A weekend topic starting with The Intercept. "If you were reading the news back in 2008, then you probably remember how residential mortgage backed securities fueled by subprime mortgages tanked the global economy. Now John Flynn, a veteran of the mortgage securities market, says it’s happening all over again — this time in the commercial real estate market. Flynn joins Ryan Grim and The Intercept’s Jon Schwarz to discuss."

"RG: So John Flynn, as you start digging deeper into the underlying documents, behind the CMBS loans, you start to find something that looked a little bit similar to what John Schwarz just described. When did you start to realize that you were onto something fairly huge? JF: It was in late 2017, basically. I started out: 'OK, I’m just gonna do 10 of these and I’ll see where it goes.' And all ten of them were inflated. I’m like, 'What?' And so I kept going from there, basically."

"RG: Right. And so you found that often these numbers were different. How often was it that the error was inflating the amount of income? JF: It was inflated over 90 percent, maybe over 95 percent of the time. And I never went back and measured it because this is very laborious work."

"RG: So what’s the function of that? What’s the benefit to the lender? JF: So the liar loans in RMBS, the credit driver for RMBS is the borrower’s credit, the borrower’s income. And the credit driver for CMBS is cash flow. Cash flow is king, right?"

"And so if you inflate the cash flow, you — of course — get a higher income that increases what they call the debt service coverage ratio, which is the NOI — the net operating income — and there’s thresholds under regulatory guidelines that loans have to meet to be sold into a pool."

"And so the benefit is, one, that they get the loan sold, that is an otherwise unsalable loan; benefit number two is it can load on more debt, because with that NOI increase, it also increases the value. Number three, is they show a less volatile cash-flow profile of the underlying asset; less volatility is a higher credit quality, right?"

"RG: Right. So there’s an extraordinary amount of benefit to the lender to be able to inflate the cash flow that their borrower claimed to have."

"JF: Well, look, we’re in a low-interest-rate environment right now. Right? So the hunt for yield is on. Any money out there needs to be placed to earn a yield — any kind of yield. And CMBS still offers a reasonable yield as compared to treasuries. And so the demand will still be there, and if there’s no accountability in this low-interest-rate environment, all they need to do is inflate numbers again. So to get these troubled loans refinanced, people say, 'Oh, how are they going to get refinanced?' Well they could just create value."

"RG: Same way they just did. JF: Yeah. Why wouldn’t you?…Let me interject there: everyone points at the credit rating agencies as the culprit, but they’re easy targets because they can’t fight back, right? They don’t suffer any damage or blowback from the credit rating agencies because they’re not the banks, they won’t suffer in deal flow, etc. But the real culprits are the ones doing the inflating."

From Twin Cities Business. "A new analysis of commercial real estate loans backed by multifamily properties found 'areas of concern starting to appear in major U.S. markets.' That’s according to New York-based Trepp, which tracks data on commercial mortgage-backed securities (CMBS). The apartment building boom has been running uninterrupted for several years across the U.S. Now Trepp says that it is seeing signs that the market is 'fraying' in some cities."

"Trepp analyzed data for loans backing more than 22,000 multifamily properties. Out of that pool, Trepp found that 4.8 percent of those apartment properties had occupancy rates below 80 percent for 2020. Many larger metros in the U.S. are in worse shape. The five markets with the highest percentage of loans backed by multifamily properties with occupancy under 80 percent are: Boston: 28%, Santa Monica, Calif.: 22.8%, Tallahassee, Fla.: 15.4%, San Francisco: 14.6%, Seattle: 11%."

"Other large metros with a notable percentage of properties seeing occupancy levels below 80 percent include Kansas City, Memphis, Cleveland, Indianapolis and Washington D.C. Trepp found 7.4 percent of properties in New York reporting occupancy below 80 percent."

From Bisnow Boston in Massachusetts. "Boston’s multifamily market is showing significant signs of stress, and it is leading the nation in an ominous metric that shows that stress could soon turn into distress. More than 28% of Boston apartment properties with CMBS loans sit at less than 80% occupied, a new Trepp report shows, well above the national average of 4.8%. The vacancy, fueled by a flight to the suburbs and the lack of the city's typically large student population, has driven rents to drop precipitously in Boston."

The San Francisco Examiner in California. "Generous dollops of doom and gloom from the local commercial real estate world this week, courtesy of Cushman & Wakefield’s Marketbeat for the first quarter of 2021. It would take the most sublime shade of rose-colored glasses to put a positive spin on these numbers — 18.7 percent vacancy rate in San Francisco (it was at 6 percent in the first quarter of 2020); 7.87 million square feet of direct vacancy and 7.99 million of subleased space. That’s almost 16 million square feet of ghost town, representing more than a billion dollars of lost revenue at Q1’s average asking price of $73.76 per square foot."

"For now we’re faced with a conundrum: What do we do with all of this empty office space?"

From Bisnow Houston in Texas. "Moody Law Group founder John Moody Jr., who specializes in commercial real estate law, told Bisnow that lease restructuring, foreclosures, deed restrictions, bankruptcies, reopening challenges and permitting are among the most pressing hurdles for his clients navigating a world where the pandemic’s hold is easing. 'I'm doing a ton of people buying out of their office leases, people downsizing other office leases, tenant defaults. I've negotiated settlements on a bunch of leases that are in default. There’s still a lot of lease issues out there,' Moody said."

"Moody has worked with clients to craft demand letters and place loans in default, but those situations have not been able to move forward. He noted that once foreclosures are permitted to resume, the huge backlog could cause some temporary challenges in managing the volume. 'We have posted for foreclosure a number of times during this shutdown for clients. We just haven't actually been able to foreclose. It's just been a lot of these kinds of threatening letters and forms saying we're going to foreclose, but we really haven't been able to,' Moody said."

The New York Post. "The rental market remains in the pits, according to the first-quarter market report from listings portal StreetEasy, which found that city rents continue their free fall to record lows. In Manhattan, for instance, median rents dipped to a brand-new low of $2,700 per month, marking the borough’s cheapest housing price recorded on StreetEasy since the site began tallying in 2010. That figure marks a significant year-over-year drop."

"In Brooklyn, median rents slipped 10 percent year-over-year to $2,390 — its lowest level since 2011. Queens saw its prices slip to $1,999, the first time they’ve slid below $2,000 in eight years. That borough’s rents are down 10.5 percent year-over-year."

"Midtown saw the largest decline in median rents to $2,895. That’s down 14.8 percent from the same quarter last year. A close second: the Upper East Side, which slipped 13.9 percent year-over-year to $2,400. In prime North Brooklyn, home to trendy Williamsburg and Greenpoint, renters can find a $2,500 median price for a one-bedroom unit — the area’s lowest in more than 10 years. And in northwest Queens, the borough’s priciest submarket — which includes Long Island City, Astoria and Sunnyside — rents slid 9 percent year-over-year to a median of $1,800."

"In an effort to lure tenants in, city landlords are throwing in some serious extras. In Manhattan, more than 44 percent of landlords offered a concession of at least one month free rent on a 12-month lease — 22 percentage points higher year-over-year and the highest sum that StreetEasy has ever recorded. In Brooklyn and Queens, 25.4 percent and 26.6 percent of landlords, respectively, also gave concessions — a record high share for both boroughs."

The Real Deal on New York. "Buyers are getting a big break on Ron Perelman’s properties and loans backed by them. Citigroup has sold loans secured by three of Perelman’s Upper East Side properties at a discount of approximately 40 percent, Bloomberg News reported. The loans, scooped up by an undisclosed party for $115 million, were in default with a balance of $193 million, according to the outlet. They mature in 2023."

"Citi’s move comes as two of the three buildings securing the loans were sold this month — at least one far below what Perelman paid for it, according to documents filed Thursday. The offices of Perelman’s investment firm MacAndrews & Forbes at 35 East 62nd Street sold for $25 million, and the company’s adjacent building at 39 East 62nd Street went for $10 million. Perelman’s firm bought the latter building in 2004 for $14.5 million."

From Yield Pro. "The global pandemic didn’t stop developers from planning new apartments projects—often in smaller, quickly growing metro areas. The boom in apartment construction that began around 2015 barely slowed down in 2020. They took out a total of 416,200 building permits in the pandemic year 2020. It was the fifth year in a row that developers took out permits to build more than 400,000 apartments, continuing a boom that began in 2015. The total of new multifamily permits in 2020 was down from a record of 481,300 the year before—but not by much."

"'Developers are encouraged by much of what they see,' says Greg Willett, chief economist for RealPage, Inc., based in Richardson, Texas. Lenders seem happy to provide the money. 'There’s lots of capital available for development,' says Willett. 'Investors are eager to deploy it.'"

"Developers have been more able to find suburban sites where they can build garden apartments since the pandemic. Even in the most expensive metro areas, like New York, developers are beginning to find more opportunities to build in suburban areas. 'There are going to be towns that are going to be open to this,' says Richard Katzenstein, national director of Marcus & Millichap Capital Corporation. 'This is all about taxes.'"