
The CRE Weekly Digest by LightBox
Stay informed with weekly episodes by LightBox offering insights into the latest developments in commercial real estate (CRE) and interviews with the industry's market leaders. Join Martha Coacher, Manus Clancy, and Dianne Crocker as they provide CRE data and news in context. Subscribe so you don't miss an episode.
The CRE Weekly Digest by LightBox
In the CMBS Trenches with Shlomo Chopp— Distress, Risk, and Finding Diamonds in the Rough
CMBS workouts aren’t for the faint of heart—and CMBS expert Shlomo Chopp knows it better than most. With 20+ years of experience untangling distressed assets, Shlomo offers a rare, unsparing look into what borrowers, bondholders, and even AAA investors often get wrong. From why “non-recourse” loans aren’t always what they seem to how banking can relationships collapse under pressure, Shlomo lays out why CMBS is a different beast—and why many borrowers walk in unprepared. He dives into tranche warfare, special servicers, and the dangers of relying on outdated property values.
For bondholders, the takeaway is clear: think like real estate professionals. If you're not walking the property and talking to brokers, you're already behind. Stay to the end to hear a sneak peek of Shlomo’s patented micro-fulfillment retail centers—aimed at reviving malls by merging e-commerce with in-store logistics.
This episode is part finance class, part war story, and a must-listen for anyone trying to read between the lines of CRE distress.
01:13 Understanding CMBS Borrowers and Their Motivations
03:19 Recourse vs Non-Recourse Loans in CMBS
07:36 Complexities of CMBS Trusts and Workouts
11:25 Navigating Distress in CMBS Investments
15:17 The Importance of Market Awareness for Investors
25:20 Understanding Market Dynamics and Credit Risk
29:38 Current State of the Distress Cycle
32:43 The Evolution of Retail in the E-Commerce Era
Have questions for the pod team? Send them to Podcast@LightBoxRE.com.
www.lightboxre.com
The CRE Weekly Digest by LightBox
Episode 49: In the CMBS Trenches with Shlomo Chopp— Distress, Risk, and Finding Diamonds in the Rough
Friday, June 6, 2025
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 Manus Clancy and Dianne Crocker. In today's episode, we're diving into CMBS lending. Today's guest is Shlomo Chopp.
Martha Coacher: Founder and managing partner of Case Property Services with over 20 years of experience, Shlomo is a go-to expert in distressed real estate workouts, advising borrowers on navigating CMBS challenges. We're gonna turn the lens with SH slow mo's help on the bond investors point of view. What should CMBS credit analysts, traders, and investors know when things go south? Welcome, Shlomo.
Shlomo Chopp: Thank you Martha. Thank you for having me.
Martha Coacher: And I probably should mention quickly, you're also an investor, an inventor, a bit of a social media celeb, so we're excited about some of the things you're gonna walk us through today. Let's start with setting the stage. What kind of borrower typically chooses CMBS over banks, insurance companies, or private lenders?
Shlomo Chopp: I think in today's market there are two types of borrowers, but let's just talk generally. CMBS is a highly structured product, which means that it comes with a lot of rules and strings attached. So typically you are looking at a borrower that is looking for maximum proceeds. Minimum risk outside the property and has a really solid infrastructure to stay within.
Shlomo Chopp: The guidelines of the CMBS documents, which can be perplexing to certain borrowers today, in today's market is a whole new set of borrowers, which are borrowers that don't have any other options on the table, borrowers that may not be suitable for CIBS, but they find that CMBS gives them more proceeds and not to go down a rabbit hole.
Shlomo Chopp: But the reason for that is that c. MBS as opposed to a bank, the underwriting is different. If I'm going to borrow from a bank, a bank is gonna gimme a loan based on the secure releases and secure income at my property. A-C-M-B-S lender may actually give you more than that and take greater risk, but they will have their hands all over your cashflow on a day-to-day basis.
Shlomo Chopp: And the second the business plan doesn't go as you proposed it would go or believed it would go at the time of origination or the originating lender CMBS lender thought. It would go, then they start taking your cashflow as risk as almost like a credit enhancement against future issues. For example, a leasing requirement or not enough money coming in to pay that service.
Shlomo Chopp: So a different, there are different reserves, if you will, that gets filled up. So the short answer is used to be owners of stable assets with great infrastructure today. A lot of people that can find financing elsewhere and CMBS lenders are okay with that additional risk because they control the cash flow.
Manus Clancy: You made a remark a moment ago about if, I'm gonna, I'm gonna paraphrase this entanglement. So I think what you're talking about there is the recourse nonrecourse element. Most bank loans, recourse CMBS, non-recourse. Is that a big motivating factor for people that go into CMBS loans?
Shlomo Chopp: It's a very big motivating factor, but they need to be careful.
Shlomo Chopp: The extra five to 10% you may get with A-C-M-E-S loan. Read those recourse paragraphs or the recourse language a little very carefully. So, here's an interesting thing that people don't realize. Nonrecourse, CMBS loans actually have a full unconditional guarantee from the borrower. There is, however, a paragraph called Exculpation paragraph that essentially says, provided you don't violate a series of.
Shlomo Chopp: We call 'em carve out. So bad boy acts, then we won't go after you for a monetary judgment, but we will pursue you for a judgment of foreclosure to collect our collateral. So what those sentences say are extremely important, and if you don't read it properly, you walked into a recourse loan that has way more restrictions than your average bank recourse loan would have.
Manus Clancy: So I wanna stick on that point for just a moment, or maybe it's a slight bit of a tangent here. But when you write on LinkedIn or when you write on Twitter, you said before that you hear from the borrower periodically that when they deal with a bank, they have a relationship, they value that relationship.
Manus Clancy: They believe that that relationship will, for lack of a better term, save them. Whereas in the CMBS market, they're dealing with somebody who's faceless to begin with. Right. Until they, they go through the process, they don't really know the banker. There's no relationship there. But you've said that that banking relationship isn't worth a whole lot.
Manus Clancy: Can you get into that a little bit?
Shlomo Chopp: Yes. I'll go even further to say that in the events of true distress, it may be easier to work at A-C-M-B-S loan than a bank loan. And the reason for that is as follows, man is, let's say you owe my dad a million dollars. You and I golf together every single day. What are the odds I'm gonna tell my dad to walk away from those million dollars?
Shlomo Chopp: Just because we're really close. I mean, we've had you over for dinner. You know, we've had, you know, you've been by family weddings and like, but you owed a million dollars, right? The relationship is good to first stall. Smaller issues. The relationship is good to stop small issues from turning into big issues, but the reality is if you want to ask your lender counterparty for a significant write down, it's probably best done.
Shlomo Chopp: I. To an impersonal bond holder with whom you don't have a one-on-one relationship that basically baked in, that write down a certain extent of it, or during some type of a trade baked in that write down when one bond holder bought from another bond holder, that's gonna be way easier. And part of the reason it's gonna be easier aside from the personalities is because.
Shlomo Chopp: The underlying documents for the CMBS trust actually go through a series of steps, a process for dealing with distress, and it becomes a very, you know, a numbers game. What do I get if I give this guy his discount, air quotes, and what do I get if I foreclose on him and sell the property as REO in the market?
Shlomo Chopp: So the point twofold is that relationships are great until. I really come after you with something you don't like. Then all of a sudden we don't have a relationship anymore. I mean, people get divorced. At one point. They were in love. Right? And the second thing is, if you're going to deal with a potential breakup, you'd rather it be something that's documented, something that's been explored, something that's been accounted for, that you could then walk through the doors and the pathway that's been laid out.
Dianne Crocker: CMBS involves borrowers, it involves servicers, it involves layered investors. Do multiple classes and interest complicate workouts or does it delay them?
Shlomo Chopp: The nature of A-C-M-B-S trust, I. Is that they have multiple classes. But if you think of A-C-M-B-S trust as a structured syndication, right? If, let's say I am Wachovia Bank, okay, and I wanted to go out there and make a $500 million loan, typically I, as the lead bank would maybe take two 50 of that.
Shlomo Chopp: Then I then go sell off the other two 50 to a couple of other banks. Then there'd be an intercreditor agreement and a co lender agreement that would dictate how they would tackle any issues that may arise. CMES trusts are essentially the same thing, except there's a lot more. Security for one lender versus another.
Shlomo Chopp: So for example, if in the case of the example that I gave, Wachovia may have certain rights and they have to go out there and get approvals from their other lenders, co lenders for taking certain actions and the CMBS trust, let's just assume Wachovia says, I'll take the first two 50 in losses. If there's a loss and you two 50 above me, you don't have to worry about it.
Shlomo Chopp: So I'm gonna go out there and I'm just going to resolve it however I want. Then you guys don't worry about it. We're good. And the other two lenders say to themselves, Hmm. I don't see how the losses ever eclipse two 50 we're good. No problem. You got all the rights, Wachovia, go do what you need to do.
Shlomo Chopp: But then the market hits a downturn. All of a sudden that two 50 potential loss seems more realistic, and it may even hit two 70 depending on how. How scrupulous Wachovia is and how, you know, how things work out with the borrower. That's what CMBS is. You end up with a bunch of different bond holders or tranches of bond holders, and you have one decision making or if you will, controlling tranche.
Shlomo Chopp: Slash bond holder, the guy that owns 50% of that tranche that gets to make the call on how things play out. Now, if a upper bond holder that is not in a first loss position but actually is, has a credit and enhancement, if you will, or credit support, by having the two 50 under them, decides that the guy at the bottom is about to be wiped out, but he's about to make a decision that's going to affect me.
Shlomo Chopp: Then they send what's called I don't know love letters. I don't know what the, I forgot the exact term, but they, it becomes what's called tranche warfare. And they could devolve sometimes into litigation, and you end up with two tranches, two bundles fighting against each other and threatening the special servicer who's following the direction typically, or at least seeking consent of the first position.
Shlomo Chopp: Lost the Wachovia Bank, if you will, and say, if you do this, we're gonna come after you. That could slow things down. I've had workouts that I'm working on now that, you know, we were gonna go to a deal and somebody got upset and servicer didn't wanna risk it, and it's just dragging out and it's a process.
Shlomo Chopp: So anytime you have more than one person making a decision, it becomes complicated. But there's a process in place and the question then becomes. Really of settling the argument because no one wants to leave it up to a judge, or even in some cases, God forbid, a jury to make a decision on something this complex.
Manus Clancy: Let's pull back the lens a little bit on what you were saying there. I wanna get into some real meaty stuff here. You mentioned people at the top of the stack that when things are good, when the loan is first made. They're okay assigning their rights away because they largely think that the worst case scenario will never happen.
Manus Clancy: But worst case scenarios do happen and eventually a single aa AAA bonds can get threatened. You're in the weeds every day with documents. You're in the weeds every day with lease negotiations, renewals, maturity dates coming up. If you're AAA buyer that. For lack of a better word is on autopilot. What would you advise that AAA buyer to look at to avoid something where they are later coming into tranche warfare?
Manus Clancy: What are some of the clues out there that might prevent this sneaking up on somebody, not necessarily aaa, but somebody above their first loss holder.
Shlomo Chopp: Yes. I think first of, as you mentioned, the aaa as they call 'em, the super seniors, super duper seniors or whatever the cliche, they have to call 'em.
Shlomo Chopp: Typically they're in a decent position. There is the matter of duration, essentially, like how long I have my money out there and at what rate I have my money out there. So for example, if I'm a AAA buyer and I have a 2% yield and I bought it for 90 90 cents on a dollar, and I expect it to get paid off, and the payoff doesn't happen because the borrower got an extension that affects me.
Shlomo Chopp: But one could argue you have a little less of a yield, but you know, at least you're sort of made whole. Although that's never true in bond land because you're buying with the yield bacon baked in. But the second part of your question, you asked Manus, is some guys in the middle of the stack, if you will, that they neither have control, nor do they have status, right?
Shlomo Chopp: Their bonds are maybe at the lower end of the credit spectrum, the Triple Bs or just below it. And these tranches often trade. And I think the most important thing that most of these traders and bond holders need to realize is that a property goes from money, good to money, bad very quickly. And often the lender taking over from a borrower that's deemed to be not the greatest borrower in the world may not solve the problem.
Shlomo Chopp: I think we've been. Spoiled in some respects, even the GFC, there were a lot of losses for sure, but we rebounded pretty quickly. And even now, the pace of losses in CMBS land take much longer. Then real estate land, and that's because you are up the stack. You have the buffer of, let's say it's a hundred percent L, TV is the total value, a hundred percent value.
Shlomo Chopp: You have 70% LTV, you got a 30% buffer, right? Furthermore, there may be money in reserves that you could eat from, while money may be stagnates at the property, but a disincentivized borrower. For a lender that maybe is not a top tier operator will find themselves impaired quickly and therefore. The property will deteriorate.
Shlomo Chopp: And once the property starts going downhill, it's much harder to rebuild than to demolish, right? All it does to demolish, you take a huge crane with this huge ball, you go boom, you knock down a building, you put some TNT, and you implode the building. When in reality, to build it up from scratch, you gotta build a foundation.
Shlomo Chopp: You gotta actually, you know, come with a plan. And the whole thing is takes way longer as everyone knows. So I think. The biggest challenge that I see is that I've seen a lot of bonds that should be trading for less, trading for more, and that's because of one very simple fact. I think it's for borrowers need to understand this.
Shlomo Chopp: The guys that buy C-M-B-S-I. At the super senior level, meaning at the aaas, the top of the stack, they're investors, they're in it to hold, have a good day, right? The lower you get down the stack, you're dealing with bond traders. The question is, if I bought this bond, how much cash flow could I squeeze out before it goes to hell?
Shlomo Chopp: That's really what it comes down to, and the more down the stack you go, the more close to hell you are. Of thinking actually enters into the equation. So borrowers look at operating properties and borrowers need realize they need momentum. Lenders are like, listen, in a worst case scenario, it's worth. X, or let's call it x minus 20% and therefore good, but that ship sinks very, very quickly, and that's a huge challenge, and it's often not underwritten, and often it's pushed too far in my opinion, by either ccrs, controlling class certificate holders or special servicers and borrowers are not given enough credit for their expertise.
Manus Clancy: It's funny, as I hear you talking about this, I keep getting the image of Dante's Inferno, right? Isn't that like the is it the seven layers of hell or the 12 layers of hell? I keep thinking, there's a book out there called Shlomo Inferno, right? Where you go from the AAA down to the single A, down to the unrated.
Manus Clancy: Bond And the closer you go down that stack, the closer you are to true hell.
Shlomo Chopp: Well, but Manus, I gotta tell you I got interrupt you. Okay. Because just like they make mistakes on the upside, they make mistakes on the downside. And I found some really cool diamonds in the rough over time to invest in where the market has discounted it.
Shlomo Chopp: Oh, office is bad. Right? And then you're looking like this is pristine and the basis is great. I'm perfect, right? So the good thing about bad things is when everyone follows the leader and you could actually find the things that shouldn't have follow leader. So I just wanna make sure Shlomo Inferno not coming to a book steer near you anytime soon.
Manus Clancy: You know, I'm gonna bring up two very high profile scenarios, one which the losses has really moved up the stack very, very far. One, which losses are looming and will hit people very far up the stack. The first 1, 17 40 Broadway in Manhattan, L Brands was a big tenant. The property was once worth 600 million, got sold for under 200 million big losses, not just to the first loss holder, but I.
Manus Clancy: Up the stack. We have one looming right now, the market center out in San Francisco. Similar type of story, right? Tenants don't renew the market's. Weak vacancies are high. Eventually these are gonna be losses that could threaten the AAA class in that issue as well. Does AAA buyer normally find this out from the Wall Street Journal while they're riding Metro North, or is there a way where guys are.
Manus Clancy: On top of this before something this cataclysmic takes place, right. Is there a way to kind of sidestep this in your world?
Shlomo Chopp: I think there's too much reliance on yesterday's value, right? Properties don't get reappraised until their 60 days plus past the fault. So it's really difficult to figure out.
Shlomo Chopp: That you have a problem unless you're paying attention to what you own. And it goes, you know, I tell people in real estate all the time, there's no such thing as passive income, only passive losses. And it's the same thing. If you are passive with your investments, it's gonna hit you and it's gonna be a problem.
Shlomo Chopp: I would throw another one in, which is 1407 Broadway, which I think 1740 Broadway was a good finance. You got, the timer was made. Right, COVID came, but I mean, from what I understand, Blackstone did everything right. They did a great job marketing the building, added amenities to the building. It was just a matter of, you know, COVID and we looked at it from a residential conversion perspective and we did not like it.
Shlomo Chopp: The guy that's doing it right now is supposed see real talented, and I'm sure he'll do very well with it. I just couldn't make the numbers work. I'm not familiar with San Francisco one at the moment. I'll tell you for, you know, certain Broadway is one where I don't understand it. It had a ground lease that had bumps built in.
Shlomo Chopp: It just is, it's, I just don't see the thought process and the financing to begin with. Right. Almost similar to, you know, we saw with, with the Chrysler buildings like I did. I don't understand how you buy it at that number with that type of a. Risk attached to it. So I think too often there is the thrill of the deal that comes into play.
Shlomo Chopp: I think often those are issues. But back to your question on the aaas. They never thought they'd get hit. Like, who would ever think? Right? And that's sort of the, some of the calculus that gets put in place. And especially when you higher up in the stack, you get a lot of the pricing the pricing services that give you a number and you look at it and you go, why is that price at that number?
Shlomo Chopp: Like, I have bonds. You look at it and you know, on the statement that says, the value is X. I'm like, no, it's not. But okay, you wanna put it there? You wanna market there? No problem. Have a good day. So I think. When you are not paying attention, when you're not on top of things, it becomes a challenge and it could surprise you to the negative sometimes.
Shlomo Chopp: And then if you are paying attention, you'll surprise the market to the positive.
Dianne Crocker: All right, Shlomo, let's go into the weeds here. So, for triple B or below bond holders, if they're facing potential large losses or modifications, you know, what should they be analyzing? What are some red flags that you see?
Shlomo Chopp: Yeah, I think by the time you're triple B and below, well Triple B. Below Triple B, and you're looking at some losses, you are too late because the way you know that there's losses is because you see there's some distress at the property. You see the appraisal came in too low. You need to be out ahead of it.
Shlomo Chopp: Anyone who's gonna play in that lower BP space is going to have to literally act as a. Real estate participant, you're gonna have to have relationships with every single brokerage house. You should be walking by your property. You should see what's going on. You should be talking to people in real estate.
Shlomo Chopp: You should be aligning yourself with these people so that you can see a few steps ahead. It's like, oh, John Doe, how's this management company doing? Right? You wanna know the answer to that question, right? Is he having issues there? How's the property leasing? Which tenants in the market, where are they going?
Shlomo Chopp: What part of town are they going to? What's going on with the market? Generally, there's a lot of work that needs to be done. It's funny, you know, you think A-C-M-B-S trader should not be like a stock day trader sitting at his kitchen table, sort of trading, you know, IBM and going in and out, there's so much diligence that needs to be, needs to go into this.
Shlomo Chopp: It requires a lot of work, and there are these, there are services that help you with it, but there's nothing better than having conversations in the market because the average real estate broker. Probably knows more about your risk than the guy that's trading, trading the asset with you.
Shlomo Chopp: And if you could stay on top of that, you could probably be out ahead of certain things and know certain informations that's not, it's not material non-public information, it's public, it's just not spoken about in the bond market. It's spoken about in the real estate market. And that's interesting thing.
Shlomo Chopp: And I'm gonna go a step further and say, CMBS bonds, the attractiveness of this is that it's like corporate bonds, but its exposure is to commercial real estate, which to a certain extent is an indirect exposure to corporations because they're the ultimate tenants that are leasing from you other than residential, multifamily.
Shlomo Chopp: Putting that aside, so you're getting that level of exposure, but unlike a corporation where you're looking at it's. Position within a niche market, and it's position in how much of the market it captures, how much sales does all that. You are actually competing very heavily in a very wide market that's constantly changing and constantly moving.
Shlomo Chopp: And heck, if the municipality decides to elect a, I don't know, assessor, like in Chicago, that's going to tax the properties. Like crazy, you'll end up with a property that's worth way less than it did, you know, than it was a year ago. And that actually the operational challenges of a property could flow through to you, but you'll never know it if you're not paying attention until it's too late.
Shlomo Chopp: So the cognizant investor in CMBS, the investor that's paying attention. It could be a few steps ahead and really on the ball, understand what's going to happen next if they just pay attention and you know, for example, like the bond investors, that lends to a widget company that makes sure to go to every widget conference, to listen to every presentation on widgets.
Shlomo Chopp: Heck, if the guy is. Lending to Simon Moles. He goes to ICSC and he listens to all the presentations about camera conciliation that sort of understands how the underlying numbers he's looking at actually come to be. If you do that, you have your competitive edge, and I think those that don't are unfortunately, coming up the rear in this long train of losses.
Shlomo Chopp: So it's, it becomes a real big issue.
Manus Clancy: You're really talking about two different types of risk, right? One is. The likelihood of demand from tenants, right? Will the tenant come to this property? Will he renew and will he renew at what price? Right? So you're talking about market dynamics, how much supply and demand there is at the property level among the tenant base.
Manus Clancy: How much vacancy there is. How much absorption there is. But you're also talking about credit risk here, right? We've seen it a lot in retail where you've seen. Defaults hand over fist for the last 10 years with retailers, they say, oh, this property is 79% occupied. But if a big chunk of it is Joanne Fabrics, or a big chunk of it was Sears or somebody else that would eventually go into bankruptcy you're kinda lost.
Manus Clancy: So this is a long-winded way of me asking. There's a lot out there, you know? How do you stay on top of it personally to make sure that you are the most informed you can be as you're advising your clients?
Shlomo Chopp: Well, the good news for me is that I don't have to trade CMBS. Right? It's something that I do opportunistically.
Shlomo Chopp: I don't have to typically focus on. Large pools of conduit loans that I have in my portfolio and keeping an eye on it because that would be. Very let's say costly and require a much bigger operation than I am on the investment side. But on the debt restructuring side, this is where, we are very differentiated compared to the rest of the market.
Shlomo Chopp: The rest of the market will pitch themselves in one of the following ways. We have great relationships. We understand CMBS, we demystify the CMBS process. We understand how to deal with your lender, and all those things appeal to different borrowers at different levels. Our biggest differentiating factor is less the talent because a lot of these workout guys have the talent.
Shlomo Chopp: It's more the heavy work and lifting. We'll do multiple leasing calls, try to understand what's going on. Like we had a call Friday and the broker's talking about the market. It's a 25% vacancy market, and he had various ideas, but whatever the idea was, he wasn't getting over 25%. He. But the question is, okay, but we need to get over 25% for our loan.
Shlomo Chopp: We need to bring up that income in order to make this work. Because even if I can restructure something with a lender, the lender's gonna make me overpay, the value and I need to make it work. What are the various solutions we come up with to make it work? How do we do that? We dig in. We tore the properties, we tore the competitive properties.
Shlomo Chopp: We understand where things are going within the individual market, and we guide the client to come up. With ideas using their strengths, not ours, because we just ask the questions and to propose something to the lender that puts them on better footing. So we actually dig in. We'll spend in some instances, a couple of hundred hours of diligence just to figure out what is the pitch we're telling the lender, other than like, it's bad.
Shlomo Chopp: We all know it's bad. Great. You're in the second position, the third position as equity. The lender's in the first position, the prescribed remedies are the lender forecloses. Thank you. It's bad. It's our bad. Now. We're happy to foreclose on you. And quite frankly, in CMES loan, we prefer to foreclose. No one ever got fired for not modifying a loan. So what we do, we put in a lot of effort and we constantly hear back from our clients, our not the clients from the lenders. Thank you so much for all the information you've provided and trust me, it's not peachy. It's very much suits our clients' needs. It positions our, the problem as being a property problem, as being a market problem, and the solution as being a borrower solution.
Shlomo Chopp: Yeah, every time that's what it is. It just happens somewhere. The plot killer, that's what it works out every time, but there's something to it and something the lender could say, okay, we now have a plan. The guy's ready to put up additional capital. He has a way to turn this thing around. Okay.
Martha Coacher: Shlomo, you're dealing with clients and helping them with this distress, so you have probably a very good view of where we are in the distress cycle. What's your point of view on that?
Shlomo Chopp: It's very hard to tell because it's very hard to tell how far we are and how far we still have to go. I could tell you that I am extremely busy getting busier every day.
Shlomo Chopp: Does that mean that the market's catching up to me? I'm catching up to the market. I don't know. I'm sitting in meetings with borrowers that look like the truck, hit 'em in their face. I mean, there's no better way to describe it. LPs shouting at gps. Show me the, show me that account. Show me that. Show me that.
Shlomo Chopp: I mean. It is. It is rough. Okay. And the lenders haven't even gotten any hint of what's coming in some of these specific situations. It could be challenging. So the way I look at it is that there's a lot of issues. The way I see this is that I don't think they could be solved. Just with time alone in many instances I think the market has moved on from a lot of office buildings.
Shlomo Chopp: The market has moved on from some sea malls. There are challenges with too many hotels developed in certain markets that still haven't recovered, but there are things that could change that can make an impact. So how much lower could we go? I mean, they have things that could take us even lower, and I don't think it's tariffs, I don't think.
Shlomo Chopp: I think tariffs is a nice macro argument. I don't think it's a micro argument. I think the guy that owns a shopping center in Tuscaloosa, Alabama is not getting affected as much by tariffs as, I don't know, somebody that owns a huge portfolio of moles and 10% of his portfolio rolls every year. And he needs to re-tenant them, and he's gonna see his stock price come down as a result of certain people pulling back from re from renewing.
Shlomo Chopp: So the whole tariff discussion is a macro discussion, but for the average singular borrower that I work with on a single property on one, one at a time basis I don't see tariffs being an issue. So there's a long-winded way of saying it's so hard to tell, I don't know. The best thing about, you know, being recorded is that when you make a really bad prediction, they could wave it back at you, although it's never stopped anyone in some of these TV shows from saying a lot of interesting things.
Shlomo Chopp: But nonetheless, I'm gonna beg out of predicting where we are. I.
Dianne Crocker: So Schlomo, I wanna ask you about retail. Not too long ago, a lot of people were kind of buying into the narrative that brick and mortar retail was a casualty of e-commerce. And the malls we shopped at were dinosaurs, but now we know post COVID that this narrative was too simple. Retail's not dead and it's evolving and you've been right at the forefront of that evolution. So I wanted you to kind of walk through your retail concept and what it means for the future of that sector.
Shlomo Chopp: Let's talk about e-commerce and retail as a whole and why I am, I think e-commerce is. I don't know, all in from a business perspective might be the biggest bad I've seen ever.
Shlomo Chopp: But then again, I haven't seen a lot of 'em, but haven't been around for the tulip bulb disaster back in the day. So retail margins are, I don't know, two to 10% or so. Very, very thin, right. I got an idea, let's smack on some more expenses to it, right? Let's add some shipping to it, some additional returns.
Shlomo Chopp: Hey, let's get some warehousing on it in addition to our stores. And yeah, I mean, if we lose enough, we'll, we make up what we lose in profit, we'll make it up in volume. It just doesn't make sense. I mean, I'm still trying to get someone to explain to me how. E-commerce for at least lower ticketed items.
Shlomo Chopp: Makes sense. It does it to me. It to me it doesn't. But on the flip side, the consumer wants convenience. I think this concept of we can deliver things to your home is good until you start dealing with the issues. The biggest issue being the economic viability of it from a seller's perspective. So what if instead of.
Shlomo Chopp: Delivering to someone's home from some warehouse that I had to keep enough product here in addition to some product in my store as well. So if I run to, you know, if I run outta one place, I'm not gonna have it. So I gotta move it around. Or if I have too much, I gotta put it on sale in another place.
Shlomo Chopp: What if I just deliver it from the store? I mean, doesn't it seem I'm closest to the customer? Doesn't it make sense? That was really my thinking. When everyone was screaming about e-commerce, everyone was going like, oh, e-commerce is killing retail. Retail is dead. Stores are terrible. I. No, the assortment in stores were terrible.
Shlomo Chopp: The product from the retail selling in stores were terrible. Innovation wasn't happening in stores. Why? Because the stores didn't have to innovate. They owned the customer. Innovation was happening online. Why? Because the guy that was innovating, he couldn't afford to open a store. So what if instead we delivered from store, but even they say Shlomo, hold on one second.
Shlomo Chopp: The guy can't open the store. How is he gonna deliver from the store? He can't open. So we got a solution. We got all these vacant big boxes out there, and in those vacant big boxes, you can store product and if someone orders online, you could drop it into the mail or put it on a truck and deliver it to the guy's house also.
Shlomo Chopp: If they come to store and it's not on the shelf, instead of telling them, oh, thank you so much for taking the half hour to visit our store. Those shoes you like, we don't have it in your size and you don't know whether, if we had it in your size, it would even fit. But let's put that aside. We could ship it to your house.
Shlomo Chopp: You'll have it in two days. And if you don't like it, you could always find the mailbox half a mile from your house, drop it into and send it back to us. How about instead of that, you say, hold on one second. Be right there. You beck in from the warehouse in an in, I don't know, two minutes, it's there. What if you had a way to combine online and offline retail?
Shlomo Chopp: 'cause it never should have been separate to begin with. Now there's opportunity to step in and acquires at the right price and to add this. Micro fulfillment. We are essentially out of a 20,000, 30,000 square foot space we could probably fulfill on an annual basis about $900 million worth of product.
Shlomo Chopp: Probably it would be too much traffic to get the product out the door out of a smaller space. It also enables a retailer to have a smaller store. If a retail's a smaller store, but access to more product and assortment, then two things happen. First off, the customer has a better experience in the store.
Shlomo Chopp: There's more product to sell to them. They could try on, they could decide they don't want it. They could exchange in store and the product's all on hand, but with less space, you pay. Less rent. Even if I raised the rent on you, which I could now because he's selling more product and because he has less rent, and I'm selling from a fulfillment center that by the way, you'd anyways pay rent for if you fulfill the e-commerce, you put those pieces together and I could charge higher rents out of a store.
Shlomo Chopp: My shopping centers are worth more e-commerce, fulfillment, distributions probably worth less, but that's fine. But shopping centers go up in value. And if I happen to own those shopping centers due to a patent, that's great. I'm not a logistics guy. I'm a shopping center. I'm a shopping center, or a real estate guy, and that's my primary focus over here.
Shlomo Chopp: But there's tremendous opportunity to unlock potential not only in NOY and value, but also in a totally different business that can rival, quite frankly to Amazon's and Walmarts of the world.
Manus Clancy: I love the idea. I really think that you might be onto something here. I'd love to see somebody either yourself or somebody else take this on.
Manus Clancy: I'd like to see this be kind of a. FedEx like experiment, right? Nobody thought that you could deliver things overnight, cheaply 40 years ago, 50 years ago, and it became one of the great investments of the world so, but I do think Shlomo, you're underselling yourself. You're a real estate guy. I think you're a Renaissance guy.
Manus Clancy: We said you could be an author. You could be a professor. We already know you're an inventor, right? You could be a lawyer with your encyclopedic knowledge of pooling and servicing agreements. The true Renaissance man of 2025.
Shlomo Chopp: Manus, if I was Julius Caesar, you would've been the trumpeter.
Manus Clancy: I love that even though I don't have a hint of musical ability, I would certainly enjoy the role.
Shlomo Chopp: Yeah. Although I prefer that I would not be him because after all, his buddy turned on him and it was like, it was rough. That whole story.
Martha Coacher: The downside.
Manus Clancy: I'd have your back Shlomo .
Shlomo Chopp: Thank you.
Martha Coacher: Well, with that, we will close. Thank you, Shlomo for joining us today on the CRE Weekly Digest. Thanks to our producer Josh Bruyning.
Martha Coacher: Please join us every week as our LightBox team shares CRE News and Data in Context. You can listen and subscribe on any of your favorite podcast channels and send your comments or questions to podcast@LightBoxre.com. Thank you for listening and have a great week.
Manus Clancy: Let's go.