First Draft Live Ep 11: CMBS Pain Is Only Beginning (with Ethan Penner)
Hi. Welcome to First Draft Live. It's Friday, August 22. I'm Mark Bonner, business editor in chief coming to you live from New York. Thank you to everyone for tuning in.
Mark Bonner:Today's episode of First Draft Live is presented by Agora. Whether you're managing deals, raising capital, or growing your portfolio, Agora is your trusted platform for seamless real estate investment management. Visit agorareal.com to learn more. That's Agora, real.com. Okay.
Mark Bonner:Today, we're stepping into the eye of the storm in commercial real estate finance. More than $23,000,000,000 in CMBS loans have passed maturity without resolution. AAA bonds have taken losses for the first time since the financial crisis. Yet, new issuance is booming. Nearly $60,000,000,000 in the 2025 alone.
Mark Bonner:That is the busiest start since 02/2007. Investors are flocking to single asset deals. Conduits are shrinking. Office is even creeping back into favor. So which is it?
Mark Bonner:A market on the brink or one evolving into something stronger? Our guest today knows this world better than anyone. He's credited as the creator of the CMBS market in the 1990s, and now he's aiming to remake another system he calls broken: California politics. Ethan Penner is the CEO of Mosaic Real Estate Investors. He's chairman of Revan Office REIT, an independent candidate for the governor of California with policy ideas on CEQUA, homelessness, affordability, and wildfire prevention that could reshape the state's real estate future.
Mark Bonner:Before we get going, send your questions in the chat. We'll get to as many as we can. Ethan, welcome to the show. Appreciate you being here.
Ethan Penner:Thank you, Mark. It's a pleasure to be here with you.
Mark Bonner:Look. Before we get into CMBS, let's talk about this, speech that Jerome Powell just delivered in Jackson Hole, Wyoming this morning. You know, he is he the market was hoping that he would give a clear green light for interest rates, but instead he gave a little bit of a warning shot. I'm quoting him here. The chairman said, the baseline outlook and the shifting balance of risk may warrant adjusting our policy.
Mark Bonner:That seems to be a clear hint to relief next month for the next, FOMC meeting. The markets are reacting positively. Right now, we're hovering around 900 gain on the Dow. But he said decisions, quote, will be based solely on their assessment of data and its implication for the economic outlook and the balance of risk. Clearly, a rejection of president Donald Trump's push to slash rates for his own political gain.
Mark Bonner:His overall tone was a little murky. The bottom line, Ethan, is that his outlook for The US economy is not looking good. Yet we're seeing what the Dow is doing this morning. What do you make of it?
Ethan Penner:Well, I think we always get mixed messages. I I I would say that, Mark, his comments today absolutely foreshadow interest rate cuts over the over the coming periods. He's starting to set up the argument for that, and he's making sure that people understand that the argument is not political. The argument is economic. And I think that is very important.
Ethan Penner:I think that people have to believe, you know, we for better or worse, the Fed is the Fed. It is what it is. I I think that there's arguments to be made that is for better, and there are arguments to be made that is for the worse, but it is what it is. It's an animal that exists ideally, apart from the political machinery of our nation, and I think that's part of its important value proposition. And I think he's resisted the pressures from our president.
Ethan Penner:And I think he doesn't want it seem as though, when he does cut rates, that it's because of president, and I think that's important. So he's setting up the arguments, and you could see it. And it I think that that portends lower rates going forward. I think, in fact, had the president not publicly pressured him over the last few months, we would already seen cuts in interest rates. I think that he was fighting two fights.
Ethan Penner:He was fighting the fight to actually do what his he believes his job is as the Fed chairman, with regards to the economy, and he was also doing his job as the Fed chairman to ensure that the world sees the Fed continuing to be an an entity independent of economic of, political pressure.
Mark Bonner:Assuming we get to mid September and the Fed lowers rates by 50 basis points, that doesn't seem like a lot in the grand scheme of things in the last five or six years when we were at near zero. How big of a difference do you think that's gonna make for the commercial real estate market?
Ethan Penner:I don't think the Fed fund rate is gonna matter at all, to tell you the truth. I I don't think that's the story. I think that the only thing that will matter is, monetary policy as pertains to, quantitative easing. I think that, if we believe and if our Fed believes that the economy is in tough spots, what we've learned over the last seventeen years is that quantitative easing, the injection of capital of new money into our system, Fed buying bonds and expanding its balance sheet, that actually works. I think that managing the overnight borrowing rate to banks won't matter at all.
Mark Bonner:Okay. Let's move into the CMBS conversation. So as we just discussed, more than $23,000,000,000 in CMBS loans have owned past maturity without resolution. Assets are frozen in place. Valuations are unclear and workouts are kind of slow to materialize.
Mark Bonner:KBRA says delinquencies just hit seven and a half percent in July with over 10% of loans either delinquent or in special servicing. Are these maturity extensions just kicking the can or does this represent the early stages of a reset?
Ethan Penner:Well, I think that when look. You gotta go. You brought me here. Obviously, I go back to the very, very beginning of the creation of securitization, and the word securitization kind of needs to be described here perhaps better, which is really just the introduction of an illiquid asset class called real estate and real estate loans to the liquid market of trading bonds minute by minute. Right?
Ethan Penner:And so you have this weird marriage of illiquid into liquid or or kind of like an alchemy that happened. Right? And it's a very unnatural and uncomfortable combination. It it it was done for existential reasons back in the early nineties because the lenders, the non you know, the traditional lenders had abandoned the market, and accessing the bond market for capital was what saved the market. But but you have to understand it's a naturally kind of weird combination of naturally illiquid assets that are clunky, in a bond structure that trades minute by minute and has fight has price discovery.
Ethan Penner:And I think that that's gonna create these kinds of questions forever. Like, gee, you know, is the pricing right? What's going on? You know, because historically, with illiquid assets, and illiquid also means poor price discovery, you have slow moving prices. You have Mhmm.
Ethan Penner:Arguments, and you have concealment, and you have the let's wait and see what happens approach to slow moving price discovery assets like real estate. But then, of course, now you've you've turned it into a fast moving price discovery asset, which is the securitization form, whether it be REIT stocks and equity or CMBS and debt. And they're gonna kind of tell different stories at different times. The thing that's interesting that kind of I'd say throughout all the questions that you wanna cover today, is that CMBS and price discovery of kind of a securitized version of an illiquid asset, it's not that it's wrong or right. It's just that it is.
Ethan Penner:And I think that that's the cool part of it is that it's always there, you know, and that's the true value proposition of accessing the capital markets unlike the traditional regulated markets. The regulated lender markets are not always there, and they move in lockstep. So, you know, the the response, the creation of CMBS was in response to a kind of a kind of across the board abandonment of of by kind of regulatory edict of this asset class, which was obviously extremely unhealthy for this asset class and everybody in it. Securitization allowed for everyday money to be there, just different prices.
Mark Bonner:But, I mean, are we that's the macro. But getting into the moment we're in now, Ethan, again, are we kicking the can on these maturity extensions or we
Ethan Penner:Well, there's no question. There's a natural kick the can that is part of every kind of clunky asset class like real estate. And and we can call it, whatever we wanna call it, praying for a better future, lying to our investors. There's a whole lot of ways to characterize what's going on and what always goes on in market downturns. And then, you know, I think there's a lot of hopeful, wishful thinking because there are a lot of a lot of people have made investments that jobs are on the line and performance is on the line and and real losses are on line.
Ethan Penner:And I think that, you know, people say, it's not a realized loss until you sell, and the mark to market sometimes compel sales. And so there's arguments. You know, there's arguments about concealment of truth one way or other. I grew up on a bond trading floor. And so for me, concealment of truth meant you get escorted out of the building immediately, and maybe you're, you find yourself defending, against a criminal prosecution.
Ethan Penner:So I'm not very a big fan of concealment of the truth, and there is clearly a concealment of the truth going on today.
Mark Bonner:What is that truth?
Ethan Penner:Well, the truth is that there's massive, massive losses in real estate, and they're leaking out now. I mean, you you probably saw the news recently on Worldwide Plaza in New York and how that asset has lost, I don't know, 80% of its value. It's lost, you know, just one asset. And, I think there was another one on Lexington that was announced recently that lost 85% of its value. And and I'm talking about in the last four or five years.
Ethan Penner:And so, you know, these are breathtaking losses. And I think that clearly the system hasn't recognized that on any level. And I think is afraid that there's existential issues for many investors and even companies were those losses to be realized. And so this is not a this is a big deal, right? This is a very, very big deal.
Ethan Penner:And it cuts to, rippling through the economy that, Chairman Powell spoke about today. The losses in commercial real estate are so big that the rippling effect of those losses through the economy once felt could actually be very, very harmful and show up in the national economy.
Mark Bonner:Sure, and you talk about the ripple effects. For the first time since the great financial crisis, AAA tranches have taken losses. The layer investors once assumed that was untouchable. That shakes faith in securitization at its core. Mhmm.
Mark Bonner:What do you what does it mean when even triple a is no longer sacred in your view, Ethan?
Ethan Penner:Well, you know, Mark, one of the things I've noticed since the early nineteen nineties is how a triple a from one vintage is not the same as a triple a from another vintage. And unfortunately, lenders get lax in bull markets with their underwriting standards, and rating agencies are really just proxy lenders. And they also get lax in bull markets, and they have a history of loosening their standards. So a triple a in one part of a cycle is actually not the same bond with the same protections as a triple a from another part of a cycle. And I remember most profoundly when the kind of financial crisis happened in 2008 in the wake of a very lax underwriting cycle, which always happens.
Ethan Penner:And so 02/1967, you saw a continued decline in credit standards applied by the whole market, including the rating agencies. And AAA bonds and AA bonds and whatever else you wanna call them from that period, were underwritten to a different standard than the same rating from the prior standard. And they when they collapsed, they collapsed. But then in 02/2009, there was new issuance. And guess what?
Ethan Penner:The rating agencies, learned their lesson and became chased and started Mhmm. Underwrite like the rest of the market ultra conservatively. And I was running a fund at the time, and I couldn't buy b pieces fast enough in 2009 because you're buying from the most tight standards of all time. So when you're an investor in a market, it's incumbent upon you to understand these things. I I don't feel bad for people who bought triple a's and are gonna lose money.
Ethan Penner:I think that they need to under people, they need to understand their market. They need to understand that a triple a that's underwritten in a lax underwriting standard is not really the same as a triple a that's gonna be underwritten today or tomorrow in a time when people or rating agencies and lenders are are are much tighter.
Mark Bonner:So it sounds like you you think that the moment we're in here is just simply the cycle running its course. It's not a pricing problem. It's not a structural flaw in your view?
Ethan Penner:No. No. Well, there are structural flaws in CMBS that have been there since the beginning, and that has to do with the incentives of this and the controls associated with trouble loans with a special servicer and what and whose whose interest they are supposed to be acting in the best interest of, you know, and whose interests are prioritized. That's a different conversation. But I think the, the trading, the pricing, the price discovery, the beauty of it is it's there in the market.
Ethan Penner:Go trade them. You know what I mean? That's fine. I think that mistakes get made. That's part of people living their lives, which includes buying securities.
Ethan Penner:You know?
Mark Bonner:And to complicate matters even further, an issuance is booming. Trepp reports nearly $60,000,000,000 in the 2025, the biggest first half since 02/2007. Is this resilience? Is this denial? What do you make of this season?
Ethan Penner:Look. I think that I think that there are smart, experienced investors in every field. And I would bet the smart, experienced investors in CMBS, and I'm not an active CMBS investor, but if I was managing a CMBS fund, I would have not been loading up the boat on the vintages that were misunderwritten by the market, including the rating agencies. And I would be ready to load up the boat right now because corrections, you know, the pendulum doesn't stop in the middle. When it swings, it swings to the other side.
Ethan Penner:And this is probably gonna be a very good time to buy.
Mark Bonner:If you're just tuning in, this episode of First Draft Live is presented by Agora. We're here with Ethan Penner, the creator of the CMBS market, CEO of Mosaic Real Estate Investors, now an independent candidate for governor of California. Let's talk politics, Ethan. Your career has been about rebuilding broken systems. From creating CMBS out of a collapsed real estate finance market to now running for governor, You've called California politics just as broken as CRE finance was in the early 90s.
Mark Bonner:Tell me, how does your outsider track record finance shape the way you might govern the state of California?
Ethan Penner:Well, I I'm a systems person. Right? I I look at systems. I I try to find kind of where they're working and where they're not working as a trader, take advantage of where they're not working as a, and as a repair or fixer, trying to, you know, try to find opportunities where my skills can be a value in repairing. I did that in commercial real estate.
Ethan Penner:I really came to commercial real estate in the early nineties as a complete outsider from structured finance. And I come to politics as a as a from an operational standpoint as an outsider, but, but we all live with politics. You know, the idea that none of us have political experience means we're not living in society. Political experience is living in society. When we when we are citizens and we experience society, we are involved in politics.
Ethan Penner:We know where the rubber in the road are meeting because we're in it. So the idea that we're completely inexperienced is silly. I think that, I don't know where the toilets are in the state house. That makes me an outsider. But I do know that, you know, our systems are broken on every level, and they desperately need an outsider to bring kind of bring healing to them.
Ethan Penner:Albert Einstein said, the people who who, break things are never the people who you turn to to fix them. And I think that's true.
Mark Bonner:California is one of the strongest economies on the planet. Well, not. What's broken?
Ethan Penner:It's actually one of the biggest economies. I I would say it's not one of the strongest economies. So we have, for example
Mark Bonner:Semantics. I mean, it's gigantic on the global stage, even.
Ethan Penner:Much more of that. We have so we have the it depends on when you say about economy, there's headline numbers, and then there's kind of again rubber meets the road number. So the headline number is the GDP number. Right? 4,200,000,000,000.0 in GDP makes us by far the largest state, and in fact, would be the largest the fourth largest country were we to be our own country.
Ethan Penner:So that's very, very impressive. But what's shocking is that we're actually fiftieth out of 50 states in a number of really bad things. We're the fiftieth state when it comes to unemployment. We're the fiftieth state when it comes to people living at or near the poverty line, both on a percentage and an absolute basis. We're fiftieth out of 50 state in homelessness.
Ethan Penner:We're fiftieth out of 50 in affordability, housing affordability. So the economy is not working for many, many, many people. It's big for sure, and I think that gives a competent leader and a competent team of leaders an opportunity to turn it around reasonably quickly, but it's definitely failing right now. So that's the appeal for me. It's it's a big monstrous, economy that just needs professional management.
Ethan Penner:We don't have that today, and we haven't had that for quite a long time in California.
Mark Bonner:You've said, quote, delete CEQA and even the Coastal Commission. What does that mean for housing and development timelines?
Ethan Penner:Well, that's a big part of it. So I think that we have a couple of policies set up in our, in our state that repels ambition, repels drive, repels development of real estate or companies and growth companies. I would say that there are three problems. One is our tax structure. Two is our bureaucracy and the compliance and processes.
Ethan Penner:And, you know, those those are really big deals. And the third one is not as important as the first two, but there are the the the legal process. We have a we have a tort problem in our country, in our state. And so so you've got three big repellents and that, those things have driven, as as everyone knows, driven business and driven taxpayers out. In fact, by the way, I didn't mention this, but the other worst thing that we're fiftieth in is we're fiftieth and we've been each of the last five years in net migration, which means that citizens are choosing to move to any state but California.
Ethan Penner:Now when anyone who's been in California knows, that's astounding because people are choosing North Dakota over over California. That's that's how bad things have gotten, how unpleasant with quality of life and how difficult it's been to build businesses here. So when I say delete CEQA or delete the coastal commission, what's interesting is that both of those were programs that were introduced as temporary programs. So deleting them is actually consistent with with their original construct. The fact that they're still around is the problem.
Ethan Penner:The fact that they they were not intended when they were brought out to be permanent, programs. So deleting them is just going back to the original intention of both of those programs. And when you look at the kind of we we are the most I think the most beautiful state naturally. It's kind of why I've chosen to live here and make my life here. I love nature.
Ethan Penner:And in this zeal to protect our nature, which I think is fine, it's consistent with how how important it is to our state, we've, over, regulated. We've created, I think I think by my last count, 19 different organizations that are environmental compliance related organizations that a developer would have to deal with in order to get an apartment building built. It it's like if I said to you, Mark, let's go on a trip. And and I said, but, you know, we have to go through the TSA checking process. And you say, okay.
Ethan Penner:It's not a problem. What if I told you that going to LaGuardia involved going through 19 consecutive TSA checks? You know, you it might deter you to actually make the trip. Right? And that's what's going on here in California is the the processes to get something built are long, arduous, costly, and irrational, and it's a deterrent.
Ethan Penner:And that has translated into a whole lot of problems, including affordability. So because we have we don't have enough homes. We have roughly the same amount of homes as we did when we were a 20,000,000 person population. We're now 40,000,000. So just anyone who knows anything about supply and demand can infer that that's going to create price inflation, serious
Mark Bonner:price Shortly after you announced your candidacy, BizNum reported your proposal to build new towns for the homelessness in rural California. How do you respond to critics who see that as a sec as segregation rather than than a real solution to that issue?
Ethan Penner:Okay. Well, 0.4% of our population is homeless. By the way, we have the largest homeless population, as I said before, of any state by far in the country. So, but 0.4% of our population is homeless. 99.6% of us that are not homeless are very kind.
Ethan Penner:We pay for the livelihoods of that 0.4%. And we pay a lot of money, but we but we we pay it in a very inefficient way. And and I believe that the end outcome of of our generosity of supporting the lives of these 187,000 humans, which is phenomenal. I'm so proud to be a Californian that we are in a state where we care about our weakest people, our most vulnerable people. I think that's a very important hallmark of a great society.
Ethan Penner:Unfortunately, our kindness is going not only to naught, but it's being preyed upon by people. So there's an industry that makes money keeping people homeless, believe it or not. And there's a lot of people who make money keeping people homeless. There is nothing kind about sleeping on the pavement. And if you if you doubt that, go lay down on the pavement for half an hour and tell me how that feels.
Ethan Penner:Can you imagine living on the pavement? Okay. Which is what we have. That's what homeless is. So my solution is actually the most kind.
Ethan Penner:This is the first kind solution, which is let's build let's build proper housing for people. Let's take the generosity of the 99.6% of Californians, and let's actually put it to good use. Let's build proper housing, which we could have done, by the way, already for all the money
Mark Bonner:that we've How does that integrate those people back into society? If you're putting them on because you're shipping them out to a rural part
Ethan Penner:Yeah. Of answer is clear. No. The answer is very clear. They can't be integrated off the pavement.
Ethan Penner:There's no there's no pathway from the pavement to a functional place in society. But if they had a proper house, if they had a place to sleep and gather themselves, take a shower, and then also if they were segregated from each other based on their unique problems. Right? Some of them are economically off the wagon. They've lost their way.
Ethan Penner:They should not be commingled with people who are, have mental illness or have drug addiction problems. Each of these groups deserve a need to be counseled in a way that will enhance the best possibility of them returning to a productive, functional, fulfilling life. The way it's set up right now is absolutely a deterrent for that. So what I would do is create separate housing based on their unique problems, have counseling for their unique problems, and create pathways for them back into society. But that's gotta come from a bed and a shower and proper treatment.
Ethan Penner:It's not coming from the pavement. Believe me.
Mark Bonner:Look, there are any number of advocacy groups in California that are dedicated to trying to help the homeless.
Ethan Penner:Where do they make this idea? Hundreds of these people.
Mark Bonner:Hundreds, if not thousands. What do they make of this idea that we're gonna scoop up people off the street and bring them to some place in the middle of California and away from
Ethan Penner:You have a hundreds or thousands of
Mark Bonner:them. I just wanna get into the logistics either because
Ethan Penner:I I don't
Mark Bonner:I think there's lot of miscommunication out there about what this plan actually is, and I'd like you to explain it.
Ethan Penner:Right. The hundreds or thousands of those organizations that are feeding off of this problem and and have done nothing for the homeless with all the money that's been directed to them and by them, the homeless population has grown by 25% in the last four years. So they've done nothing. And you know what? The only people who have done okay is the people in those organizations who get paid.
Ethan Penner:So there's livelihoods being made off the backs of these people sleeping on the pavement. They're gonna hate my idea because my idea is gonna work and will put them out of business. So, you know, unfortunately, self interest is isn't is at work here as it always is in human nature. And these people need better jobs than preying upon, making a living because it perpetuates homelessness and perpetuates people sleeping on pavement. That's just not gonna it's not gonna persist in my administration.
Ethan Penner:So I will fix homelessness. I will do everything in my power because it's the kind thing to do. Okay.
Mark Bonner:I'm getting the hook from my producer, Ethan. I apologize, but that's all the time we have today. I just wanna remind our audience that Ethan Penner is the author of Greatness is a Choice and Awareness and Prayer. You can learn more about his campaign at pennerforgovernor.com. Ethan, thank you so much for joining us.
Ethan Penner:Thanks, Mark. It's a pleasure to be with you.
Mark Bonner:And a big thank you to Agora for presenting another episode of First Draft Live. We're off next week, but we'll be back after Labor Day with another conversation at the intersection of real estate capital and public policy. So don't miss out. You can sign up now on our event page. You can also catch today's episode and every past conversation on your favorite podcast app.
Mark Bonner:This is First Draft Live. Have a great weekend, y'all.