal. So sticking with office, and this one might actually extend the theme of the haunted SASB deals that we were talking about earlier. We saw news this week that the proposed sale of Hughes Center, a 19-building mixed-use property in Vegas, has fallen through. So, Stephen, what's happening with this complex? This one's interesting. The complex includes nine office buildings tolling 1.38 million square feet and 10 retail buildings with another 110 ,000 square feet.

39:14It had been under contract with a buyer reported to be Borden Industries of Las Vegas. Now, this property backs a$325 million CMBS loan, securitized through a 2018 SASB deal. The loan has been in special servicing since its September 2023 maturity, after the property failed to meet the performance requirements needed for another extension. Blackstone Real Estate Partners 7 acquired Hughes Center in 2013 for$347 million. The property was only 43 % occupied last year and generated$16.45 million of net cash flow, down from 74 % occupancy and $18.62 million of cash flow in 2019. The property's valuation has dropped sharply.

39:57It was appraised at$496.45 million when the loan was originated in 2018, but its early 2025 appraisal put the value at$248.5 million, about a 50 % decline. CBRE began marketing the property in October of 2025, with expectations that it could sell it for$200 to$250 million. The complex was viewed as a potential redevelopment opportunity, but the latest deal did not close. Hughes Center has been under the control of a quarter-pointed receiver, Logic Commercial Real Estate of Las Vegas, for about two years. So the failed sale leaves the property's ownership and debt resolution unresolved and really kind of speaks to the current environment where you're seeing deals get re-penciled and sometimes just fall out of contract like we're seeing with this one.

40:48Yeah, I think the question I would have on this, Stephen, is this a one-off or is this something that we maybe start seeing a little bit more of given the macro conditions we talked about on the front end of today's show? It wouldn't surprise me to see this pickup pace a little bit, certainly in the margins, certainly for those riskier deals where your pencil has to be especially sharp. And in some cases, it almost feels like you're threading a needle, maybe like it is for this one, because it's not like Las Vegas is the most straightforward market to pull off a redevelopment play like this. Now let's talk about a hotel story.

41:22This one really shows how operating weakness can connect to payment default ahead of maturity. So here we have the loan against a Southern U.S. hotel portfolio transferring to special servicing. So, Stephen, I've been talking about hotels as having pressure for the last 18 months or so. And it's, to my surprise, hotels have generally fared really, really well. But I think kind of as I was alluding to, you know, in our macro section today, I think some of these pricing pressures are really going to start putting some significant dour pressure on performance. And so this is maybe, again, maybe it's a one-off or maybe this is indicative of what's to come, but$58.24 million loan against a portfolio of seven hotels across the southern U.S.

42:08is transferred to special servicing due to payment default. The loan had an original balance of$65 million. This one in particular is no stranger to delinquency. It's fallen behind on payments 17 times since its origination back in mid-2017. It's slated to mature next August. So the properties, for those that maybe have access to the tools or want to dig a little deeper, is known as Lightstone Portfolio. They've struggled with cash flow issues for several years. As we mentioned, Portfolio generated$1.78 million in cash flow during the 12 months through June, 56 % less than needed to service its fixed rate loan.

42:46Not great. It was underwritten to generate$8.61 million in cash flow. So this one you can tell considerably missing the mark on performance. Properties operated as a collective 59.6 % occupancy and generated$111.09 in ADR, average daily rate, and$67.31 in REVPAR, or Revenue Per Available Room. This was in June, according to commentary. compares to$73.34 RevPAR at the end of last year. So pretty significant$6 change to the negative on RevPAR. 778-room portfolio consists of seven limited-service hotels in Louisiana, Arkansas, and Florida. Three properties with a combined 353 rooms are in Baton Rouge and Harahan, Louisiana, among three with 305 rooms in Rogers, Jonesboro, and Springsdale, Arkansas.

43:40and the remaining property is 120 room hotel in Fort Myers Beach, Florida. All seven hotels were built between 1997 and 2009. And get this, Stephen, this is what I've been screaming from the rooftops renovated between 2010 and 2017. These hotels are tired. Current appraised value for the portfolio is 79.9 million, which is down pretty considerably from the 105.5 million at the time of the loan securitization. Yeah, when I was looking at the financials on this deal, and you have a little bit of decline in top-line revenue. In 2024, they got up to$24.1 million. That's actually higher than what they underwrote at securitization, at least in terms of total revenues.

44:23Where they're getting crushed, and they did get crushed in 2024, was expenses. They underwrote the$15 million, ended up being$19.3 million in 2024. And then in 2025, revenue declined, expenses still stayed elevated almost$18 million. And so it's just been absolutely crushed. Like we've been talking about, the expense pressure is real. And if you cannot grow that top line revenue to offset it, it's just unfortunate margin erosion. And finally, let's talk industrial. This week, we saw Morgan Stanley acquire a newly built logistics facility in Virginia for$172 million. Now, this isn't a data center, but there is an interesting connection to the AI investment boom we've been discussing.

45:08So Stephen, walk us through this deal. Yes. Morgan Stanley Real Estate Investing acquired this newly built 935 ,000 square foot industrial and logistics facility in Stafford, Virginia for$172.1 million, or about$184 per square foot. The Class A property was completed in 2026 and is positioned along Interstate 95, roughly an hour from Washington, D.C. and Richmond. The facility is leased to J.E. Richards, an electrical contracting and engineering firm whose lease is guaranteed by its investment-grade parent, Quanta Services. The building features 40-foot clear heights, a cross-dock configuration, and extensive loading capacity, making it suited to logistics and industrial operations.

45:55Morgan Stanley cited demand linked to investment in digital infrastructure as an opportunity in the broader Northern Virginia market, where data center development has helped drive demand for supporting businesses and facilities. The tenant's credit backing is an important part of the investment story. Rather than relying solely on future lease-up, the buyer is acquiring a newly completed property with an established tenant and a parent company guarantee. At approximately$184 per square foot, the transaction provides a pricing benchmark for recently built industrial properties in Northern Virginia and surrounding Washington, D.C., in that region.

46:31And I just want to give a shout out to one of my friends, former colleagues at Clemson, Ernesto A., who was working on a paper about the employment impact of data center development. And just the long and short of what that paper found was that so much of the employment gain that you get from these data centers really comes from supporting industries and businesses. In other words, the big bump is not in direct employment inside the box. It's everything outside and near proximity to the box that's really driving the employment gains. And obviously, there's going to be some bump from, say, like necessary support services like your grocery stores, gas stations, etc., etc.

47:14etc. But the big gain is really from those supporting industries that help support the long-term viability of that data center. So good to have some timely research on that impact, because a lot of people have been asking that question of, okay, that's great, we're getting a data center, but what does it mean for our employment and wage growth and our locale? Is it just going to be a short-term bump, or do we have sustainable long-term employment growth? What's interesting about that, Stephen, would be to see a comparison between the economic impact of those supportive businesses from a data center development compared to other like type developments in certain markets, right?

47:51Is this in line with other investment or the data center, like to the supporting businesses for data centers are more significant than other types of new businesses that move there as an example, you know? So it may be early for us do that side-by-side comparison. But if you look at, like in Austin, had the Circuit of the Americas, the F1 track. Infrastructure costs and everything that went into that was significant, but it creates recurring economic impact in the billions of dollars for the city. I'd love to see kind of how maybe a data center compares to something like that, or maybe even a little bit on a lesser scale, some of these Amazon developments, etc.

48:34And before we close, we have a lot of programming notes today. I've been talking about this for the last several weeks, but applications are still open for our TREP Future CRE Leaders Program. As a reminder, if you're graduating or you know someone who is graduating in December 2026, you can apply to be named a TREP Future Commercial Real Estate Leader. You have until Wednesday, November 11th. We've had a lot of our listeners either nominate someone or reach out to colleagues or students that they teach who have now applied. So we're really excited. We're rounding up all the resumes and applications, and we will share the winners in the next few weeks.

49:16But still, Chance, get your name in there if you're graduating or you know someone who is. We have several webinars coming up. The first one ties to an exciting product update that we shared with our CMBS clients recently. Just to share that here, many of you may be familiar with TrepDM, which is our proprietary default model that banks have relied on for more than a decade for stress testing and analyzing their portfolios. So TrepDM is now integrated directly into Trep Analytics, which is our CMBS product. Clients have always been able to run their own default and loss severity assumptions, but now they can leverage TREP's model-driven projections as a starting point for their analysis.

50:03So if you're a client that has access to any of our CMBS products or CMBS suite, and you're interested in learning more, we are hosting a webinar on Thursday, November 5th at 2 p.m. Eastern. Our team will walk through the integration and show you our new TREP DM vectors, which allow users to generate these default rates and loss severity assumptions without having to build them from scratch. Reach out to us at podcast.trep.com or you can email your account manager directly and they will get you access. If you're a client of our Trep CRE solutions, we also have a webinar on Thursday, November 19th at 2 p.m.

50:42Eastern, where we're really calling this Get the Most Out of Trep CRE. We want you to have a place and a forum to see all of our latest capabilities and enhancements that really were designed to make your life easier, whether you're finding opportunities, analyzing properties and loans, or monitoring your portfolio. So in this session, our CRE product team will connect the dots for you. They'll walk through some practical workflows that are really bringing all of our product enhancements together to save you time. Send us an email, podcast at trep.com. If you are a user of Trep CRE, or if you're not and you'd love to see how the tool works in action, reach out to us and we can make sure you get access.

51:26If you missed it this week, TREP released our Q3 2026 quarterly data review magazine. The latest edition had a lot of great content in there. We looked at how rising treasury yields are impacting CRE financing, where property values are showing signs of stabilization, and how credit conditions and distress are evolving across the market. This is a really robust magazine. Podcast at trip.com. We will get you a copy. And we're already working on our year-end magazine. If you'd like to contribute to that magazine or run an ad in there, this is our largest edition of the year. We release this at the annual Crefcy Conference in Miami.

52:09So reach out to us now and we'd love to find out how to work with you for this edition. Turning to shout outs, we had several of our team members at an NYU event today here in New York City, and they met a lot of podcast fans. So thank you to everyone who came by our booth. One in particular was Michael R., who's a grad student and is a huge fan of the show. We had several others who were interested in our Future Leaders program and wanted to learn more about our TREP training solution. So as a reminder, we do have courses for CMBS and commercial real estate. If you're looking to expand your knowledge or get your team up to speed.

52:48Alex M. was interested in our email list for our newsletters. So we do have a client-only newsletter called Trepwire. And then we also have a public-facing newsletter called the CRE Rundown. If you're interested in getting access to either of those, reach out to us, podcasts at trep.com. James C. wanted access to our quarterly data review and was looking forward to reading our outlook for CRE heading into 2027. Michael P. wanted a recording of our webinar that's coming up on November 5th, so we will get you access to that so you can understand the TREP DM, TREP Analytics capabilities. Daniel W.

53:26said he loves the podcast and our MarketPulse webinars. Sarah Kay really enjoys the show and is finishing her degree in real estate and was interested in our future CRE Leaders program. Andrew B. wants to see the latest data we have on the CRE Debt Universe report. So we've been pushing a lot of content out about maturities, hard maturities, and the overall commercial real estate debt universe. If you want access to any of those or you'd like to understand the differences between some of those reports, reach out to us. We'd be happy to chat with you. And Jason F. said, great podcast as always.

54:02I listen every week. And I wanted to give a shout out to two recent guests we've had on the show. We recently had Joey Chalili of Van Barton Group on. and Barrett Lindbergh of Savoy Company's two really interesting episodes if you haven't tuned in yet. And we recently recorded with Glenn Kanofsky of Surmount, and that will be released in the next few days. So if you haven't listened to our guest episodes, please check them out. If you found the guests through our show, send them an email, send them a LinkedIn message, and tell them you found them with Trep. So that's all for today. Hope everyone has a happy Halloween.

54:40no more haunted houses for your son Lonnie and if you guys have costumes send me a picture in them because I want to see that 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 Trapwire podcast with your favorite provider thank you for listening and stay well all right you