September 5, 2025 • 28 mins
Global bond markets are under siege and CRE is caught in the crossfire.
UK 30-year gilt yields surged to their highest level since 1998, and volatility in U.S. Treasuries has repeatedly brushed them against 5%.
For commercial real estate, that means more expensive debt, climbing cap rates and global investors second-guessing allocations.
Christopher Stanley, banking industry practice lead at Moody’s Analytics, said the tightness of the spread shows increased competition in the market, but the entire yield curve has moved up considerably.
That’s going to hit net operating income, and Stanley said staying on top of liquidity and forecasting out volatility all the way through the life cycle of the project have become crucial.
“When we’re in a nervous economy like we’re in right now, everyone immediately jumps to what kind of credit problems are there going to be,” Stanley said on the show. “Credit is a part of it, but we’re really playing a balance sheet management game.”
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Mark Bonner (00:09):
Okay. Welcome to First Draft Live. It's Friday,
September 5. I'm Mark Bonner,business owner's editor in chief
coming to you live from NewYork. Thank you to everyone for
tuning in.
So today, we're gonna get intothe bond markets. They're
throwing a tantrum again, andnot just here in The United
States. UK gilts cracked 5.6%this week, the highest since
(00:29):
1998. The last time thathappened, The UK prime minister
couldn't outlast a head oflettuce. And France is also
seeing decade highs.
But let's be real. The marketthat matters is ours. US
treasuries brushed 5% this week,and everyone suddenly remembered
what expensive money feels like.Why is this happening? Well,
(00:51):
Washington's still runningdeficits north of
$1,600,000,000,000 for the firstten months of the year to be
exact.
And labor, it's no bull marketanymore. BLS data released this
morning showed August leveragejust 22,000 new jobs, far below
forecast. Unemployment ticked upto 4.3%, and wage growth is
(01:11):
slowing. All that means the Fedis juggling fire. Inflation is
still hot.
Labor is starting to crack. Thegood news today, if there is
any, is that on September 17,the Fed will almost certainly
cut rates for the first timesince December 2024. But
meanwhile, a wall of newtreasury issuance is testing
(01:32):
just how much debt investors arewilling to swallow. For real
estate, that's the punchline.Every refi takes more equity.
Every loan comes at a couponyou'd rather forget, and
valuations are getting yankedbetween higher cap rates and
rent rolls that don't look asbulletproof in a hybrid world.
Oh, and that yield curve,Totally bent. Short rates above
(01:56):
5%, long bonds climbing, themiddle sagging. It's a roller
coaster. Banks hate it.
Spreads are tight. Borrowers arestuck making ugly choices. So
that's the setup heading intothe fall. More volatility, more
repricing, and no easy answers.But all is not lost because
(02:19):
Chris Stanley, senior directorfrom Moody's Analytics, is here
to help us make sense of it all,and maybe tell us if this storm
passes or if we're living in anew normal.
Send us your questions in thechat. We'll hit as many as we
can. Chris, welcome to FirstDraft Live.
Chris Stanley (02:35):
It's great to be here. Thank you, Mark.
Mark Bonner (02:38):
So Chris, what do you make of all this? Tell us
about the moment that we're intoday when it comes to the bond
market.
Chris Stanley (02:45):
Well, you know, I've always been told that in
bond markets there is truth. AndI think we're getting a very
complex forward picture. And soa lot of really what needs to
happen next for a lot ofparticipants is, you know, start
taking in an array or anensemble of signals to try to
(03:09):
reconcile what is this forwardview of the world that's coming
from the yield curve? And how doI make heads and tails of some
of these headline indicatorsthat you mentioned relative to
the local markets that I'moperating in, you know, as a
(03:29):
builder developer or propertyowner or banker, you know, no
matter which side of thatequation you're on.
Mark Bonner (03:37):
So everything we talked about, it basically boils
down to higher operating costs,tenants negotiating harder and
capital raising getting a littlebit tougher. It already was
tough, now it's a little bitharder. Do you think these
overlapping pressures complicatethe operating picture for
landlords?
Chris Stanley (03:54):
Well, you know, I think when we're in a nervous
economy like we're in right now,everybody immediately jumps to,
you know, what kind of creditproblems are there going to be?
Are we on the edge of a bunch ofdefaults? And I think the
picture that we're looking at isreally, you know, is a part of
(04:15):
it, but we're really playing abalance sheet management game.
You know, whether you're alender or a borrower or a
landlord, it doesn't matter. Weare looking at a complex picture
where liquidity is going tomatter.
So, you know, making sure you'vegot a really solid picture of
not just how much cash, but whenit's going to be flowing in and
(04:39):
out, what interest rates aregoing to be doing all along that
yield curve are important tomanage that cost of funds and
expected returns and interestrate risk. If you give it enough
time has a tendency to turn intocredit risk. Keeping that, in in
play as a part of a deepplaybook for a lot of different
(05:01):
futures is is going to becritical.
Mark Bonner (05:04):
Yeah, let's talk about credit. I mean, even with
volatility, credit spreads aretight. Lenders are still
competing for business. Thatmeans financing is available,
but it's not cheap. Forborrowers rolling off 3% debt
into six or 7%, the spread isn'tthe problem.
It's the absolute cost of moneyand the new equity gap. So if
spreads are still tight, what doyou think is really driving the
(05:27):
squeeze for borrowers right now?
Chris Stanley (05:30):
Well, you know, think the tightness of the
spread is something that youwant to keep an eye on, right?
That for at least for themoment, signaling that there's
still a lot of competition.There's a lot of dollars out
there competing to capture theloan demand that's available.
But I think the, you know, it'sreally that kind of higher
(05:54):
baseline, the entire yield curvehas moved up considerably from
where we were several years ago.And that's going to weigh not
only on, you know, the NOI ofyour property, but also on its
value, right?
Cap rates are going to followthose benchmark rates with a
little bit of a lag and it'stough to observe until there's
Mark Bonner (06:14):
a bunch
Chris Stanley (06:15):
of rates in the market, but you know, if you're
facing a situation where theprice you paid five years ago is
really not a relevant measure ofthe value of the property today,
and there's all this, you know,pressure on the expenses of
operating the property, becomesa much different conversation
(06:35):
about what is my forward view ofif this property can pay for
itself and if is returningenough to stay in my portfolio.
Mark Bonner (06:45):
So how do you balance the debt availability
and that stress that'sassociated with that, with the
new equity owners need to bringto the table right now?
Chris Stanley (06:54):
So that's where I think this balance sheet
management game is so important.So much of the media commentary
we see is ultimately around, youknow, what is going to happen at
the Fed's next meeting andhoping for cuts or focusing only
(07:14):
on those short term rates reallymisses a big part of the picture
when we think about the termsthat we're investing in
properties for and thematurities of debts on those
properties out, as well asleases right out into the
future. So thinking about thisas a balance sheet management
(07:35):
game, thinking about liquidity,thinking about leverage,
thinking about interest raterisk and what that does to your
NOI, as well as what's beingcommunicated about future
inflation expectations for whatyou need to be getting out of
that property well into thefuture. That's the kind of game
(07:56):
we got to have a bunch of playsand strategies for.
Mark Bonner (08:01):
So, I mean, you know, we we got this drop this
morning from the BLS. Right? Itwas a weaker than normal jobs
report, 22,000 jobs for August.There were some technical
difficulties. I'm not gonna getinto the of that, but, you know,
the data is now up in therewhether we can trust it or not,
and we'll see what the revisionmight be in a month.
But assuming that everything ishunky dory, it just turbocharged
(08:22):
this idea that absolutely,almost certainly, on September
17 when the FOMC meetinghappens, that we are going to
get our first rate cut sinceDecember 2024 at least 25 basis
points, maybe even up to 50basis points. Does that change
your thinking? Did that did thatchange anything for you today,
Chris, when you saw that news onthis front? Listen.
Chris Stanley (08:47):
I I like to keep myself anchored in what is most
likely to happen, but you got toplan for an upside and a
downside what if around that aswell. I think J Powell is under
tremendous pressure right now tolower rates. Part of the
presentation, when you look atthe six month or one year
(09:09):
maturities on the yield curve isa lot of market expectation that
there's going to be 25 to 50basis points of cuts coming up.
There's no guarantee that thatwill happen. And, know, I think
particularly on the long end ofthe curve, some of the noise
that we've seen around the last,series of Fed cuts, there's a
(09:33):
lot of disagreement out there,in that market.
So you got to do your best toput a confidence interval around
a few different futures, have aplan or, you know, ability to
act if information changes, butdon't count on consensus being
(09:55):
the only outcome that you'repotentially up against.
Mark Bonner (10:00):
The curve is bent in some unusual ways right now.
You know, short rates above 5%,long bonds pushing the same dip
in the middle. For banks, thatkills net interest margins. For
commercial real estate, it'sseemingly making financing tenor
a tactical choice. And lenderscan't just extend debt on
(10:20):
yesterday's yields when today'scoupons are double.
How is the curve shaping,lenders willingness to revise
properties at this moment,Chris? Well, and what do you do
if you, if you're sitting herewatching this, what's your best
advice on how to deal with thatdynamic?
Chris Stanley (10:37):
So staying on top of liquidity is going to be
critical. I think, you know, theone of the things that has been
very interesting to watch,particularly over, you know, the
the span of of, you know, thelast twenty years, right, is how
the mix of lenders in the markethas continued to evolve. I
(11:00):
think, you know, at this point,there is a share of the market
that is still with traditionalbank lenders, but there's been
tremendous growth in that nonbank financing sources, as well
as an evolution in composition,term structures, all those
(11:20):
different things that you can belooking at. The curve shape that
we've got means that, you know,you may not only be looking at
replacing fixed rate debt with afloating rate because of the
volatility and interest raterisk that your lenders are
facing, but also a return of,you know, things like
(11:43):
derivatives and other things tokind of manage the risk profile
that you have, as well as thatyour lenders have as this
volatility continues issomething that I'm definitely,
you know, anticipating. So notlooking just to traditional
banks as your only source offunds, being cognizant around,
(12:07):
you know, debt service under avariety of different conditions,
and honestly taking a hard lookat your portfolio, and, and
what, what does today's LTV, youknow, really look like?
And, and is that something thatyou foresee improvement in, to
where you've got the right mixin your portfolio? Or are there
(12:31):
conditions where you need tostart to revisit, that strategy?
Mark Bonner (12:37):
Chris, when you look at the macro picture,
looking at like that twenty tothirty year window here, I mean,
historically, how does the yieldcurve resolve when it enters
into a dynamic like the onewe're in today?
Chris Stanley (12:49):
Well, the problem with the one that we're in today
is we've got uncertainty in themiddle. That's what's giving us
that, that trough around some ofthose shorter maturities. We've
got a disagreement between thelong end and the short end
policy rates. Normally whenthere are cuts, it helps to
(13:12):
normalize the entire yieldcurve. Last September, when the
Fed cut rates, inflationexpectations, sovereign
borrowing pressure that youmentioned at the top of the
call, these are all reasonsamong who knows what other ones
that there was an offsettingincrease in some of the longer
(13:36):
maturities on the yield curve.
So there's a disagreementbetween market participants
about what does tomorrow holdand the, you know, those current
policy rates. In the times thatthis has happened before, one
side or the other tends to bethe one that kind of violently
responds either because we gointo a recession and policy
(13:58):
rates get cut, or, you know, thelong end of the curve kind of
sorts itself out. But you know,this is where you gotta, you
gotta be on the lookout andagile for a bunch of different
possibilities.
Mark Bonner (14:11):
I mean, you said uncertainty in the middle, and I
think we all know where thatemanates from, right? And I
can't recall another time ineconomic history where we had a
word like that in the middle.And can you? I mean, is there
any other point in history thatyou know of economically
speaking, Chris, where there wasuncertainty in the middle? I
(14:34):
mean, you know, this is thisreally a very unique moment in
history, or are there othermoments in time in the past that
maybe we've all forgotten aboutwhere there was also concurrent
uncertainty when it came tothese matters?
Chris Stanley (14:48):
You know, I guess the thing I would go to is how
pernicious inflation is once itgets started. For a good number
of the bankers and propertyowners and developers working
today, we've spent a goodportion of our careers where
inflation just wasn't a problem.In fact, getting the economy to
(15:13):
inflate enough, like getting upto that 2% target, was really
the focus of a lot of monetarypolicy for much of our careers.
That shaped hurdle rates onproperties and other
investments. It shapedexpectations or kind of muscle
memory that was or wasn'tdeveloped on balance sheet
(15:35):
management strategies at banks.
And so, you know, I would Ithink this is part of the reason
we keep going back to the late70s, early 80s, we had trouble
in labor markets and withinflation, and kind of the
dramatic things that need tohappen sometimes to unwind
those. Job losses are bad.Inflation on average, still the
(16:02):
bigger problem. Has much morewide ranging effects, and I
wouldn't rule out either side ofthat Fed mandate getting worse
or both of them at once in themarket that we're in. And that's
where we need to really beconsiderate of volatility at, at
(16:25):
multiple maturities of thatyield curve and having a plan
for things not working in unisonor the way that we've seen them
work, you know, in, in, in therecent past.
Mark Bonner (16:39):
If you're just tuning in, this is First Draft
Live. We're digging into thebond markets warning signs for
commercial real estate. We'resitting here with Chris Stanley,
senior director of Moody'sAnalytics. Send your questions
into the chat and we'll get toas many as we can. Chris, let's
talk about the September effect.
September has a little bit of areputation, right? Over the past
decade, long bonds have lostground in most years. Part of it
(17:00):
is seasonal, issuance, calendarsare heavy, traders return, loss
harvesting kicks in. But thisSeptember arrives with deficits
and inflation that are stillvery live issues as you've
already discussed. Forcommercial real estate, the
noise and the signal both matterbecause uncertainty as we've
discussed drives repricing justas much as hard rates.
(17:22):
How do you separate the seasonalnoise from the structural change
in the bond market right now,Chris?
Chris Stanley (17:27):
So I think first of all, gotta zoom out, right?
Day to day, we're seeing a tonof noise, tons of ups and downs
in equity and bond markets. Andso really kind of interpreting
some of these moves in yieldthrough a more of a multi year
(17:48):
type of view, you know, to say,hey, are we seeing a persistent
upward, persistent downward? Howdoes that shape my forward
expectation there? I think yougot to start relying on a much
broader ensemble of signals.
You know, this is the kind of amarket where we start to see
(18:12):
participants pull back. Youknow, it can be dangerous to
see, a national view and applythat everywhere. So, you know,
really kind of looking at, Hey,what's the yield curve doing?
What's inflation doing? What arelabor markets like?
Just nationally, but you know,how does some of those play out
(18:33):
in, in the local markets whereI've got properties? And then
ultimately trying to filter someof that through the lens of a
cause. Know, why do we see thesemoves? What do we, is it a Fed
announcement? Is there some kindof change in government policy
or some new economic report liketoday's jobs report or something
(18:58):
that's, that's maybe causingsome of those, those near term,
you know, noises, but could alsobe a signal.
Mark Bonner (19:06):
Right, I mean, look, the other word of the year
or the phrase of the year iswait and see. Wait and see, wait
and see, wait and see. We'repost Labor Day now, we're coming
into the end of Q3. This istypically the time of year where
commercial real estate gets backfrom the summer and does that
hard March to the end of theyear. It's where a lot of deal
making occurs, lot of bigtransactions.
So if you're a commercial realestate decision maker, like,
(19:28):
you've gotta weigh this. And sowhat I meant my question to you,
Chris, is what's the bigger riskin making a decision right now?
Overreacting to volatility andall this noise and uncertainty
or under reacting to it?
Chris Stanley (19:42):
I think the not thinking about how volatility is
going to change liquidity, debtservice or valuations into the
future. You know, the thing I'mconstantly trying to do as I'm
working with bankers and otherindustry participants is to say,
(20:05):
we have a short term bias in ourvision. We want to look at with
this new thing just happenedtoday. How does that change
dynamics of this property inthis instant?
Mark Bonner (20:15):
But
Chris Stanley (20:15):
what that property looks like to the
maturity of its current debts?You know, what it looks like at
maturity, of its current debts,not just, you know, over that
debt service life. That's reallywhat you gotta be thinking
about. So time boxing those cashflows from changes in rents,
(20:37):
changes in, you know, vacancies,you know, thinking about some of
those asset dynamics around yourNOI, really focusing on putting
some stress on forward view ofdebt service or LAV as some of
these indicators come in andreally keeping your eyes open to
(21:00):
what other properties in themarket are up to because
strategic defaults or major rentconcessions to fix some vacancy
or other things. The what is theother guy gonna do factor in the
face of these could be theunknown unknown that gets you in
(21:23):
this kind of market.
Mark Bonner (21:26):
All right, let's go to a question from the audience.
How much will the currentpricing of bonds have an impact
on discount rates? How much willthe current pricing of bonds
have on the impact of discountrates? Forgive me.
Chris Stanley (21:43):
That's a million dollar question. I think if I
knew the exact answer, we'd,we'd, we'd need to go make some
trades. But I, you know, I wouldsay, I think the strategies that
are most important at this pointare based on adapting to the new
(22:09):
world as we know it, notexpecting a return to, you know,
we're never going to see zero,you know, policy rates again.
You know, the hurdle rate thatyou're up against today that's
impacting today's property valueor, you know, the refinancing
cost of, of, you know, debt onthe property. Let that set a new
(22:34):
normal in, in your mind andadjust your portfolio
accordingly.
Mark Bonner (22:40):
Yeah. And look, moving on, I mean, the industry
is still trying to figure outwhere, what assets, what their
assets are actually worth today,right? Coming off the pandemic,
coming into this new economy. Imean, far along are we in true
price discovery in the industryright now?
Chris Stanley (22:57):
I think it's only just started. You can see, I
don't have a background, likeyours, Mark, but, this isn't an
office I'm calling in from, andI'll bet a bunch of the folks on
the call are in a similarposition, right? The way that we
are using these properties hasdramatically changed, and I
(23:20):
don't think it's going to goback. Strategic defaults, you
know, jingle mail to bankers,know, or foreclosures are still,
know, not they're happening notthat frequently yet, but you
know, there are other things outthere that can cause shocks, you
(23:41):
know, beyond just moves in, in,you know, those hurdle rates,
on, on price value and pricesand values.
Mark Bonner (23:49):
I mean, do we, do you expect that we're going to
see more distressed trades thatmight accelerate this process,
or do you think it's going to bea slow grind like it sort of has
been?
Chris Stanley (23:58):
If CMBS are any indicator, I think we're going
to see some more distressedtrades coming. There's there's
quite a bit of delinquency thatthat has spiked out there.
Office multifamily, you know,are kind of key property types
to be keeping an eye on. But,you know, I also think some of
(24:22):
those changes are offset againwith credit spreads are still
really tight. There's still abunch of money that's out there
competing, and I think thegrowth of some of these non bank
sources of funding is going tochange the way those defaults
get handled or if they occur,you know, versus kind of pay
some strategic, you know,takeouts of equity or debt, you
(24:45):
know, by other interestedparties that can do different
things, with that property than,than a bank traditionally could.
Mark Bonner (24:54):
Let's go to another question from the audience.
Since operating expenses are keyto NOI, what do you see
regarding the impact of tariffsand national economic policy on
that element?
Chris Stanley (25:06):
I think it creates a need to stress
whatever assumptions you haveabout operating expense on any
properties you're holding.Immigration dynamics, tariff
dynamics, these are part of whywe continue to see, there are
(25:28):
many factors obviously, butgoods and services are both
contributing to the inflationthat remains above target. And
so how that continues to playout is something that I would be
really stressing in plans that Imade around my portfolio.
Mark Bonner (25:49):
I mean, if anything, volatility has become
a great teacher this past year.So knowing that, and we talked
about uncertainty and we talkedabout wait and see, which are
like sort of these buzzwords andphrases of the moment. What does
winning look like for lendersand landlords in this
environment?
Chris Stanley (26:10):
Everybody is getting a lesson in the
fundamentals. The quicker thatyou get back there, absent these
assumptions about a return tonormal, you know, the sooner you
can prepare for multiple statesof the world, the sooner you're
in a position to be agile andresilient, no matter what
(26:31):
happens. Tomorrow is uncertain,so there's no solutions. There's
only going to be trade offs.Organize yourself and your
portfolio around the best set oftrade offs possible given that
future variability.
Mark Bonner (26:48):
Okay, we're running out of time, but I do want to
finish up on one question fromthe audience. Chris, for
investors, is passive indexingnow a thing of the past? Do
investors need to look foractive bond traders or managers?
Chris Stanley (27:03):
I got to be careful. I can't give you
investment advice, but I thinkthat part of what I would be on
the lookout for is the effect ofthe volume of passive investing
that is out there and how thatmay be affecting some of these
(27:26):
price signals. You know, it'stough to outperform the market,
but it's even tougher whenyou've got kind of some of those
signals that may be a little bitmore muted because of the volume
and extent of some of thoseindex or other, you know, kind
(27:49):
of passive investments outthere. So maybe time to kind of
consider some of that in, insome variability in your
strategy.
Mark Bonner (28:00):
Okay. That's all the time we have today. Chris,
thanks so much for joining us.
Chris Stanley (28:06):
Thank you so much for having me, Mark. It was it
was a pleasure.
Mark Bonner (28:10):
If you missed part of today's show or wanna go back
and catch any of our pastconversations, you can find
every episode of our show inyour favorite podcast app. Just
search First Draft Live. We'llbe back next Friday with another
conversation that putscommercial real estate right in
the middle of the big picture.Until then, I'm Mark Bonner and
this is First Draft Live. Have agreat weekend y'all.
Okay. Welcome to First Draft Live. It's Friday,
September 5. I'm Mark Bonner,business owner's editor in chief
coming to you live from NewYork. Thank you to everyone for
tuning in.
So today, we're gonna get intothe bond markets. They're
throwing a tantrum again, andnot just here in The United
States. UK gilts cracked 5.6%this week, the highest since
(00:29):
1998. The last time thathappened, The UK prime minister
couldn't outlast a head oflettuce. And France is also
seeing decade highs.
But let's be real. The marketthat matters is ours. US
treasuries brushed 5% this week,and everyone suddenly remembered
what expensive money feels like.Why is this happening? Well,
(00:51):
Washington's still runningdeficits north of
$1,600,000,000,000 for the firstten months of the year to be
exact.
And labor, it's no bull marketanymore. BLS data released this
morning showed August leveragejust 22,000 new jobs, far below
forecast. Unemployment ticked upto 4.3%, and wage growth is
(01:11):
slowing. All that means the Fedis juggling fire. Inflation is
still hot.
Labor is starting to crack. Thegood news today, if there is
any, is that on September 17,the Fed will almost certainly
cut rates for the first timesince December 2024. But
meanwhile, a wall of newtreasury issuance is testing
(01:32):
just how much debt investors arewilling to swallow. For real
estate, that's the punchline.Every refi takes more equity.
Every loan comes at a couponyou'd rather forget, and
valuations are getting yankedbetween higher cap rates and
rent rolls that don't look asbulletproof in a hybrid world.
Oh, and that yield curve,Totally bent. Short rates above
(01:56):
5%, long bonds climbing, themiddle sagging. It's a roller
coaster. Banks hate it.
Spreads are tight. Borrowers arestuck making ugly choices. So
that's the setup heading intothe fall. More volatility, more
repricing, and no easy answers.But all is not lost because
(02:19):
Chris Stanley, senior directorfrom Moody's Analytics, is here
to help us make sense of it all,and maybe tell us if this storm
passes or if we're living in anew normal.
Send us your questions in thechat. We'll hit as many as we
can. Chris, welcome to FirstDraft Live.
Chris Stanley (02:35):
It's great to be here. Thank you, Mark.
Mark Bonner (02:38):
So Chris, what do you make of all this? Tell us
about the moment that we're intoday when it comes to the bond
market.
Chris Stanley (02:45):
Well, you know, I've always been told that in
bond markets there is truth. AndI think we're getting a very
complex forward picture. And soa lot of really what needs to
happen next for a lot ofparticipants is, you know, start
taking in an array or anensemble of signals to try to
(03:09):
reconcile what is this forwardview of the world that's coming
from the yield curve? And how doI make heads and tails of some
of these headline indicatorsthat you mentioned relative to
the local markets that I'moperating in, you know, as a
(03:29):
builder developer or propertyowner or banker, you know, no
matter which side of thatequation you're on.
Mark Bonner (03:37):
So everything we talked about, it basically boils
down to higher operating costs,tenants negotiating harder and
capital raising getting a littlebit tougher. It already was
tough, now it's a little bitharder. Do you think these
overlapping pressures complicatethe operating picture for
landlords?
Chris Stanley (03:54):
Well, you know, I think when we're in a nervous
economy like we're in right now,everybody immediately jumps to,
you know, what kind of creditproblems are there going to be?
Are we on the edge of a bunch ofdefaults? And I think the
picture that we're looking at isreally, you know, is a part of
(04:15):
it, but we're really playing abalance sheet management game.
You know, whether you're alender or a borrower or a
landlord, it doesn't matter. Weare looking at a complex picture
where liquidity is going tomatter.
So, you know, making sure you'vegot a really solid picture of
not just how much cash, but whenit's going to be flowing in and
(04:39):
out, what interest rates aregoing to be doing all along that
yield curve are important tomanage that cost of funds and
expected returns and interestrate risk. If you give it enough
time has a tendency to turn intocredit risk. Keeping that, in in
play as a part of a deepplaybook for a lot of different
(05:01):
futures is is going to becritical.
Mark Bonner (05:04):
Yeah, let's talk about credit. I mean, even with
volatility, credit spreads aretight. Lenders are still
competing for business. Thatmeans financing is available,
but it's not cheap. Forborrowers rolling off 3% debt
into six or 7%, the spread isn'tthe problem.
It's the absolute cost of moneyand the new equity gap. So if
spreads are still tight, what doyou think is really driving the
(05:27):
squeeze for borrowers right now?
Chris Stanley (05:30):
Well, you know, think the tightness of the
spread is something that youwant to keep an eye on, right?
That for at least for themoment, signaling that there's
still a lot of competition.There's a lot of dollars out
there competing to capture theloan demand that's available.
But I think the, you know, it'sreally that kind of higher
(05:54):
baseline, the entire yield curvehas moved up considerably from
where we were several years ago.And that's going to weigh not
only on, you know, the NOI ofyour property, but also on its
value, right?
Cap rates are going to followthose benchmark rates with a
little bit of a lag and it'stough to observe until there's
Mark Bonner (06:14):
a bunch
Chris Stanley (06:15):
of rates in the market, but you know, if you're
facing a situation where theprice you paid five years ago is
really not a relevant measure ofthe value of the property today,
and there's all this, you know,pressure on the expenses of
operating the property, becomesa much different conversation
(06:35):
about what is my forward view ofif this property can pay for
itself and if is returningenough to stay in my portfolio.
Mark Bonner (06:45):
So how do you balance the debt availability
and that stress that'sassociated with that, with the
new equity owners need to bringto the table right now?
Chris Stanley (06:54):
So that's where I think this balance sheet
management game is so important.So much of the media commentary
we see is ultimately around, youknow, what is going to happen at
the Fed's next meeting andhoping for cuts or focusing only
(07:14):
on those short term rates reallymisses a big part of the picture
when we think about the termsthat we're investing in
properties for and thematurities of debts on those
properties out, as well asleases right out into the
future. So thinking about thisas a balance sheet management
(07:35):
game, thinking about liquidity,thinking about leverage,
thinking about interest raterisk and what that does to your
NOI, as well as what's beingcommunicated about future
inflation expectations for whatyou need to be getting out of
that property well into thefuture. That's the kind of game
(07:56):
we got to have a bunch of playsand strategies for.
Mark Bonner (08:01):
So, I mean, you know, we we got this drop this
morning from the BLS. Right? Itwas a weaker than normal jobs
report, 22,000 jobs for August.There were some technical
difficulties. I'm not gonna getinto the of that, but, you know,
the data is now up in therewhether we can trust it or not,
and we'll see what the revisionmight be in a month.
But assuming that everything ishunky dory, it just turbocharged
(08:22):
this idea that absolutely,almost certainly, on September
17 when the FOMC meetinghappens, that we are going to
get our first rate cut sinceDecember 2024 at least 25 basis
points, maybe even up to 50basis points. Does that change
your thinking? Did that did thatchange anything for you today,
Chris, when you saw that news onthis front? Listen.
Chris Stanley (08:47):
I I like to keep myself anchored in what is most
likely to happen, but you got toplan for an upside and a
downside what if around that aswell. I think J Powell is under
tremendous pressure right now tolower rates. Part of the
presentation, when you look atthe six month or one year
(09:09):
maturities on the yield curve isa lot of market expectation that
there's going to be 25 to 50basis points of cuts coming up.
There's no guarantee that thatwill happen. And, know, I think
particularly on the long end ofthe curve, some of the noise
that we've seen around the last,series of Fed cuts, there's a
(09:33):
lot of disagreement out there,in that market.
So you got to do your best toput a confidence interval around
a few different futures, have aplan or, you know, ability to
act if information changes, butdon't count on consensus being
(09:55):
the only outcome that you'repotentially up against.
Mark Bonner (10:00):
The curve is bent in some unusual ways right now.
You know, short rates above 5%,long bonds pushing the same dip
in the middle. For banks, thatkills net interest margins. For
commercial real estate, it'sseemingly making financing tenor
a tactical choice. And lenderscan't just extend debt on
(10:20):
yesterday's yields when today'scoupons are double.
How is the curve shaping,lenders willingness to revise
properties at this moment,Chris? Well, and what do you do
if you, if you're sitting herewatching this, what's your best
advice on how to deal with thatdynamic?
Chris Stanley (10:37):
So staying on top of liquidity is going to be
critical. I think, you know, theone of the things that has been
very interesting to watch,particularly over, you know, the
the span of of, you know, thelast twenty years, right, is how
the mix of lenders in the markethas continued to evolve. I
(11:00):
think, you know, at this point,there is a share of the market
that is still with traditionalbank lenders, but there's been
tremendous growth in that nonbank financing sources, as well
as an evolution in composition,term structures, all those
(11:20):
different things that you can belooking at. The curve shape that
we've got means that, you know,you may not only be looking at
replacing fixed rate debt with afloating rate because of the
volatility and interest raterisk that your lenders are
facing, but also a return of,you know, things like
(11:43):
derivatives and other things tokind of manage the risk profile
that you have, as well as thatyour lenders have as this
volatility continues issomething that I'm definitely,
you know, anticipating. So notlooking just to traditional
banks as your only source offunds, being cognizant around,
(12:07):
you know, debt service under avariety of different conditions,
and honestly taking a hard lookat your portfolio, and, and
what, what does today's LTV, youknow, really look like?
And, and is that something thatyou foresee improvement in, to
where you've got the right mixin your portfolio? Or are there
(12:31):
conditions where you need tostart to revisit, that strategy?
Mark Bonner (12:37):
Chris, when you look at the macro picture,
looking at like that twenty tothirty year window here, I mean,
historically, how does the yieldcurve resolve when it enters
into a dynamic like the onewe're in today?
Chris Stanley (12:49):
Well, the problem with the one that we're in today
is we've got uncertainty in themiddle. That's what's giving us
that, that trough around some ofthose shorter maturities. We've
got a disagreement between thelong end and the short end
policy rates. Normally whenthere are cuts, it helps to
(13:12):
normalize the entire yieldcurve. Last September, when the
Fed cut rates, inflationexpectations, sovereign
borrowing pressure that youmentioned at the top of the
call, these are all reasonsamong who knows what other ones
that there was an offsettingincrease in some of the longer
(13:36):
maturities on the yield curve.
So there's a disagreementbetween market participants
about what does tomorrow holdand the, you know, those current
policy rates. In the times thatthis has happened before, one
side or the other tends to bethe one that kind of violently
responds either because we gointo a recession and policy
(13:58):
rates get cut, or, you know, thelong end of the curve kind of
sorts itself out. But you know,this is where you gotta, you
gotta be on the lookout andagile for a bunch of different
possibilities.
Mark Bonner (14:11):
I mean, you said uncertainty in the middle, and I
think we all know where thatemanates from, right? And I
can't recall another time ineconomic history where we had a
word like that in the middle.And can you? I mean, is there
any other point in history thatyou know of economically
speaking, Chris, where there wasuncertainty in the middle? I
(14:34):
mean, you know, this is thisreally a very unique moment in
history, or are there othermoments in time in the past that
maybe we've all forgotten aboutwhere there was also concurrent
uncertainty when it came tothese matters?
Chris Stanley (14:48):
You know, I guess the thing I would go to is how
pernicious inflation is once itgets started. For a good number
of the bankers and propertyowners and developers working
today, we've spent a goodportion of our careers where
inflation just wasn't a problem.In fact, getting the economy to
(15:13):
inflate enough, like getting upto that 2% target, was really
the focus of a lot of monetarypolicy for much of our careers.
That shaped hurdle rates onproperties and other
investments. It shapedexpectations or kind of muscle
memory that was or wasn'tdeveloped on balance sheet
(15:35):
management strategies at banks.
And so, you know, I would Ithink this is part of the reason
we keep going back to the late70s, early 80s, we had trouble
in labor markets and withinflation, and kind of the
dramatic things that need tohappen sometimes to unwind
those. Job losses are bad.Inflation on average, still the
(16:02):
bigger problem. Has much morewide ranging effects, and I
wouldn't rule out either side ofthat Fed mandate getting worse
or both of them at once in themarket that we're in. And that's
where we need to really beconsiderate of volatility at, at
(16:25):
multiple maturities of thatyield curve and having a plan
for things not working in unisonor the way that we've seen them
work, you know, in, in, in therecent past.
Mark Bonner (16:39):
If you're just tuning in, this is First Draft
Live. We're digging into thebond markets warning signs for
commercial real estate. We'resitting here with Chris Stanley,
senior director of Moody'sAnalytics. Send your questions
into the chat and we'll get toas many as we can. Chris, let's
talk about the September effect.
September has a little bit of areputation, right? Over the past
decade, long bonds have lostground in most years. Part of it
(17:00):
is seasonal, issuance, calendarsare heavy, traders return, loss
harvesting kicks in. But thisSeptember arrives with deficits
and inflation that are stillvery live issues as you've
already discussed. Forcommercial real estate, the
noise and the signal both matterbecause uncertainty as we've
discussed drives repricing justas much as hard rates.
(17:22):
How do you separate the seasonalnoise from the structural change
in the bond market right now,Chris?
Chris Stanley (17:27):
So I think first of all, gotta zoom out, right?
Day to day, we're seeing a tonof noise, tons of ups and downs
in equity and bond markets. Andso really kind of interpreting
some of these moves in yieldthrough a more of a multi year
(17:48):
type of view, you know, to say,hey, are we seeing a persistent
upward, persistent downward? Howdoes that shape my forward
expectation there? I think yougot to start relying on a much
broader ensemble of signals.
You know, this is the kind of amarket where we start to see
(18:12):
participants pull back. Youknow, it can be dangerous to
see, a national view and applythat everywhere. So, you know,
really kind of looking at, Hey,what's the yield curve doing?
What's inflation doing? What arelabor markets like?
Just nationally, but you know,how does some of those play out
(18:33):
in, in the local markets whereI've got properties? And then
ultimately trying to filter someof that through the lens of a
cause. Know, why do we see thesemoves? What do we, is it a Fed
announcement? Is there some kindof change in government policy
or some new economic report liketoday's jobs report or something
(18:58):
that's, that's maybe causingsome of those, those near term,
you know, noises, but could alsobe a signal.
Mark Bonner (19:06):
Right, I mean, look, the other word of the year
or the phrase of the year iswait and see. Wait and see, wait
and see, wait and see. We'repost Labor Day now, we're coming
into the end of Q3. This istypically the time of year where
commercial real estate gets backfrom the summer and does that
hard March to the end of theyear. It's where a lot of deal
making occurs, lot of bigtransactions.
So if you're a commercial realestate decision maker, like,
(19:28):
you've gotta weigh this. And sowhat I meant my question to you,
Chris, is what's the bigger riskin making a decision right now?
Overreacting to volatility andall this noise and uncertainty
or under reacting to it?
Chris Stanley (19:42):
I think the not thinking about how volatility is
going to change liquidity, debtservice or valuations into the
future. You know, the thing I'mconstantly trying to do as I'm
working with bankers and otherindustry participants is to say,
(20:05):
we have a short term bias in ourvision. We want to look at with
this new thing just happenedtoday. How does that change
dynamics of this property inthis instant?
Mark Bonner (20:15):
But
Chris Stanley (20:15):
what that property looks like to the
maturity of its current debts?You know, what it looks like at
maturity, of its current debts,not just, you know, over that
debt service life. That's reallywhat you gotta be thinking
about. So time boxing those cashflows from changes in rents,
(20:37):
changes in, you know, vacancies,you know, thinking about some of
those asset dynamics around yourNOI, really focusing on putting
some stress on forward view ofdebt service or LAV as some of
these indicators come in andreally keeping your eyes open to
(21:00):
what other properties in themarket are up to because
strategic defaults or major rentconcessions to fix some vacancy
or other things. The what is theother guy gonna do factor in the
face of these could be theunknown unknown that gets you in
(21:23):
this kind of market.
Mark Bonner (21:26):
All right, let's go to a question from the audience.
How much will the currentpricing of bonds have an impact
on discount rates? How much willthe current pricing of bonds
have on the impact of discountrates? Forgive me.
Chris Stanley (21:43):
That's a million dollar question. I think if I
knew the exact answer, we'd,we'd, we'd need to go make some
trades. But I, you know, I wouldsay, I think the strategies that
are most important at this pointare based on adapting to the new
(22:09):
world as we know it, notexpecting a return to, you know,
we're never going to see zero,you know, policy rates again.
You know, the hurdle rate thatyou're up against today that's
impacting today's property valueor, you know, the refinancing
cost of, of, you know, debt onthe property. Let that set a new
(22:34):
normal in, in your mind andadjust your portfolio
accordingly.
Mark Bonner (22:40):
Yeah. And look, moving on, I mean, the industry
is still trying to figure outwhere, what assets, what their
assets are actually worth today,right? Coming off the pandemic,
coming into this new economy. Imean, far along are we in true
price discovery in the industryright now?
Chris Stanley (22:57):
I think it's only just started. You can see, I
don't have a background, likeyours, Mark, but, this isn't an
office I'm calling in from, andI'll bet a bunch of the folks on
the call are in a similarposition, right? The way that we
are using these properties hasdramatically changed, and I
(23:20):
don't think it's going to goback. Strategic defaults, you
know, jingle mail to bankers,know, or foreclosures are still,
know, not they're happening notthat frequently yet, but you
know, there are other things outthere that can cause shocks, you
(23:41):
know, beyond just moves in, in,you know, those hurdle rates,
on, on price value and pricesand values.
Mark Bonner (23:49):
I mean, do we, do you expect that we're going to
see more distressed trades thatmight accelerate this process,
or do you think it's going to bea slow grind like it sort of has
been?
Chris Stanley (23:58):
If CMBS are any indicator, I think we're going
to see some more distressedtrades coming. There's there's
quite a bit of delinquency thatthat has spiked out there.
Office multifamily, you know,are kind of key property types
to be keeping an eye on. But,you know, I also think some of
(24:22):
those changes are offset againwith credit spreads are still
really tight. There's still abunch of money that's out there
competing, and I think thegrowth of some of these non bank
sources of funding is going tochange the way those defaults
get handled or if they occur,you know, versus kind of pay
some strategic, you know,takeouts of equity or debt, you
(24:45):
know, by other interestedparties that can do different
things, with that property than,than a bank traditionally could.
Mark Bonner (24:54):
Let's go to another question from the audience.
Since operating expenses are keyto NOI, what do you see
regarding the impact of tariffsand national economic policy on
that element?
Chris Stanley (25:06):
I think it creates a need to stress
whatever assumptions you haveabout operating expense on any
properties you're holding.Immigration dynamics, tariff
dynamics, these are part of whywe continue to see, there are
(25:28):
many factors obviously, butgoods and services are both
contributing to the inflationthat remains above target. And
so how that continues to playout is something that I would be
really stressing in plans that Imade around my portfolio.
Mark Bonner (25:49):
I mean, if anything, volatility has become
a great teacher this past year.So knowing that, and we talked
about uncertainty and we talkedabout wait and see, which are
like sort of these buzzwords andphrases of the moment. What does
winning look like for lendersand landlords in this
environment?
Chris Stanley (26:10):
Everybody is getting a lesson in the
fundamentals. The quicker thatyou get back there, absent these
assumptions about a return tonormal, you know, the sooner you
can prepare for multiple statesof the world, the sooner you're
in a position to be agile andresilient, no matter what
(26:31):
happens. Tomorrow is uncertain,so there's no solutions. There's
only going to be trade offs.Organize yourself and your
portfolio around the best set oftrade offs possible given that
future variability.
Mark Bonner (26:48):
Okay, we're running out of time, but I do want to
finish up on one question fromthe audience. Chris, for
investors, is passive indexingnow a thing of the past? Do
investors need to look foractive bond traders or managers?
Chris Stanley (27:03):
I got to be careful. I can't give you
investment advice, but I thinkthat part of what I would be on
the lookout for is the effect ofthe volume of passive investing
that is out there and how thatmay be affecting some of these
(27:26):
price signals. You know, it'stough to outperform the market,
but it's even tougher whenyou've got kind of some of those
signals that may be a little bitmore muted because of the volume
and extent of some of thoseindex or other, you know, kind
(27:49):
of passive investments outthere. So maybe time to kind of
consider some of that in, insome variability in your
strategy.
Mark Bonner (28:00):
Okay. That's all the time we have today. Chris,
thanks so much for joining us.
Chris Stanley (28:06):
Thank you so much for having me, Mark. It was it
was a pleasure.
Mark Bonner (28:10):
If you missed part of today's show or wanna go back
and catch any of our pastconversations, you can find
every episode of our show inyour favorite podcast app. Just
search First Draft Live. We'llbe back next Friday with another
conversation that putscommercial real estate right in
the middle of the big picture.Until then, I'm Mark Bonner and
this is First Draft Live. Have agreat weekend y'all.
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