CREFC head on current state of the commercial market

I think it will, but not a significant one. And I'll tell you why. There had been some SEC regulations proposed for the securitization markets that ended up not happening. But what has in fact occurred was Basel III for banks that are $100 billion and larger. The capital charges under the Basel plan are going to be significant, to as much as 20% of the loan. I think the banks are going to be a little bit cautious about how much commercial real estate they put on their books. So how would the banks operate in the current environment and that's really to securitize. The chances are that they will originate loans like conduits again, I think that they'll go the securitization route in order to avoid those capital charges. That whole gestation period where you're putting a pool together and you're originating loans, that's going to be a little bit of a capital charge for them, but it's not going to last for long. So you can see some of the CMBS transactions come back into vogue. Over the last several years, you've seen a lot of the single borrower CMBS market, one loan or one portfolio to one borrower, being financed via a single asset, single borrower CMBS. And all of the securitization markets are likely to see a pickup in volume given the capital charges of originating loans.

I break it down into agency CMBS and non-agency CMBS, which is conduit and single asset, single borrower CMBS. They have a great program for multifamily lending, both Fannie and Freddie. Ginnie Mae is the only one that will originate a construction loan amongst the three of those bodies. What's going to happen is that you'll see the agencies step up and do multifamily. Everything has slowed down at this juncture, just because of the uncertainty. Most of those loans are transitional, they may be 70% occupied with the goal of getting it to 95% over the next six months, 12 months or whatever it might be. But I am always impressed with how much multifamily they do. And I think in some ways, it's a good thing to have them out there because they are creating and developing those transitional loans creating ultimately more multifamily units, which I think we need.

Obviously, they [the Federal Reserve] are not going to move 100 basis points [lower] their first time out. This is probably a 25 to 50 basis point move once they get there and they're not there yet. The real question is there's a significant amount of loans that need to be refinanced and the basic challenge is that these loans were originated at a time where, during COVID, where the Fed eased and put a bunch of liquidity into the market, and the rates were much lower than they are today, given where benchmark rates are right now. The Fed keeps tightening and it's just causing the cost of financings on real estate to increase. There are some situations where you will see an uptick in maturity defaults, where it's challenging to refinance that loan, particularly if the value of the asset has deteriorated. So now you have two problems. You have difficulties refinancing the balance that existed, because the value of the assets may not be what it was. And then the other side of it is, you're now going to have a loan that's significantly higher in terms of the mortgage interest rate. It depends on the willingness of the borrower to put more capital into the deal and to make up that differential. The good news is that multifamily as an asset class is doing reasonably well. If you look at multifamily delinquencies, in November 2023, and that's my most recent data, but they were about 2.5% on the CMBS side, and that's conduit, not agency. Whereas, some of the other sectors like retail are almost 6.6%. So you know, and the only other [property type] that's much better than multifamily is industrial where you have 40 basis points, 0.38%, in terms of delinquency, so the numbers aren't crazy. If you look at the November numbers, the weighted average is about a 4.6% delinquency rate. The loans that were underwritten since 2021 are far more conservative in terms of their loan-to-value ratios, debt service coverage ratios, and all of those metrics. It makes sense, because at the end of the day, these lenders aren't in the business of making loans that are going to default 12 months later. And the market is in reasonably good shape. But, you will see higher levels of delinquencies and losses, particularly if you've seen deterioration in the value of the real estate, as well as an increase in mortgage rates. It's kind of a double whammy for the borrower.