Odd Lots - The Father Of CMBS Says We’re In ‘Uncharted Territory’ When It Comes To Valuing Real Estate

Episode Date: August 27, 2020

There are some sectors of the real estate market, such as suburban residential housing, that are doing just fine throughout this crisis. However, other areas are facing true existential risk. The value of commercial real estate in big cities is extremely uncertain due to the combination of the virus itself, potential migration out of cities, and the fact that so many people can work from home. On this episode, we speak with Mosaic Real Estate Partners Managing Partner Ethan Penner, who has been described as the father of Commercial Mortgage-Backed Securities, on real estate market structure and what it means for the billions of dollars worth of assets that are on the line.See omnystudio.com/listener for privacy information.

I'm June Grasso, inviting you to join me for the Bloomberg Law podcast. Every weekday, we help you make sense of the legal stories that shape the nation and the world. Listen for complete analysis of the biggest court cases, the latest actions from Congress and regulators, and the legal moves driving the markets, from corporate law to constitutional law, and from state courts to the Supreme Court. At Bloomberg Law, we go beyond the day's headlines. We speak with top attorneys, judges, scholars and policy experts to break down what the rulings really mean. We do this every weekday,

then bring you the best conversations in our daily podcast. Search for Bloomberg Law on YouTube, Apple, Spotify, or anywhere else you listen. On the East Coast, listen as you start your day, and on the West Coast, catch up in the evening. That's the Bloomberg Law podcast with me, June Grosso. Subscribe today wherever you get your podcast. And welcome to another episode of the Odd Thoughts podcast. I'm Tracy Allaway. And I'm Joe Weissenthal. So Joe, one of the themes that I think has been popping up quite a bit on recent episodes is this idea of, this sounds really trite, but opportunity in crisis, or this idea that we're facing big, big economic devastation, but maybe there's some sort of hidden opportunity or even very obvious opportunity to remake the economic system or improve

the financial system at the same time. Yeah, I think that's right. I mean, yeah, I think that that has been a theme, and this idea that there are a lot of policies, and we've sort of talked a lot about fiscal policies or monetary policy, but there's all kinds of trends that have been going in one direction and people are questioning, have they reached their endpoint? As a society, as an economy, do we need to make some sort of like meaningful turn in a different direction? Right. And, times of crises tend to be when we also see new innovations in the market specifically. And I'm thinking about one in particular back in the 1990s immediately after the savings and loan crisis. There is a shortage of capital going into commercial real estate. Fast forward a few years.

And someone invented commercial mortgage-backed securities to kind of take care of that problem. Now, today, we've been discussing already the intense pain facing the commercial real estate sector at the moment. The question is, is this going to lead to some sort of innovation or is it going to present some sort of opportunity to revisit the system as a whole? There are different types and different degrees of changes that could come about because of what we're seeing happen right now. Wait, you want to hear an interesting commercial real estate data point? Go on. You're back in New York, aren't you? I'm in the office. I'm not only back in New York. You're going to be brimming, brimming with commercial real estate anecdotes now, aren't you? So I'm literally in commercial real estate as we speak after several months of recording the podcast from a bedroom.

So maybe it was all over hype. Maybe everything is going back to normal. But no, I don't know. It's definitely not normal by any stretch here in New York. It's definitely not normal by any stretch here in the office. And it's really unclear whether there will be a return to normal at all. Yeah. Okay.

Well, on this episode, we're going to be digging more. into the state of the commercial real estate industry. We touched upon it a little bit when we were talking about REITs the other day, but now we're going to go in-depth with a really, really special guest. I'm thrilled to say that on today's episode, we have Ethan Penner, who is widely credited as being the father of CMBS, or the guy that created it, as I mentioned back in the 1990s. he's currently the founder and managing partner of Mosaic real estate partners. So, Ethan, thank you so much for coming on. Thank you. It's a pleasure to appear with you. So, Ethan, I'm really curious. Could you

maybe start out by describing the problems as you saw it in commercial real estate in the early 1990s when you were first thinking about the CMBS structure, the CNBS product, what was the issue that you were trying to solve? And how much of that do you see paralleled in the current situation today? Well, it's not really paralleled at all at this point. I'd say the situation that existed in the early 90s that moved me to kind of bring about the CNBS industry or CNBS solution was a very unique situation where kind of all the lender. who had serviced the real estate industry, abandoned the industry all at once. And so the industry, which is, you probably know this, but real estate is the most

dependent upon debt financing of all industries. And so here you had an industry that had its line cut off, essentially. And it's an industry that is financed, not only acquisitions, of course, with heavier debt, but the debt itself is structured so that there was very little amortization and loans mature on a regular basis and need to be refinanced. And so borrowers were finding themselves in the early 90s with loans scheduled to mature and their existing lenders telling them, regardless of how well the loans were performing or the underlying properties, that they didn't have an interest in refinancing those loans. And they might give some short extension

but the borrower needed to find a way to repay them. And so the industry was facing a tremendous crisis, an existential crisis for many borrowers. And I saw that and realized that the securities markets, the bond buyer who had come to finance other asset types, primarily single-family mortgages, but other sources through the securization process that had kind of grown significantly through the 80s and that I had been a part of,

was a very well-suited place to turn to to fill this massive need. And from that, CMBS was born. I mean, there was a lot of work, a lot of mostly convincing, actually. You know, when you create something new, even though it's needed, there's a certain constituent that feel threatened by anything new. And so getting kind of the necessary buy-in is really the challenge when you introduce the new concepts. And it was a great experience for me, not without its pains and scars, but it was certainly well worth it. Can you just explain real quickly what it was about the conditions that caused the traditional real estate lenders to pull back from the market?

Sure. Well, real estate prior to this period, this early 90s period, wasn't, even though it's a very large financial asset, it was a financial asset that was pretty much untethered to the rest of the financial or capital markets. It was a business that kind of happened entirely in the private sector. So there was no public market participation in real estate. There were really no reeds to speak of. And there was no capital market for this patient in the equity or the debt financing real estate. It was largely financed on the debt side by banks and insurance companies. And in a very, I would say, backwards way to tell you the truth.

Without being tethered to the public markets, it was also being done without, what I'll say, traditional financial governance. So relative value didn't play a part in things. And pricing was oftentimes bizarre. credit decisions were also kind of wacky. In fact, there was a time when for a lot of the kind of wealthiest old American real estate families gain their wealth through the benefit of getting 100% or more a loan to costs. So they were able to borrow the totality of the cost of building a project, if not more,

and have all the upside for putting up no money themselves. themselves. That formula tends to create great wealth, and it did for many of the legendary names in real estate. The big problem that led to the crisis was that all the lenders were regulated lenders, insurance companies and banks for this part. And regulators tend to react in a herd-like fashion to especially market crises. And so the late 80s, early 90s, was a period that was really a very deep economic recession and it's centered around real estate because in the prior years, real estate had benefited from an immense amount of bubble amount of capital that drove prices to ridiculous levels. And as the bubble started to burst and people started to kind

of withdraw or try to sell, the unwinding was quite dramatic. You know, losses tend to communicate to regulators risk, right? Loses are equal to risk. And, you know, losses are equal to risk. Regulators react to risk by telling their constituents to stop doing whatever they feel is risky, realizing that doing so actually enhances the losses and the risk. It's kind of a perverse system, in fact. Regulated lending, we could talk about that separately because it's one of the biggest problems, I think, in all of finance. Regulatory-driven lending and regulated lending create its own set of cyclical problems,

the likes of which we've seen and I think we're likely to see again. So this kind of lemming like the action to regulation created this entire industry to be abandoned and it created this need that I was able to help Bill. The news doesn't stop on the weekends. Context changes constantly. And now Bloomberg is the place to stay on top of it all. Hi, I'm David Gurra.

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Watch us on Bloomberg Television. Listen on Bloomberg Radio, stream the show live on the Bloomberg business app, or listen to the podcast. That's Bloomberg this weekend. Saturdays and Sundays starting at 7 a.m. Eastern. Make us part of your weekend routine on Bloomberg Television, radio, and wherever you get your podcasts. So today we have a big chunk of the commercial real estate industry financed through the

private market through investors who are buying CNBS. We still have lots of bank loans, but there is a chunk of it in private investor hands. How has that changed the dynamics, if at all, or how does it impact the dynamics when we see a commercial real estate crisis such as the one we're in now? Well, CMBS was born to deliver capital to a capital-starved, desperate industry. It was not born perfect. And so its infections or its flaws, like all systems, are revealed most dramatically when things are tough, when times are tough and there's challenges like downturns, like the 0809 financial crisis.

And I think like today, but it's true of all loans, by the way. Like when times are good, there are never problems. Like, well, borrowers pay their lenders on time. And then when loans come due, borrowers pay their lenders off. And lenders are very happy. And everyone's happy. It's only when that doesn't work out, when times are tough. And borrowers can't make their loan payments on time or can't make their loan repayments on time.

That's maturity. You have stresses in the lending business. And so not surprisingly, CMBS, its problems always crop up. And the shortcomings become obvious in these challenged times. And fundamental kind of unique aspects that I think maybe you're alluding to that's worth mentioning with regards to CMBS's kind of what I'll call endemic flaws. The ones that are, that are, I think, germane today most have to do with, I would say, two realities. One is typical of bond market financing. So it's not unique to CNBS. I would say it's true for

any bond market financing. Let's pretend that you have two different lending constructs. One where you're a borrower and you borrow from me and I loan you money and you put up something as collateral, whatever that something is. Okay. And now you're calling me and telling me that you can't make your payments on time or you can't repay your loan. I'm your lender and I have your loan and I could have a conversation with you and determine what's the right way to go forward. You know, is this a temporary downturn? Are you valuable to the collateral like keeping you involved collateral?

Is that a good thing for the collateral's value or not? We can make rational decisions together and I have staying power because I have your loan and you don't have staying power because you owe me now. money. I could trade staying power for economics with you. I could do things that are whatever it needs to be done. I could take over the collateral and kick you out if I needed to and contract would allow me to do that. And if that was the best thing to protect my investors, well, then I should be prepared to do that. Bond market financing doesn't actually allow for that because, as you probably know, whether it's corporate bond construct or a commercial mortgage-backed

securities construct, bond market lending really involves fragmented ownerships of that loan, right? It's taking that loan that was originated by one party, let's say it was me, and then making it up into many little pieces and selling it to people all over the world. And none of those people have enough control of the loan to actually have a conversation with you, the borrower, when you need to have a conversation. So the problem number one is you don't have anyone who owns the loan to have a reasonable conversation and even make an appeal to that maybe the loan needs to be restructured. That's in the best interest of the lender and the borrower and the collateral, but there's no one to really talk to.

Okay, that's problem number one in bond financing. Problem number two is that because the loan ownership is so fragmented, there is no lender, per se, to actually act in a lender's best interest, which is oftentimes in times that are trying to actually protect the lender's downside and take over the collateral and control it and operate it to the best of the lender's ability. But because there's no one lender in control, there's no one really to do that. In CMBS, there was a structure, there is a something called a special servicer, right? And the special servicer is theoretically the bondholders representative in this process,

the one who is supposed to speak on behalf of all the bondholders and make decisions with regards to workouts and restructurings and foreclosures on behalf of all the bondholders. But there are a couple problems. Number one, the special servicer is typically special servicer for hundreds, if not thousands of loans. And during good times, very few of those loans are in trouble. And so they don't want to need to run a big staff to handle the few loans that are in trouble. And they don't because they don't actually get to charge servicing fees to the bond holders into the trust that the bondholders are invested in,

until and unless loans going into problems status. So they're not paid to maintain a regular staff to handle big volume of problem loans as happens in times that are tough like today or in the great financial crisis. So they're just not staff for it. First of all, second of all, and then they have to play catch up

because they have to quickly bring on staff, but how do you find an amount of talented people who can quickly address the needs of a borrower base that's in desperate strengths and need someone who can make decisions quickly? It's not really possible. The second problem is that the special servicer is also typically paid a fee stream when a loan becomes problematic and for as long it remains unresolved. So they actually have a financial incentive to not resolve problems quickly, which is agonistic, of course, to the senior bond holders who accepted a very low rate of return for their low risk position. And now they're kind of hanging out longer than they want to hang out and longer than they probably should be hanging out.

the special servicer is almost always the owner of the junior most interest of the CMBS bond structure. And so for them, a quick resolution that locks in losses is literally money out of their pocket. And so they have the further incentives to drag resolutions on for as long as possible in the hope that markets recover they can avoid locking in losses. So there's all kinds of intricate conflicts of interest built into the whole structure and it's imperfect. Let's put it that way in its current form. It's unfair to throw CNBS under the bus because so much of what I just said that was

problematic about CMBS is also problematic in the corporate bond world, where ownership of loans in bond form is fragmented. And, you know, one can make a reasonable case that buying debt in bond form is a bad deal. When you're a debt investor, you don't have any share of the upside. All you have is a best case to get your money back and your coupon interest. Best case. And if things don't happen as planned, it gets, worse from there, right? So owning that loan in fragmented form called bond form, you've given up

your ability to actually enforce your lien, to protect yourself when you need protection, which is why in my firm, you know, the construct of mosaic, we're able to own bonds and we're able to own loans in this kind of debt fund that we run. I never would buy a bond unless it was extremely cheap than being distressed prices. And it's sad that they are because distressed debt, the whole concept of distressed debt and the opportunities that rise from distress debt are the kind of flip side of the same coin of the flawed structure that creates the opportunity for distress debt, right?

Where people just throw their hands up that own these fragmented ownership of loans in bond form and so, I can't enforce my... my lien, I just want out of this thing. And then the I just want out of this thing translates into too deep of a discount relative to the credit. And it creates huge opportunities for opportunists. But I think the bond format kind of creates the stress debt opportunities. It's an interesting phenomenon. But it needn't be that way, but it is that way the way bonds work. So given that it takes a lot of time to renegotiate leases and given the dynamics and different incentives that you just described, such as the idea that special servicers might be

overwhelmed with the number of troubled loans that are having to take care of at the moment. What does that mean for valuations? Like, how long will valuation resets actually take in commercial real estate now versus previous real estate crises? We're in uncharted territories in much of the commercial real estate market today. and there is no real basis for many assets, for even taking wild guesses on valuation. Valuation really comes from at the very beginning, the question of viability.

And to me, the word viability when I apply it to real estate is very simply, do human beings want to be there? Okay, wherever there is. Like, you know, you have a nice office building, goes in right now. and the question is, will human beings want to actually go to the office in that location? Well, it was the answer before March seemed to be unquestionably yes. But even for a wonderful building like the one Joe sitting in right now,

it's certainly less certain than an absolute yes. And so out knowing kind of viability, it's really impossible to kind of arrive at value today. I think much of commercial real estate today, I would say it's nearly impossible to establish values for a lot of commercial real estate today. And we just have to see how the world plays out a little bit more. Both the other part of valuation, also timing. So you can say, well, maybe that building is going to be viable, but maybe it's going to take two years before it returns to its prior normal operating level, well, then you have to discount cash flows that are suboptimal for two years and deduct kind of whatever shortfall there is from the valuation. So timing and

absolute viability are so uncertain today that it would be, it would just be more gambling than investing to try to decide a value. So I loved your sort of description about the tensions and conflicts of interest that emerge from the bond or the CNBS structure and the difficulty that arises. So practically speaking, right now in New York, obviously there are all kinds of issues. There's questions about office buildings. There's questions about areas that are retail and very tourist-dominated. And as you say, we really just, we're just guessing at this point because we really don't know what the future looks like.

We don't know when there will be a vaccine and so forth. how does the tension that you described, how is it playing out right now as retailers try to renegotiate with landlords and landlords try to renegotiate with lenders? What is the discussion and the tension? What's happening right now in those rooms? Well, I've not been privy to those rooms myself. So again, I'd be just reporting secondhand. you from what I see and how things are playing out and how I, knowing some of the players,

how I would imagine they're handling it. But it's not fun for anybody. You're talking about retail real estate, which is the most uncertain of all. You know, you've got retail, you've got office, hotels to a certain extent are the three areas where you've got the greatest uncertainty in that order, I would imagine. And as it pertains to retail real estate, there's existential issues that retailers themselves are facing. So, you know, I think it will be some lawyers who do very well in this process because I think that you're going to see heightened litigation. You'll see bankruptcy lawyers doing very well.

And I think a lot of it will be centered around retail. The counterbalance so far is that kind of historically easy monetary policy. And that's playing out not just with historically low-eastern. interest rates, but also directs straight from the Fed to the banking community to be kind, the borrowers and not press them. You know, the old me might have not been too happy about that because I'm a fairly strong free market advocate, but I actually think it's the prudent thing to do. You know, the system itself is so fragile that I'd say historically fragile that it's the wise thing to do.

And it's creating whatever odicum of stability that allows us to kind of breathe as easy as we can be breathing today, considering how grave the crisis we're facing it. There was some talk earlier this year, sort of in the depths of the crisis of potentially seeing a CNBS or CRE bailing. out of some sort. What do you think about that idea? Does the idea of being nice to borrowers extend all the way to bailout? I don't think so. You know, I actually wrote a piece. It was picked up by some of your folks at Bloomberg and the government can't help everybody out. I think it should not. I think that it needs, you know, in times like this, we need to make sure that the people who are most fragile, most vulnerable, and whose basic needs they're not able to attend to, but their needs

can be attended to. So that's where I think the bandwidth of government largesse must be spent. I don't think having that large less run through the hands of corporate entities or wealthy individuals makes any sense at all. It just so we have a full. fine legal system in this country that allows for bankers to resolve issues and that allows for loan foreclosures to resolve issues. And new owners can come in. I don't think that's not the way the world should work. I'm pretty out of it. I'm Francine Lacqua, an award-winning journalist. And I've got a new podcast, leaders with Francine Lacqua from Bloomberg Podcasts. I've interviewed to everyone from heads of state to fashion icons about the news of the moment.

But I've always been curious who are these people as leaders. I don't think there's one right way to be a leader. Make decisions. A poor decision is always better than no decision. Listen to new episodes every other Monday. Follow leaders with Francine Lacquois wherever you get your podcasts. I just want to go back to a question you mean talking about this extraordinary moment of uncertainty in the valuation of real estate. Is there a market for it? Is there even a bid-ask spread right now if someone wanted to come in and make a bid for a big commercial real estate location? Does that market exist? Or is it just basically no one's selling because no one has any idea? I think that there's there is a market. There's a fairly big gap between where sellers would like to sell and where buyers would like to buy. I think that there, I don't necessarily think there should be a market, though. As I said,

before for many assets because I think uncertainty is very high. But I think that there is money burning a hole through people's pockets and it's not their money. It's money they charge fees on. So that's part of the interesting phenomenon of how money is managed and is invested in this world, not just in real estate, but it's typically invested. It's money is kind of pooled as it is in pools that I manage and invested by people like myself who get paid to manage the money. So money also sometimes comes with final maturity dates where if it's not invested by a certain time, it needs to be checked to its original owner. So that creates an impetus to invest, okay?

So as to lock in the fee associated with managing that money rather than return it to its investor or uninvested. So there is a lot of. of money organized today that is sitting and waiting and wants to invest and managers who want to invest it. And I think that there is the tug of war between being imprudent and investing. I think sellers would like to get near March prices. And I think buyers would feel very bad if they didn't get at least for real estate today

in the retail sector or the office sector, at least a 20%. percent and hotels, 20 percent or more down to March pricing. And I would argue they deserve more because uncertainty is so high. So I think that there is a market. There's been very little that's transacted again because on the seller side, there's been kind of an abeyance of pressure from the lending community really directly resulted from the Fed's policies. And I think you've seen very little selling. And there was a big office building in downtown LA that sold at what I think one would characterize at 20%, maybe 25% below what it might have been worth six months ago. It was about it.

There has been very little and there was very little activity for the reasons I mentioned so far. You mentioned the role of the Fed just then. And of course, we know that the central bank is acting as a backstop for a whole bunch of different assets at the moment. I'm wondering, given the Fed is there and the Fed is the backstop, in what situation would we ever see CRE credit spreads blowing out again? When you say CRE spread, so there's CMBS, which has almost, I would say, a very bifurcated rule in the sense that there's the senior most bonds, which are AAA rated, which I think are reasonable credits. and have held up over cycles before. And those tend to blow out at the very beginning with everything,

because when liquidity tightens, when liquidity tightens up, it affects everything. And then the AAA spreads tend to snap back. And it turns out to have been a very good trade if you could, if you could buy some in enough trades to make it a big trade for anybody. And it happened here. So like AAA spreads, which had been, certainly sub 100, spread and widened out to 320. And it was, you know, it was a great and obvious trade. Not too many sellers sold at 320.

And therefore not too many buyers bought, but it was obvious it was going to snap back. And it has snap back to some hundred again. The more junior classes where there's concentrated credit risk, they're still pretty wide. And I think deservedly so. I wouldn't touch him with the 10 foot pole. You're taking a concentrated credit risk with tremendous exposure to retail and office and hotel properties around the country and no ability to really enforce your lien because of this fragmentation ownership and bond form.

So I think I'd be surprised if those tightened anytime soon. Over time, if things heal, they will tighten because there's money to invest and the will push spreads tighter. Money flows determine pricing more than anything else, more than creditworthiness. On the loan side, it's more of an on-off thing. I think that there's no real loan money to speak of available for office and retail today and hotel, very little. So there's just not a lot getting done.

So I don't know if spreads are wider. Just money is not very available. Spreads are a little wider as a result when you have to get some. something done for sure spreads are wider in the loan side by a good 100 basis points, maybe maybe even a little more. Looking forward, this is where I think going back to something we talked about earlier, which is the tie-in of everything, everything. So if you look at the gigantic debt government runs and not just federal government, but state and local governments, and the fiscal imbalances that exist in this country,

I often wonder how much of bank balance sheets will ultimately be co-opted to buy that debt. If that happens, and I suspect it will, you know, there was a time of America when bank balance sheets were more than 40% government debt in recent past it in the single digits. So if I'm right, and bank balance sheets become the haven, to store low rate government debt because there's no real market bid for that,

any near the yields that make sense kind of fiscally, then that crowds the bank out for forcing a lot of the private sector, which pushes it into private funds financing. And the rate that private funds want is going to be substantially higher than where benchmarks like government bonds, trade, which is where benchmarks typically are. So spreads to governments for credit could widen dramatically over the next, I would say, decade. I would not be surprised if that was a trend that we saw over the next decade for the reason I mentioned. I'm curious about the sort of knock-on

effects. Like, let's say some of these assets really do, they don't bounce back for years, prime real estate and hotels and offices and big cities like New York and other Chicago and elsewhere. What are the then follow-on effects? Like, what is the, who are the pools of owners of this debt and what does it do to them if they really have to take in the end sort of massive marks down, markdowns on their holding? It's going to be very exciting to see that play out because they're clearly, one would suggest there are clearly going to be big losses that have to be born by someone, you know, some group of someone. And there's always been a tug of war as to the allocation of those

losses between the equity owner of property and their lender. It's an old kind of tradition in real estate. When when things go well, the property creates sufficient cash flow to pay the lender and repay the lender when the loan matures. But when things don't go well, the borrower calls a lender and says, we've got a problem. Instead of I've got a problem, we've got a problem. How are we going to fix it? Of course, the way it's supposed to be is the bar is supposed to lose everything because the lender has taken this safer position in lieu of upside. But again, as I go back because most lenders, even whole loan lenders like banks, are just not set up to own property. There's been a long tradition in real estate where when things don't go well, the lender recreates

value or economic value because they don't have the will or the capacity to enforce their lien and take the borrower out. And so lenders do lose money when they don't necessarily, you wouldn't think they should because of the hierarchy of the capital structure. So how that all plays out will be very interesting to watch. But unquestionably, there are losses in the system. I have a sort of big picture question for you. And I know you like to think about these.

And I've seen some of your recent blog postings. But when you look at the economic crisis of 2020, what role do you see there for the federal government? What should they be doing to cushion the blow, if anything? As I said earlier, I'm a big free market advocate, but I'm also a person who's living my eyes open and realizing the realities of the situation we're facing. I think we're too far on to have a libertarian laissez-faire approach to things. You know, that worked, by the way, in the early 90s when CNBS was created, that was a time when the government largely had a laissez-faire approach and enclosed a lot of financial institutions and liquidated their assets

when they didn't have enough regulatory capital. they actually took a harsh stance and a non kind of savior stance to the world. The 08 response changed everything. And I would say the 08 response was gravely mistaken, but it created, and I knew it would, and I wrote at the time, it created a dependence mentality upon the Fed and upon the government. to save us from pain and suffering. And once that precedent was set in 08, there's never going to be turning back.

And so it's too late. We've been running around with this crutch of dependence for so long that our legs don't work any. As a society, we can't run around without the crutch. And so bad behavior, running up massive debts and unsustainable fiscal imbalances has been the natural byproduct of 0809.

And now as a society, and I say us, it's global, it's not just America, we're in an impossible position. And no one can really predict exactly what things are going to. I have my opinions, but I don't think the government can walk away because government kind of exists to help a society, to avoid anarchy. And I think we're at the, we're as a close to anarchy as we've ever been in modern times. I think we're in a depression. So I'll tell you this. I think that we're in a depression like the 1930s. But the difference between the 1930s and now is the federal government's

response, right? In the 1930s, there was no response. So nobody got helped. The banks were allowed to fail. Everything was allowed to kind of go under and where there were breadlines and there was massive homelessness. Today you have massive government response, right? And so the massive government response is masking over some of the natural symptoms of the depression. And you know what? It's hard for someone libertarian leaning to say this. It's the only right choice. There is no other And we're just going to have to get used to it. Those of us who grew up lovers of the free market, we're just going to have to suck it up and just say this is the new world that we're living and it's not going to change and can't change. I'm curious. So, you know, thinking back in 2008,

2009, that was truly a national crisis. And it basically hit everywhere at the same time and arguably to the same severity. This time, I mean, you know, I'm in New York and obviously, people think it's going to be pretty bleak here for a while, but I was just in Austin, Texas for a while, and people, this is booming and a lot of people are moving there. And so I'm curious how you see the sort of bifurcation of the economy, where it's not just not necessarily a national recession or a national depression, but a simultaneous boom in one place, boom in some real estate markets, boom in some office markets, and a crash in others. That is a very accurate assessment of the way things are right now, which makes it very very interesting in the sense that there are definitely going to be winners and losers. And that's, you know, it's not fun for the losers, but it's fun for the people who like to play the game and think they're capable of winning. So, you know, when you talk about real estate, when you talk about anything related to the economy, And when you talk even about societal constructs, there's a massive competition going on right now for all those things.

And you just described it very well. And it's going to be, it's going to be something to behold. So you just sort of describe the challenge. I mean, A, we've had this extraordinary government response so far. We'll see what further is going to come. But you also sort of describe this sort of sense of anarchy. Does that exacerbate the fact that different parts of the country are experiencing this moment so differently? I think that what's likely to occur is rational things will occur, meaning investors, companies will go to places that they feel can deliver things that benefit companies and their constituents, primarily their employees.

So companies will move from places where perhaps physical safety is not as certain or fiscal imbalances create a need for higher taxation. And they're going to move to places where physical safety is perceived to be better and taxation lighter. And that's true for employers and it's true for the wealthiest of the communities who pay a lot of the taxes. As you know, New York 50% of its budgets paid for by 1% of the taxpayer. So that creates this downward spiral. It's very, very hard to undo. And then a very bullish spiral for the kind of recipients of these movers and the states that people are coming to. So that's how that ultimately plays out because if you play it out to its logical conclusion,

you're going to have dystopian cities around this country, and it's going to be really weird. And the federal government has to make a decision, I think, about what is the United States, right? I mean, there's some really big questions that really have never been asked for a couple hundred years in this country that will need to be asked if this plays out the way I think it will play out. Okay, well, Ethan, we'll have to have you back

on, I guess in a few years' time to see how this all shakes out and talk about it some more. But Ethan Penner, thank you so much for being on all thoughts. Really appreciate it. Yeah, that was great, Ethan. Pleasure. Thank you. So, Joe, are you looking forward to your dystopian city future in New York? I am. You know what? I took a walk yesterday, sort of my first day, sort of really exploring because I was doing my required two weeks quarantine. And I don't know. It didn't feel, I don't know. I was not as alarmed as other people were by the state of the,

by the state of the city. There weren't like people driving around in weird trucks and wearing like masks and stuff like madmacks and flowing, flame throwers. No, I'm like, no, I think people on the news and blogs like talking about what a dystopia of anarchy is New York. Mostly it just sort of seemed kind of quiet. Okay. Yeah. That's not quite anarchy, is it? No. All right. Well, I really enjoyed that conversation with Ethan. It's great to talk to someone who invented CMBS, obviously, but beyond that, one thing that I always find fascinating in all these conversations about real estate is the mechanics of it and the different incentives of all the players involved. And I thought he laid those out really well when it came to CMBS, the difference between traditional

lending versus having a group of private bondholders and also the interests of the special servicers. That was great. That was really interesting, and I hadn't thought about that at all. And it also seems it's extremely important to sort of have a feel for all these different incentives right now because of this sort of requirement, at least in the short and medium term, that the tenants, the underlying tenants be given some sort of break, right? Because if a bunch of stores were to just completely board up and go out of business, then that could, you know, crush a neighborhood for a long time, whereas if they're allowed to hang on for four months or six months or maybe even a year as we get a vaccine and life returns to something resembling

normal, that maybe they can open up and some sort of normalcy can exist. But everyone in that chain has some sort of incentive and do landlords hold out for maximum rents? And can the landlords renegotiate with the lenders so that they have time to give their tenants a break. There's sort of all kinds of complications just to get through what is going to be an extremely complicated time. Absolutely. And again, it kind of makes you, well, you asked about price discovery in this market, and it really makes you think about how much of that is going on given the timelines

involved and given the fact that a lot of transactions just aren't happening at the moment. Shall we leave it there? Let's leave it there. All right. This has been another episode of the Othlots podcast. I'm Tracy Allaway. You can follow me on Twitter at Tracy Allaway. And I'm Joe Wisenthall. You can follow me at the stalwart. And follow our producer Laura Carlson at Laura M. Carlson. Follow the Bloomberg head of podcasts, Francesca Levy, at Francesca Today. And check out all of our podcasts at Bloomberg under the handle at podcasts. Thanks for listening. You can get the news whenever you want it with Bloomberg. News Now, I'm Amy Morris. And I'm Karen Moscow here to tell you about our new on-demand news report, delivered right to your podcast feed. Bloomberg News Now is a short five-minute audio report on the

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