Commercial Real Estate at Mid-Year | Preparing for the Second Half of 2026

Lonnie Hendry:Thanks, Lisa. Very excited to be here today and we love doing these webinars with you and your team. You've been incredible to work with. And I think your intro is right on. It's really interesting in 2026. If you haven't noticed, there's a lot of moving parts in the market today. We have a lot of macro uncertainty. We have a lot of refinancing uncertainty. I think we're not allowed to say maturity wall anymore because people are tired of hearing about it. We have issuance that's jumping off the page. And so there's all of these themes that independent and in and of themselves give you a signal that things are, if you look at issuance as a standalone, really strong right now, you would say, wow, that's great. Things must be really moving along. But you look at the macro backdrop and there's a lot of uncertainty.

So we're going to try to distill this into a generally digestible, consumable construct of where we think the market is mid-year. I'll tell you there's a lot more positive than there has been the last couple of years, but it's not without some negative and some distress that still has to work its way through the system. So just as a way of overview for today's presentation, we've broken it down into six effective categories here. We'll start off with just macro and capital backdrop. I think these are topics that everyone's seeing every day in all of the headlines. What's happening with growth? Where's inflation? Is higher for longer real? And what does that mean? Spoiler alert, higher for longer is real. We'll talk about that. And then we'll go into issuance and spreads because really that's kind of the lifeblood of the market. Is there liquidity available?

Are we seeing transactions get done? And if so, at what price? We'll give you a little bit of deep dive there. And then Trep actually produces a property price index. It's called the TPPI. And we'll give you some perspective on where we think prices are in the transaction market across the different sectors. And then we wouldn't be able to have a webinar today if we didn't focus a little bit on delinquency. I mean, this is not a leading indicator. It's kind of a lagging indicator of where the distress is piling up. And again, this is one that has garnered a bunch of headlines and it continues to because we're in a very elevated period of delinquency. It's not negative in the sense that the market's terrible. It's just there's a sizable portion of the market that's still working through some of this interest rate hike cycle that the Fed implemented a few years ago and markets are having to price too today.

Then we're going to do a deep dive on eight markets across five different property sectors, look at cap rates and some occupancy data, and then we'll provide some outlook and key takeaways for the second half of 2026. So we're excited to give some perspective on what we're seeing in the data. I think it is important. I'm going to give you my conceptual views and some of my opinion here, but really this is backed by the data. And I think that's the important thing, especially in a market like today. You need expertise from people like EisnerAmper that work in this business every day, but you also need the underlying data to form really solid opinions on what's taking place. And I think that the way we framed 2026 year to date is stabilization, but not a reset. And so if you go back to the Kreft C Conference in January of this year, they typically have just over 2,000 people in attendance.

It's down in Miami. Everyone from the north goes down there. It's nice and comfortable in January to be in Miami. It's exciting. This year there was over 4,000 people there and the optimism was overflowing. I mean, it was the most optimistic conference in the Kreft C era that I've been to in the last 10 years or so. And I think what's happened is we've seen a little bit of pullback from some of the optimism. 2025 finished extremely strong. And with Iran conflict and some of these other challenges that we've seen on the macro, it's really stabilized the market, but I don't think that we're maybe going to live up to the early year hype that everyone was pontificating in January. So capital has reopened. If you look at issuance, as I mentioned a moment ago, issuance is really, really strong. 2025 was a really high year for issuance, over 150 billion in the structured world.

We'll have a slide that kind of gives some detail on that. But if you look at it, it's not across the spectrum equally distributed. There are clearly the haves and the have - nots. I think the underlying takeaway behind this stabilization and not a reset is that two things can be true at once. And we're seeing that play out in the marketplace. The high end, highly monetized, credit tenant backed type of buildings, incredible insatiable apetite for refinancing transaction activity, et cetera. The class B, older, maybe less great location properties, it's not a lot of demand for them, especially in office. And you're starting to see some of that trickle down in some of the other sectors in multifamily, et cetera. I think the other takeaway, and we'll have a question on this later in the presentation, I'd love to hear what people's thoughts are, but it's no longer one cycle.

I mean, really we say on our podcast and then our commentary that commercial real estate by definition is a local and sometimes hyper local endeavor. You can have two buildings on the same street with completely different outcomes depending on who the owner is, what the capital stack looks like, who the tenants are. And I think you're seeing this play out more broadly just across the marketplace. It's no longer the case that you can say definitively commercial real estate is in recovery. While that may be true in some markets, there are others where it's still trying to find the bottom on pricing and occupancy stabilization, et cetera. So those are kind of the overarching themes as we head into some of the more broadly discussed headlines and some of the data. So I'm a transition here to the macro backdrop. The highlight here is that capital is returning and just echo what I said, it's selective.

So this just means if you do have an upcoming maturity, there's no certainty that all of those properties are going to be able to refinance out in today's higher cost to capital market. The highly amenitized, well located class A buildings are not having an issue. They've been able to push rents even in the office sector. You look in New York, we've seen an incredible amount of absorption. We've seen rent growth at top line across the high end class A offices. So for them, they've actually seen value appreciation, which is a little bit contra to the headlines. But if you go to the class B and lower subset of that market across the US, there's still a lot of work that has to be done. If you're a class B 1980s suburban office across the US and anywhere city and you were financed in your last deal at 3.5% mortgage and today you're having to refi it at seven, you haven't seen that same type of value appreciation.

You're probably coming to the table with some cash for a refi. And so I think the higher for longer narrative has turned into a higher for longer reality. And if you look at the new Fed share, they held rates at this last meeting and they basically took away forward guidance and the markets have effectively priced in potentially one, maybe two rate hikes the latter half of 2026, not the one or two rate cuts that I think the markets had priced in at the beginning of the year. So again, not catastrophic, but certainly putting a little bit of pause on the optimism that we maybe entered 2026 with. So if you look at occupancy as a metric -

Lisa Knee:Yeah, go ahead. Can we just go back for one second? Set the higher for longer a few times. So at what point is that not the headwind? And are people really just accepting that as the new normal? Is that where we're at, that this is our new normal that people are going to start on underwriting at? I mean, is that where we're at?

Lonnie Hendry:Yeah. So it's a great question. And I think if you've had to refinance, if you've had a maturity or you've had an acquisition or whatever, the higher for longer reality has set in. The markets generally have priced in the higher interest rate environment for things that were forced, whether it be an acquisition or a refinance. If you are still holding out for another couple years until your maturity comes into a closer view, people still want to hold onto some of the legacy pricing from 21, 22, et cetera, because they haven't been forced to sell. So if you look at the market in any given year, you're going to have just a small subset of deals on a relative basis that come up for maturity. So those deals that have had that obviously felt that reality real time as those maturities played themselves out. There's a large subset of the market here that still haven't had that maturity date forced upon them and they haven't had to sell because of distress in the operations of the property.

So for them, it's still somewhat theoretical. But I like the question, Lisa, because if you've been in this business any length of time, I'm about 25 years in at this point, the rates that we're seeing today are very good rates. I mean, if you look from a historical context, today's rates are not higher in a long-term perspective. You look back the last 40 years where commercial mortgage rates are today is right in line with what you'd look at if you looked at the median or average over any selected time period outside of the anomaly where we were in a zero interest rate environment. The anomaly is not today's higher rates. The anomaly is when the Fed put rates at zero and the markets took off to the moon. And that's probably the biggest catalyst at this point for the distress that interest rates went to zero.

Cap rates effectively went to unfathomably low cap rates, 1970s class C multifamily across the Sunbelt. In 2021, we're trading on three and a half to 4% cap rates on trailing 12 NOI. It's just not supportable. That's the anomaly and that's what's caused some of this consternation that the market's having to go through now. But to me, the higher for longer it's there. Properties are dealing with this with maturity or when an acquisition or financing event happens and you've seen prices adjust across the spectrum. So I do think you're starting to see that bid ask spread.You were saying the last couple of years, people were asking when are sellers going to capitulate to the market. You've seen that pretty much across the spectrum play itself out. But for folks that are performing well, they don't have a maturity, they're still hoping and praying for some rate cuts before their maturity window comes in.

Lisa Knee:We may need a new slogan, not higher for longer though.

Lonnie Hendry:Yeah. We talked about this on our show a couple weeks ago. It's like for how long can you say it's higher for longer? At this point, it's where it's been for the last year plus.This is just what we call reality. And sometimes in life, you just got to accept what's real and this is what's real. The reality is rates are where they are. They're not going to go down anytime. Not withstanding some crazy macro event or something else. I don't see rates coming down precipitously. So yeah, this is just the new reality. And what I know about commercial real estate and that one thing that's great about this industry is it has proven its resiliency through the last six years or so. I mean, if you look at any of these events, you had COVID, which nobody could have predicted it happened. That was in nobody's underwriting model.

Nobody had that in their 10-year DCF that we're going to have shutdowns and lockdowns and all these things. You have the Fed tightening rates like crazy, 500 basis points in 16 months. You've had a bunch of macro challenges. You've had Iran and cost of energy and all these things skyrocket. You've had the inflation, that pressure that was the catalyst for the Fed moving rates. And then you've had tariffs. At any other point in history, any one of those things singularly would have derailed a market or had the potential to. This last five years has had all of those things in conjunction. And really issuance volume for a short period was down. Transaction volume for a short period was down. But on the whole, the industry has held up incredibly well. I mean, office delinquency, as an example, hit an all - time high in October of last year over 11%.

So I'm always a silver lining kind of optimist guy. That by definition means 89% of the offices were still making their mortgage payment. And with all we know about work from home, paradigm shift around office, all this functionally obsolete office stock across the US, the fact that in the worst of worst, only 11% of the offices were delinquent, I think just speaks to the reality of how resilient this industry has become. So let's transition here to the issuance. I've spoken about it quite a bit, but I wanted to give you guys some visual representation here. And a couple of takeaways. If you look at where we are at the end of 25 and where we've been through the first half of 26, issuance back. It's at a strongest level since the great financial crisis. And so it's interesting if you look at the years 2005, 2006 and 2007, I mean, we were hovering around or eclipsing 200 billion in annual issuance, which once that happened and CMBS 2.0 came into effect and you had risk retention and you had underwriting standards that weren't allowing proforma financials to be underwritten into loan and valuations, et cetera.

I would've been pretty steadfast in saying that we'll never approach those levels of origination volume again because the market just won't support it. But if you look at 2025, we're about 159 billion. I mean, that's pretty impressive in comparison to what we saw pre - GSC. If you look at 2026, annualize that, depending on how the year finishes, we're probably going to end up at 150 to 170 billion this year, getting really close to that $200 billion threshold, which I didn't think we would ever see again. So on the securitized space, whether it be Conduit, SASB or CRE/CLO, you've seen a really strong bounce back from origination volume. 2021 is somewhat of an anomaly here because in 2020 you had COVID, so the market shut down effectively for 60 or 90 days. And then the Fed aggressively cut rates and you saw 2021 basically take a year and a half's worth of issuance in 12 months.

And then you see the interaction of government involvement with the Fed raising rates and what's happened to issuance in 22 and 23. But to your question, Lisa, this proves the fact that the markets have recalibrated to the higher interest rate environment because 24 saw a pretty strong recovery. 25 was incredible and 2026 is set up to be just as good, if not better. So I think for me, this is the underlying, this is like the oil in the engine. Issuance is what has to happen for transactions. Liquidity has to be available. This is demonstrative of the fact that those things are in play in today's market.

So what's interesting though is if you do a little bit of a deep dive in not just looking at broad origination, but you start parsing it down by origination type, this speaks to the narrative that I was talking about in some of the big picture items. The SASB, which for those that maybe are not as familiar, SASB just stands for single asset, single borrower. So in the securitized world, think of like one Vanderbilt or Rockefeller Center or the Spiral of New York City. These are office buildings or mixed use properties that would be candidates for a SASB type of origination where in a conduit deal, you're going to have a composition of loans, call it 40 to 100 loans spread out geographically across multiple property types. And that makes up the bond that gets sold on the market. In a SASB deal, you either have a single asset.

So one building is the entire composition of the bond offering, or you have a single borrower that maybe has six or eight Great Wolf Lodge hotels as an example. So it's multiple assets, but it's all under the same umbrella. What this is indicative of is just the flight to quality as we talked about. So the SASB volume being such a high percentage of overall origination just shows that it doesn't invalidate the broader narrative that liquidity is available and issuance is really strong universally because it is, but really it's concentrated across these higher quality, better, well-located assets. The conduit market, which as I mentioned, is a composition of loans, which historically have performed very well because they diversify risk both in geographic concentration and in property sector concentration have really fallen out of favor the last several years. And so if you look at the year to date when the report was put together, 77 billion in issuance, only 14% of that was conduit.

SASB was an overwhelming majority of 56%. And then the CRE CLO, those are short-term floating rate loans, typically 24 to 36 months in original term. A lot of them have one, two or three 12-month extension options that can be executed by the borrower. This market is really interesting. If you go back to 2021, it hit an all time high of 45 billion in issuance. The previous high watermark was around 20 billion in 2019. After 2021 though, it fell off a cliff. If you look at 23 and 24, they're about 8.9 and 8.7 billion respectively in total origination for the entire year. So we effectively went from 45 billion to about eight billion for a couple of years. Fast forward to last year, it was up back over 30 billion, 30.9 billion in 2025. And for 2026, it's on pace to eclipse 50 billion in issuance.

Now for the folks in the audience that wonder what that signals, it signals a couple of things. A certain percentage of those deals are bridge to bridge type of financing. So these are new construction multifamily properties that have taken longer to lease up than what was expected. And so they haven't been able to get permanent takeout financing through say Fannie or Freddie as an example. And so they had a short term loan and they've gone back into a short term loan until they can get occupancy to a stabilized basis. That's super important distinction because those are still transitional loans where it's not like an upside play. They're not trying to do a value add or renovation. They're really just trying to get to stabilization. But the overwhelming majority of this outside of those examples are value add reposition plays where people are believing again that there is some rent growth opportunities available in the market.

And if you have a strong operator with good experience, they can actually take advantage of some of these dislocations in the market and push rental rates and actually create value. This is good. That's indicative of a growth part of the cycle. When this market is shuttered, it tells you that everyone is conservative and everyone's underwriting and viewing today's in - place income is the only thing that's viable. This gives us some hope that there's some value add reposition, rent growth, operational increases in valuation that can be applied. And so I'm pretty bullish on the fact that we're seeing an active CRE CLO market. Now this is in large part driven. Spreads have really compressed. And so if you look across the different investment grade stacks at the AA level, spreads have come in to about 73 basis points. That was in from 93 a year ago.

So we hosted a conference in New York back in May and we had a bunch of lenders on and the theme was universal. This is an incredibly competitive market for lenders in the lending space right now. There's a lot of available equity in the marketplace that needs to get placed into deals. And so transaction volume is picking up and lenders are having to compete to win business from active acquisition firms. And so you're seeing spreads compress at the top end of the stack. So 73 basis points is indicative of just the composition of the competitive nature of the marketplace. If you go down to the triple minus, again, you've seen pretty significant compression at that level, 391 basis points relative to the 461 that we saw a year ago. And if you go back to early 2024, you were seeing 700 plus. And so you've seen significant compression across the stack on spreads, which highlights the fact that there's activity despite some of the negative headwinds with inflation, with uncertainty, with higher interest rates.

It's not definitively locking people out of getting deals done. It's just putting a little more pressure on the lenders to be competitive. So this is our second poll question here. Is the CRE environment moving in one cycle? We'll give everyone just a second to answer this. This one's pretty straightforward, yes or no. We're actually going to move on to our next slide and we'll come back to the results on this one in just a second, but please take an opportunity here to fill out the poll question.

And then Lisa, I wanted to jump in here on repricing. So your question earlier on the higher for longer, we're seeing it play out in the form of assets being repriced. And at the end of the day, some of this is just a math equation. If interest rates go from three to seven and NOI has stayed the same and cap rates have expanded, values by definition come down. And if you're an owner of an asset that has to sell into this market, you're not excited about that because in a lot of instances, as I mentioned, you're either bringing cash to close refi, or you're selling the property for significantly less than you anticipated when you did your acquisition underwriting analysis. And so if you look across the spectrum, retail is showing positive growth. Industrial's pretty much flat. We've not seen any distress to speak of across industrial.

There's been some negative headlines over the last six months or so about some market softening in industrial. I personally push back on the narrative. I mean, I've talked to a bunch of brokerage clients in the last couple of months and they all universally have discussed how strong the industrial sector remains, even in the million plus square foot where I though you might start seeing some pullback. Met with the broker in the Dallas area about a month ago and they were saying how last year in DFW alone, their office did 10 one million square foot leases in the industrial sector in the Dallas market. And they have another five clients, four or five clients on the sidelines wanting to do million square foot deals and there's not enough million square foot inventory in the marketplace. And so you haven't really seen any fluctuation there. Multifamily pulled back but stabilized.

Even office has started to stabilize. We're starting to see an equal weighted in our index 3.3% increase year over year. If you look at the value weight, it's still down 15% from the peak, but we're starting to see stabilization, you're starting to see assets trade. Lodging is the one sector that's still kind of in the active repricing phase. And so I have my thoughts on this relative to how COVID negatively impacted lodging with PIP plan enforcement. And a lot of hotels just nationally are very tired. They haven't been renovated, but they've been able to aggressively push ADR and RevPAR, which has negatively incentivized them to take rooms offline and renovate them. So there is in this weird conundrum where revenues are very strong, but the assets themselves are super tired. And so we're going to see the rubber meeting the road there at some level where these assets trade the physical deterioration gets factored in even though the economics, the financials look like they're performing exceptionally well.

And then here's the results of our poll question. So I think everyone for the most part agrees that it's not moving in one cycle. There's still pretty good response that maybe it is. And I think you could make the case that maybe it is broadly, you could say that generally based on issuance, the market's improved, but I'm with the folks to say no. I think there's a lot of different storylines here across the landscape. So we had mentioned earlier some of the delinquency. And so just to kind of highlight this and quantify this in real number terms here for the attendees, what we're seeing the headline delinquency number in the CNBS universe, this is as of when the report was put out 7.54%.

Again, significantly elevated from historical norms, but just to give you some historical context on what is the worst reading we've seen back in May or June of 2012, well, it was 10.34%. I think it was June of 2012, the all time high was 10.34%. So we're multiple hundred basis points below that at 7.54. Still high, but not catastrophic. If you look at including the performing assets that are past their maturity, so these are assets that are still making the mortgage payment, but they were not able to refi, then delinquency would go up to 9.06%. So seven and a half is the headline number that we run with. If you parse out the seriously delinquent, so these are loans that are past 60 days or in foreclosure or REO status, it's 7.27%. So this just tells you it's heavily weighted towards the seriously delinquent. And these are the ones, Lisa, to your point earlier, where refinancing is just not an option for them.

The current loan balance is outside of what the market price is. And so these assets are underwater and this creates a conundrum for the lender and the borrower to say, do we take the losses now and move on down the road? Do we try to work something out by going to a receiver and potentially trying to lease the building up or try a new strategy? And so you're seeing these seriously delinquent loans kind of working their way through the system. And something we've noticed is headlines move a lot faster than actual distress. So we can say we're in recovery. We can say we're doing these things and that's great. But for these properties, there's still a lot of work to be done on how to get them repositioned in the marketplace.

Lisa Knee:So are you saying that people shouldn't be worried about the story underneath the headline, those loans that are actively working out in the marketplace?

Lonnie Hendry:Yeah. So it's kind of like there's a saying that says that if your neighbor gets laid off, that's kind of depressing. But if you get laid off, it's like a much different feel. It's like you're sad for them to get laid off and for you, you might have to sell your house. And so I think it's, look, if you're in that 7.27% serious delinquent and you own the asset, either you're a lender that holds a note or you're an operator that owns the building. I mean, you don't care what the headlines say about market recovery because for you, you're still in the midst of a depression. You've got an asset that doesn't perform in today's market. I think broadly though, if the fact that only seven and a half percent of assets are delinquent just indicates how strong the overall market is at this point.

I mean, again, we'd like to see delinquency at zero. The reality is that there's always going to be some delinquency, whether it be through inefficient operators or markets that shift or financing that doesn't work. So I think my position is that we're kind of in the tail of two markets. It's the haves and the have - nots broadly outside of office that the haves are a much larger percentage of the overall total. In the office sector, it's maybe a little bit different. The haves are the high end class A, well located assets. And the have nots, that B, Office sector, there's a lot more of those than there are the AAs. And so that sector is the one where you're starting to see some recovery and there's some optimism generally. But if you look at the performance on any type of comparative basis to pre - COVID, office has still got a long ways to go at this point.

The darling here is industrial, obviously less than 1% delinquency. And I would contend retail is a little bit inflated here. It's a factual number at 6.31%, but that includes the regional and super regional malls, which if you back those out, those are legacy delinquency challenges that the sector faces. If you back those out and look at retail notwithstanding the mall space, retail has been on fire post - COVID and the delinquency numbers are very low for retail. So retail and industrial have certainly kind of been the darlings. Multifamily is starting to show some cracks. We'll talk a little bit about that. So our position, no longer one CRE cycle. And the data we're going to show here in the next couple of slides effectively give you some perspective on that. So we've looked at eight markets. We're going to look at five different property sectors. Your gateway markets, historically New York City, Boston, Chicago, California.

Those are established markets, a lot of institutional investment in those markets. Then you have your Sunbelt and Mountain West, Texas, Miami and Carolinas. These are much more faster growing markets, but there's not some of that built-in insulation that you've seen in cities like New York and in California certainly where there's just high barriers to entry. Boston and Chicago meet that as well where you can't just build next door. There's a process and it creates a value protection in those gateway markets. In the Sunbelt and the Mountain West, it's the opposite. They're like rolling out the red carpet, bringing people in. And your newly built class A multifamily is the best complex on the market for nine months until your neighbor builds one that's a little bit better. And they're feeling the implications of that. So let's look at the office sector. If you look at the valuation pressure, as we mentioned, it's pretty broad.

The occupancy rates are localized. And so I think nationally you're seeing vacancy rates across the spectrum hovering plus or minus 20% vacancy. Some markets, it's as high as 30% vacancy. Some markets it's as low as 10% vacancy. And so they're feeling the pressure at a local level and by quality of building. If you look at the cap rates, you can see some pretty wide divergence here from when these properties, what 2022 vintage cap rates look like compared to current day cap rates. And if you notice in the 2025 vintage, I mean, all of them are up, call it 100 or 200 plus basis points on the median. And so this just tells you again, as a function of just math, if the NOI is the same and cap rates are up a hundred basis points, you're seeing a pretty significant decline in pricing, which is just a function of the market.

And I think one thing from my perspective is the first thing you learn in real estate if you're an undergrad or grad student is that real estate by definition is a cyclical business. And you have to have some component of decline or deterioration, which allows investors to come in and buy properties at bargain prices and gives them the resetting basis so they can reinvest in those assets and make them demand worthy in the current environment. And with some of the stimulus and some of the government intervention that we saw in 2021 and now some of the extend and pretend that we've seen across the lending landscape, in my opinion, we've prolonged the realization of some of those losses. And you're seeing this kind of prolonged lack of recovery because nobody's ripped the bandaid off and just taken the loss and allowed the market to heal itself.

So I do think 2026, we've seen a lot more non-performing loan sales off the bank's balance sheet. I think that will continue as we finish the year. And I think 2027, you're going to see some of these extend and pretend modification type of deals. They're not going to extend them anymore. They're going to have to face the reality of bringing cash to the table or the lenders are going to take the assets and move them down the road. So if you look at the market, Chicago highest, Texas, California, Carolinas, but you look at New York City and Boston on a relative basis, still pretty competitive, especially for office sector on a cap rate basis.

Lisa Knee:So when you look at that for office, if you can go back for one sec. If you're down at the Chicago and we'll keep New York City out of it, but if you're at the Chicago level, are you thinking about hold, restructuring? And what are you thinking about if those assets move on? Are you optimistic in those environments?

Lonnie Hendry:Yeah. Chicago is the one market where I have a personal affinity for Chicago. I love the city. And I think from a real estate perspective, the architecture and just the scale, it's New York and Chicago are the only two markets in the US that have the scale from an office perspective. The challenge is just they're far behind on the recovery side of the equation. They've got some issues with quality of life, life safety, political turmoil, a bunch of things that are negatively impacting beyond just the math. And so for me, Chicago is a market where if you look at pricing on deals that have traded, I mean, they're rock bottom price, but they're still going to be capital intensive for the next four or five years because I don't see a huge demand driver that's going to bring occupancies up to where they need to be.

If you look at some of these other markets like California as an example, we're going to have a piece come out here in the next couple of weeks asking the question is San Francisco office market back. And the reality is, if you look at the AI activity in California, it's on fire. If you look at multifamily rents in San Francisco, they're up 10 plus percent over the last 12 months. They're probably the strongest multifamily market in the US and clearly one of the strongest office leasing markets driven by AI. So they have this external catalyst that's driving that market back to performance. You're seeing the same thing in Texas with Yall Street. They just opened the stock exchange here and they have all these other demand drivers in Texas and the Dallas market in particular that are really moving the needle. For me right now, Chicago is just lacking some of that.

I mean, the Chicago bears are about to move out of Chicago. Any indication. I

Lisa Knee:Think that was on your podcast, you guys had that. You went through that whole analysis. We had an event out in San Francisco and we saw the office was exciting and the multifamily. And what was really crazy was the hospitality, what the hotel prices were going for. And so to your point, these were hotels that have not had a dime of investment in them and yet the room rate was astronomical and yet there's no retail there to support anything, to support any of that structure. So to your point with AI and office, those cities are definitely seeing the benefit for it.

Lonnie Hendry:100%. And I think if you look at the Carolinas as an example, it doesn't have an external AI catalyst, but if you look at just population trends, North and South Carolina have led the nation in migration each of the last two years. Actually surpassed Texas and Florida. So that's the catalyst there is that there's just a lot of people moving there. And if you look at the Mountain West, Salt Lake City was a city coming out of COVID that I was nervous about. You had Boise and you had Salt Lake that really drove a lot of activity. But if you look at the infrastructure and the fundamentals in those markets, they had never really been tier one type of cities. Well, you've seen Boise revert to the mean, people have moved back out of Boise and it's not as strong as it was. But Salt Lake, as an example, has continued to flourish.

You're seeing it grow into a tier one city. So then Miami is Miami. I mean, Miami's incredible. Every time I go to Miami, one, I'm not pretty enough to live in Miami. It's a city of its own. And two, the money that flows into Miami is just people are paying like $5 million for a condo and then they're having someone at Crane lift their million dollar supercar and putting it in the condo with them. I mean, things that you see in movies that you don't think actually happen, they actually happen in Miami. And so how long will that last? I don't know. I mean, that's the one market where they have really benefited from this New York exodus. You've seen King Griffin and Citadel and a lot of these firms. I forget West

Lisa Knee:Palm Beach. Related Ross. Yeah. All of them. That's exciting to see. I mean, I look outside my window in West Palm and it is exciting to see what Related Ross and all the other developers are doing down there from an office and residential perspective.

Lonnie Hendry:Yeah. Huge play on the residential golf course communities. A lot of stuff with office related is on fire. I mean, anything they touched lately has been incredibly successful. So listen, I think this just speaks to just in our discussion right now, Lisa, it's not an even uniform recovery. There are positive and negative things for each market. But the overarching theme here is just that there's certainly valuation pressure. I mean, when cap rates go up measurably and interest rate costs are higher, unless you've grown NOI substantially, which in the office sector is pretty hard to do, you're going to see some valuation pressure across the spectrum. Now on the retail side, a little bit different story. You do have a certain market like Miami that actually shows cap rates going the other direction. You're still seeing expansion across the cities here. The benefit for retail is just that vacancy has really tightened across the US, especially in the major markets.

So retail's operating at historically low vacancy rates. And anytime that happens, it gives you pricing power as an owner to really push rents. So again, outside of the mall space and even in select malls, but generally speaking, outside of the mall space, retail rents have really accelerated. Vacancy has compressed. And so even with an expansion in the cap rates here, you might end up seeing yourself neutral or you might see yourself slightly ahead from a valuation perspective than what you would expect. And I think this will continue. Retail COVID was kind of the catalyst for getting rid of a lot of non-performing retailer, poor located, poorly run retail. We're in a new paradigm now where retailers have embraced omnichannel delivery. So they have e-commerce bricks and sticks and kind of a curbside appeal where you can just order online and come pick it up in your own car, have it delivered.

That's really pivoted the sector and it's started with grocery anchored centers. We're kind of in vogue in the early days of COVID. Now anything that has a TJ Maxx, Ross, Dress for Less or anything else in those kind of community centers, you're seeing sales activity and cap rates really strong in those sectors. And even smaller strip malls, really strong fundamentals there. So I think retail has kind of been an underappreciated part of the market recovery. I think we'll see if it has staying power. I think in most markets it does. This is one that certainly does have some underlying challenges like in San Francisco. You just talked about Lisa, like hotel prices through the roof, office starting to come back, multifamily really strong. But a lot of retailers haven't decided to move back into San Francisco because of them having to depart over the last call it five or six years due to life safety issues.

So we'll see how these things come back. It'll be uneven, but it will come back. Poll question three. Where could you find weak occupancy and high cap rates combined for the office sector? And I think we talked about that. So this one should be pretty straightforward to answer.

And so as we move on here to multifamily, multifamily is a very interesting subset. I mean, we go on record as saying multifamily is the only needs-based property type. It's one where somebody has to have a place to live. So they have a demand driver unlike the others and they have a government backstop with Fannie and Freddie that provides stability in pricing and availability of capital that some of the other property sectors just don't provide. And so it's been probably the most stable asset class post - COVID. I mean, industrial has definitely been the most high performing, but multifamily has been incredibly stable, but the cracks are starting to emerge here. If you look across certain markets and for different reasons in the Sunbelt region, there's been a lot of non-performing loans due to really high prices that were paid in 2021. And so again, 1970s class C multifamily trading on a 3.75 cap rate on trailing 12 months, that doesn't make any sense in a long-term real interest rate environment.

And we're seeing the ramifications of those deals that were financed that way, especially if they were floating rate. Those are all going to come to pass where the current owner is definitely going to have to reinvest additional capital into the deal or more than likely those assets are going to trade at a discount. We're starting to see that play out across the Sunbelt. We actually just released a paper today looking at this narrative between Midwest multifamily and the Sunbelt. The consensus has been everyone needs to rotate their capital into the Midwest. I actually take the counter argument in the article and I say even with the distress in the Sunbelt, I think it provides a better long-term opportunity than the Midwest does. But if you look here, cap rates have expanded, occupancies have come down, concessions have gone up. You're starting to see properties not perform.

But again, it's market by market. And a lot of these markets, like if you look at the Carolinas, we spoke about the net and migration there. There's been a proliferation of new construction multifamily in the Carolinas. So if you look at them today, snapshot of the data, you would say, wow, I can't believe they're over 10% vacancy. They're offering a month or two free rent. That market's really struggling. Same thing with Austin. You look at Austin, Texas, renal rate prices in multifamily are down 25% from the peak. Vacancy's been at 14% for the last couple of years. You would say that market is really struggling. And I would say actually they're not struggling. It's just a function of supply and demand economics. There's too much supply. They got to work their way through the system. But if you look at the migration patterns, if you look at the jobs, if you look at corporate relocations in Texas as an example, I don't know how you could not be bullish on multifamily in Texas, the primary markets, because the fundamentals are so strong, even though I can accept that there's a supply glut across several of these cities.

So story here is just it's still really strong performance wise, but there are certainly going to be some headlines. We saw some last week where people are going to potentially lose some money on some of these multifamily deals that were vintage 2021.

Lisa Knee:Just to put in the multifamily context, the multifamily you're dealing with is market rate and not affordable, but workforce housing could go into these numbers or just to put some context behind the definition here.

Lonnie Hendry:Yeah. So these are looking at market rate, multifamily. These would not include low income housing tax credit or anything like that. They would have potentially some of the rent regulated or rent stabilized communities, say like in New York as an example, or in Minnesota where they've enacted, or obviously in LA where they have rent control. Those would be part of the sample. It's really just the carve out for the light tech or some of these others, the HUD financed ones that maybe are not market rate. That is an interesting point, Lisa, is just that you're starting to see investors really pull back from some of these markets where rent control is taking a much more prevalent role in the marketplace. And I think strategically for operators, you're going to see them deploying capital into markets where rent control's not an issue. I mean, it's really tough to operate in a market where you cannot pull the lever that is revenue, but you're still forced to accept the higher cost of operations.

Insurance is up, taxes are up, personnel is up, repairs and maintenance up. If you can't move the needle on the revenue side to offset that, I don't know how long those markets are going to be viable.

So here's our poll response. So Chicago and Texas, Chicago takes the lead here, but they're pretty evenly spread on the all of the above. And I think you can make the case that all of the above is where we land here. Let's just quickly move through lodging. We highlighted this. If you look at Boston as an example, just to pull a couple of carve outs here, occupancy is 89% across the data set. I mean, that's unheard of. Stabilized occupancy across the US has ebbed and flowed somewhere between call it 68 and 74% for the last decade. If you're above 80% in hotel occupancy, you're doing something incredibly well. And Boston is leading the pack there with incredibly strong occupancy. Chicago, Carolinas and Texas 70, 71%. That's typically where things fall out. And if you look across most of these geographies, cap rates are in that eight to 10% range.

Demand is improving, but I think what you're seeing here, and it kind of goes to my point earlier of the hotels being tired is the markets are underwriting some of that into the risk premium. And so even though you might have stronger occupancy and you might have really strong revenue, the cap rates are not coming down and then showing an investor demand to chase every dollar of NOI at a high price. You're still seeing cap rates hover in that eight to 10 range, which is not outside of what we've seen in some of these markets over time. The one thing here is you didn't see cap rates generally get chased down nearly as much as you did in the other asset classes. And part of that maybe is hotels have an operating component. Some of these others don't, especially if you're in the full service or convention space.

So there's obviously an operational component to these properties that factors into what people are willing to pay from a cap rate basis.

And then industrial, again, all of these markets you've seen expansion, but industrial pretty much, it's kind of funny. I've been in the business 25 years. Industrial used to be the sector that nobody wanted to tell people they worked in. All of my students at the classes I teach, they wanted to be office brokers, multifamily brokers, retail brokers. And you'd have one or two students that got an internship or took a job as industrial and they were like, "Yeah, I'm in industrial, but I'm hoping to move to office or retail." But now industrial is on fire. It's logistics, it's sexy. It's what everyone wants to be in. And the performance is off the charts. I mean, occupancy is at all time highs, delinquency, all time lows, even with some increased pressure on the cap rate side. But here it's really interesting. I mean, forever, you could go to any mid-market US city in the country and look at industrial and rental rates were going to be somewhere between $5 and $8 a square foot on a triple net basis or industrial gross, however they price them in those markets.

And now you're seeing rates that call it 10 to $20 depending on what market you're in. It's incredible the pricing power that's been realized on the owner side here. And with AI, with data centers, with all of this stuff, last mile distribution has now turned into people don't want Amazon deliver that day. They don't want Amazon to deliver within three hours. They want Amazon to deliver within 45 minutes. That bodes well for this urban core infill type of industrial play. So I think industrial is poised to continue the terror that it's been on. Some markets, Inland Empire in California, maybe a few others are starting to soften at some level compared to the all time highs that they've been at. But I don't think any of the major markets across the US are seeing any type of fallout that would fall below what they considered a stabilized operation in those markets.

And then just as we kind of wrap this up, key takeaways, capital is open and available for financeable properties. Maybe that's a word we're making up here, financeable. But the reality is if you have a good property in a good location, operational expertise, operational chops matter in today's market. They're not just underwriting the asset. They're underwriting the borrower in a much more stringent level. If you've never operated in a tough market like today, it's going to put downward pressure on your ability to get financing. Prices are stabilizing, but it doesn't mean all asset classes are back. It doesn't mean all markets are back. So you're going to have to look at, this is just where data comes into the picture. You got to look at the local market, local demand drivers, local supply side influence, et cetera. Credit is a near term risk. I mean, this is where we've kind of honed in on delinquencies still higher than historical norms.Financing costs are higher than what they were.

The market's reset, but it doesn't mean that every property still qualifies in today's higher cost of capital. And you're going to have delinquencies, distress, foreclosures, those things are going to have to play themselves out. And that's been somewhat muted based on the laissez-faire approach of a lot of these lenders with extended pretend. And I think the overarching thing is it's no longer one cycle. I mean, office is the most market specific. If you look at multifamily across the region of the Sunbelt as an example, moved higher, lodging is really property by property and retail and industrial remain the strongest. So I think what we'll see is does the second half of this year, do refinancing conditions improve enough to relieve some of the maturity pressure? I think with the first Fed meeting with the new Fed chair, optimism around that faded pretty quickly because rate hikes are probably on the table before cuts.

And then does the stable property performance keep offsetting the drag from the required higher yield threshold? So that's what I have. We have one more poll question and I'll be happy to take some questions, Lisa, if we have some time. So which sector could be categorized as having selective recovery? A for lodging, B for industrial, or C for retail?

Lisa Knee:Yeah, we've discussed this a little bit before while people are going through this, which we didn't mention today. And you normally always talk about the office to resi conversions. And I know that that's been a sector that you've been watching pretty carefully in terms of where we are in 26, mid-year through of how those conversions are faring and what we see is going to keep having that trend for the foreseeable future.

Lonnie Hendry:So I think it's interesting. The timing of this webinar and that question is great in the sense that with yesterday in New York, they had the former Pfizer building, which was going to be the largest office to multifamily conversion in the country had some support beams that cratered under the weight of some of the new improvements that they've made. And so I think just my knee-jerk reaction to that is that that has a negative consequence for the sector broadly just because it just adds a wrinkle to the construction concept, the component of transitioning from one to the other, whether it's operator error, which it probably was. I mean, they don't know the cause yet, but I doubt that it was engineered incorrectly. It probably was just installation or some sort of human component that didn't do what they needed to. But I think it leaves a stigma that it's going to have some at least short-term negative consequence for this sector.

I think broadly, I was a proponent initially of saying this is not a solution. This does not cure the office woes. It's not scalable and it's not going to be something that really moves the needle. I've actually kind of changed positions at some level and say in certain markets, I think it is a workable solution. So New York, as an example, I do think they have enough inventory where this makes sense where it could actually move the needle. If you look at the non-rent stabilized market rate multifamily costs, they've gone through the roof. It's a sector that's a market that is in dire need of new units. So this maybe makes sense for them. Other markets probably not going to move the needle. And I think the barriers are still there. This requires some sort of public-private partnership where you have tax abatements or other incentives that help offset some of the cost.

Because even if you get the building for free, the cost to convert is still a huge burden for most operators. And as proven yesterday, these are not easy transitions. These take real expertise and real precision. And so I think it's going to work in some markets. I don't think it's a wholesale. It's not a savior for office.

Lisa Knee:I agree. So I think we're down to our last minute. I was going to ask about data centers, but maybe we'll save that for our next, unless you want to give one minute on where we are in the data center cycle since we didn't touch base on an industrial.

Lonnie Hendry:Yeah. Data centers are on fire, insatiable demand, incredible amounts of capital. I think the first slide I showed with data showed GDP growth in 26 at 2.6%. Some economists have estimated that data center investment equates to about 1.5% of the 2.6% GDP growth. I don't think it's sustainable, but I think that's the new reality. We live in a data center compute filled world. That part's not going to get less. It's going to get more. Technology and power are going to have to evolve. We have to be able to marry up power with the required compute component, don't know where that comes from, but I think it will happen the next five years.

Lisa Knee:Perfect. Well, Lonnie, thank you so much. This was exactly the type of conversation we were hoping to have and our clients are having right now. So we appreciate you sharing both your data and your perspective so openly and candidly. There's one thing I hope everyone takes away today, it's that the market is not broken, it's just different and that the rules don't always apply anymore. And so we really need to go out there and continue to have conversations and what's working and thriving right now are the ones who have accepted decision making accordingly and having those conversations. So from where we are at EisnerAmper, the most important thing we can do for our clients is to help them and navigate what's around those corners. And whether it's understanding tax consequences of a refinancing or restructuring or planning an exit, we want to make sure that we're simply with our clients, understanding the structures and making what we do today make sense for the world of where we're headed.

So hopefully everyone enjoyed today's conversation with Lonnie as much as I did. And thank you all for your time. We will be sending the recording and a copy of the report. So until next time, hope everyone has a great afternoon and I will hand this back over to Savannah. Thank you again.

^{Transcribed by Rev.com AI}