A Tale of Two Markets --CRE Distress vs. CMBS Resurgence with Morningstar’s David Putro

David Putro, Head of Analytics for Morningstar Credit, doesn’t sugarcoat it. In this candid conversation with the LightBox team, he offers an unflinching look at where distress is building in commercial real estate and why resolution is moving at a crawl. With a sharp focus on office, multifamily, and malls, David explains why this cycle is unfolding slower than the last, and why some properties may never exit special servicing. From billion-dollar loans stuck in limbo to zombie malls surviving on post-COVID extensions, he lays out the long road ahead for asset resolution.  The picture of growing distress offers a stark counterpoint to the healthy surge in CMBS lending so far in 2025.  So, what gives?

David breaks it all down and shares what Morningstar’s “Boots on the Ground” research reveals that spreadsheets miss (think vacancy patterns, tenant quality, and hidden red flags that influence recovery timelines). Don't miss David’s outlook on where distress is headed for the rest of 2025, why office assets remain frozen, and what really keeps credit pros like him up at night (spoiler: it’s not just interest rates).

00:55 Market Paradox: CRE Distress and CMBS Issuance

02:05 Challenges in Multifamily and Office Sectors

03:49 CMBS Purgatory and Loan Resolutions

10:59 Mall Distress and Adaptive Reuse

20:07 Boots on the Ground: Real Estate Insights

27:08 Future Outlook and Concern

Have questions for the pod team? Send them to Podcast@LightBoxRE.com. 

www.lightboxre.com

Transcript

The CRE Weekly Digest by LightBox

Episode 54: A Tale of Two Markets — CRE Distress vs. CMBS Resurgence with Morningstar’s David Putro

July 11, 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 Coacher with Manus Clancy and Dianne Crocker. In today's episode, we're taking a hard look at the credit market in commercial real estate from rising distress in office to shifting fundamentals in multifamily.

Debt maturities, looming asset values, recalibrating and capital sitting on the sidelines. The big question is, where do we go from here To help answer that, we're joined by David Putro, Senior Vice President and Sector Lead at Morningstar Credit Analytics. David leads a team that tracks credit losses across the CRE landscape, and he brings deep perspective on what's driving performance and underperformance in today's environment.

David Putro: Thank you. I'm thrilled to be here. Love talking about this stuff. So ready to get moving. 

Martha Coacher: Great. Well then let's not waste any time you're A-C-M-B-S expert and appear to be two competing headlines in the CMBS market right now. Distress is at the highest level since 2012, especially in office in multifamily.

But CMBS issuance is also at a 15 year high with spreads tightening since the Silicon Valley Bank crisis. How do you explain this dichotomy? I. 

David Putro: Well, I guess there's a, a couple things at play and I, I, I tend to focus more on the, more on the DA as a surveillance guy, more on the downside than on the upside.

So taking a look at, at what's going on with distress. There's a couple things that are, that are going on that are really keeping that distress rate elevated. So one thing, there's, there's, you know, still an influx of, of maturing loans that simply are not refining even loans that perform over the course of their 10 year lives.

You get to. Year 10 and you've, you know, you took out a loan in 2015 at four point a half percent and you're trying to refi at six point a half percent and you, you need a 180 DSCR as opposed to a one 60 DSCR. There's, there's a lot of, uh, a lot of movement there. But also I think one of the things that's, that's a little bit different in this cycle is it is taking an awful lot of time to.

To resolve a lot of very large loans. So your, your basis of your distressed numbers staying quite elevated. Uh, you know, if you look at the multi-family side that park me said loan has been in special servicing for over a year. It's a billion and a half of debt. And I don't think since, you know, probably since Sty Town in the last downturn, I don't recall a multi-family loan that, you know, was kind of driving up that number that much.

And obviously on the, on the multifamily side, I think you also had a sort of a reset post COVID remote work and, and folks that. We're working in Chicago or New York, we're able to work in San Diego or, or, or Nashville, which obviously brought more supply in. So you have a lot of factors in play on the multifamily side.

On the office side, I don't think it's come close to working itself out yet. Uh, in terms of what return to office looks like, where values are, again, a lot of very large loans that are just kind of parked in special servicing really with unclear. Unclear resolutions. So on the, on the distress side, you know, I anticipate it staying elevated for quite some time.

There's still a lot to work through, not to mention some thoughts. I have a mos that we'll get to in a bit on the issuance side, you know, my take, and again, I, I don't track it as, uh, as closely as, as you know what's going wrong, but there's a bit less volatility now on interest rates. So there's at least a predictability in where, you know, where loans can get done, where deals can get done.

And there's also cashing out there that wants to invest. So you have demand building up, um, yeah, you're seeing different. Different dynamics going into deals in terms of LTVs and dscr. But with all that being said, you know, kind of just circling back to my, my, my negative view on, on a handful of office markets, even with this frothy lending, I think there's been two Chicago office deals done in the last 18 months.

Two in Philadelphia, a couple in dc. So some of these really distressed office markets in particular aren't getting the benefit of that. Frothy CMBS market, you know, on the ground here in Philadelphia. There's, there's a lot that has to get worked through, I think before it becomes a kind of a, a stabilized functioning market again.

So you talked about 

Manus Clancy: maturing loans and. And the large volume of we, we call it CMBS purgatory, right? Things perform for 10 years. They reach the maturity date and they get into this state, which is neither heaven nor hell, right? They just kinda linger out there for 18 months, 20 more months, 36 months, no two crises or the same.

We saw how this played out in 2009, 2010, 2011, right? That sometimes there were modifications, there were bifurcations, there were loan extensions. How would you say this cycle differs from that cycle in terms of how things are getting resolved? 

David Putro: I guess the first part of that is how much is getting resolved is my first question.

You know, I, I, I, I, I wish I could go through my entire life, dual tracking every decision I have to make, the way that the servicers dual track resolutions for. For years on end. You know, I, I think one thing that's happened, you know, we have not seen this so far in this cycle is, you know, the AB splits, the quote unquote hope notes with the, you know, the new private equity in the middle or whatever the case is.

We haven't seen that yet. I mean, we have seen a lot of extensions. The one thing I've noted with extensions though, which is pretty. Interest and some of it's anecdotal and some of is what we've seen, you know, especially in the office space, it seems like the servicers may be at a point now where rubber stamping, for lack of better term, you know, a two year extension without any kind of new equity coming in is sort of becoming not the norm.

And if you look back, you know, earlier, I guess. I guess it was last year you had one market in San Francisco, two 80 Park that had to get extensions, but over a hundred million of fresh equity going in. Right? So that's a little bit different. And I, I, I always cringe at the, at the extended pretend, uh, added it's, it's not pretending anywhere when you're putting a hundred million dollars of equity, you know, into a deal.

So I think that's been a benefit, I think where the reverse has happened. Is in a lot of the regional malls that got extended during the pandemic. Very little consideration. Maybe a cashflow suite, but you know, sometimes you're not cashflow and gonna enough to make that worthwhile anyway. And all those are back now for a second extension to third extension without really any noticeable change in net cash flow.

The values, if you, if you look at where they were at, you know, a couple years ago, you know, some of these loans you, I looked at a bunch of them. They need to make up about a hundred percent of their value to. Refinanceable, let's say 60% LTV. So you know, there's, there's, there's still like a price to pay for those COVID era mall modifications and extensions that I've been saying for years.

They're kind of sitting out there, I call them sort of like a shadow, especially service population because they're, you know, they're really not performing, you know, to the terms of the original loan, but yet they're not especially serviced and they're, you're, they're not gonna be a term default until they have to, you know, ultimate refi.

Manus Clancy: So you said a moment ago, you're not sure even how much of this stuff is really getting resolved. I know that was. Tongue in cheek. So it sounds like you are expecting this wave of, of loans that are maturing going into CMBS purgatory to just remain elevated for a couple more years. Right. We're not gonna see, even if rates come down, a lot of these resolved in in short order.

Is that fair? 

David Putro: I think it depends on property type to some degree as well. Right? So again, you know, looking at office because it's top of mind, there's no exit for some of them. On the multi-family side. Right. You know, consider the situation where you have, you know, you have a loan that's gotten through, its 10 years and it accrues along at a one 50 cover, whatever the case is, you know, just can't get there now because of interest rates.

And I sort of wonder on those, does it really behoove a servicer or a trust to try to take those properties when you have an owner that knows the market, that knows the property, but simply needs 50 basis points, a hundred basis points, relief on interest rates to make that a refinanceable property? So there's sort of two sides of this.

I think there's some loans that are gonna move over as maturity defaults that end up. Being more or less okay with some minor modification. Maybe they just need another year or two. But I guess, you know, I guess my thought on that, on the flip side of that is, you know, some of the office stock, some of the regional mall stock, it's almost like you need the first shoe to drop.

Right. And I think through in particular, you know, again, I'm based outside Philadelphia and you know, right now there's three SB office loans within a two block stretch of Market Street just west of of City Hall. All three have been there in special servicing for at least two years, maybe three years.

And it's almost like. One of them needs to get sorted before the other ones can, if that makes sense. So I think there's a lot, there's a lot of factors. It's sort of as, you know, there's, it's not as easy as just a simple D-S-C-R-L-T-V calculation or minimizing a loss to the trust. There's, there's timing elements.

There's those properties in Philadelphia, you need, two of them have the same ownership trying to get two properties plus the one next to it, back to 80% or 85%. It takes time and I understand it. Um, it just seems to be taking a lot longer at this cycle with a lot of larger loans that are kind of keeping some of those numbers elevated.

Manus Clancy: I think you hit on a great point there, David, is that once one thing clears, then you see markets start to open. And I think what we've seen in San Francisco is over the last two years that has become a $275 a square foot market that we've seen five or six things sell. If you look at Chicago, sadly that might be $150 square foot market, and you're right, as soon as one goes.

You have the transparency on what people have paid for it, whether it's class A, class B, or class C. Then you start to see this trickle down effect, and I think we've yet to see that in Philadelphia and other markets. I'm not sure we've seen that in Charlotte yet. We started to see a little bit in Atlanta, and it's really binary.

Once it happens, the market's really clear. Like in San Francisco or Chicago, but in other places, this can go on for a long period of time. I'll let, let me let you 

David Putro: react there again, to sort of take this beyond, you know, kind of the numbers that you can dump into a spreadsheet. If you look at what was happening in Philadelphia prior to the pandemic gradually, and, and for folks that don't know, you know, center City is literally the center of the city, market Street and Broad Street intersect at City Hall.

So that's always been sort of the, the center, you have everything historic to the east, everything business to the west, you know, even before COVID. Between what the University of Pennsylvania Children's Hospital, Drexel University started building out towards the west in University City. There was a gradual move towards the west, right?

So you have two buildings at the train station. Now you have 2,400 market that took Aramark from the other side of Market Street and put them in 2,400. So there's been this gradual change. Now these properties I'm talking about in special servicing are all at the tail end of that. They're, they're very close to city Hall.

And I think one of the real important things for, for folks to think about when they're looking, especially at distressed assets in this market, is you're getting an appraised value. And that appraised value is taking certain things into consideration. They're gonna assume some stabilization and some rent, et cetera, back out the lease up, which all works great in a vacuum.

Right? But you know, when you think about these three buildings that are, that are so close to each other, can you make a case that one of them can get back to 85% occupied? Sure, but when you try to make the case that all three of them can, you know, it's sort of the numbers start falling apart a little bit.

So that's why I find some of these very, not even sub-market specific, but whether it's block specific or, or zip code specific concentrations of commercial real estate. Really interesting because it's sort of this jockeying for, I mean, as soon as soon as soon as one of those works out, the other two are probably negatively impacted.

Just as you know, there's fewer tenants to fill them. Now it, it, it's a whole ecosystem as opposed to a building that's sitting there. It is really truly an ecosystem. 

Dianne Crocker: Welcome, David. You know it's interesting what you said about your focus being more on the downside, and so I wanna dial back and return to the mall topic that you talked about a few minutes ago.

One property that's on Morningstar's watch list is one that I've been watching, and I like examples, so I'd like to get your thoughts. For our listeners, it's a loan at the Natick Mall. It's just outside of Boston. It's New England's largest mall. I've been there and I have to say, I don't think it really presented as.

An old tired mall from the eighties. You know, it's got a modern feel. There's a wide range of of retailers. My teens gave it the thumbs up, but. There's a $505 million loan on it that entered special servicing in December, and it just got a two year extension to late next year. And the challenges I read is that they lost some big tenants like Neiman Marcus, Lord and Taylor.

They have 57 tenant leases that are expiring. And I also read Manus that they're trying to inject new life into the mall by replacing Neiman Marcus with a pickleball venue, which is something we've talked about before. But David, you know, I, I'd like you to kind of. Talk us through the growing strain that you're seeing on legacy malls, even in a strong market like this one, and I, I, I wonder what goes into the decisions about whether to extend or, or refi on loans like Natick, that phase tenant rollover exposure.

I. 

David Putro: Sure. And, and, and Natia is, is interesting because it, it, it got a relatively quick workout and there was, you know, considerable consideration given by, uh, by the borrower on that one to get that modification done. So the loan paid down by somewhere in the, about of 50, 54 million, something like that, as part of the modification.

But they also added a collateral, which is, you know, you don't see that every day in CMBS. So they took the old Sears parcel that was not part of the collateral originally, that's been backfill by a handful of tenants. They added that as collateral for the, for the loan. So there was sort of a two. Value injections, um, as part of that.

And then of course, you know, they'll pick up the rent from that Sears space as well. I think the challenge with malls is very acute. I, it's funny, I read a, an article yesterday that Gen Zers are, are fleeing back, you know, back to the malls. They, they love the malls as a hangout. So I'll give you a, a couple, a couple of examples.

So where I'm at, outside, outside Philadelphia, as soon as COVID hit, Simon threw their hands up on a mall that was, you know, a mile from the office here. It went r very quickly turned around. That was a mall. That was probably the epitome of what would be a bad outcome. I hated that mall as a kid because that was the mall where we went for school clothes.

That was not the toy mall. It was not the Fun Mall. It was not the food court mall. It was the mall for school clothes. And we also only only went on Sunday afternoon. So that meant I was either missing Affiliates game or an Eagles game because we were shopping for school clothes at they got Forsaken Montgomery Mall.

That turned over quickly. Right, and it's still there. It's still functioning. I have not been in there since it went REO. I'm not sure. What's in there, but you know, these, these sort of functionally obsolete malls. But then to your point about pickleball courts, you know, I, I, I think right after COVID happened and you started seeing these big vacancies at malls, I was astounded by how many restaurants that have 97 beers on tap and 800, you know, it, it was these, these massive.

For lack of better, these massive drinking establishments, right, right. That they're, that they're putting in there that, you know, most of these malls needed. They needed something that was sit down that was different than a food court. Where the separation comes in, right, is, you know, if you have an experienced owner with deep enough pockets, right?

That can take something like Natick Mall. Put some equity into it. Take some space that was tired, that's probably out used as usefulness as a, as a retail spot and put in pickleball or put in one of these, these restaurants, kinda these up and coming trendier restaurants. That's sort of where the difference comes in, getting creative with backfilling the space, not just plugging holes.

We'll talk about our, our boots on the ground later in the podcast, but one of the things that's, that's really an important takeaway when we go out and look at malls is, you know. You can see two malls that that report 80% occupancies on paper, and they can have two very different 80% occupancies. Right. So I mean that two ways.

One is there's the mall that the entire west end of it is empty, right? In our mind, that's the dining mall. The rest of it's filled and it's usually filled with t-shirt shops and vape shops and, and all the stuff they're plugging in. I remember during that last downturn, like one had like a dinosaur museum, like who, I wasn't sure who was gonna the mall for a dinosaur museum in 2009, but that, that one just always sticks in my head as a, as a memory from the last downturn.

It's a key takeaway when you look at these malls, understanding not just who the tenants are, but how those tenants are dispersed within the property. What are the drivers are their non collateral drivers? Again, you know, at, at, at the mall I mentioned that's close to the office here, there was a Wegmans that was fantastic.

You know, a supermarket that was doing bonkers business, but it was sealed off from the rest of the mall, so there was no. Pass through, right? There was no egress. And also, you know, I'm not sure who was gonna go buy a shirt and then go buy milk. It seemed like an odd mix. And what the odor did after that, when REO was, they sold the Wegmans right away and, you know, recouped a good chunk of what they put out for the rest of the mall.

So there's, there's plays like that as well. When I look at the malls that are, that are kind of stuck in, in the purgatory of having had a COVID era modification that are still, you know, cruising along at 2.0 covers whatever the case is. I still don't see what the exit is. I'm not sure how they ever get refied in their current state.

'cause a, there's a lot of debt, right. There's just a, it's a big number to take down, which obviously requires a big value to make the math work on a takeout loan. And Yeah, sure. They, they can kind of cruise along performing forever, but it's not a refinanceable, so it's sort of like a zombie mall. Not in terms of, you know, being a dead mall, but being a, uh, I don't know.

It, it's sort of like they're artificially propped up for a bit, they still have to get reckoned with. And there's, there's a lot, there's a lot of that stock out there still. 

Manus Clancy: Resolvable, I guess it would be. And we saw that coming out of 2007, we saw some of these malls that had maturity dates in 2010. Were still sitting in purgatory 7, 8, 9 years later, sitting on their third extension.

So it's, it's a, it's a, a story that's been around there for a while. But I have to say, Dave, we're kind of kindred spirits on the mall on the Sunday afternoon. Getting the school closed. I hated missing the Met Games or the giant games. But I do think you left one part out, I don't know if this was part of your family, but once a year going to Sears for the family portrait.

Right. Which, which was even worse than the, uh, the school clothes shopping, because you might be online at the. At the portrait place for maybe an hour to get that $99 special. I don't know if that was part of the, your family's tradition. 

David Putro: We skipped that for the, uh, the trip to Red Lobster after the, uh, the clothes shopping.

So, 

Manus Clancy: oh, my father was a big Red Lobster guy, so I get mine, mine, mine too. Get that. So I know we're gonna get to boots on the ground shortly, but before we get to that, I want to talk about your process, right? We have a lot of listeners out there that. CBS credit people, right? For those listeners who don't know the CMBS market, if you're buying the Triple A bonds, you're not as worried about credit as if you were buying the Triple B, the double B, the single A, where a loss could really impact you, but you're talking about tens of thousands of loans, tens of thousands of properties every month.

That data gets updated. By the servicers as you're seeing new data on net operating income, occupancy, delinquency rates, and. At a very high level, tell us a little bit about your process. What are you looking at in the middle of the month when you're getting this wave of new data? How do you get your arms around which properties are concerning to you?

Which ones are on the verge of getting new valuations? Give us a little, without giving away your special sauce, how do you start? 

David Putro: It's a great question because it's, you know, covering the entire c mb s universe, you know, we're, I dunno, 14, 1500 deals deep at this point. So really, I mean, the key to what we do now is we have, we have two systems that we use.

We have an internal system and a external subscription based system that we use internally as well. That's flagging loan level changes in real time. So we're not waiting for tapes to roll overnight. As soon as the trustee's releasing the new data, uh, it's getting picked up and we have a dashboard that's showing.

Changes in real time. So we're seeing, okay, this deal has two new appraisals, one new loan of special servicing, three new loans that had NOI changes. You know, we could toggle that 10%, 15%, 20%. This one has new service or commentary and we can hit a button and see the difference between last month's commentary, this month's commentary.

So, so my team of analysts on, on a monthly basis are going through their portfolios and. Looking at, at every loan that kind of hits these, these criteria, and then determining whether there needs to be valuation change. Is it simply sort of a credit, you know, a credit event that can comment on, but you sort of have to let it play out a bit before you revalue it.

And then we're, we're ultimately bubbling that up and forecasting, you know, loan level losses and, and you know, ultimately bond level losses. And then on the flip side, we have the team that's, that's doing the research. So, uh, you know, we do our, our daily CMBS newsletter, we're. Blasting these, these credit events out, you know, as quickly as we can.

And then writing some other research as well, doing the boots on the ground. It's a bottom up analysis. It sits, you know, in very individual kind of work units. Uh, each analyst kind of has their process for what they do, but it ultimately is based on getting these changes in real time and, and making credit decisions on loans and deals, you know, as quickly as you can process the data.

Martha Coacher: Let's talk about ground truths. One thing we love about the boots on the ground series that your team does is you're literally walking these properties, looking at the conditions, looking at who's in them, and whether they're empty or busy. What are some of the things that you're seeing on the ground in terms of if things you can observe that aren't in investor reporting packages or spreadsheets?

David Putro: Just a background on, on how boots on the ground came about. I took my current role here, uh, about three years ago. Uh, I'd been with the, with the rating agency prior to that. So I, I took this role with Morningstar credit and was in our Chicago headquarters and had a free afternoon and just realized how much, how much distress real estate was at within walking distance of, of Morningstar's headquarters in Chicago.

And, and I set out on a walk with no expectation of this becoming a, a thing, right? And it turns out that that first piece was so well received that we, we kept with it. So. I, I think there's a handful of things that are really, that have become really beneficial in doing these types of, of walkarounds and, you know, for full understanding, these are not tours that are led by property managers.

So, you know, we go see a mall, uh, see a hotel. Offices are a little bit harder to discern what's going on, but there's a lot of things you can get that, that are not buried in the numbers. So, for example, uh, again, I, I, I did, I did a walking tour through Philadelphia, and this is just, you know, just after you return to office started and trying to get an idea of, you know.

Okay, are these buildings really being used or these kind of shells that have, you know, 90% occupancy on paper, but in reality they're being used, you know, 30% what, whatever the case is. Right. So even just take, take one. Building as, as an example where, you know, at dusk and understanding that most buildings these days have energy efficient lights that go on and off with movement.

And seeing the number of lights on in that building at dusk told me that. Most of that building was occupied, taking a walk around and seeing the bike parking area and just seeing dozens of bike. And this is a property that sits along a bike trail that runs through Philadelphia. Seeing the number of bicycles that were in that bike lockup told me that, that that building was being used.

Right. It was a, it was a lively building, but there's other things too that just kind of come up naturally. So, you know, again, uh, a couple years back, uh, stopping and getting gas and seeing a hotel that, that had a fencing all the way around it, the entire. Hotel was fenced off. It was a $17 million loan.

Not the biggest CNBS story in the world, but you know, enough to blow up the bottom of a debt stack if it goes really south. And sure enough, get back to the office and there's no mention in any commentary that the, that the hotels actually closed. And that's when we, you know, had somebody go back out and take a look at it and get pictures inside.

And you could tell sure enough, this was a damaged hotel. You know, I mentioned earlier with malls, you know, seeing where vacancies are, seeing the, the, the stores that are open but have signs on the wall that say no. Be back in three hours. I mean, that, that was still seeing an awful lot of that when we go out where a handwritten sign that they're, they're not open at that moment.

It's stuff like that that really piques our interest. You know, even in office spaces, we have a, a couple more daring analysts that will try to venture into office buildings where they're, you know, where, where maybe they shouldn't be, but they managed to talk their way in and just seeing their even internal.

Tenant rosters by the elevator and seeing where there's empty slots that, that were once occupied. It ends up being a lot of work after the fact too, where we can observe something and then come back and do the research and figure out exactly what's going on. Uh, so it's been, it's been great. Um, again, you know, we, we tend to concentrate, you know, Pennsylvania, New Jersey, New York, but we've done, you know, Hawaii, Texas, Florida, uh, St.

Louis. Indianapolis. You know, there, there's a story everywhere. Going back to my original thought about, you know, all this being an ecosystem, every building's different. Every building has its own story. Look at two buildings that have one 50 dscr and 80% occupancies, and they get, they can be vastly different.

That's what we try to, we try to discern when we go out and do these walk arounds. 

Manus Clancy: Certainly hope it was your boots on the ground in Hawaii, David, but, uh, you got to do that gig and not the junior analysts. 

David Putro: Actually, it was one of our fellows who was there on, on vacation with his wife and just took an afternoon and did them.

Now, I, uh, I'm responsible for the Indianapolis and St. Louis man. So not, not quite as, uh, not quite as exotic as, uh, as as Hawaii. 

Dianne Crocker: I agree with what you said, David, though, that what you see on the ground can be very, very different than perception. And I love the boot series, so put me in that fan club. I used to live in DC so that was a very fun one to watch and they're just very cool highlights of, of.

What's changing in the downtown, where redevelopment is happening, where it isn't? I'll say in terms of an on the boots perception being different than what you read. I was in Portland and there was an office tower there called Big Pink because it's kind of a rose color that got a lot of negative publicity because they lost a huge year long tenant when us Bankcorp left.

To read the news articles, you would think that it was completely overrun with homeless. And yes, it has a high vacancy, but I walk through it and it's gleaming. It's absolutely beautiful. Um, and they're working hard to bring in new tenants. So I think the importance of the boots on the ground and the points that you just made is that sometimes the perceptions that you get about a property can only be achieved by actually being there, you know, and looking at it.

One thing that I did wanna ask you is something that really stands out in my mind about this cycle and the market that's a bit different than previous is just how differentiated it is. So like just within a city or just within an asset class, there are sub-markets and there are neighborhoods that can be very different from others.

And so I wonder. Just generally, what kinds of submarkets or specific cities that kind of stand out in your mind as being mispriced, um, are either too pessimistic or too rosy 

David Putro: Reading, just, uh, this morning about kind of the year over year changes in in sales activity in Los Angeles and San Francisco. It sort of points to, okay, like there's some kind of a resurgence going on, but when you realize, you know, kind of how low that denominator was last year, it's easy to get to 157% change year over year.

Right. So, and again, I'm not as actively involved in, in sort of the, the, the sales transactions that occur outside of CMBS. I do think on the downside, the markets that still have this, this large stock of, of distressed office that hasn't moved yet. Are gonna be really, really challenging when you look at what, what's going on in Chicago, uh, very little.

That distress has, has found takers, you know, the whole conversion to residential and that's probably in the rear view mirror already, except for limited cases. You know, that turned out to be a bit more challenging when you consider architectural engineering pieces of the puzzle. So I'm still watching those markets that have big stocks of distressed office that, that haven't moved yet.

Right. On the flip side, you know, you're, you're, you're seeing pockets segment. I think it, it seems like. New York's come back a good bit. You know, class A space in New York is back to being class A space in New York. Right? You went out, saw St. Louis and granted it's not a, not a major footprint in CMBS.

There's, there's a handful of buildings, but I was shocked by, by downtown St. Louis. Not in terms of, of crime or anything else, just in terms of lack of vibrancy. Um, and there's a couple, couple of big properties have to get worked out there. So like, I dunno, I, I'm very, very much kind of finger on the pulse of, of the distress markets more so than, than the ones that are, you know, kind of roaring back to life.

Manus Clancy: Let's talk about where we're gonna be a year from now in office and where we're gonna be a year from now in multifamily. Let's, let's start with the multifamily. It's really been the golden child of CRE for 15 years, even during the great financial crisis, not a whole lot of disaster stories coming outta the grad great financial crisis compared to other asset classes like malls.

During the COVID years really saw a spike in valuations. People flooded into the market trying to buy these value add properties at three and a half cap rates and so forth. But now the, you know, the piper has, uh, has to be paid and we're seeing a, an uptick in distress. There. Is this transitory to use that old fed word, or is this gonna be with us for a while?

Where do you see us in a year from now on? Multifamily distress us. 

David Putro: So I, I do think it's, it's a bit transitory and, and, and stepping away from the kind of the C-R-E-C-L-O space that were, you know, that were, the pure value adds with rent growth expectations that just never materialized. I think there's, there's more distress just, you know, kind of going through some of the math on, on the refinance ability of even a, a decent performing property, there's still gonna be.

Some of that pressuring the multifamily distress side, you know, to, to the upside, whatever reason. I think multifamily more than others, have been really affected by this, by this interest rate difference because they were not able to, to grow rents at the pace that they needed to make up that difference in, in spread.

You know, I would anticipate a year from now that we're, we're still looking at a, at a fairly elevated. Multifamily distress number, does that manifest itself in loan level losses or bond level losses? I, I, I, I tend to think not, I think a lot of them are holding, you know, enough value that they're, you know, maybe they're highly levered, but I, I don't see a lot that are underwater from a value perspective.

It's, it's more from a cashflow perspective that, that makes refinancing a challenge. And, and again, that's, you know, that's kinda like your stock conduit, multi-family loans that I've been looking at. 

Manus Clancy: Fair to say, then un refinanceable, they sit in purgatory for a while, but not a huge wave of losses forthcoming.

Is that fair? Yeah, that's my thought at the moment. Okay. 

Dianne Crocker: I think David, one point that I'm hearing loud and clear from you is that, uh, distress will be with us for a while, that things are moving very, very slowly, um, through the process. And there's so many moving parts, right? You know, there are interest rates, inflation, pf, geopolitical risk, all things that we talk about pretty much every week on this podcast.

So I wanna ask you, as you kind of zoom out and you think about the road that we're on. What do you kind of view as your biggest concern as you look ahead to the next six to 12 months? What keeps you up at night? 

David Putro: I think there's a couple things and you know, taking the geopolitical tariffs, all that.

Outta the mix. And I, I say that only because, you know, we've seen a, an incredibly healthy first half of this year in terms of issuance. Whether the market's adopted to a new norm or just shrugs it off and figures the market's resilient enough, you know, it hasn't really manifested itself as a, as a direct impact on Team S at the moment.

You know, the things that keep me as a diehard surveillance guy, I can kind of tick through a couple of things across property types, you know, in the office space a this long time to resolve the loans. At some point, somebody has to make a move on one of these, on one of these buildings to sort of set the dominoes in motion to kind of clear up a lot of it.

And I just don't see that happening yet. And also from the, from the, again, I keep on using the word ecosystem. I saw an article, uh, yesterday that outside San Francisco and San Mateo, uh, I forget what the number was, but this, this tremendous amount of office space will end up coming offline as office space.

Right? And then, you know, the, the follow up there is a, what happens to the surrounding area, right? So you have. You have office spaces that have pharmacies and, and cafes and all this other ground, uh, ground level retail that's gonna be permanently impacted by these buildings disappearing and by fewer people coming in.

Now, I will say the one thing that offsets that is I still don't think that we've. Come all the way to the end of what constitutes a normal return to office schedule. It seems to be like the pendulum was swinging the other way at this point in terms of, you know, more companies are going back to four or five days.

I think companies, you know, companies, tenants, however you wanna classify the people that are, that are in these buildings, I. I don't think the calculation is finalized yet as to how much space they need going forward. Right. And obviously that becomes a question if your, if your lease is ending in the next year or so.

But if you saw three years to play out on a lease, you know, that's kind of a different story. We we're gonna be in a whole different environment in three years than we are now. All my questions about what's gonna happen with Boulder office space, both from A-A-C-M-B-S loss standpoint and from a functionality effects on the market standpoint are things I worry about.

In the mall space, as Mattis alluded to earlier, if you think back to the, to the last downturn, we ended up seeing some malls go out at $7 a foot, $9 a foot. They're being liquidated at very low prices and and effectively what that did at the time was it separated your, your class C obsolete malls from the A and B stuff, right?

Then when COVID hit it, sort of did that, did that again, but now it was just separated the A from the B. The problem is, is there's still an awful lot of Class B mall space left that has to get resolved, but also sort of the same issue arises there where yes, there's, there's folks out there that wanna come in and, and, and take 'em mall and turn it inside out and add, add multifamily and add a hotel and, and make it, you know, an outside lifestyle center.

It kind of only works so many times, right? Especially in a given market, there's a number of distress malls around me. You can't take all four or five of them and turn them into lifestyle centers with, you know, with, with 3,200 hour a month apartments, the economics don't work. So what becomes of those, and then especially when you think about it in the CMBS context, you know, there's, I don't know, six, 7 billion of, of, of these types of loans that are sitting out there that are these, you know, giant loan balances, extended stays in, in special servicing, and.

That's a lot for the market to digest. Right? That that's an awful, and granted, you know, if, if you own those bonds, they're probably written down already. So it's, you know, from a, a practical standpoint, but just from a, a headline standpoint, if some SB mall takes an 80% loss, it's gonna be a headline obviously then has reciprocal or, uh, uh, residual effects on other things.

So, um, you know, getting, getting through all that again, you know, on the multifamily side, a little less concerned on the industrial side, you know, probably some overbuilding, but by and large it's holding up hotels from a practical standpoint. What I'm paying these days for hotels is, is through the roof for what it was.

It's amazing. And I, and I thought this was the, the, the post COVID stimulus. We've been pent up. We have extra cash we're gonna go spend for a year and travel. It's not letting up. It's amazing. So again, you know, outside of property specific, or again, you know, a a a, a port, a structured loan, don't see a a, a whole lot going on in the hotel space either.

Martha Coacher: Spoken like a true credit surveillance expert. Thank you so much for joining us today, really giving us a lot to think about. Thanks to our producer, Josh Bruyning. Please join us every week as our LightBox team shares CRE News and Data in context. Don't forget to subscribe and share this episode with someone navigating the same uncertainty in the CRE world and send your comments or questions to podcast@LightBoxre.com.

Thank you for listening and have a great week. 

Manus Clancy: Let's go.