Talk Your Book: How Higher Rates Are Re-Shaping Commercial Real Estate
Animal Spirits Podcast
Hosts Michael Batnick and Ben Carlson interview Jerry Baglien of Benefit Street Partners to analyze how rapidly rising interest rates are reshaping the commercial real estate
Key takeaways
- Jerry Baglien warns that the rapid surge in the 10-year Treasury yield is depressing valuations and complicating refinances, but views it as a catalyst for opportunistic buying rather than panic.
- Office real estate remains broadly unattractive due to remote work shifts, with only Class A, newer buildings in major hubs preserving value while older assets face permanent obsolescence.
Main topics
- Commercial real estate market conditions
- Rising interest rates and refinancing pressures
Notable quotes
"I think hope is getting pretty stomped on at this point."
Conclusion
The episode delivers a pragmatic framework for navigating commercial r
Transcript preview
Speaker 2 (0:00) Today's Animal Spirits Talk Your Book is brought to you by Benefit Street Partners, a Franklin Templeton company. Go to ftprivatemarkets.com to learn more. Speaker 1 (0:09) Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnick and Ben Carlson as they talk about what they're reading, writing, and watching. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast. Speaker 2 (0:38) Welcome to Animal Spirits with Michael and Ben. Michael, one of the most fun things about changing times is that people love to predict what's going to happen. And most of the time, people are wrong. But think about coming out of the pandemic, there was a ton of, this is how the world is going to change. Remember, there was like, no one's ever going to give handshakes anymore. People are going to wear more masks on planes. College is done. All of these predictions. Travel is dead. Business travel is dead. Business Speaker 4 (1:02) travel is booming. Speaker 2 (1:03) Yeah, there's all these things that people predicted. And one of them was, all right, that's it. commercial real estate is just dead, deader than dead. No one's ever going to go to an office again. Well, it is pretty dead. I think you could say it's- Mostly dead. More of a death by a thousand cuts as opposed to like people, remember people thought like, okay, the commercial real estate crash, that was a story that you and Josh and I talked about for probably a month. It was like a thing people were discussing and then it kind of moved on and you realize, oh, that's not how real estate works actually. Speaker 4 (1:31) No, but commercial real estate really did crash. I mean, it's office space. Speaker 2 (1:34) Explain yourself. Well, how did office space crash? Speaker 4 (1:37) Well, it went down a lot in value. Speaker 2 (1:39) Okay. Speaker 4 (1:42) Oh, but it really did. I mean, the class A buildings in New York City, for example, are doing just fine. But my God, you do not want to be where people don't want to be. Speaker 2 (1:52) Right. An older building, right. It Speaker 4 (1:53) is dead. Never coming back. Speaker 2 (1:55) When we go to look for new space, whenever our lease runs up in a few years in New York City, we're not going to go to some 1970s building. We're going to go to a brand new spot that looks nice, right? Anyway, fascinating time to be in real estate because rates are shooting up and the economy's booming. It's like a weird thing to think about. The economy is still kind of booming, but rates are going up, making it more difficult. So on today's show, we had Jerry Bagley. And Jerry is the head of real estate at Benefit Street Partners, a Franklin Templeton company, to talk about everything that's going on in commercial real estate, the spots that are attractive, the spots that are unattractive. I love talking to people in the space like this when big things are happening. Speaker 2 (2:31) If real estate was booming right now, it wouldn't be as interesting of a conversation as, oh my gosh, rates keep going up and up and up. They're going up really fast. What does this mean? And Jerry is a straight shooter with upper management written all over him. He told it like it is, right? You said office space earlier. So here's our talk with Jerry Baglian. Speaker 2 (2:56) Jerry, welcome to the show. Speaker 3 (2:57) Thanks for having me, guys. Speaker 4 (2:58) All right, we're going to start out big picture and then we'll zoom in on some different areas of the real estate debt market. How would you describe where we are right here? We're recording on September 28th, the 10-year screaming higher that is the base rate for which all other rates are determined, certainly in the real estate market. Save us, help us. What's going on with interest rates screaming higher? Speaker 3 (3:17) Your timing is impeccable. I think I've done seven calls today. And that's been the first question in every single call. Speaker 4 (3:27) If AI doesn't kill us, the 10-year will. Speaker 3 (3:29) Exactly. No, it's beyond the topic du jour at this point. I think it's scaring everyone clearly because it's ripped so fast in such a short period of time. It's putting a bit of a pall, I think, over a lot of different things. It's going to slow down transaction volume for sure. It's going to make refis trickier than they were, and it's going to put pressure on valuation. All wonderful things if you're in the real estate business. It's exactly what you want. Multiple headwinds all at once. But also opportunity, right? I think people are terrified by it, but it also means you're going to have to solve a lot of problems. So I don't think fear is the right response. I think you should be cautious, but also very opportunistic. It's going to make agency much more challenging. It's going to depress valuation. So even refis get trickier. I think it could force some capitulation in the market. Those aren't all terrible in my mind, right? I think those are all things you can attack if you're well-capitalized or if you're willing to be inventive. So, you know, I think everyone's hoping that I'll just be all doom and gloom, but that's always easy. And maybe it's more popular, but I don't believe it's the only response just because things got a little bit negative. Speaker 4 (4:40) Jerry, you know, at the end of like a sporting event, doesn't matter with the sport, where a team gets killed, but they want to at least like... do one thing well so that they can take something good into the next game. I feel like that happens a lot in the NFL. They say like, all right, just put something on tape that we could take it to the next game. It sounds like even though the real estate market has been challenged for a while and it doesn't look like it's going to get any easier today, there might be something that investors can look forward to once the next game happens. Speaker 3 (5:14) Yeah, I think that's right. I mean, in terms of where where I'm spending a lot of my time and that's on the credit side, this is just more conviction in that part of the real estate trade than I had six months ago. I think I've been very comfortable investing on the credit side of the real estate space because I've been saying for two years, I love having that cushion for uncertainty. You just got a big dose of uncertainty. Having a 30 % 40 % cushion in front of you before you take losses feels a lot better, right? We had a big correction in value a couple of years ago, but it didn't feel like everything got sorted out in terms of all the stuff that had to be resolved, the refied or grown out of from an NOI perspective. I could never tell you with certainty that rates were going to go all the way back down or they're going to stay as high as they were. And