Talk Your Book: No Bank Runs in Commercial Real Estate

Episode Summary

Executive Summary: The episode examines commercial real estate—especially office—amid post-COVID work shifts and higher rates, arguing the public market has likely already priced in much of the pain. Guest Tom Miller of USQ says office is only a minority of CRE, Class A assets remain resilient, refinancing risk is manageable for well-capitalized properties, and industrial and multifamily are stronger segments. The discussion also explains interval funds as a more practical way for RIAs to access private real estate.

Main Topics: Commercial real estate is broader than office (Priority: 5/5): The hosts open by noting that office real estate gets outsized attention, but commercial real estate also includes industrial, multifamily, and retail, which make up much of the opportunity set and have different fundamentals. Office real estate pain is real but uneven (Priority: 5/5): Tom Miller argues office is facing secular headwinds, yet Class A, highly amenitized assets still lease, while Class B/C offices are the real problem. The hosts counter that COVID permanently changed office demand. Public vs. private market pricing (Priority: 5/5): The conversation emphasizes that public REITs can overshoot in both directions, while private real estate marks lag because they depend on transactions. This creates a gap between public market performance and reported private marks. Refinancing risk and debt maturity timing (Priority: 4/5): Higher rates do matter, but Miller says many owners extended debt during low-rate years, so near-term maturities are limited. He argues fears of a rolling crisis are overstated for conservatively levered assets. Industrial and multifamily as stronger sectors (Priority: 5/5): Industrial benefits from e-commerce logistics demand, while multifamily benefits from a U.S. housing shortage and strong rent growth. These are presented as the most attractive CRE sectors. Interval funds as access vehicles for private real estate (Priority: 4/5): Miller explains USQ’s interval fund structure, quarterly liquidity limits, daily NAVs, and advisor-friendly access. The structure is framed as suitable for long-term investors and less prone to fire-sale behavior. Regional banks, lending, and capital alternatives (Priority: 3/5): The episode discusses how financing for high-quality CRE is not limited to regional banks; insurance companies and larger lenders also provide capital. That reduces systemic risk versus a concentrated bank-only narrative.

Key Arguments: Commercial real estate should not be reduced to office; office is less than 20% of the NFI Odyssey index, so broader CRE health is different from the office narrative. Class A office in strong locations remains functional and is still leasing, while weaker Class B/C assets are the true stress points. Public REITs and other public CRE assets can overreact materially, so sharp price declines do not automatically mean private assets are correctly valued lower by the same amount. Refinancing risk is muted for many owners because debt was pushed out during the low-rate period, and very little debt in the tracked universe matures immediately. Well-capitalized, low-leverage properties with strong cash flow can absorb higher rates better than highly levered assets. Industrial real estate remains strong because e-commerce requires dense logistics infrastructure. Multifamily benefits from persistent U.S. housing undersupply, giving it a long runway despite slower rent growth. Interval funds provide a more usable structure for private real estate in advisor channels because they combine daily NAVs, periodic liquidity, and regulated reporting with long-term capital discipline. Private real estate can add diversification because its marks and return patterns differ from public markets, especially in volatile periods.

Data Points: SL Green stock decline: 82% down - Used as an example of how deeply public office REITs have already sold off. SL Green GFC decline: 94% down - Compared to the current drawdown to show that the market has already priced in substantial distress. Office share of NFI Odyssey index: Less than 20% - Illustrates that commercial real estate is broader than office. Industrial share of NFI Odyssey index: About 40% - Shows industrial is the largest sector in the index. Multifamily share of NFI Odyssey index: About 30% - Represents a major part of the private CRE universe. Size of Odyssey universe: About $300 billion - Tom Miller described the amount of CRE represented by the NFI Odyssey index. 2023 near-term maturities: De minimis - Miller said very little debt in the tracked universe matures in 2023. Loan-to-value threshold discussed: Less than 60% LTV - Presented as a conservative leverage level for office debt. Implied office borrowing cost: 550-600 basis points - Miller estimated current office financing costs for lower-leverage assets. Spread over the 10-year: About 200 basis points - Described as the approximate credit spread for real estate borrowing. Quarterly liquidity in interval fund: 5% - USQ’s interval fund offers up to 5% liquidity per quarter. Current cash allocation: About 9% - Miller noted elevated cash in one strategy to support liquidity. US housing shortage: About 10 million homes short - Used to support the long-term case for multifamily real estate. REIT performance in 2021: Up more than 40% - Used in discussing public market overreaction and valuation swings. REIT performance in 2022: Down 26% - Used to show public market volatility versus private marks. USQ strategy performance last year: About 6% up - Presented as evidence of diversification when other assets fell. Commercial real estate market focus: 1994 Act / 1940 Act mutual fund-like structure - USQ’s interval fund is regulated similarly to a mutual fund under the 1940 Act.

Pivotal Quotes: "public markets overreact almost every time" — Tom Miller: Miller’s core defense of why public REIT price declines should not be read as a direct proxy for private real estate values. "there's no one perfect solution. If you're going to make a real estate allocation, you shouldn't put it all in private, and you shouldn't put it all in public" — Tom Miller: His explanation of why combining public and private real estate can improve diversification and risk-adjusted returns. "No bank runs in commercial real estate" — Tom Miller: Used to describe the controlled liquidity structure of interval funds and why gating/redemption limits can protect shareholders.

Implications: Listeners should distinguish office from all CRE, expect weakness to persist in lower-quality office, and recognize that industrial/multifamily still look attractive. For investors, private real estate may offer diversification, but only with patience and acceptance of limited liquidity.