319. Liberation or Uncertainty? Tariff News, CMBS Delinquencies Back Up, & CRE CLO Issuance

The Trepwire Podcast, hosted by Hailey Keen, Lonnie Hendry, and Steven Bushbaum, discusses the significant impact of recent tariff announcements overshadowing macroeconomic data, including higher-than-expected ISM manufacturing prices and a decline in job openings. The market's negative reaction to the tariffs, particularly on Liberation Day, is explored, with concerns about prolonged negotiations and potential recessionary impacts. The discussion highlights the strategic nature of the tariffs and their implications on sectors like commercial real estate, with a focus on data centers and retail investments. The podcast also covers the latest CMBS delinquency rates and recent industrial property transactions.

• Recent tariff announcements have dominated market discussions, overshadowing other significant economic data.
• The market reaction to tariffs has been predominantly negative, with concerns about the long-term impact on the economy.
• The tariffs are seen as a bargaining chip in ongoing trade negotiations, adding uncertainty to the economic outlook.

"The market reaction has been overwhelmingly pessimistic. Now what's funny is some investment strategists and chief economists have said maybe this isn't negative enough."

• The market's negative response indicates concerns about the potential for prolonged economic impact due to tariffs. Some experts believe the full downside risk is not yet priced in.

"The tariff announcements are pretty negative for markets. Granted, that's a bargaining chip."

• Tariffs are viewed as a strategic move in trade negotiations, potentially leading to short-term economic pain.

• ISM manufacturing prices were higher than expected, indicating inflationary pressures.
• JOLTS job openings missed expectations, suggesting a contractionary trend, though not severe enough to signal a recession.
• The Atlanta Fed GDP now index showed a negative 3.7% growth estimate for Q1, pointing to a dismal GDP outlook.
• ADP nonfarm employment change was stronger than expected, offering a positive economic indicator amidst negative data.

"The data we've had this week has been an interesting mix. Granted, it's been eclipsed by Liberation Day headlines."

• Despite significant economic data, tariff announcements have taken precedence in market discussions.

• The U.S. has imposed tariffs on various countries, with differing rates for each, such as the European Union at 20% and Vietnam at 46%.
• There is uncertainty about the exact tariffs on China, with conflicting data suggesting rates as high as 79% for some products.
• The tariffs are expected to lead to increased prices on products and influence trade negotiations.

"According to the data we're looking at today, it looks like around 34%, although Treasury Secretary Scott Bessant said that 34% will be in addition to tariffs China already faces."

• The complexity and uncertainty around the tariffs on China highlight the challenges in assessing their full impact.

• The tariffs have caused a significant negative reaction in the stock market, particularly in sectors like automotive manufacturing.
• Companies are exploring ways to mitigate the impact, such as increasing U.S. manufacturing capacity.
• The long-term response may involve strategic adjustments to avoid the high costs associated with tariffs.

"If you look at, say, car manufacturer stocks, the price response there tells you that obviously market participants are not expecting these to be permanent, long-lasting tariffs in the auto sector."

• The market anticipates that tariffs may be adjusted or reduced, particularly in sectors like automotive manufacturing.

• The current tariff strategy is compared to historical economic policies, with potential outcomes ranging from positive economic reshaping to negative stagnation.
• The situation is seen as a strategic move in global trade, with the potential for significant economic shifts.

"One of the comparisons, historical comparisons, I absolutely love that. I've heard this week came from Mohamed Al Erian where he compared the current administration's move with tariffs and how they're trying to reshape global trade to two possible endgames."

• The comparison illustrates the potential for tariffs to lead to either positive economic outcomes or negative consequences, depending on how the situation evolves.

• The tariffs have sparked political and economic uncertainty, with various industries seeking carve-outs or reductions.
• There is hope for reshoring manufacturing to the U.S., though this will take time due to infrastructure and logistical challenges.

"I think the jockeying begins now. Everything you said, like this is where the lobbyists, this is where everyone from every respective industry tries to figure out a way to get these reduced, removed, carve out, et cetera."

• The political and economic landscape is expected to be dynamic, with industries actively seeking to influence tariff policies.

• The tariff announcements have set a new economic landscape, with potential for both short-term pain and long-term strategic adjustments.
• The situation remains fluid, with ongoing negotiations and potential changes in tariff policies.

"I do think the timing of this is interesting given that we spoke last week around, you know, the falling consumer confidence and kind of what this might mean for us from a recessionary perspective."

• The tariffs are part of a broader economic context, influencing consumer confidence and recessionary concerns.

• Concerns about tariffs negatively impacting American businesses, potentially leading to some going out of business.
• Hope for data-driven decisions to mitigate negative impacts on local employers and the overall economy.

"I'm hopeful that this doesn't negatively impact too many American businesses. There's going to be some where it does and for some it maybe puts them out of business and that's not great."

• This quote highlights the concern that tariffs could harm American businesses, emphasizing the need for careful decision-making to avoid significant economic downturns.

• Consumers and businesses are reacting to tariffs with uncertainty, affecting purchasing decisions.
• Example of Ford not providing a truck price due to tariff uncertainties, indicating broader industry hesitance.

"Ford could not tell me how much that truck was going to cost me. I don't know if it was one, two, three months from now."

• Illustrates how tariff uncertainties are causing companies like Ford to withhold pricing, impacting consumer confidence and decision-making.

• Builders are hesitant to bid on jobs due to fluctuating prices, contributing to economic slowdown.
• Tariff-related uncertainty is slowing GDP, economic growth, and consumer spending.

"The builders have no idea which way things are going... that level of uncertainty will slow GDP."

• Highlights how price uncertainties in construction are contributing to broader economic deceleration.

• Microsoft pulling back on data center commitments due to tariff effects and potential business relationship issues.
• The data center sector, previously experiencing high demand, now faces a potential slowdown.

"Microsoft pulling back on these data centers... a much broader based pause on expenditures."

• Indicates a significant shift in Microsoft's investment strategy in response to economic and industry changes.

• Microsoft's capital expenditures have dramatically increased, raising questions about sustainability.
• The rapid increase in spending is seen as a response to market demand and FOMO (fear of missing out).

"In 2023, that jumped to 41.2 billion. And in 2024, 75.6 billion. Absolutely wild acceleration."

• Demonstrates the aggressive growth in Microsoft's capital expenditures, suggesting potential overextension.

• Real estate developer Joshua Simon is investing heavily in retail space, defying general industry trends.
• Despite high construction costs and consumer spending pullback, Simon CRE remains optimistic about retail.

"Joshua Simon, who is defying industry trends by aggressively investing in retail space."

• Highlights a contrarian investment approach in retail space, betting on its resurgence despite broader economic challenges.

• CMBS delinquency rate increased in March, driven by multifamily and lodging sectors.
• The office sector shows slight improvement, with a decrease in delinquency rates.

"The TREP CMBS delinquency rate ticked back up in March by 35 basis points, increasing to 6.65%."

• Reflects a concerning trend in CMBS delinquency rates, with specific sectors experiencing notable challenges.

• The discussion highlights the unexpected decline in multifamily delinquency rates, contrary to previous predictions.
• Concerns are expressed about potential increases in multifamily distress, but current levels are not seen as alarming.
• The impact of CMBS (Commercial Mortgage-Backed Securities) data on market perception is considered, particularly if delinquency rates reach 8-9%.

"It's interesting though because I think we've both been on record as saying we don't think that multifamily distress is at a level that really should cause any concern."

• The speaker acknowledges previous statements about the stability of the multifamily sector despite rising delinquencies.

"If CMBS delinquency, if it gets to 8 or 9%, does that maybe change your perspective of kind of where we're at with that market?"

• A hypothetical scenario is posed about the impact of high CMBS delinquency rates on market sentiment.

• A $1.1 billion CRE CLO (Commercial Real Estate Collateralized Loan Obligation) deal is highlighted as a positive development in a sector often criticized in investment reports.
• The deal's specifics include a 30-month reinvestment period and a weighted average interest rate at issuance of term SOFR plus 183 basis points.
• The issuance volume for Series CLOs has increased compared to the previous year, indicating a strong market performance.

"TPG Real Estate Finance Trust closed on a 2025 CRE CLOS totaling 1.1 billion."

• The announcement of a significant CRE CLO deal underscores positive market activity.

"We talked about how good it's been to see an increase in Series CLO issuance volume given that last year we only had about call it 8.6 or 8.7 billion in series CLO issuance."

• The increase in Series CLO issuance volume is noted as a positive trend compared to the previous year.

• The widening of spreads in the CRE CLO market is discussed, with senior AAA bonds widening by about 20 basis points.
• The potential for further spread widening is linked to recent tariff announcements and could impact new issuance attractiveness.
• The discussion includes the disproportionate widening of spreads as credit quality decreases.

"The deals that have gotten done in January and February were priced right around the spread of 140 basis points... this most recent deal that got priced came in at 160 basis points."

• The quote highlights the spread widening in recent CRE CLO deals compared to earlier in the year.

"The more that widens, the less attractive new issuance is going to be for the book runners and the issuers."

• The impact of spread widening on the attractiveness of new issuances is emphasized.

• The podcast covers a $475 million CMBS loan secured by six office properties on the West Coast.
• The financing will be used to refinance existing debt and support operational needs, led by Goldman Sachs and Citigroup.
• A notable transaction involves Apollo Global Management's potential lease of nearly 100,000 square feet at 590 Madison Avenue in Manhattan.

"Hudson Pacific Properties has closed a $475 million CMBS loan secured by six office properties across major west coast markets."

• The completion of a significant CMBS loan deal for office properties is noted.

"Apollo Global Management is in talks to lease nearly 100,000 square feet at the 1.1 million square foot 590 Madison Avenue office building in Midtown Manhattan."

• The potential lease by Apollo Global Management is highlighted as a significant office sector transaction.

• A Connecticut ground lease in foreclosure saw a value increase of approximately 40% from its previous valuation.
• The asset, a 288,000 square foot building, was reappraised at $14.1 million, up from a previous value of $9.6 million.

"The asset behind the $21.7 million campus at Green Hill loan was recently reappraised at a value that's approximately 40% higher than its previous value."

• The significant increase in the asset's value is noted, indicating a positive shift despite foreclosure status.

"The collateral was originally valued at 22.8 million at securitization in 2014... most recently, however, the value increased to $14.1 million."

• The quote traces the asset's valuation history, highlighting the recent increase in value.

• Discussion of a property with a significant drop in occupancy from 76% in 2021 to 40% in 2023, impacting revenue and loan repayment.
• The Special Servicer is collaborating with the receiver to update leasing and operations status and address ground lease issues.
• The loan had a repayment date set for September 2024, with an extended maturity date of September 2044.

"That one has a lot to digest. Stephen, we don't usually have ground lease deals that go into foreclosure to see an increase in value with underlying problems on the, you know, surface built building."

• This quote highlights the unusual situation of a ground lease deal in foreclosure while the property value increases.

• Distressed loans with potential value increases can be interesting for bond traders, as they may impact credit bonds positively.
• These situations typically involve limited liquidity trades, especially for bonds rated single A or below.

"This particular loan could be interesting for bond traders. You know, anytime you have distressed loans that have the potential to value increases, that makes for interesting trading on the credit bonds."

• The quote emphasizes the potential trading opportunities in credit bonds when distressed loans show value recovery.

• A suburban New Jersey ground leased office loan entered special servicing due to payment default, becoming delinquent over several months.
• The loan is secured by a borrower's fee interest, with a ground lease term of 99 years, and annual rent escalations starting in year 11.

"We saw a suburban New Jersey ground leased office loan transfer to special servicing this month. According to March data, the $26.3 million 44 Whippany Fee Loan entered special servicing due to payment default."

• This quote outlines the circumstances of a New Jersey office loan entering special servicing due to payment issues.

• Discussion of industrial property sales in Florida and Washington, indicating a strong market despite some cooling in prices.
• Codena Partners sold a warehouse in Florida for $58.94 million, while Kennedy Wilson acquired a property in Washington for $44 million.

"We talked a little bit about some of the pullback in industrial, but these transactions actually maybe tell a different story, that the market's still strong."

• The quote suggests that despite some market cooling, industrial real estate remains robust.

• Announcement of the upcoming TREP Connect conference in New York, offering continuing education credits for brokers and agents.
• New speakers have been added, and the event promises networking opportunities and industry insights.

"We are almost a month away from our TREP Connect in New York City conference that's taking place in Rockefeller Center."

• The quote provides information about the TREP Connect conference, emphasizing its educational and networking value.

• Promotion of TREP Training Solutions for CMBS, offering certification and understanding of the CMBS industry.
• Call for nominations for the Future CRE Leaders Awards, recognizing students graduating in 2025.

"If you're still looking to get TREP certified and feel like you have a better understanding of the CMBS industry, send an email to podcastrep.com and we will send you the details for that."

• This quote highlights the opportunity for professional development through TREP certification programs.

• Shout outs to community members and partners, acknowledging their contributions and collaborations.
• Mention of involvement in events like the Texas Tech Real Estate and Banking Case Competition.

"Haley, a good friend of mine, Jared H. From Texas Tech tagged us in his LinkedIn post talking about the Texas Tech center for Real Estate and Excellence in banking programs 2025 real estate and Banking Case Competition."

• The quote underscores TREP's engagement with educational programs and industry events.