Commercial Real Estate Outlook | Lessons from 2025 and What's Ahead for 2026

Lonnie Hendry:Thanks, Jennifer. It's exciting to be here. This is the second year in a row that we've done this type of webinar and I think it's interesting. 2025 was a really great year, all things considered, although it did have some macro headwinds, but I think maybe as we head into 2026, we'll talk about it today. Some tailwinds may be emerging. So without any further ado, I think we'll jump into the narrative here and start talking a little bit. We'll go broad picture, macro economic review first and then we'll drill down as we conclude into some property sector specific perspective. And so as we start off the presentation, I think just some of the broader narratives as we look at 2025 and look forward to 2026 is just that you're starting to see some labor market softening. I mean, I remember back when we were coming out of COVID, you had this labor market that was on fire and people were quiet, quitting and salaries were jumping through the roof, and it was this really interesting time in the marketplace and we started to see some pullback.

Obviously given some of the constraints that we'll talk about here today from a real estate perspective with higher interest rates, higher operating costs, people really trying to trim their budgets down, but also there was a lot of hiring coming out of 2021 that maybe just not supported given where we're at in the new cycle. AI has definitely taken on a headline that we'll focus on today, and there's definitely going to be a shifting of just labor. So what we've seen though is not a significant weakening in the market. There's softening, so there's less hiring, less firing. I think we're actually getting to some form of equilibrium. It'll be interesting to see if some of the tariffs or some of these other policy measures that have been implemented in 2025 start to rear themselves in 2026. I think a lot of people are underestimate maybe the impacts of how long those things take to play out in a macro cycle.

And so at this point, given the dual mandate from the Fed, we're all paying a little bit more attention on the labor market and I think right now we're seeing a softening, but it's not anything to sound the alarm bell at this point. GDP growth at 1.9% looks generally okay given where we are in the marketplace, but some maybe concerning components of that is that there's a really high spend on AI investment and we'll talk about that later in the presentation. I think immigration is another thing that is noteworthy here. Lower immigration is contributing to slower labor force growth. There's been a distinct shift in policy with the new presidential administration taking a hard line stance on immigration. And so you're seeing labor shortages across construction, hospitality and logistics, which obviously have some negative ramifications for the CRE sector. As we transition here, I mentioned earlier the tariff effects and I think what you're starting to see is those gradually play themselves out in the market.

And it's interesting, our chief economist at Trepp has been warning us for a while that this just takes time to play itself out in the marketplace. All of us on the CRE side that live in the data, we want to see things real time and we expect when a tariffs announced that we're going to be able to start tracking impacts in the first quarter after that announcement. And the reality is it just takes time for these to play themselves out. So on the bar chart here, you can see that housing has had some disinflation, but goods inflation has been picking up and we think those are related to the tariffs. And so the estimation would be that the full effects of tariffs will probably be enforced in 2026 core PCEs to 2.6 in April, but climb back up to 2.9% in August. And so we'll see with this upcoming reading says, I think the inflation concerns are legitimate.

We've seen inflation generally hold fairly steady that side of the equation. There's been some optimism, but the full effects of the tariffs obviously have not been priced into everything at this point. And we'll see if and when these businesses stop absorbing and taking the margin pressure from the tariffs and start passing them on directly to consumers, if consumer resilience will continue to remain, at least at this point, consumers have been very resilient and I've become of the belief that if you can give an American line to credit or access to credit, they will spend it. And we've seen that play out over the holiday season at the end of 2025. So more to come on this, but I think the narrative, if you had asked us in April of 25 when you had liberation day, we saw about a 30 day pause and everyone froze after that.

When the tariffs started getting relaxed or reworked, the markets generally worked as they were intended and the impacts of the tariffs were not nearly as bad as what I think some of us thought they might've been at the first part of last year. So with those as kind of the macro backdrop, you saw the Fed deliver three rate cuts in 2025, very similar to what we saw at the end of 2024 where the Fed started cutting the federal funds rate. So we saw 3 25 basis point rate cuts September, October and December respectively. So 75 basis points total. If you look at the yield curve though, it transitioned to a U-shape with near term easing and long-term concern. So people are still concerned about this persistent inflation on the longer end of the yield curve. And so for commercial real estate borrowers, that's the end of the curve that most people are concerned about.

So our mortgage interest rates generally follow 10 year treasury more so than they do the short term federal funds. Rate rates remain well above pre pandemic levels. And I think it's interesting just as a broad narrative to walk through, the anomaly in rates really was that five year zero interest rate policy that we saw five seven year policy period. If you look at where rates are today, yes, they're significantly higher than they were. Yes, the Fed was incredibly aggressive getting us 500 basis point rate hike in 18 months, fairly unprecedented. But where rates settled out where they are today, if you look at it on a 50 or 75 year time horizon is generally where they should be. So I think what we've seen, and we'll talk a little bit about this throughout the presentation is you've still seen muted transaction volume broadly, but I think people are realizing that rates are generally where they should be and the market can function with rates at this level.

You just have to work through this broad swath of properties that were financed in this really low interest rate environment, which to me is pretty much the anomaly. I don't think where we are today is an anomaly. I think where we are today is generally speaking indicative of where rates have been for the last several decades. Higher cost to capital does put downward pressure or softer yields, narrower spreads. We saw spreads come in considerably. We'll talk, we have some slides about spreads in particular. And so the interest rate environment, the fed policy, all of these things do have direct and indirect implications for commercial real estate. Some are felt immediately when the Fed started raising rates. Obviously that had an immediate impact for those with floating rate debt and once they settled on a higher rate for longer, that obviously has had major ramifications for people that were up for refinancing or their loans were maturing.

But some of these other policy items may not play themselves out for the next couple of years. It takes some time for them to work through the process. So as we look here, we have short-term cost pressure, long-term productivity potential. This is in relation to ai. If you've listened to our podcast, which I appreciate the shout out from Jennifer, we do have a weekly show and we would love to have you guys listen to us, but AI has been a topic on our show pretty much every week for the last year or so, and I think it's warranted. We've definitely gotten some pushback that why are we talking so much about ai? But the reality is if you look at where the dollars are going both on the macro and if you drill down into commercial real estate, data centers and AI have driven the economy, and I think it's early in the game, obviously people expect just because the capital flows are going into this sector that you're going to see immediate return on investment or you're going to see these compounded significant returns in terms of workforce productivity or whatever.

And the reality is we're still in the early infancy. We're putting the foundational components together and it's going to take some time for this to work its way out in the marketplace. What we're starting to see though is AI is definitely going to substitute for some jobs. If your job is repetitive in nature and can be automated using ai, that's definitely should cause some concern for you. What we're also realizing is the infrastructure component that's required for these data centers is substantial. And so energy, power, water, electric, those things are going to be more and more crucial as this continues to ramp up. And then just long-term productivity games, I think it's still too early to kind of see where we're at, although from my perspective, I do feel like we're making strides towards that end. You're starting to see firms that two or three years ago, we just have a hard line stance against AI starting to find ways to implement it in their workflows.

And some firms obviously are on the cutting edge and they're doing everything with ai. So from a broad market perspective, are we in a bubble with ai? Potentially there's a lot of money being spent on this, and what we know is if you look at some of the browser wars of the nineties, not all of these companies are going to make it. One of these firms is probably going to become the dominant player in ai. And that's going to raise some very interesting questions as to how do these other firms pivot or what happens to them? And some of that spending will obviously wane, but as of right now, I don't see, there still appears to be an insatiable demand for data centers, for infrastructure, for all the components that are necessary for this, and I think we're going to figure out how to make this work faster than people imagine. I think AI is really the next frontier for where we're at as a species. So I'll take a pause there. Jennifer, I don't know if there was any questions or anything that you wanted to jump into here before we get into the capital markets.

Jennifer DeMasi:Thanks, Lonnie. We do have a question. Is there concern if the tariffs are not upheld by the Supreme Court that the rates and the long end of the bond curve would rise?

Lonnie Hendry:Yeah, so I think that's a very interesting question and it's a good question in the sense that if the Supreme Court rules that the tariffs are unconstitutional, I think it's not just the long end of the curve we have to worry about. I think there's a whole lot of other things. I mean especially now that some of the tariff revenue has been spent to give service members bonuses at the end of last year. There's talks now of there being a rebate to taxpayers at a certain income threshold. All of those things become very difficult to unwind, and I think that there would definitely be some ramifications. One of the interesting takeaways on that is that we've thought twice now that the Supreme Court would have some comment or some ruling on the tariffs over the last couple of months, they've declined to comment or provide any guidance on that.

When those opportunities presented themselves and based on the people that we've spoken with, the consensus seems to be that the longer they don't talk about it, the more likely it is that they're not going to rule them unconstitutional. So for me personally, this is just me personally speaking at this point. I almost feel like the tariffs have not, the economy didn't drop off a cliff with the tariffs. I think we all thought they might and there was a lot of pontification of what would happen if the tariffs were implemented. And if you look at it on the whole, given the revisions and the implementation and kind of the sporadic who got when they have not been catastrophic, and I think that if you were to say they're unconstitutional now the ramifications of that could be catastrophic. So I'm not saying I support the tariffs, but I do think just to keep the markets moving, my personal hope is that we kind of just keep moving along because it feels like the economy has absorbed it and after that first 30 day window, it really just moved itself along and I don't think it's been a huge issue if they reverse course here, I think it could have some real damaging implications for CRE.

Okay, so let's move forward here to the capital markets. So I think capital markets are an interesting construct because the implications from the Fed raising rates, obviously direct hit on the capital markets. And if you go back and look at the great financial crisis in 2007, 2008, the one thing that stood out was in hindsight now is that there was no availability of capital during that downturn. So there were so many subprime mortgages and everyone was afraid to lend and take any more losses. The capital really dried up. And so the credit availability was non-existent. And I think what we've seen here is that the government has realized that they can't allow that to happen. So if you look at 2021, you had policy backstop rebound, so a lot of stimulus, a lot of credit facilities on the banking space when you had bank failures, you had credit line, you had all these things in place to keep the markets moving.

Now that created some downstream challenges with inflation and other things we had to deal with. But I think on the whole having the banking sector preserved as safe and salient for borrowers and lenders and depositors I think was necessary. You saw the Fed take aggressive action when they realized inflation was not just transitory as they had initially thought. And you saw this rate hike cycle that we went through 18 month period. Then in 24 and 25, the higher for longer narrative became the higher for longer reality. As I mentioned earlier, borrowers, lenders, buyers, sellers, you started to see some capitulation as it pertains to what values were in 25 based on the current capital market, availability of funds and the cost of capital. And so I think right now we're saying the market is active but operating with priorities. And so what does that mean?

Capital flow is first to the largest transparent, stabilized assets, strong sponsors, some of this is just A to B stuff, it's foundational better borrowers with better assets and better locations are going to get better treatment. Legacy and transitional risk prices are at a premium and they're struggling to clear the hurdles. And so what we saw, if you look back in the end of 21 before the Fed really started raising rates was, and it's funny looking back now in the moment you didn't see it, but at the end of 2021, you had 1970 vintage multifamily assets, say in Dallas, Texas or in Miami priced at same cap rates as brand new construction assets in those markets. And fundamentally, that's just not how the market should work. And it was because the cost of capital was so low that people are willing to take their bets and lever up on these legacy assets.

And so what we've seen now as a return to normalcy, the GSEs multifamily, their back in play, we've seen their credit limits or their lending limits in 2026 have been increased by 20%, 24 and 25, they saw good productivity. Obviously there's some enhancement on the credit side, they have low losses, et cetera, conduit, CMBS, which is another nice component of the market pools, smaller loans, they multiple property types. They really hedge based on geography and property type and it's a pretty good barometer of what broad credit availability is in the market cycle. SASB has been kind of the winner here. It's almost like industrial property sector post COVID. They're large asset, they have bespoke protections, investor alignment on terms, and these are really to the current state, the best assets with the best sponsors, the best tenants. And so you've seen a huge proliferation of SASB deals and C-R-E-C-L-O, which maybe were the most impacted during the rate hike cycle because these are floating rate transitional loans.

We went from a high watermark of 45 billion in 2021 to effectively less than 8.8 billion respectively for each of the next three years. 2025 we're over 31 billion. So you saw a return to people looking at transitional assets with some optimism on the tail end. So that's a good thing to see. Private label CMBS, if you've listened to the trip podcast or read anything we've put out, we've been tracking this month over month issuance has been on fire. 2025 ended the year at 125 billion plus in total issuance strongest since 2007. Now if we showed you the full historical chart here, 2005, six and seven are just off the charts, they'll never be replicated. But in 2025, I would say 125 billion was incredibly strong. This was on the heels of a really strong 2024 at 108 billion and we're predicting 2026 to be somewhere about 130 plus C-R-E-C-L-O. I mentioned just a moment ago, it was up 256% year over year from 8.7 billion to just under 31 billion. And then that SB issuance that I talked about, single assets, single borrower, they were up 25% year over year. So you see about 70 billion to 90 billion in one single year. An agency was up 56%. So we have the totals there on agency and SASB general takeaway here, capital markets are working well, availability of capital is there. Credit is available with a preference to better assets and better locations with stronger sponsors. But even if you are transitional with the C-R-E-C-L-O, you're seeing an increased appetite in 25 and we expect that to continue in 2026.

Multifamily, and then I'll stop here in just second, Jennifer, if you want to ask any questions, multifamily is dominated and it makes sense. I mean, multifamily is the only asset class, and so everyone has to have a place to live. And so even with the softening of, depending on who you read or where you find the numbers, 1.2 to 1.4 million new deliveries over the last couple of years, multifamily still is a preferred asset class both from a lender and borrower perspective. Office has rebounded and office is interesting. If you look at the headlines here, I usually in my presentations ask the audience if they've read an article about the demise of office, then I follow it up with have you read a thousand articles about the demise of office? Because every time you've picked up a paper to tell you about how terrible the office is, if you look at the headlines in 2025, it's rebounded significantly.

I mean, there's been a lot of office origination. The challenge with that is if you dig a little bit behind the headline is it's really concentrated in a handful of office buildings in New York that are class A highly amenitized, best tenants, best location. And so it's disproportionate amount of office recapitalization to refinancing outside of the best office has still been really struggling on the whole industrial 24 billion lodging, 23 billion retail, 19 billion. I think what you're seeing is just a continuation of what we've seen over the last several years where industrial has definitely been a bright spot, lodging in certain sectors and certain geographies, very bright. And then retail has really come back from the retail apocalypse and really solidified itself is now if you're an omnichannel retail provider and you survive COVID, you're in a pretty good spot. Now, retail vacancies are at all time low and rents are at all time high, but you're still seeing some retail bankruptcies. We saw sacs and some of these announcements over the last couple of weeks where no one is safe. But on the whole, I think retail is better than what we've seen in the last 10 years or so. If you average it all out. Multifamily though seems to be the property sector though with the least amount of volatility.

And then if you look at just borrowing costs, we've talked about this. Coupons reset from 2020 and 2021 low's rates eased in 24 and they reformed in 25. If you look at the median note rates at the bottom there, I have a lodging at 7.22%, office at 6.64 in industrial 5.38 and the chart, we'd give you a quarterly breakdown of median note rate. These are for CMBS properties that have been securitized broken out by property type end quarter. And so what you're seeing over the last call it two plus years is effectively leveling off at some level. There's still some volatility, but you're not seeing huge spikes. And the reality I think going forward is just that part of this gets back to just market fundamentals and the cycle industrial assets have seen significant rent growth in the five plus years post COVID. We're starting to see those rent growth numbers start to level off.

They've seen an insatiable amount of demand. So new construction has been off the charts. You're starting to see pullback on the industrial side, on the new construction. Outside of data centers, are we going to start seeing a risk premium added to that that we haven't seen? I think potentially for office, again, this is driven predominantly by the really high end class A office properties. If you look at a 1970s or early eighties vintage class B office, they're probably still pricing in higher than a 6.64 on that rate for that deal on the lender side. And then lodging is really market specific and property sector specific. If it's limited service in a very strong market, still favorable. If it's limited service in a market that's seen a pullback in government related business travel or something else, you're starting to see those risks being priced in. So I think what you're seeing here is just the market work as it's intended and factoring in risks associated with each individual property sector and geography as the market should. And so if you look at the spreads here, yeah, go ahead Jennifer.

Jennifer DeMasi:I'm sorry, we just had a couple of questions. Yeah, great.

Lonnie Hendry:Yeah,

Jennifer DeMasi:So you spoke about office in detail. Have valuations hit bottom or is this a longer reset that we should settle in for?

Lonnie Hendry:Yeah, so I think it's a fair question. I think it's a hard one to answer directly in the sense that if you look at the indices, we put out one of the truck property price index, which is a paired sales index, it would look like office is bottomed out. I think for me, the reality is real estate by definition is a local endeavor. And I like to say it's really a hyper-local endeavor. You can have two buildings on the same street that have completely different outcomes. So I think when you talk about office property in particular, it's very market and very asset specific. And so on the whole, I would say yes, I think we bottomed out on pricing. I think if you let look at the delinquency rates, it's fairly level over the last several months, even though it's significantly elevated. So I think you're starting to see buying opportunities present themselves, but I think there's a lot of assets that maybe weren't in their maturity window that maybe haven't been scrutinized because they've been able to cover debt service and those values still have not been fully recognized, and the lenders have been very selective in how they've offloaded some of these office properties.

So I think there's still some losses to take, and I think we'll see that play out in 26. I think you'll see non-performing loans moved off of a bank's balance sheet much more frequently than what we've seen in the last couple of years because people feel like we're at the bottom on price. I'm starting to see a rebound, but I wouldn't hesitate to say that it's every building just because I think there are certain markets where price discovery is still happening. If you look at Chicago as an example, I don't know that we've bottomed down a Chicago office market today. I think for San Francisco potentially we have, we're starting to see a little bit of upward trajectory. LA would be kind of 50 50. Portland still trying to get some price discovery, but for some of these markets that have been fairly strong, I think that they're on the upper trajectory, Dallas, Miami, et cetera. It feels like those have cleared and now we're starting to see some stronger interest in office than we have in the last couple of years.

Jennifer DeMasi:So how concerned should we be that office financing was kicked down the road? And are lenders still using the old extend and pretend model? Do we expect to see that continuing or are they going to get tougher?

Lonnie Hendry:Yeah, so I think it's yes, extend and pretend did take place. It's part of the process now and I think it's justifiable why we do that. I mean, what we've seen is if you go back and look at the great financial crisis in 2008, at the beginning of that distress cycle, everyone was just tossing the keys back and it was a disaster for the lender, the borrower, and everyone involved. And what we've seen is if borrowers are still willing to try to make payments, contribute additional capital to get an extension, and borrowers are willing to work with them, you can actually weather the storm. And when prices stabilize or cost of capital gets more stable, then refinancing is not as difficult as it might've been during the height of the disruption. And so are there going to be losses? Yes, X extend and pretend work for every asset?

No. But on the whole I think it's been generally successful and I think it has preserved just the market being able to navigate through this without seeing significant losses. If a lot of these office properties in particular had been forced to either pay off or toss the keys back, we would be talking about significantly more office delinquency as a percentage and you would be seeing markets that were in significantly worse positions than they are today. So I think what you'll see in 26 is we did an analysis over the last couple of years of the top a hundred bank holding companies and the average or median allocation to office across their CRE books was around 20% and about 20% of that 20% were non-performing. So I think it's taken some time for people to just quantify what is their allocation and what is their risk related to office on the whole. And at this point, they've kind of narrowed in on what the non-performing offices are and they've done an extension or two, those properties still have not recovered. They're going to cut their losses and move on. And I think we'll see that play itself out in 2026 in a controlled way where the markets will benefit, people will buy at a reset basis and hopefully be able to reposition those assets.

So if we look at just the spreads here, office spreads 279 bips and Q3 of 25 lodging was most volatile, volatile, excuse me, at 345 basis points and multifamily tide is at 145. So I don't think anything jumps off. The page here is super shocking. I think lodging is interesting in the sense that it's still viewed as a night to night business. And while it's recovered fairly strongly post COVID, we saw the implications of what happened when you don't have long-term leases in place, it does increase the risk premium for those assets. And so if we look at delinquency here, conduit delinquency by 8.26%, which is near post COVID highs, if you look at SASB as a comparison is a 5.05% also hovering near post COVID highs, C-R-E-C-L-O, which we mentioned earlier, transitional asset loans you would think would be higher. It's at 4.61.

Now we'll say they have a little bit of a built-in advantage here in the sense that some of those assets they know are going to operate at less than 1.0 debt service for a while and they reserve for that. So it kind of paints maybe a little rosier picture than reality, but seeing significant improvement. And I think this is why the appetite has come back for some of that lending and then agency, so Fannie and Freddie, et cetera, incredibly resilient. Less than 1% delinquency about 58 basis points. If you look at November, 2025 at the bottom, the highlight of the takeaways here, 8.26 for conduit as contrasted to 0.58% for agency. Now if we look at the office delinquency, we talked earlier, leads the way by 10.89%, retail's at 6.32, lodging at 5.43. Multifamily on the whole is low and industrial barely registers. And so I think this trends with what we've seen in the marketplace, retail gets included here because retail has the regional super regional malls as part of that category.

And so there's a lot of legacy mall loans that are still delinquent, which drive that number up. If you look at non mall retail delinquency, it's not nearly as high and lodging I think is just still at some level working its way through the cycle. Surprisingly, the higher end lodging assets that perform better post COVID, you've seen some challenges with some of the limited and extended serve type of hotels where foot traffic, travel, business travel, et cetera, drive demand on those. So we're here for our next poll question. This is our poll question number two. So true or false, CRE insurance costs have been rising faster than inflation. So again, if you're looking for the CPE credit, if you would take the poll and just make sure you hit submit so we can register those. Then we will work through this, give you about a minute and we'll work through this and show you the results.

Jennifer DeMasi:Lonnie, while our attendees are working through answering the poll, data centers are absorbing a disproportionate share of capital, what are some of the risks that are under discussed?

Lonnie Hendry:It's reminiscent of the dotcom bust in the early two thousands where you saw a disproportionate amount of capital going into this new dotcom internet era. And there's been a lot of parallels between that and this. If you're someone that's bearish on ai, you think that we're entering a bubble phase, you could draw a lot of similarities between those two. And I don't know that that's being discussed enough. If you're bullish like I am, then you're saying this is just necessary to kind of be a catalyst to get AI broadly implemented and accepted and utilized across the landscape. And so this enormous infrastructure cost and push and development is just part of the cycle and process. And so it's really interesting where I think there's not something that's very black and white. We can say, oh, we haven't talked about these three things because honestly, the amount of money being spent on data centers is truly unprecedented and the reach and the scale and the capabilities that they potentially bring are likewise unprecedented.

And so it's one of those things where I think you're going to start seeing some winners emerge in 26 if we're continuing, if we're sitting here at the same time next year with the same players talking the same things, I think that we're going to be in for a real shock because that would definitely mean that we're in a bubble if we don't start seeing some real payoff at some level, whether it be at the certain sector level, whether financial services or whatever. We're getting close to where some of these investments have to start paying off. I'm confident they will, but if not, I do think you're going to start hearing a lot of people talking about the.com bust, and this is some multiple of that if you look at just volume. So I think we're probably okay on the poll. So I'm going to try to click on the poll. We're at 79%. Okay, so let's try this and see if we're showing the results. So can you see the results there, Jennifer? Are they sharing with you?

Jennifer DeMasi:Not yet. Oh, there they are.

Lonnie Hendry:Okay, perfect. Yep. So 91% say true, 8% say false, and if we had a drum roll, we would play it here. But yes, insurance has been rising faster than inflation and at some multiple, we'll talk about that here on an upcoming slide. And it's a real challenge. It definitely has made some deals not pencil, and what used to be kind of just a non-sequitur line item to the deal now is germane in almost every instance. So let's do some property type deep dives and I'll try to leave some questions at time for questions around here as well. So again, ai, I don't want to belabor this, but it's just driving explosive data center demand cap rates compressed. It was really interesting. You're starting to see some cap rate reversion here and power and land constraints are really the limiting factors to the supply. And so I've been talking for a while now.

I don't think that we as an industry have really determined if this is a pure real estate play or if this is some sort of a hybrid with the infrastructure component. I think we'll get some more clarity on that in the coming 18 to 24 months. Power and land are real constraints, power being the primary constraint at some level. In order for this to continue at the pace that it is, you're going to have to find a better way to power these things, whether it be nuclear reactors on site or something else because the grid itself just cannot fulfill the power needs without disproportionately negatively affecting consumers who are also using the same power grid. So to me, that's something that has to be figured out. I know there's a lot smarter people than me working on that, so I'm assuming they will figure it out, but it'll be interesting to see if they don't.

You're going to see a pretty stark reversal in some of the spending here. In my estimation. Full service hotels we talked about earlier, recovered more strongly than limited service performance gap narrowed in 2022. Again, the K shape economy that we've talked about broadly on our show and other places, the premium folks have benefited from this, right? So if you have disposable income, if you're on the upper end of the income spectrum, you benefited. And obviously full service hotels cater to those folks. So whether it be through conferences or just through stays, they've seen a benefit here. Now what's really interesting is just hotels broadly have posted really strong occupancies, strong RevPAR, strong ADRs, but it's driven predominantly from these full service hotels. And what's interesting as well is we've done some analysis here, and this is something I've experienced just being a business traveler. And I joke sometimes in my addresses, American Airlines, oh 12 CC, because it seems like I'm on a plane so much, but a lot of hotels have not spent on CapEx.

And so what that means is during COVID, they took their PIP reserves and they used it to fund debt service. And then when revenge travel came back and everyone had been vaccinated and people were traveling again, they didn't want to take units offline to renovate them because they were generating sizable increases in RevPAR and A DR. And so they've kind of ridden the wave. And so now you have some hotels that are 10 years out from being renovated and they're really starting to show the impacts here. And so if you look at 20 and 21 and 2020, they both saw reduced CapEx per key, and it doesn't really, when they're not spending CapEx on that, their deferred maintenance goes up. And so what we're seeing here is just this tale of markets where that mid tier hotel is not putting the money into it, even though on the revenue side they're still seeing increased revenue, the user experience is significantly diminished.

Now, I think if you extrapolate this out, we're getting very close to a point where if borrowers, excuse me, start underwriting the physical asset, we're in for a tough road on some of these hotels because the asset itself doesn't justify the revenue it's creating. If lenders continue to underwrite the revenue and they don't pay too much attention to the physical asset, then hotels are in the clear because revenue is really strong. But as someone that stays a hundred plus nights a year in hotels, a lot of these hotels are just really, really tired. And we'll see if we start to see a reversal here in CapEx coming back into the picture. I hope so.

And so if we look at some of this delinquency on the multifamily side, we talked earlier about multifamily being really, really strong and a preferred from a pricing perspective, preferred from a lender's point of view, it's not all equal though. If you look at some of the pre 1974, you're starting to see some high delinquency here. And so a lot of this is in markets that maybe have rent stabilization or other things that contribute to some of that, but age related capital expenditures and insurance costs are definitely putting downward pressure for some of these owners of these older multifamily assets. And so as I mentioned earlier, when these deals were pricing at the same cap rate on a going in basis, if you're looking at trailing 12 month income, 19 74, 19 70 vintage compared to new construction, you knew something was off. And now you're starting to see it's a lot more labor intensive and you have to have a lot more operational chops to manage these assets versus something that's new that doesn't need all of the CapEx and gets treated a little more preferably on the insurance side.

And if we look at the issuance for SASB transactions, again, SAS B's an acronym for single asset or single borrower, and we talked a little bit about this earlier in New York in particular looking at the office rebound, I mean it was significant. So you can look at 2025 issuance dwarfs, 22, 23 and 24 combined and even higher than what we saw in 2021 when you had all the stimulus money funding, capital markets activity. You saw the spiral Tishman Spiral building, a couple of other trophy assets in New York get recapped in 2025. I think you'll continue to see this in 26 and beyond, where highly amenitized class A office buildings get preferential treatment. The challenge is just that the number of those buildings relative to the overarching marketplace is a fraction of the overall market. I mean, the large majority of office buildings fall in that class B category, and that's the market that's most challenged.

And so I think what you're going to have to see in order for that Class B office, just kind of what the catalyst needs to be is a reset of basis. And so if people can acquire those at 50 cents or 30 cents or 40 cents on the dollar, then they might be able to put some CapEx into the lobby and operate them at 70% occupancy and still cash flow. But at the current basis, it's going to be really tough for them to do that. So continue to see a forward projection of SASB transactions very high, but we really need that core Class B office sector to kind of pick itself up if we're going to start seeing material change across that part of the CRE market. If we look at super regional malls, they've sustained stronger N oi. The mall story has been one that's been very widely documented, and I think it really comes down just to, is it a class A mall or is it not?

If it's a class A mall, they've seen strong performance and OI has been relatively predictable. If it's not a Class A, then you see all the challenges that you're seeing in the Class B office sector here. And so the super regional malls typically have the best of the best tenants, and so that leads to some of the stronger n OI growth across that subset. But we had a guest on our podcast a couple of weeks ago that is in this space, and I'm pretty bullish on malls making comeback as we go forward. I mean, what's interesting is Amazon announced now that it's going to start building bricks and mortar store to combat that of Walmart and Target, and it just goes to show that people still want to have that physical interaction with spending. Now, we all spend a disproportionate amount of effort on Amazon ordering things and having them delivered, but for well-managed, well operated, enclosed mall environments, I think there's still a place for them in the ecosystem.

It just comes down to are you attracting the type of tenants that get people to come in their car, drive to the location and walk through the shopping experience? I think for some they figured out that formula and they're able to sustain, and for others it's going to be a challenge for them. This is not too dissimilar. I think people underestimate the similarities between mall space and the office space. I put out a paper a couple years ago, financing on these were pretty much identical, 10 year full term interest only loans. They were benefiting from lower cost of capital, higher appraised values at the end of the term, not putting a bunch of CapEx into their assets. And when the market shifts, you're in a really vulnerable position. We've seen it across both of those asset classes. So I'm hopeful well-managed models will continue to thrive and for some of these others that they'll figure out if you get the right tenant mix, create the right experiences, people will still drive to come to your facility.

So we asked the poll question earlier about the insurance cost. And so just to give you some perspective here and help quantify that insurance costs are rising two times faster than revenue growth. Now, we did an analysis here for multifamily in particular. So multifamily is the easiest because of the GSE financing, such a large amount of these to give you a good sample size to kind of do the analysis. But if you look at property insurance from 2015 to 2024, their compounded annual growth rate was 11.77%. I think the raw increase was like 175% from 15 to 24. And if you look at their compound annual growth on the revenue side, it was still strong, 4.96%, so roughly 5%, which is really, really historically phenomenal. But insurance just as a line item has been disproportionately impacted. Now, depending on where you sit and what your thoughts are, some of this is contributed by climate change.

Some of this is contributed by just an inordinate amount of storms that have hit wildfires, unprecedented wildfires that we've seen in California, et cetera, et cetera. And some of it's just more sophisticated modeling on the insurance side of doing a better job, being able to predict and actually price in the risk associated with some of these assets. But on the whole, it's definitely something, as I mentioned before, it went from kind of an anecdotal component of the underwriting process to now, I would assume most operators have some sort of third party insurance consultants that are actively managing their insurance. The other interesting thing here beyond just the headline number is just that you're paying significantly more, but you're actually getting less coverage in a lot of cases. And so they've redefined some of the terminology around what replacement cost is, what agreed upon values are, et cetera, et cetera.

So this is something I would just encourage everyone. You should be working with someone that's experienced in this field to help guide your decision making here, because this is no longer something where as an investor you can treat it as a passive component of the equation. This is something that needs real time understanding management because it's very nuanced. If you look at the other expenses, none of them really jump off the page. Obviously taxes gets a lot of headline news. It was up 5.43% compounded annual growth management fees up about 5.6% professional fees up. What was interesting here is if you look at NOI growth though, NOI growth was actually at 5.58% over the same time period. So it's not putting significant downward pressure on margin that you might expect even though insurance is definitely jumping off the page as a percentage. I do think the insurance industry's challenged and we're seeing that play itself out here where some of these states, even as a state backdrop insurer of last resort, they're not capitalized enough to absorb some of these challenges.

So I think you'll be seeing government intervention or a talk track about insurance in the 26 and 27 as we try to figure out as an industry, how do we deal with this? And so if you look at some of the industrial markets, I'm sorry, multifamily markets by markets with high risk, so Inland Empire, Miami, these make sense just given the geographic location of these. But if you look at some of these other cities, maybe you might be surprised about Austin Round Rock as an example, central Texas, almost 14%. Memphis, Tennessee central US, 13.8%. Atlanta, almost 14%. Dallas-Fort Worth 14%. So what used to be a very geographically dominated. So if you were a hurricane territory, so if you're Houston or you were Miami or you were in fire prone areas in California, it made sense that you're going to see significant insurance increases. But now it's spread pretty much where it's across the US regardless of geographic location, you're now dealing with the ramifications of just the overall cost spreading, being disseminated across the marketplace.

And so definitely something to keep an eye on here, the snow storms in the Northeast this last weekend, the ice storms in Texas, not favorable for this because obviously there'll be a lot of claims that come from that. So something that I think will be top of mind as we head into 2026 as well. I know Jennifer, if wanted, if there were any other questions if we wanted to do this poll and maybe you could ask, that would be a good segue here. So again, for the poll three, what is the largest property type by securitized origination volume in 2025? Select your answer please and then make sure you hit submit and then we will share the results with you once we've had a big enough proportion of people hit submit. Apologies.

Jennifer DeMasi:So Lonnie, we've got some questions about office to residential conversions. How realistic is that? Is it as a solution to scale in particular with respect to class SaaS B spaces in New York, for example?

Lonnie Hendry:Yeah, so I think it's a great question. This was obviously what everyone's initial reaction was when we saw the demise of office, oh, we'll just convert them to multifamily. My opinion on this has shifted slightly. I was not a proponent of office to residential conversions. I just didn't think that it would work for various reasons. One, the cost to acquire the building, it requires public private partnership. There has to be these things that kind of fall lockstep. But I think in certain markets, New York being one of them, they've actually hit critical mass here where it actually is a viable alternative. And so you have a number of projects that are underway and some that have delivered. So I think my revised answer as today is in certain markets, this is going to be a viable alternative for some of those Class B offices across the US broadly, I still don't think it scales because of the factors I mentioned with tax abatements or public private partnership or financing or new reset basis.

All these things have to work in conjunction. But in New York, definitely you're seeing it even in some of the Dallas office markets, you're seeing it some of the California office markets, you're seeing it so market specific. I do think they can scale in certain markets, but I don't think it's scalable across the us. I honestly think for office properties, what has to happen is just a reset in basis. Class B offices that traded at a six cap in 2019 or 2020 need a trade in an 11 cap today to reset the value to a level where people can buy them, put some money into them, and just operate them as a Class B office with lower rents. The price that they paid on the last transaction is prohibitive for them to be able to do that, unfortunately. So let's go here to our poll results. So it looks like the answer here, largest property type securitized volume office was 18 multifamily, 56, industrial at 17, retail was 7.8. So we will walk through some of the numbers here.

So multifamily was the correct answer here by volume office was high on the SASB side, but still dwarfed by multifamily broadly. So let's talk about sales and valuation trends. So nothing too surprising here. I think as we look at transaction activity, it's subdued. When you look across all property types. If you're looking at, call it the 2020 to 20, 24 time period, 25 was a good year generally, but it wasn't anything that says, Hey, we've now eclipsed what we saw in the previous part of the market cycle. Sales volume was below the 2020 to 2024 average. As I mentioned, office sale volume saw the steepest drop at 41%. So again, I don't think that's surprising. I think it actually lends itself back to one of the earlier questions of have we started to see prices bottom out? I think the answer is yes, but in order for that to happen, volume has to stop.

If people are able to transact at higher prices, they're going to continue to transact. It's not until you see transactions stop that. I think capitulation actually starts, and then if you look at cap rates, they've expanded across all sectors, office and lodging expanded the most. Again, some of this is a function of just the cost of capital. Some of this is also a function of just risk premium that's being attributed to these assets and what it takes to get deals done. I would contend if you look at office, we're showing on sales transactions cap rates at about 7.26%. It's important to remember that these are on properties that actually transacted. So there's a huge swath that we've talked about that did not transact or have not sold or still in that kind of purgatory phase. Cap rates on those you would estimate would be significantly higher than the median.

And so this is reflective of where we're at in the market cycle and deals that have transacted. But for office in particular, I would contend there's a large swath of that market that just hasn't kind of reached that point of transaction lodging. I think it makes sense. You're seeing plus or minus 50, 60 basis points on the median cap rate and for the other sectors fairly negligible increases year over year or in 25 as compared to the four year look back. So if you look at Texas, there's a couple markets we've called out here, Texas, Chicago, Miami. These are markets where you started to see sales transaction come back and actually exceed what they were during that 2020 to 2024 time series. And I think the one surprising one here is Chicago. Chicago has been pretty much headline fodder for what not to want in CRE over the last several years.

I'm bullish on Chicago. I think anyone that's betting against Chicago, la, New York City, San Francisco, I think you're going to wish that you hadn't. Those gateway cities are going to come back. They're too integral to the success of America not to be what they have always been. They're just going to, for various reasons, maybe take a little longer. It's good to see that the sales volume in Chicago has exceeded the average, but it's still less than what we've seen when Chicago is fully rocking and rolling. Texas has been significant benefactor of some of the migration pattern trends coming out of California, New York, et cetera. Same with Florida and Miami in particular here. If you look at cap rates here, again, you're still seeing an expansion across the board. Again, higher across the capital, it's just math at some level. Miami is the one exception where you're starting to see the media in 2025 cap rate on deals there was less than what it was on the time series.

I go to Miami probably four or five times a year for different presentations or events and I'll tell you, it's a one of one market. The capital inflows there are unlike anything else. And the foreign capital in particular, it comes in there and I think as people refer to it as gray money, it's very interesting to see how it shifts the dynamic from a CRE perspective. So Miami is an interesting marketplace. I mean you can stop at an intersection and just have the car values at that intersection be more than an apartment building in some markets across the us and you see the impetus here with the cap rates being lower for the rest of these though, none of this makes me feel like we're in a catastrophic territory on the whole, I mean if you look at sales volume here, New York doesn't look great, but if you look at foot traffic metrics or some of the other things around New York City, the city for all intents and purposes is pretty much back Boston looks pretty good. So I think 2026, if I'm looking for, and especially coming off of CREF C conference in Miami in December, in January, excuse me, transaction velocity transaction activity is going to pick up significantly. Everyone is very bullish on what's going to happen in 2026. So again, here we're belabor this, so

Jennifer DeMasi:Lonnie while there our attendees are answering the question. Where do you see the biggest disconnect today between buyer and seller expectations in terms of sales?

Lonnie Hendry:Yeah, I mean I think it's all about perspective. If someone bought something in 2021, it's really hard for them to understand what 2025 or 2026 valuation is. If someone has been an active buyer or active participant in the current market cycle with debt repricing, then transactions are generally more favorable and happening because both buyer and seller understand where the current market is. But I think the challenge is there was just a huge influx. If you look at origination statistics of transaction volume in 2021, it was effectively a year and a half it's worth of transaction activity in one year. They paid really top of the market prices for assets that have not performed top of the market. So I think that's the biggest disconnect. But the reality is that the rubber meets the road at some point the extend and pretend fades and wears off. And in 2026, maybe it's the second half of the year or first part of 27, you're going to see the capitulation that's needed to get those deals done.

Lonnie Hendry:Perfect. Yeah, so I'm not surprised by the poll question there in terms of the results. I think it's interesting just to give you some perspective here is if you look at New York City as an example, strongest sales volume, it was 56 billion compared to 34 billion average. If you look at San Francisco as an example, as a market level, San Francisco and the CMBS one has the highest multifamily delinquency, but it also had the strongest rent growth. So the one common thing which I really haven't spoken about much on this presentation is just the bifurcation between the haves and the have nots. It's not regulated to just office, we're seeing it across all sectors. And in San Francisco as an example, there's definitely a large pool of halves even though there's a large pool of have-nots as well. And so you see Mountain West and Carolinas with cell volumes definitively below the average.

And cap rates expanded 50 to 90 basis points. Two more slides here and then we'll wrap up. If you look at cap rate compression and you look at New York City and Mountain West sales volume here, 3.74 billion for Mountain West on the time series 4,000,000,025 New York City, 4.11 billion on the time series 5.47. But Carolinas and Chicago, you see some pretty significant cap rate expansion, 8.97 to 10.49 and 9.65 to 10.46 respectively, 150 plus basis point jumps there. And then if you look at some of the California and Texas sales volume trailing the prior averages, and again here, same story for Chicago cap rate expansion across the other locations here, not significant expansion. New York City, maybe you could consider 4.86 to 5.24 pretty significant. But outside of that, and again Miami following the trend we saw earlier, you actually saw some compression on the cap rate 4.86 down to 4.09.

So if we transition to what are some of the general takeaways or where we're at cautious optimism and there's definitely some structural headwinds. So I think the tailwinds for us are the modest monetary easing is supporting activity, just the lack of rate volatility, people understanding kind of where rates are going to be. That definitely gives people some ability to underwrite and feel more confident in their decision. And then selective liquidity returning to quality the headwinds, refinancing pressures persist. There's still a large number of deals and a large volume of deals that need to be refinanced. It's going to really challenge the extent and pretend and where we're at with that office and multifamily delinquencies are elevated. And then just office use requirements and adaptation. We still haven't quite figured out how to manage the Class B office challenges at scale. I think for themes, quality is the focus.

Private credit growth has been substantial, very well documented even though it's opaque and not super transparent like some of the other markets. But you're seeing strategic banking partnerships playing a larger role. And I think what you see in 2026 is maybe what we expected in 22, 23 and 24 is distressed opportunities are really going to start emerging. And here we put for over-leveraged multifamily, which has definitely taken some of the headline space, but I think you're going to see this obviously in office and maybe even some industrial markets that have been overbuilt and then capital is available. But discipline success hinges on asset quality sponsorship matters more than ever, and there's adaptability to the structural change is essential. So that's what I have. Jennifer, happy to answer any questions and apologies for being a few minutes over.

Jennifer DeMasi:Thank you Lonnie. We do have a couple of additional questions in here. Maybe we can get back to the attendees via email. Sure. Today's presentation materials are available to be downloaded and I just want to give a huge thank you to Yoani for sharing all of this information. It's a lot to digest. I could sit on here and talk with you for the next six hours, but want to be respectful of your time as well as the time of the attendees. So again, thank you very much. We appreciate your time. This has been great.

Lonnie Hendry:Thank you for having me. Really appreciate the opportunity.

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