Q: Do you expect challenges in the commercial mortgage market to continue, or do you think we've hit an inflection point?
Henry Song, CFA
I think the pain is going to continue. We have hit an inflection point — not that the worst is behind us, but that we have more clarity now as to what may happen in this market. I think there's two things in the office segment. A: We have enough data now, we have seen enough leasing momentum or lack thereof to more or less determine whether something's going to continue to function as an office going forward. So that resolves our first question.
Then, number two, I think given what I mentioned earlier, that higher rates for longer, people are rethinking their financing strategy. In the CMBS market, the biggest issue is even if you have a building that's 90-95% occupied that's functioning well, you have this huge carrying cost and you have this inability to refinance your debt when it's coming due. What we have seen more now is for stronger sponsors who have equity and want to protect equity, they're willing to put more cash in. They're doing cash-in refinance right now because, in their view, their property only is going to be great in another five years, 10 years. We we're seeing more five year — people want shorter-term debt because of the high costs.
If rates were to dramatically change or rents were to grow, they'll be able to right-size with their investments. But you're also seeing other weaker sponsors now at this point basically trying to solve the issue now. Whether it's selling the debt they own or trying to list the building itself. So, we're seeing more buildings going into special servicing and more resolutions being played out in the marketplace. Whereas if you go back a couple of years, a lot of the sponsors are waiting to see what the Fed's going to do. If the Fed were to cut aggressively, that would give them breathing room. So, I think that's kind of behind us. That's why I said we're hitting inflection point to a point where everyone's more or less like, “Hey, it's been a while. We need to figure out what's going on.”
I think we're going to continue to see a lot of headline stories, some positive, some not so positive. But we're going to continue to see the mass, the wall of office CMBS maturity getting tackled, getting resolved slowly in the upcoming next couple of years. It's going to take time to play out, but I do think it's positive. We are seeing overall positive momentum for the office space.