Polpo Capital

REAL ESTATE MELTDOWN STRAINS EVEN THE SAFEST OFFICE BONDS In the below WSJ article, the author does a great job of starting to expose the opportunity set that exists, and will exist in the near term, from defaults that are starting to take place in commercial real estate. While the article focuses on SASB loans, we at Polpo think there is opportunity in the conduit space as well, an asset class requiring a far more intricate underwriting process. From Polpo’s investment team: “Office performance continues to deteriorate as employees have fully embraced the benefits of working from home and employees look to cut costs. The nationwide vacancy rate for offices was 9.3% in 2019. It has climbed almost every month since the pandemic and now sits at 13.8%, higher than the peak level of 12.7% seen during the GFC. Levels are even worse when you dig into some of the larger markets. Areas like San Francisco, Downtown LA, Chicago’s West Loop, and Houston’s CBD are all experiencing vacancy rates greater than 20%. New York City is fairing relatively well with a rate of only 13.9%. At the same time revenue has been dropping on office buildings, borrowing costs have been rising dramatically. The result is drastically lower property values. A recent report by Morgan Stanley shows that reappraisals on office properties in deals is coming in almost 50% lower than underwritten appraisals from deal issuance. Reappraisals are done on delinquent loans or ones that did not pay off at maturity, but still points to a significant decrease in office property valuations. This is not only a problem for SASB deals backed by office buildings, but also for conduit deals. Traditionally, office buildings made up 20-40% of the collateral in conduit deals as these were seen pre-COVID as safer investments which would offset riskier asset types in the deals. As loss assumptions continue to increase on offices, more investment grade bonds should get downgraded and/or incur losses. Those bonds should change hands from passive investors who want to be protected from losses to those willing to take on those risks with desirable return expectations.” Please feel free to reach out to discuss. https://lnkd.in/dKS9t4aM Real-Estate Meltdown Strains Even the Safest Office Bondswsj.com

Polpo Capital CIO Daniel McNamara and Danielle DiMartino Booth joined The TreppWire Podcast: https://lnkd.in/gU5tVZny

Polpo Capital founder and CIO Daniel McNamara quoted in San Francisco Examiner article highlighting office vacancies in downtown SF. https://lnkd.in/epZD9aJv