Dechert 4 Real

Forecasting Year-End Commercial Real Estate and Driving Forklifts Through the Office

• Dechert LLP • Episode 16

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Dechert 4 Real hosts Jon Gaynor, Ella Smith and Sam Gilbert are joined by Barclays Head of CMBS Research Lea Overby to discuss commercial real estate trends we can expect in the second half of 2024, floating rate debt risk, lessons learned from the “Mall Apocalypse” and why “forklift offices” are better than “cave offices.” Plus, Dechert’s Steve Engel shares his thoughts on the Supreme Court’s recent Loper Bright decision. 

Show Notes 

Supreme Court Ends Chevron Deference Among String of Decisions Limiting Agency Power – Dechert OnPoint (July 2024)

THE CRED: Legal & Business Insights for the Private Credit Industry 

Hello and welcome. This is the Dechert 4 Real podcast, where we discuss current issues and trends in commercial real estate finance. We aim to bring market commentary about developments updates you can use and hopefully a little bit of banter along the way. I'm Jon Gaynor, a counsel based in Dechert's Philadelphia office. Hi, I'm Ella Smith, a partner based in Dechert's Charlotte office. And I'm Sam Gilbert, a partner based up in Dechert's Boston office. And today we're recording out of the Boston office where we'll be joined by Lea Overby of Barclays to discuss her forecasts for commercial real estate in the second half of 2024 and her thoughts on the industry leaders roundtable questions from the CREFC conference in New York. Before that, in our 411 segment where we talk about issues percolating in the market, you'll hear about a recent ruling from the Supreme Court that overturned the Chevron Doctrine, which previously required courts to defer to agencies' reasonable interpretations of ambiguous statutes. But first, let's get 4 Real with the hosts and break the ice. So as lawyers, we spent a lot of time working in the office. And I mean, a lot of time. That changed a bit after COVID. But at Dechert, we're back to working at least three days per week in the office. A lot of us are in the office for even five days. So the question

for today is:

What is your first memory of being in an office? Sam, do you want to go first? Yeah, I'll take that one first. This is my first "office job." I've been here a while but this was my first real office job. I've worked, as you know, drove an ice cream truck. I worked at a golf course a little bit after college. So you know, there's some benefits to being in an office like air conditioning and vending machines. It's also nice to be at a golf course when you're working. I did have a little stint, during law school, I worked in the NFL for a summer. Dor a year, actually. So I worked down there in Manhattan. I guess that was technically my first office job. The one thing I do remember about that is, you know, we have very nice views here in Boston, but they had, all along the hallway, they had pictures. The Super Bowl trophy was there, all the Super Bowl rings. So a little bit better atmosphere in that office than this one. I guess that would be my first true office memory. It's certainly better than when you were working in an ice cream truck. Absolutely. What about you, Ella? So I took this question and went way back to like the first time I actually, like, stepped foot into an office. And that was my dad's office. He worked at a company called Technicon in Tarrytown, New York. And, so, it's about 45 minutes from where we lived. And it was Take Your Kids to Work Day. So I got to go with him. And he was the warehouse manager. Like the floor manager of the warehouse. So I thought he had the coolest job ever. He got to drive a forklift and he got to boss around the other guys who drove the forklifts. But in no part of that day did I get to ride on the forklift, which was really incredibly disappointing to me. But it was a very cool office experience. I really feel like if we had more forklifts in our offices, maybe we'd have less trouble getting people back into the office. Yeah, I was gonna ask have you since been able to ride on a forklift? Is that still on the bucket list? I never have, I've never had the opportunity. I have been kicked off of a few forklifts at the Home Depot. But I haven't actually made it for a joyride yet. It's funny because I also had a different interpretation on this question. My first real memories in the office are when I was actually interviewing for summer positions for my second summer of law school, and I remember each office feeling very different, like some were bright and sunny and welcoming. Some look like caves that were 40 floors up. You know, all respectable law firms ... not quite as respectable as Dechert, but we can hold that aside. But all respectable law firms. But the difference in space and how it affected how you felt every time you walked in, it stuck with me. Which one did you pick, the bright and airy are the dark and gloomy? The Philly office at Dechert, it's actually like very bright and open and it was a real breath of fresh air compared to some of the other ones. Definitely not cave-like at all. I think that counts as getting 4 Real with the hosts. The private credit industry is always on the move, and it can be difficult keeping pace as you navigate its most complex challenges and opportunities. And that's why Dechert created THE CRED, our new platform dedicated solely to providing legal and business insights on the private credit landscape. From the latest news to in depth analysis from the top minds in the space, THE CRED has private credit covered. To learn more and to sign up for THE CRED newsletter, visit dechert.com. Today for our 411 segment, we're doing something a little different. We're having Steven Engel, who is a partner in Dechert's appellate and regulatory litigation group and the chair of that group, talk to us a little bit about this very consequential term in the Supreme Court for admin law, particularly around the Loper Bright case, Steve, thanks for joining us on the Dechert 4 Real podcast. Thanks, Jon, happy to be here. All right. So before we get into the substance, we have a little tradition of getting 4 Real with the hosts and guests. And so, since you're technically a guest, we're gonna get 4 Real with you. So we're curious, what is your first memory of being in an office? I think I'd have to go back to my father's office. My father has a small real estate business in the Bronx. And I recall, you know, as a little kid being brought there often to pick up my dad as we went somewhere else in New York City. And so I, you know, I recall that office, it wasn't in, you know, one of these big buildings that were surrounded by here in New York, but, but it was an office nonetheless. And I was most attracted to the Xerox machine, because it's not something I was familiar with, but was something that I was able to play with. O bet younger listeners of the podcasts are like "Xerox machine?" No, but that's a that's a really nice memory. Thanks for sharing. I didn't know you had a a family connection to real estate too, that's always interesting to learn. So we appreciate you getting 4 Real with us. Now, on to the kind of main event for you. Will you talk to us a little bit about this Supreme Court term in terms of admin law, and the Loper Bright decision in particular? Sure, happy to do so. I mean, we have a Supreme Court now that has, over the past five to 10 years, increasingly shown skepticism towards the powers of administrative agencies. Administrative agencies often issue regulations. They bring enforcement actions for violations of those regulations. And they often also get to make judicial decisions, adjudicative decisions about those parties. And when we think of the separation of powers that are our Constitution, the idea is to separate the three branches of government in order to preserve liberty, and the kind of modern administrative state that grew And that's a sea change because the vast majority of cases never up in the 20th century kind of blurred those lines. And so, in a series of decisions, and there were definitely several blockbusters this term at the Supreme Court, we've seen the Supreme Court cut back and try to police the separation of, of powers and narrow, the powers of administrative agencies. And so one doctrine that administrative agencies had increasingly relied upon was known as a doctrine of Chevron Deference. And what this meant was that when federal laws were arguably ambiguous, courts would defer to agency regulations that interpreted those regulations. And so what it meant was that often, administrative agencies could make pretty significant policy decisions by finding ambiguities in decades old federal statutes and using those to craft very aggressive regulatory programs. And we've seen that in the environmental space. We've seen that at the SEC. And seeing that the telecommunications sphere as well and commercial banking, and banking regulations, is certainly not immune to that. And so the Supreme Court had increasingly had skepticism about Chevron Deference, which basically allowed the limited the power of the courts to declare what the law is, in the statutes that they're interpreting. It says instead, they would defer to the agencies. And the Supreme Court has not cited Chevron in eight years, and when cases would come up, it would just interpret the statutes and decide what the right answer is. And finally, you know, the Supreme Court could ignore Chevron, lower courts could not because there's a precedent of the Supreme Court. So finally, in Loper Bright the court took up the doctrine and said, "No, Chevron is overruled." And for now, courts, , when they deal with statutes, just must give the best interpretation of the statute in the cases that come before them. make it to the Supreme Court and get decided at the lower court levels. Also, we had other consequential decisions like Corner Post. Do you want to talk for just a moment on that? Yeah sure. I mean ... so at the same time as the court jettisoned the Chevron Doctrine, the court also expanded the ability of regulated parties to bring challenges under the Administrative Procedure Act, and Corner Post concerns, basically, the statute limitations for agency action, the the APA has a six-year statute of limitations. And so that's the general rule, though many agencies have their own statute, agency specific statute limitations. But if you're bringing an action under the APA, you could not up into, prior to Corner Post, in many courts of appeals in a country, you could not bring a challenge after, to an agency rule, after six years after it was issued. What Corner Post said is that the statute of limitations begins to run from the time that the plaintiff is injured by the regulation. Now what that means when it comes to businesses, which can be injured by regulations, that if your business only opens up in 2019, yet the regulation has been on the books since 2010, you still can bring a challenge to that regulation, including in 2024, because you were not injured before your business opened up by the regulation. And so it significantly expanded the scope of the statute of limitations that, therefore, the kinds of challenges that regulated parties can bring, you know, to to existing agency regulations. Thank you for that. Now, bringing it all together for our audience who mostly is focused on commercial real estate finance, what does it all mean? I mean, we know there's a bunch of pending regulations coming out, like for example, the revisions for Basel III Endgame and other kind of banking regulations. Does this mean that we're going to potentially see more challenges to these sorts of regulations? Yeah, I think that's right, I think we're going to see more challenges. And I think the challenges are more likely to be successful where the agency is trying to seize upon ambiguities or unclear federal laws and trying to assert authority that Congress didn't clearly give to the agency. I mean, Loper Bright doesn't doesn't disturb agencies from enforcing or implementing federal statutes that clearly give them the authority to take certain actions, but where we have regulators in the banking space or otherwise seeking to rely upon general general laws that don't clearly allow them to make these policy decisions, courts are going to be much more skeptical about deferring to the agencies in this context. And so that certainly could affect challenges to Basel III, challenges to other banking regulations, challenges to CFIUS regulations, for example, and, you know, and then, of course, you know, the commercial real estate space is not immune from SEC regulations. And you know that the SEC, particularly in recent years, have been very aggressive in its authority. And so we can expect additional challenges, you know, to these regulations, you know, and, and the court privileging the best reading of the statute, rather than what the agency wants it to say. Well, thank you very much for joining us. We really appreciate it having you on the podcast, Steve. Sure. Thanks, Jon. If you want to learn more about Loper Bright, Corner Post and the rest of this monumental Supreme Court term for admin law, you should check out the OnPoint that Steve and his team published. You can find a link to that in the show notes. All right. Today, we welcome Lea Overby to the podcast. Lee Overby is a Managing Director and Head of CMBS Research at Barclays. Lee leads a team responsible for providing in-depth analysis and insights on CMBS markets. Recently, Leadid an excellent job moderating the industry leaders roundtable at the CREFC Annual Conference in New York, which we'll see later provided inspiration for a portion of this episode. Lea also has the honor of being our second outside guest on the Dechert 4 Real podcast. So welcome to Dechert 4 Real, Lea. Rhank you, I appreciate it. We're very happy to have you. And we're excited to hear what you're going to share today. But we have a tradition. So, before we get into the substance, we'd like to get 4 Real with you. So what's your first memory of being in an office? My first memory also goes back a long time, perhaps not as far back as forklifts. But when I was in high school, I did a summer internship in the marketing department of a hospital. And so I worked in a small office with two other women who were heading up the marketing division for that summer. And I remember it being a lot like home. Because it was so homey, honestly, there were pictures of kids on the walls. And the conversations were very friendly. And the banter was wonderful. And I thought you know, this is probably not such a bad way to spend your life after a;;/ Spoken like somebody in commercial real estate. So I appreciate that. Before we get started, can you give us a little bit more of an introduction about yourself how you got started in commercial real estate, how you became a Managing Director at Barclays and, you know, how, what you look at what you do? How did I get started in commercial real estate? That's definitely reaching back into the archives as well. So after I graduated from grad school, back many, many moons ago, I really had no idea what I wanted to do with my life. And I somehow ended up in the mortgage trading team of Bank of America as a computer programmer, and to be honest with you, I am a terrible computer programmer. And so not long after I started, I worked really hard to figure out how I could get out of programming while still staying at the firm. And the CMBS team there had an opening for a database programmer. And I thought, "hey, I guess it's probably better than C++" or whatever it was I was doing. And so I took it. Not long after that the opportunity came up to take a research role with that team. And I jumped at it, mostly because I really hated doing programming of databases as well. And I guess you could say the rest is history. So, you know, how did I end up at Barclays? Again, I did, it's hard to say, I've bounced around a good amount through my career. Most recently, I joined Barclays during the middle of COVID. So I guess 2020. So I've been here ever since. It's a good team, and I'm happy to be where I am Well, thank you for that introduction, Lea. I wonder if now. any of those offices felt as homey, either B of A or Barclays. They have all been trading floors. So they have definitely not. I've been on a couple of trading floors, and they don't seem as homey as as your first job. They really don't, I have never been able to recapture that. But it's okay. It's okay. You do get up close and personal with your floormates and it kind of maybe starts to feel like they're extended family. It does. All right. Well, thank you for that. Turning into our first subject, which is commercial real estate and CMBS. They seem to have had a decent first half of 2024, just based on the numbers and and how much I'm in the office recently. So I wonder if you have any thoughts on the first half of 2024? And maybe what's your forecast for the second half of 2024? You know, it's an interesting question. And really, this has been an odd year for CMBS and for commercial real estate. So on one hand, we have had weakening fundamentals, and on the other hand, spreads are really tightened in. So putting

some numbers around it:

When we go back to December 2023 conduit delinquencies were 4.4%. And now they're 5.3%. Similarly, SASB delinquencies are up about 50 basis points and we took our first triple A loss in that sector. But at the same time, conduit triple A last cashflow spreads are in 23 basis points and triple B minuses are in 425 basis points on the year. SASB tightening hasn't been as dramatic, but even there, SASB triple B spreads are in maybe 60, 70 basis points on the year. Now, looking to the second half of the year, part of that I expect to continue and part of it I expect not to. So the delinquencies that have been rising are probably going to keep on rising. We're still seeing loans transitioned to delinquencies. We're thinking maybe another 70 basis point rise and conduit delinquencies maybe a bit more into SASBs. But on the other hand, we think most of that reach for spread is probably behind us. And so we're calling for some curve steepening in the second half of the year. So conduit lines, cash flows will probably still do all right. But on the triple B minus side, we might see a good amount of widening going into year end, simply because more of these fundamental stories become so prevalent. So following up on the difference between the actual delinquencies on the existing deals and the kind of spread compression, is that because newer origination is trying to overcorrect for the current environment, and so the spreads are able to compensate? Or are people kind of being willfully blind to the the fundamental shift that you've noted at the beginning? You know, it's it's probably a mix of both. There is a thing in new origination always that new origination corrects for past sins. And so usually whatever comes out now is better than what came out right after a crisis happened. But on the other hand, there does also seem to be some willful blindness, or perhaps said more delicately, some tempering of loss expectations. So I think also, at the beginning of the year, some people's expectations for AAA losses were simply too high. And so these have now come back to more reasonable levels, we realize not all offices will default, there will be some offices that survive. And I think that is also helped the market kind of get his feet up underneath it. I hope it's fewer of the cave offices and more of the forklift offices. But maybe that's just me. So, really appreciate you sharing your forecasts and your insights there for the first half of 2024. Now we're going to change things up a little bit. If you remember hosting the industry leaders roundtable, we thought it would be fun to turn the tables on you and ask some of the questions that you asked your panelists. So I'll go first. What keeps you up at night? These are other people's problems in a certain sense. But on the other hand, as a researcher, it is my job, my duty, my responsibility to inform and to help the investor base figure out what's going on in the markets and how they can both make money and not lose money. And so right now, there's a lot of moving pieces with that and because of so there's so many moving pieces, I do worry about missing some of the key signals that could be out there in the market. So I do find myself, not in the middle of the night, but I do find myself thinking about what signals I might be missing in the data that I'm looking at. Are there any signals that you think people aren't appreciating enough or that you think people should pay more attention to? You know, that's kind of a double-edged question. Everything I think about I write so I hope that I've kind of covered all the bases. Other things that I do have on my mind involve the office sector, you know, I do feel like some of the risk for that is is underappreciated still. Do you think offices hit bottom? Oe it sounds like not. It sounds like you think there's still some room to go down there. I do think there's some more room to go. The office leases are long. And there's something interesting that happened during COVID. Many of the office renewals that came up in, say, 2021 and 2022, those office tenants essentially kicked the can themselves. So instead of signing on for another 10-year lease, they instead signed on for two-year lease or three-year lease extension, which essentially means that we have a backlog of leases that are coming through. Now, the other thing is that with the short extensions, that means many of these firms have spent the last two to three years thinking about what their office needs are, and are perhaps ready to contract. And so I know there's a lot of thought out there about perhaps we're finding some stability, but I feel like we probably have another year or two to go before we get a real handle on exactly what tenant demand is for offices. And that's just a handle. I feel like in this industry, we're a little bit apart from the rest of the world in that we think everyone's back in the office because we're back in the office. And I remember during the roundtable, someone had said like :Raise your hands if you're in the office four days a week," and you turn around and all the hands in the room are raised. And Lea, you then followed up with, "Eaise your hand if you work in commercial real estate finance." So it was a, it was a very funny moment. But it really pointed out that although everyone I know is back in the office, really not everyone is back in the office. I think that is a good point, we do tend to see the world through our own lens. But I think one of the other bits that tends to get ignored with commercial real estate with office is that even coming into COVID, we were already seeing less demand for office. So there had been this trend for, I don't know, probably 10 years at this point where law firms in particular were contracting. So there's a lot of things like law libraries that are easier to put on a computer or intake those books and not pay rent on them. So there has already been that trend even coming into this, of doing more with less, especially because office space is such a significant portion of some firms' revenues. And I think we kind of forget that. It's not only about whether or not people are in the office now versus when they were before. But it's also about firms taking a hard look at what real estate they actually need. And being more conscientious about what their footprint looks like. So I think that's also part of what's ending up getting unwound in this is that firms are just thinking harder about what they need for their commercial real estate footprint. And on the contraction and use of office, is there a difference you see between sort of downtown officem like where we are today, or suburban office? I know for a while there was you know, suburban office was sort of out of favor. But now, like, I feel like it's coming back a little bit. I don't know if you've seen You know, I'm so torn on this question. So historically, the same. within commercial real estate suburban office has always underperformed. And there are real reasons for that. If a firm is going to contract and have just one office, it will have it where it's most central for most people, which means the central business district. Because of COVID, many of the suburban firms did not contract like the central business district offices did. Because the offices were larger, it was easier to socially distance. And also, simply, rents are cheaper. And so it wasn't as significant of a hit to them to keep the whole office building rather than giving up half a part or something. Now we're seeing both sides of it. The headlines are very focused on what's going on in the central business districts largely because this also has implications for social reasons. Healthy downtowns mean, healthy commerce on the streets and less homeless and many other things thatbenefit from having a strong office market. Whereas in the suburbs, many of these office properties are also old. When we think back in the years leading up to COVID, pretty much all of the new construction was in the central business district. And so firms that are looking for top-of-the-line high-quality office space there probably are going to still to go To the central business district. But on the other hand, again, the back and forth back and forth within the suburbs, if you end up having a building that ends up needing to be decommissioned it's actually way easier to do this in the suburbs. You can rip the thing down relatively inexpensively. And you have this empty lot with a lot of parking that can be done as some sort of mixed-use center. Some of them have been done as industrial, the number of reuses for that suburban space is quite large. On the other hand, trying to rip down a central business district office building or converted to multifamily or something can be really, really daunting. Yeah, conversion to multifamily is a whole different podcast. All of the considerations about floorplates, and things that are definitely not in the indentures that I read. It's very daunting. All right, well, let's move us off of something as scary as office to something maybe scarier. But Lea, you previously warned people to be wary of floating rate debt, do you still feel the same way now? I do. Actually, I had been warning people about floating rate debt probably too late. In 2021-2022, when rates were really, really low, people plowed into floating rate loans. And I guess we all thought, for whatever reason, that rates would never go up from 1%, or wherever they were, which in hindsight was ridiculous. And essentially, what ended up happening is that rates went up way faster than property owners could push cash flows kind of full stop. And so now we have the situation where there's many properties out there that simply cannot generate enough revenue to be able to cover the debt surface at the new interest rate. So here we are, now we're kind of doing the same thing. There's a good amount of floating rate debt out and everybody thinks the Fed's next move will be lower. And so we're all have the exact same mindset that whatever it is, right now, we're at peak mortgage costs. And so, therefore, our mortgage will be more affordable in six months or 12 months, or however long. And when this borrower needs to refinance, of course, they are going to be able to refinance into cheaper debt. But on the other hand, there is a bit of a disconnect between where Fed funds might go and where the 10-year treasury could go. So the in-house view at Barclays is that Fed funds might drop by, call it 75 basis points over the next year, while the 10-year might actually hold at four and a half percent for the next year, just kind of flat. And the reason for this is myriad, I'm not a rates analyst by any stretch of the imagination, but it largely has to do with the amount of deficits that we're running in this country. And so I feel like we might actually be making the same mistake again, where we're thinking these borrowers are going to have cheaper financing whenever they want to get out of this floating rate mortgage, when in fact, maybe there is no cheaper financing available, then. Rates can never go up was not was not a good thought. But ... And we're right there. Again, we all seem to be of the same mind that the next one is definitely going to be a cut. Rates are definitely going to go down from here. And it's maybe it's being foolish again, I don't know. Foolish, or maybe just optimistic? Oh, glass always half-full in commercial real estate. I definitely do see a lot of chatter that we should not completely discount the possibility of a rate increase at this point, which ... I got shudders. , No, we're gonna get a cut in July, one in September and November, and we back down to 1% soon enough. Okay. That's what I predicted a year ago. So. How's that working out? Not so well? Okay. So we moved away from office. Let's talk a little bit about retail. Oh, boy. Okay. But does retail's path out of the doghouse teach us anything about how office might turn itself around? I hope so. I would like to think that every single crisis we have teaches us something. So I think looking back at the mall apocalypse or whatever you want to call it, I think some lessons should come through quite clearly. Maybe the first is that, you know, property values take a long time to recover. So there are malls now and the 2013 2014 vintage of CMBS that are not back up to the value that they had back then. And that's been 10 or 11 years. And so I think it is important to remember that we don't necessarily have to have a V shaped in terms of recovery on value. Other things that we should think about is, again, this whole cost to repurpose a facility for the mall space. The worst losses out there were essentially what's the ground worth less the demolition cost and that's your value, which is awful. So within the office sector, I hope we don't have some like that. But my fear is that yeah, we could have some cases out there within CMBS as well, where the loss of equities are really really steep. You mentioned losses and CMBS. I know earlier this year, we saw our first triple A loss, I think, since the crisis, right? And that, I think, was on an office building with a sort of a larger anchor tenant. So there were some, certainly some issues with the property. But do you see more of that down the road? And do you think that's something that the CMBS structure can account for? Or do you think it's more of an underlying kind of asset property loan issue that needs to correct itself? Yeah, very good questions. Regarding AAA losses on single asset, single borrower deals, I have maybe a dozen that I think could fall in the similar category. There are, I forget, five or six, maybe that the appraisal doesn't cover the value of the senior class. So I know that's really ugly. Many of them you look at it, and you just know is going to be awful. Then there's another set that haven't yet received an appraisal. And I think when we do get the appraisal in, it could be awful again. So maybe by the time we're all done with this, maybe it's a dozen. Most of them are single asset, meaning it's a securitization of a loan on one property, rather than the single borrower, which tend to be portfolios of assets. Not all of them are this way, but most of them. And so it does start to bring up the question about, what does it mean to be a triple A rated single asset deal? This is actually a question more for the rating agencies in the issuers. And it is for me, the researcher, but that never stopped me from having an opinion on things. So I think we do need to have some sort of coming together in terms of what we want to do on a go forward basis. The simplest solution would be for the market to agree that single asset deals, the ratings are capped at maybe single day. So that would just kind of, you know, cut it right there. There's many ABS deals where the rating agencies have come out and said explicitly that ratings on this type of product cannot have a rating higher than single day. And so that is one way that we could get around this problem entirely. That would cause massive downgrades across all of SASBs. And it would also cause a repricing of the asset class. Another option would be to come up with a way to deliver these deals during their term. And we have gotten very used to this idea of interest only. So the loan is struck at origination. And the idea is that will clearly it's only going to get better from here, because the borrower will will be able to push cash flows and cap rates will never go up. And so, you know, it's all rosy, but really between what happened to the retail segment. And now what's happening to offices, we see that that's probably not the right assumption to make. And so what would be more helpful is that over the course of the loan, the AAA starts to pay down while the property is doing great. So we could do this in a couple of ways. For fixed-rate

loans:

amortization. I hate to say it, it seems like an ugly word, but amortization is really the friend of the triple A bond holder. And so if the loan amortize down over its term, if it did any problems and say, year four or five, already, the principal would have paid down enough that it could potentially keep the loan at the AAA level from taking a loss. For these floating rate assets that typically have like a two year term and multiple one year extensions, perhaps something simple like requiring a paydown when the borrower extends. So you have the two year term, at the end of that two year term, if the borrower doesn't refinance, the borrower has to pay down, call it 5% 10%, which essentially goes to the triple A investor, and delivers a triple A investor and protects that class from some sort of downgrade or loss action in the future. Well, you're probably not trying to be popular with the borrower community that listens. But I really appreciate the honest takes. I personally wonder if shorter terms might also help in general. So we see new issuance having, in general, shorter terms, and maybe the world changes less dramatically in five years, compared to 10 years, I don't know, maybe pick your five-year window. The last five years has been wild. So maybe that's wrong, too. But hopefully, there are a lot of different ways this can get solved. The next term sheet that comes across my desk, I'll throw these concepts in and I'll get back to you. Let you know, You will see some truly happy borrowers. I mean, at the end of the day, if we're going to hold the triple A rating, and we're going to keep the triple A investor in the sector, the whole reason to do this is to keep rates low that you pass on to the borrower. But if the AAA investor says "no mas, I'm out," the borrowing costs are gonna go up anyways. And so the question is, do we want to do this in some sort of controlled way? Or do we want to get to the point where the AAA investors simply rebel, and then you can't place a deal full stop. And so that's, that's kind of the trade off. But, I mean, I've been in this market a long time. I know how this is gonna work. We're going to need to crash before we end uphaving any kind of, you know reconfiguration of mortgage terms. It's just me wishful thinking, that's all. Soft landing here. I appreciate the gentle feedback that putting your head in the sand isn't going to solve the issue. So I think we all need a little bit of a reminder on that. We can at least push it off till I retire. Yeah, so there's also that, right? To jump all the way to capping ratings at a single A rating, what about other improvements, we could make, like standardization of data reporting, like what CREFC is doing for the CRE CLO product. I am all about i. Very, very much in favor of any kind of standardization that can be done. As a researcher, I rely on these fields coming in some sort of machine readable format that can be put into a database, so I can strap them and I can slice and dice it. And so to have that standardization is key for being able to pick out things like relative value and performance trends, and all these sorts of things. But you know, honestly, you know, I'm going to be the borrower's best friend with this one, but here we go. Even more so than standardization, I need reporting. So there are loans out there that have not had updated financials reported for two years at this point. And so for me to be able to say with any degree of confidence what's going to happen with that loan, it's really, really hard. So in addition to the standardization, I would also like to see maybe a stick to encourage these borrowers to actually report. Also pass it to the servicers to get them to pass along the financials to U.S. researchers and investors. Well, maybe we'll end here on a positive note was a little optimism. What has you most optimistic, if anything about commercial real estate in the future of our industry here? Okay, so in defense, this is commercial real estate on the debt side. There's a lot of downside here. But I hear you. So on a positive note, making this a little bit more uplifting. I am truly encouraged about the people who are now joining our industry. So I look out there and I meet people who are coming into commercial real estate for the first time and looking at the problems that we have, which are not small, with a fresh set of eyes. And so we have talked about many problems within commercial real estate, one of the big ones we haven't touched on is climate change. So much of commercial real estate lies in the past of hurricanes or droughts or other natural disasters, that only seem to be getting more and more frequent. And I feel like many of these big topics really do need fresh perspective to come up with solutions that work for the whole industry. And I am encouraged in meeting young people who are looking at commercial real estate as a growth opportunity that can come in and you know, kind of fix all this mess that we're leaving behind. CMBS, what are we on, 5.0.? Now we're in the 12th inning, and it's CMBS 6.0 We forgot to ask Lea what inning we're in. I don't even know. Well, Lea, this has been really great. And we really appreciate your thoughts and insights. And we'll do our best to shield you from the pitchforks of the borrower community. Thank you for joining us on the Dechert 4 Real podcast. That brings us to our four real High Fives. Does anybody have any one they'd like to thank? You know, Jon, I think we should give ourselves a high five this month. Not just you and me, of course, but the entire commercial real estate industry for making it through an incredibly busy second quarter. Just as the sun started to set a little later each day, and temperatures were rising, those of us in the CRE industry were enjoying the blossoming spring into summertime by sitting at our desks on trading floors, in offices, just helping out the occupancy rates. I kid, but it is always challenging to wrap up these deals at quarter end. And the way the July 4 holiday fell this year made it particularly challenging. We know here at Dechert we had a lot of people spending a lot of time in the office and outside of the office getting things done. And we know our clients and their counterparties were playing hard as well. So hopefully everyone got done what needed to be done and were able to enjoy the July All right, so that was a great discussion of a forecast for 4 holiday. commercial real estate in the second half of 2024 and questions from the industry leaders roundtable with Lea Overby. Thanks to our guest Lea for her insight. If you have any leads on forklift offices or any thoughts you'd like to share, please reach us at our email inbox recently updated to realpodcast@dechert.com. Also, if you liked what you heard, give us a five-star rating on whatever platform that you found this on. This episode was hosted by Sam Gilbert, Ella Smith and me, Jon Gaynor. It was produced by Stewart McQueen, Matt Armstrong and Kate Mylod. Production support is by Kara Ray, Mallory Gorham, Alyssa Norton, Peggy Heffner, James Wortman and Jacob Kimmel. Our editor is Andy Robbins of AudioFile Solutions. Thanks for listening and we'll see you next time on the Dechert 4 Real podcast. Oh, I almost forgot it's a dad joke time. Lea, do you have one for us? I do have a dad joke for you. You want my dad joke. Let's have it. Why was the commercial real estate broker in therapy? Why Why was a commercial real estate broker in therapy? because he couldn't get closure? Perfect. Amazing.