Talk Your Book: How Higher Rates Are Re-Shaping Commercial Real Estate

Ben Carlson (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_2 (0:09)

Welcome to Animal Spirits, a show about markets, life and investing.

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.

Ben Carlson (0:39)

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.

Michael Batnick (0:59)

Travel is dead. Business travel is dead. Business travel is booming.

Ben Carlson (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.

Michael Batnick (1:12)

Well, it is pretty dead.

Ben Carlson (1:13)

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.

Michael Batnick (1:31)

No, but commercial real estate really did crash. I mean, it's office space.

Ben Carlson (1:35)

Explain yourself. Well, how did office space crash?

Michael Batnick (1:38)

Well, it went down a lot in value.

Ben Carlson (1:39)

Okay.

Michael Batnick (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.

Ben Carlson (1:52)

Right, an older building. Right.

Michael Batnick (1:53)

It is dead. Never coming back.

Ben Carlson (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 is 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 today's show, we had Jerry Baglien. Jerry is the head of real estate at Benefit Street Partners, a Franklin Templin 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.

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? 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 Baglien.

Michael Batnick (2:56)

Jerry, welcome to the show.

Jerry Baglien (2:57)

Thanks for having me, guys.

Michael Batnick (2:59)

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?

Jerry Baglien (3:18)

Your timing is impeccable. I think I've done seven calls today, and that's been the first question in every single call.

Michael Batnick (3:27)

If AI doesn't kill us, the 10-year will.

Jerry Baglien (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.