Inflation Concerns, CRE Lending, and Why You Shouldn’t Put All Your Eggs in One Basket

Martha, Manus, and Dianne dig into the latest economic data, including inflation reports that sent mixed signals to the markets. Consumer inflation came in hotter than expected, rattling the bond markets, while Fed Chair Powell maintained a steady stance, signaling no rush to adjust policy. The team also discussed the downstream effects of federal layoffs, the cautiously optimistic forecast for CRE lending in 2025, and the sentiment coming out of the MBA conference—where banks are back, but no one is calling the market “normal” just yet. This episode also featured a discussion about the recent LightBox Wildfires Report with insights on the environmental impact of the Palisades and Eaton fires. The discussion highlighted the hidden risks of contamination in rebuilding efforts and how environmental intelligence is shaping recovery efforts.  And, with Valentine’s Day this week, the team considers an unconventional gift option. 

02:10 Inflation Reports and Market Sentiment 

09:29 Federal Layoffs and Local Economies 

12:02 CRE Lending and Market Forecasts 

20:53 Office and Retail Market Updates 

27:00 Lightbox Data Dive: Wildfires Report 

28:50 Big Game Scorecard: How’d We Do? 

Have question for the pod team? Send them to podcast@lightboxre.com.

www.lightboxre.com

Transcript

[00:00:00] Martha Coacher: This is the CRE Weekly Digest by LightBox, a firm transforming the commercial real estate landscape by connecting every step of the CRE process with comprehensive tools and data. I'm Martha Kocher with our experts Manus Clancy and Dianne Crocker. For the week of February 10th through the 14th, Economic Data and Fed Comments were the focus for investors.

Consumer and wholesale inflation were released with some mixed responses from the market and Fed Chair Powell stuck to his script that the central bank is in no hurry to adjust its stance. Manus, the market had different reactions to the consumer and wholesale prints this week. What was that about?

[00:00:38] Manus Clancy: That's a great question because I'm not sure I know the answer. The numbers were similar to one another. CPI came in hotter than expected and the bond markets kind of got rattled. We saw the yield on the 10 year jump 11 or 12 basis points immediately, the yield on the 10 year jumped to about 4. 65%, but the reaction in the equity markets was somewhat muted, you know, the stocks were down somewhat, but there wasn't that huge sell off that had come with past hot CPI prints.

And then we get to Thursday morning, we get the PPI print, which looks a lot like the CPI print a little hotter than expected on the headline number. In line with expectations on the core and yet the yield on the 10 year reverses course, it drops 10 or 12 basis points on Thursday morning to get back to that 4.

5, three ish level where it's been for a couple of weeks now. So we had a lot to unravel this week. Both of those numbers had people on their toes, the testimony from fed chair Powell. Also had people had their antennae up for that reason. And then we had last week's jobs numbers. So a lot of stimulus, but it seems like we took a round trip and ended up exactly where we started last week in terms of interest rates, stock prices, market sentiment, and so forth.

So a little bizarre in that regard. 

[00:02:10] Dianne Crocker: Maness, you didn't even mention the increase in egg prices, which dominated the headlines that I saw about the inflation reports this week. The 15 percent increase in egg prices accounted for two thirds of the total increase in grocery prices. But, you know, obviously you point to the bird flu for that.

So I think we have to look at the inflation reports outside of the lens of what's happening with egg prices. Although I know from your story about working in a bakery as a child. You have a soft spot in your heart for eclairs, so you might see the price of those skyrocket. 

[00:02:42] Manus Clancy: Yeah, the egg thing was wild.

It almost had me thinking I should throw up a coop in my backyard in South Carolina to start profiting from the shortage we have now. I'm not sure how the HOA would feel about that. I might have the HOA police on my tail very quickly if I started throwing up some coops, but it is an issue. I was a little bit surprised I was at MBA this week out in San Diego, the Mortgage Bankers Association team through a great outing the last couple of days.

And this was a bit of a head scratcher there. I'll, I'll take a detour very quickly that in their breakfast buffet, they did have eggs on both days, but they didn't have those staples of sausage links and bacon strips. And I'm thinking. This is both unusual because bacon is such a staple of the breakfast buffet, but also they could have saved a lot of money if they just had piles of bacon, not piles of eggs.

[00:03:45] Martha Coacher: Well, besides the concern of eggs, which is actually a real issue for a lot of people. And my understanding is the numbers up about 186 percent year over year, which is like eye popping. But the trend overall of CPI, I think, is the concern since about mid year, last year, we've seen the receding inflation number pivot to an increasing problem.

And we haven't even really heard the other shoe to drop from things like tariffs and other things that may also impact inflation. 

[00:04:20] Manus Clancy: That's certainly true. And I think that the direction that we've seen interest rates go since mid September, 2024. Is evidence of that stall and reversal. You might say it's like in the first nine months of 2024, we were kind of on the steep decline of a roller coaster with inflation coming down meaningfully month after month.

And then we hit the bottom. We let out our screams, our arms went up and now we're on that slow incline. That comes towards the end of a roller coaster and that slow incline has gotten people very nervous. We've seen the yield on the 10 year ago from 360 to over 460 at one point, in fact, as high as 480 at one point, and I think that's evidence of the fact that people believe that the progress of the Fed made over two years has now stalled and that tariffs could play a role in pushing prices higher.

So. I'm not sure what this stimulus would be to see another leg down in interest rates. It could come from if there is meaningful progress on reducing our deficit, that's possible. If we start to see the labor market become a little softer and wage pressure come down even further, that too could help the inflation number.

And we've always known that housing in and of itself is a trailing indicator. If we see some relief there in future CPI numbers, that too could. Play into the feds hands. But right now it seems like we're going to be facing a four 50 ish treasury for at least a few more months. 

[00:05:58] Dianne Crocker: Yeah, I think you might be right, man.

If you know, it's, it's interesting on the, the heels of this week's inflation reports, I read somewhere that the likelihood of the fed not cutting rates at all this year went up from 20 percent to 30 percent and. It brought to mind some of the comments that I heard when I spoke at the Environmental Bankers Association conference last week, you know, certainly.

They're seeing green shoots that, you know, get them hopeful, things like dots on job creation and retail sales, but then the inflation reports, you know, showing upward pressure on pricing, volatility and the tenure certainly gets people nervous and. There's kind of this overriding Paul related to what might happen with public policy, you know, on tariffs, on immigration, on deregulation, on things that could put upward pressure on inflation.

And what one guy said to me, I'll share here. And unfortunately I don't remember his name, but he said, Maybe we start lending with the sense that this is going to be as good as it gets this year, you know, and we're no longer going to sit around and wait for rates to come down and, and we'll make smart lending decisions based on the good deals that we see now, because they're tired of having spent most of 2024 waiting for that first rate cut and waiting for the election results.

[00:07:16] Manus Clancy: Well, you know, sometimes the, the Fed is the windshield and sometimes it's the bug and on the way up, it's the windshield when it's driving rates higher. Taking money supply out of the system. It is the windshield, right? It is the one driving market activity. It's driving interest rates. It's driving the velocity in the market right now.

It's the bug. And what's the windshield right now, in my opinion, is the 10 year treasury and buyers of long term long dated treasury bonds. I don't believe the fed can cut rates. Anytime soon, if the 10 year remains a hundred basis points North of where it was when the Fed started cutting rates and to that degree, I do feel that Fed chair Powell and the rest of the governors, the rest of the voting block at the Fed do have their hands tied at this point and until the bond markets start to see something that they believe is 10 year lower, I don't think the Fed moves and that could mean it.

No rate cuts for several months and maybe no rate cuts at all. 

[00:08:30] Dianne Crocker: Right. And I was thinking about your comments last week when you referenced the treasury secretary, Beth and his position that there'll be more focused on the tenure treasury than they will be on interest rates. And I'm hearing some very favorable response in the chatter, you know, along the lines of finally, there's somebody there who understands that watching the Fed and watching rates isn't nearly as influential to lending and investment decisions as the tenure.

You know, so if you're a Powell, does that take the pressure off? What do you think? 

[00:08:59] Manus Clancy: It might. I would say in some ways the pressure is off right now. I think he cannot do certain things that perhaps President Trump and or others are hopeful that he will do. And he has good reason not to. The CPI numbers, the PPI numbers, the level of interest rates right now, the uncertainty over tariffs.

I think that it's very hard to bully him at the moment, given all of that. 

[00:09:25] Dianne Crocker: All right, man. Let's let me throw this wild card at you. That came up in the news this week. You know, what about federal layoffs, the impact to local economies from those layoffs? You know, think about all of the federal employees and every state.

You know, the Congressional Research Service says that as of December, the federal civilian workforce in Virginia numbered almost 145, 000 people, which is more than any other state, and only the non state of the District of Columbia has more than that. So, you know, it kind of begs the question, what are the downstream effects when So many well paid workers lose their job and they're concentrated in one place, you know, that can have a significant impact on the local economy and on the local real estate market.

[00:10:09] Manus Clancy: It certainly can. Let's not kid ourselves that the impact between, and it's not just the layoffs, the layoffs are one thread. If you end up laying off or encourage a hundred or 200, 000 people in the DC MSA to stop working. If you flood the zone with people looking for jobs, that has certainly an impact.

It would have impact on local real estate, certainly on buying patterns, you know, restaurant activity and other things. But if you pair that with the notion that offices could be shuttered too, and there'd be downward pressure on. Landlords of all types, not just landlords of GSA offices. But if you flood the zone with supply, it impacts every property owner in that region, then you're talking about several layers of problems in that particular area.

There was one comment that came up a lot at NBA, and I do want to spend some time on NBA and the sentiment there momentarily, but one thing came up and it was usually in the same sentence. There was a general positive reaction to the cuts and the auditing of the federal spending that people said, I like this.

I like the idea that maybe we can cut the deficit. Maybe we could find unnecessary spending, but it was always with that dot, dot, dot that came with as long as nothing breaks. Right. And I think that's how everybody feels right now that yes. If we can thoughtfully, patiently, professionally get rid of unnecessary duplicative costs, that's a wonderful thing, but if we break something, the ramifications are unknown.

So time will tell for sure. 

[00:12:02] Martha Coacher: Let's shift into CRE lending, which we have a number of data points to cover. We're going to talk about NBA and the show, which is where they released their forecast for 2025. They forecast a 16 percent increase in commercial and multifamily mortgage lending for the year reaching 585 billion.

[00:12:22] Manus Clancy: Yes, it was a generally upbeat report. It was a generally upbeat NBA conference this week, but I would not say it was effusive. 16 percent is really nice. It comes on the heels of. A pretty strong fourth quarter where lending ticked up. I think we'd all be very happy if lending surged by 16 percent next year.

But I think that there was a lot of nervous laughter. Let's call it that. Let's say we think we're going to play more offense in 2025. We think we're going to put more money out to work. We think that what we did in 2024, which was a lot of workouts. A lot of trying to get our arms around problems. That was defense.

Those are behind us in many cases. And now we can get back to our knitting, which is lending. And that part of it was good. And there was some unanimity there in the people I spoke to both private equity lenders and bank lenders. So some positivity, but there was that nervous laughter that came with it, which was as long as there's not another leg down, as long as.

The next move for the 10 year treasury isn't up, or as long as we don't see something like a slew of bank failures over CRE exposure, things like that. So I think people are bought into the fact that between 10 and 20 percent will be the number this year. But I don't think anybody is going out and counting their eggs yet, so to speak, right?

They don't have any eggs because they're too expensive. 

[00:14:02] Dianne Crocker: I was very, very interested to see where MBA landed with its forecast for this year. Last August, their prediction was that originations would increase by 24 percent this year. So the new forecast, as you said, Martha, is for 16 percent growth. Partner engineering and science is a major environmental due diligence firm.

And their CEO, Joe Durhacki was also at the conference, you know, and he said, 16 percent sounds like good growth, but you have to put it in the context of 2024 being a down year, you know? So he said for a guy that makes money on deals, that number is a little bit disappointing. Our predictions report for 2025, I looked up our prediction for commercial real estate lending.

Was 25%. So that was more in line with the NBA's previous one. I hope we're right, but the NBA's commentary, I think was spot on. As we saw a pickup and landing at the end of 2024, that will continue. But like you said, Maness, you know, it's not going to be like gangbusters and there certainly are plenty of reasons for concern and things that could cause volatility.

[00:15:12] Manus Clancy: To use a Superbowl or a football comparison for this. I would say the mood was you root for a football team that last year went four and 13, but they picked up a lot of new players and you think maybe this year they might be making the playoffs. It was that kind of enthusiasm, not the team that was 10 and seven last year.

And you're thinking, this is our year to win the Superbowl. We're going all the way. There wasn't that kind of. Yeah, we're, we're, we're going to win it all this year. There was, that's probably the kind of the metaphor I would use for this. 

[00:15:48] Martha Coacher: You're still fresh off your Giants loss, aren't you? 

[00:15:51] Manus Clancy: Oh man, the Giants, the Giants losing as badly as they did this year.

The Eagles winning the Superbowl. I don't know. That's, uh, makes you want to turn off the TV for a year. 

[00:16:02] Martha Coacher: We had our colleague, Tina Lichens, who was at MBA and she actually moderated an event there. She had a couple of things. I'm going to call this Tina's take on the MBA conference. Essentially that banks are back, especially local and regional banks.

Most expect rates to normalize in the 4 percent range. And no one has conviction that the market is normal yet, but we're at a point of stability. Also, interestingly, lenders are no longer kicking the can down the road. They're forcing repayment, no more extension, and this is causing bridge lending to be extremely active.

And I guess, an optimistic point of view, waves of deals are coming toward the end of the year and in 26. So, I feel like we've heard that before, so we'll see how that goes. 

[00:16:53] Manus Clancy: Yeah, I did get to spend some time in MBA with Tony Youssef, who is with SVN, uh, Martha and I have interviewed him before he serves as a receiver for distressed properties.

And I don't think there's anybody out there or very few people out there that can kind of size up the market like he can in the distressed area. And his take on the market is there's still a lot to be processed, that every month more stuff is coming in, more stuff has to be attacked. I got the sense that now is the time for things to be resolved, that maybe some of these procrastinations are now over, but he, you know, he was the opposite side of it.

People were saying, we're playing more offense at the broker side, at the lender side and so forth on the receiver side. And there was a couple of others I spoke to as well. Dan Megan's being another one. They were also saying, we're just so incredibly busy still as these things continue to be worked out.

So a little bit of a barbell reaction from the attendees, depending on what side of the market you see. 

[00:18:00] Martha Coacher: And a couple more data points while we're on the topic of CRE lending. There was some new analysis from CBRE that was interesting. 

[00:18:08] Dianne Crocker: Yeah, there was an article by Eric Sherman at Globe Street, a new analysis from CBRE that showed for office specifically, Extend and Pretend has really masked a serious office debt funding gap to the tune of 131 billion over the next four years.

And this is nearly 25 percent of all office debt originated between 2017 and 2023 and coming due between this year and 2028. So, you know, I think we're definitely to your point, man, is heading into a period where. More distressed assets, they have to come on the market because of that snowplow effect that we've talked about before, you know, loans that were extended over the past few years, they, they can't be ignored indefinitely.

And they're really going to come to the surface, um, this year and next year. 

[00:19:00] Manus Clancy: Yeah. I saw one very promising data point. This goes back to MBA as well. A second report that they put out recently, they said that 20 percent of all CRE lending will come due in the next 12 months. That's a big number. But what they said was it's only a 3 percent increase from where we were in 2024.

So 929 billion was the number in 2024, their expectation for this year is about 960 billion. And I thought that was promising. It means that while the number is going up, it's not going up at a very steep rate. And it probably means that between some of these things having been resolved last year, like some of these offices that we saw sold off.

And the fact that some of these entities, especially in the multifamily segment, were able to refinance that it wasn't the parabolic jump that some might've expected. 

[00:19:58] Martha Coacher: So, I mean, as you talk about loan resolutions, we saw earnings this week for the Mortgage Reap Blackstone Mortgage Trust. They said in their fourth quarter earnings call that they've resolved 49 percent of their impaired loans during.

[00:20:13] Manus Clancy: And that's consistent with the people I spoke to at MBA, some of the private equity lenders were those that were saying we're moving from defense to offense, that they had big numbers of things in 2024 that had to be dealt with, resolved, extended, more equity put in, in some cases, foreclosure and other cases, But they were coming to the tail end of those things, which I thought was very, very encouraging.

I do think that that private equity lender was the lender in 2021 and 2022. That was supporting the syndicator. It wasn't Fannie and Freddie. It wasn't the CMBS market per se. It was a CRE CLO lender giving the syndicator of value add purchases. The money they needed to execute on this, this has been the reason we've seen upticks in multifamily delinquency and for two of the bigger players or three of the bigger players that we spoke to having this tenor that these things are behind them now, I think is very, very encouraging that maybe that multifamily distress number levels offer maybe 2025.

[00:21:25] Dianne Crocker: Yeah, and the other interesting thing from that story was Blackstone said they're entering this year. Uh, poised for portfolio and earnings growth with 2 billion in the pipeline, you know, so they're definitely seeing that they're in the midst of a real estate recovery. And it's largely in the industrial and the multifamily sectors.

[00:21:44] Martha Coacher: So I know we had a couple of office transactions that we saw this week that were promising. 

[00:21:50] Manus Clancy: Yeah, these were really promising ones. I'll go through them very quickly. The first story comes from Brian Bandell of the South Florida Business Journal. I always say that he's the hardest working man in South Florida.

The amount of content he puts out every week is really something. And he recently won an award. I can't remember what it was, but I saw it on LinkedIn. So congratulations to him. He noticed that a Fort Lauderdale office complex had sold for 208 million. This particular property Olas Center one and two in Fort Lauderdale.

This is the first office sale of more than 200 million in 10 years. And even better, the price was an improvement over the 2014 price. This asset sold for 204 million in 2014. The buyer here is Bradford Allen. The seller is Areet Property Trust. This is a 470, 000 square foot office with a touch of retail in Fort Lauderdale.

A similar story comes from Denver. This comes from Jonathan Rose of BizNow. Equity Commonwealth, which is in the process of winding down, sold its property at 1225 17th street for 132. 5 million, 186 bucks per square foot. Anytime we see a nine figure sale in the office segment, I feel quite satisfied. But in this case, the property, while it took a loss, the loss was de minimis.

This property sold for 134 million in. 2009. It's a real high profile property. It has tenants like KPMG and Salesforce. So you're talking about back to back sales in the last two or three days, one with a modest improvement over a 2014 comp, the other with about a 1 percent decline in value over a 2009 comp, this is in stark contrast to the ones that we've been in, let's call it low lighting.

Over the last six months, which are sales taking place in San Francisco, Chicago, New York, et cetera, at 50, 60, and 70 percent discounts. Does this represent an inflection point? I would say no, but it is nice to know that sometimes there are buyers out there that want to pay premium prices. And in each case, the consistent element about these two properties is.

Occupancy was low in each case. In one case, the occupancy was 74 percent and the other was 69%. So borrowers are paying nine figure prices, knowing that they have to go in, put some money into this thing, build a tenant roster and are willing to do so. So great news that this has happened in Fort Lauderdale and Denver.

[00:24:39] Martha Coacher: So one quick story on retail, you saw that Aldi, the German based discount grocery giant has announced plans to open 225 new stores. Across the U S and Globe Street had the original story. It looks like they're converting 220 former Winn Dixie and Harvey's stores. It acquired from Southeastern Grocers.

[00:25:02] Manus Clancy: Yeah, Southeastern Grocers about a decade ago filed for bankruptcy. What we've seen in the last five years is a renaissance of the grocery subclass within retail. For a while there, the margins were so low. Retailers were closing stores hand over fist. We saw several bankruptcies. On the West coast, in the upper Midwest, in the Southeast, and then COVID.

This is one of the few winters out of COVID where people went back to the grocery store, shopping, improved margins, improved and so forth. So I think this is a case of Aldi leaning in and taking advantage of probably being able to buy things on the cheap, the real estate and growing their footprint. We know they've been doing this for several years, looking to improve their presence in the United States.

They started in Europe. And good on them for taking the risk. 

[00:25:52] Dianne Crocker: I wonder how much they charge for a dozen eggs 

[00:25:54] Martha Coacher: right now. I can tell you, Dianne, I've actually been to Aldi, and you can get a carton of eggs for 5, which is a lot less than some of the competing grocery stores. However, you're only allowed to get two cartons.

[00:26:11] Manus Clancy: I know some of this trend is due to the bird flu and the unfortunate fact that a lot of the fowl had to be taken out of commission because of that over the last couple of months. And that has driven prices higher, but one trend that I hope does not take off seems to be a West coast thing. Often there's not regular milk, there's oat milk, there's some other kind of nut milk.

Soy milk, other things that it's just not the same and milk is hard to find when you, even at the buffet table, you had your choice of oat milk and soy milk and something else. If I start seeing non egg eggs, lizard eggs or other things, count me out. That's, uh, I want my chicken egg. I don't want anything egg adjacent and certainly not a reptile egg.

[00:27:02] Dianne Crocker: You can go to Whole Foods and buy an ostrich egg, Mana. 

[00:27:06] Manus Clancy: Uh, I just want my regular chicken egg. I'm, I'm not, uh, that adventurous when it comes to my, my omelet. 

[00:27:13] Martha Coacher: And in our LightBox data dive this week, we just released a wildfires report. After the ashes of the Palisades and Eden fires, a new threat has emerged, environmental contamination for the areas impacted and beyond.

LightBox director of research and development, Richard W. White, authored a report highlighting the scale of the problem using our data. And Dianne sat down with Richard this week to talk about why this is a critical issue for recovery and rebuilding in the area. 

[00:27:42] Dianne Crocker: He did a very interesting study to answer questions like what types of contaminants might be in the fire debris, what should they be testing for, are there underground storage tanks that might be a concern, what sites have asbestos.

And knowing the answers to those questions can really alter cleanup and, and rebuilding plans and, and minimize human health exposure. So one stat that he shared was that the study specifically of the impact zone for the Palisades fires found that more than 10, 000 structures were affected, including housing and more than 200 businesses.

And in total, more than 700 of those properties affected by the Palisades fire were flagged for likely contamination from hazardous materials, including 150 UFTs. So in our interview, Richard shares the process that they used and some of their other findings, which were very interesting. 

[00:28:38] Martha Coacher: And you can get a copy of that report and listen to the full interview.

On our website, and if you have questions about how to get that, reach out to us at podcast at lightboxre. com and, you know, the Super Bowl outcome was, well, it was a boring game. I got to be honest, it was a bit lopsided, but our CRE data did. Accurately predict the outcome, although, you know, the scale of it probably didn't match up.

[00:29:05] Dianne Crocker: Our LightBox scorecard from last week did predict that Philly would win. Um, we predicted that they would only win by two points though, so we, we were a little bit more generous with Kansas City's performance. But I was still happy to see, although I didn't watch the game, I was happy to see that our, our LightBox scorecard predicted the winner.

[00:29:23] Manus Clancy: It was certainly a snooze, right? It was over early. The halftime show was okay. It wasn't great. Commercials were eh, so all in all, it was a tedious watch, I would say. 

[00:29:36] Martha Coacher: But if you're interested in looking at that scorecard, give us a shout. We'll be happy to share it with you. It covers some of the market statistics of those two regions, and it's pretty interesting to stack them up and see what it looks like.

Our programming note, we have a webinar February 25th with our very own Manus Dianne, and they're going to be joined by Tina Lichens. At 2 p. m. on that day. If you're interested, please reach out to us at podcast at lightboxre. com. We'll send you the registration information should be interesting as they cover market news.

What's happening with some of our LightBox snapshot data and overall what the sentiment is based on, you know, voice on the street. And Manus, you know, this Friday is Valentine's Day. The national average for a dozen roses this year is about 90 bucks and change. And I know you don't live in one of the states where they're more affordable, but I'm still hoping you're not getting a drugstore gift for your wife this year.

[00:30:41] Manus Clancy: It's, uh, well, it's first not out of the question. You know, I tend to be quite asleep at the wheel at times, sometimes frighteningly so. But let me ask you this. Let me turn the question around to the two of you. How would you feel about getting a dozen eggs instead of a dozen roses? How would you feel? Is that romantic enough?

Is that like, you know, would that, uh, be a worthy Valentine's day gift? What do you, what do you think? 

[00:31:10] Dianne Crocker: I'd prefer to have you prepare them and make me egg benedict for breakfast. 

[00:31:16] Manus Clancy: All right. There you go. So, uh, you know, you might be taking your life in your hands if it's me doing the cooking, but, uh, I'll, I'll, I'll take that under advisement.

[00:31:27] Martha Coacher: And with that, we'll close. Thanks to our producer, Josh Bruning. Please join us every week as our Lightbox team shares CRE news and data in context. You can listen on any of your favorite podcast channels and send your comments or questions to podcast at lightboxre. com. Thank you for listening and have a great week.

[00:31:45] Manus Clancy: Let's go.