Commercial Real Estate Reset: Finding Value Across Debt and Equity

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GREG HALL: Hey, everybody. Welcome to another episode of Accrued Interest, PIMCO's podcast dedicated to serving financial advisors and their clients. As always, I'm your host, Greg Hall. I lead the wealth management business for PIMCO here in the United States. Today's topic is commercial real estate. Commercial real estate is an area of investment many of you are familiar with.

It's been through its share of ups and downs over the course of our careers, and certainly in the last five or 10 years as the private REIT phenomenon has come, has ebbed a little bit, and maybe on its way back. I'm really excited today to have with me two of my favorite people at PIMCO. We have Serai Incoglu. Hello, Seray. Thanks for joining us.

SERAY INCOGLU: Hello. Thanks for having me again.

GREG HALL: Seray is here in New York with me, and then first comer to the podcast, but I think we'll put some of his predecessors to shame with his intuition and insight, Matt Tuten. Matt is an Executive Vice President in Newport Beach with us, runs our commercial mortgage-backed securities business, and plays a big role in our overall commercial real estate investment business here at PIMCO. Matt, thanks for joining us.

MATT TUTEN: Thank you for inviting me on, Greg.

GREG HALL: It's a pleasure to have you here. It's great to have you guys both here. Seray, if any of you remember listening to last year's episode, which we recorded at about this time, we had Seray on with Russ Gannaway. Russ, a Managing Director who has oversight over a big swath of our real estate activity here at PIMCO.

And I introduced Seray at the time. She's our Global Head of Asset Management within real estate credit. She's the one making sure that the people that we lend money to are sending their interest checks and their other payments back to us, and that they're running the properties in accordance with the business plans and all the milestones that we put in place to make sure that we've lent against a product that is gaining value and not the reverse. Right?

SERAY INCOGLU: That's right, exactly. I think there's a misnomer about real estate credit and it's just clipping coupons. And the last cycle has taught us that it's not just clipping coupons, that it's way beyond that. And active asset management plays an extremely important role when it comes to credit or equity.

GREG HALL: Yeah. These are living, breathing assets that we need to make sure are staying healthy as you think about the credit quality going forward, well, let me just start. I want to zoom out a little bit. I think one of the things that's interesting about real estate, and this was even true a year ago, but one of the things I notice as I talk to advisors, as I go to conferences, real estate was the only thing on the agenda going back 5, 6, 7 years.

It has left the agenda of a lot of investment conversations. We had some bumps in the road. We had 2022, which was an ugly year for a lot of yield-oriented assets. Some of the private REITs out there got into different degrees of trouble. A number of industry commentators, and we have had growing conviction that things are beginning to turn around or have turned in real estate. So maybe both of you could just give us your assessment of where we are in the cycle at this point. What's the state of the market?

SERAY INCOGLU: Maybe I'll start and then hand it off to Matt. So we're seeing, and it's actually played out just as we had sort of discussed last time around. Right? So last time around we were thinking, okay, we're beginning to see sort of the floor levels. And since then, values have increased by about two and a half percent. So we're seeing some inkling of value appreciation.

Most of it has been led by strip retail, industrial, and office. Right? So this is the first time that we saw actually a positive print in office valuations. Multifamily, pretty flat. Hotels, slightly up. Transaction activity picked up since that timeframe. We were talking about sort of forced transaction activity led by this maturity wall that everyone talks about. You know, the maturity wall is always prevalent in the real estate market.

It just became steeper, right? So when you saw real estate values drop, rates increase, liquidity pull back, a lot of capital markets volatility—Matt can speak to what transpired in the CMBS market—transaction activity dropped. So if you're a lender and you want to get paid back and you have a maturity, you can't force a sale at the time and there's no one to take you out.

So there was a lot of this extend-and-pretend game that extended that maturity wall. But guess what? Everyone's growing impatient. Lenders want to get paid back. And as a result of that, we saw transaction activity pick up by about 15–20%. It's still very muted when you compare it to historical levels. But what that means is that there's a lot more activity now in the equity space that we think is interesting.

GREG HALL: I guess what that also means—maybe I'm drawing too much of an extrapolation here—but if pricing's up kind of two and a half percent, let's just say we're bouncing along the bottom, right? And you've got people transacting at that pricing. It does sort of validate pricing, right? So you feel more confident than you might that what people are showing in their NAVs actually has some reflection on reality.

SERAY INCOGLU: Yeah, that's right.

GREG HALL: Okay. Interesting. And Matt, the maturity wall, really important concept. I think most advisors listening kind of have a natural sense of this, but obviously anytime there's a boom in an asset market, you've got a lot of people financing a lot of buildings, and a lot of things.

And usually what happens is when the music stops playing or somebody hits the light switch and you stop financing new purchases because you start to feel a little bit less sure about the underlying environment, there's this whole vintage of loans that all need to get paid back over a relatively short period. And I know I'm not explaining this to you, but just for the benefit of people listening, let's explore that concept in the private market and the CMBS market. How are you seeing that play out on the desk?

MATT TUTEN: Yeah, I think one big thing that's changed is liquidity has just improved massively in the last year as capital markets have come back. If you think about where we were a year ago, banks had taken a big step back from lending, and there's a justifiable reason for that in that a lot of them were still trying to figure out what CRE exposure they had, where the bottom was, where they were supposed to mark their positions, how they were going to get out of certain positions that were over-levered because transaction volumes were low.

And with the asset cap being lifted, with larger opportunities coming into the space, you're starting to see a large pickup in origination volumes. You're seeing transaction volumes pick up. As I said, we were down 80–85% transaction volumes in 2024 versus a normalized year.

Those have come back, but they haven't come back nearly to the same level. But the one thing, to your point, that we're seeing is a pickup in acquisitions. It's always easier to lend when you know what the spot value is, when you have fresh equity coming in, versus doing a cash-neutral refi where you're sort of guessing on the spot value because there just haven't been justifiable prints.

I mean, everybody had to throw out any sort of sales comps from previous years because of how far asset volumes had fallen. CMBS market alone, origination volumes in 2025 were up 30-plus percent. So you definitely saw, as spreads were tightening, CMBS become a more important part of the lending market than it had been going in because of the bank retrenchment, and you continue to see that today.

So I'd say the liquidity pickup has been really beneficial to CRE because what it's really helped on are the marginal assets, the ones where they were a little over-levered but not necessarily underwater. And you're starting to see more successful outcomes on refinancing. So I think the more bullish and aggressive lenders have been. And so that's been a big key help, seeing some of these legacy positions actually pay off. And I think that's something that we were missing in 2023 and some of 2024.

GREG HALL: It's interesting. So just a lot to unpack there, but when you think about the importance of fresh new money coming into the market, I'll use my words, but it's one thing when somebody already owns the asset, they're looking to refinance it, and nobody is stepping in to say, yeah, it's worth a hundred dollars, right? That I've got it on my books at a hundred dollars. I borrowed $60, $65 against it.

I'd like to borrow $65 from somebody else to pay off the guy that I borrowed $65 from. And then we all just have to agree that it's worth a hundred dollars, which is different than somebody coming and saying, I'll buy that property, I'll pay a hundred dollars for it, and if we're wrong about the value, I lose the first dollar. Right.

So it's just a more intense underwriting that happens when purchases are occurring versus just shifting underneath the lenders, which is a nuance that I think advisors can appreciate probably in their own experience, buying houses or helping clients buy houses.

It's not dissimilar. A purchase is quite different than a refi. But I do want to ask you, the liquidity that's come back into the system, compare that to what it looked like a few years back. Are we rocking and rolling here with ample liquidity, or is it just getting a few positions off the starting blocks after a market that's been pretty dead?

MATT TUTEN: You may hate this answer, but it's a little bit of both. To be frank, there's a very overused term in the last six years of K-shaped recovery, but I think everybody's sort of accepted that as the path for real estate.

GREG HALL: I think we've been using it more than anybody, so that's good, Matt. We'll let folks know.

MATT TUTEN: Sorry to call us out there, but no, it's a term. We use it a lot, right? We use it in consumer credit as well, right? So it definitely is a factor in CRE. And that's not to say office is down and multifamily is up. There are submarkets where there's stress in all asset classes, and there are markets that are really good.

I think it really depends on where you're lending and what your conviction level is on what rent growth prospects are. And because if you don't have an acquisition, you're doing a refi, you've got to do a form of pro forma underwriting. And Seray knows a lot about that from prior life, global financial crisis, and what got capital structures into trouble.

And so when you have that sort of identifiable basis today, and what something's worth, it's just a heck of a lot easier. But I would certainly say that liquidity coming back in has been a material driver of positive outcomes. But that's not to say there haven't been negative outcomes as well, but that's what creates the alpha generation. And what's so exciting for us is that you can pick and choose your spots.

It's not the rising tide lifting all boats. It's lifting some boats. And for us, it's our job to find which asset classes and which specific assets are going to be the successful ones and which ones we're comfortable underwriting to that business plan execution that ultimately either gets you paid off at par or in the equity side result in something that performs at your underwriting or even above your underwriting.

GREG HALL: Well, Seray, you had mentioned a few sectors that seem to have finally caught a bid. And I was curious about it. So you mentioned strip retail, office, and industrial. So you want to talk through a few of those sectors, what's happened, and then maybe what we like and don't like. Don't feel restricted to those three, but those are the ones you mentioned a second ago.

SERAY INCOGLU: Yeah, sure. I mean, in terms of the performance, it's also important to know what your starting point was, right? From a performance perspective, retail already had its day during COVID and had a massive price reset, and then the haves and have-nots have already played out. So the ones that are withstanding, which is typically strip retail, are outperforming.

Grocery-anchored retail is outperforming. But you just have to still pick your battles in terms of where you are in retail. And it's hard to find the yield there. In terms of industrial, the phenomenon of e-commerce and reshoring has definitely helped demand. The sector was printing almost double-digit rent growth, and all of a sudden, because of new supply hitting the market and rates increased and people were no longer underwriting these double-digit rent growths.

People were like, oh, industrial's not doing great. Well, no one should be underwriting double-digit rent growth as their base case to begin with. And when you look at that sector, it's actually held up fairly well if you're concentrated in infill locations. And when you look at essentially all of these sectors against the bottom, we're still fundamentally doing really well.

So when you compare where the vacancy levels were for industrial during the GFC and how much rents had dropped, rents were dropping 10% annually. We saw a 1% reset in rents in industrial last year. So comparatively, the fundamentals are still quite strong. Multifamily, we still—I mean, we're obviously huge at PIMCO in terms of having the research and the analytics and the granularity that's required to participate in the market.

But given the affordability concerns and just the persistent housing shortage, we're really constructive on multifamily. And it's held up quite strong as well. I think it was printing at 5% vacancy levels still, despite all of the new supply. And one thing that I want to mention on the new supply is that we heard a lot about Sunbelt, tons of new supply, some absorption issues in the market. Well, guess what?

That has dropped off a cliff, right? Because when you think about the build timeline for a multifamily asset, about two, two and a half, three years depending on what style it is, you had to have started construction three years ago to deliver into this market.

Well, if you go back three years, there wasn't a lot of construction lending available. And because of inflation, construction costs were really high. So you're going into this sort of supply-demand equilibrium for the asset class, which tends to perform really well.

GREG HALL: Yeah, I think that we talked about this a little bit, the cyclicality of some of these asset classes and just how important it is for advisors to understand the length of the cycles and what creates them.

And you're describing with real estate just how, in boom times, you're extrapolating double-digit rent growth and every deal pencils. And so you build a lot of buildings, to make it simple. And then something happens in the economy, or it just slows—it doesn't have to fall over like it did in the GFC—but it just slows, or some of your assumptions are wrong, and then those deals don't pencil any longer.

And so you stop building the buildings, right? And then by the time you realize that things are back and good again, you haven't been building buildings for three years, right? And so you do have…

SERAY INCOGLU: That's right.

GREG HALL: …which is great. It creates opportunities for you guys, obviously, to express views in advance of when markets normalize. Let me ask you though about office. I mean, we're sitting here in New York City. This has been the thing that we've talked about since the early days of COVID. What's our evaluation of where we are in the evolution of the modern-day office and that trend?

MATT TUTEN: Office has obviously been very topical. You think about where office has been going back to March 2020. Everybody wanted office exposure. Nobody wanted hotels. And then when rates started rising, people started to realize that office was going through a secular downtrend and nobody wanted office. So that created a lot of interesting buying opportunities for us, I would say in 2022, 2023, especially on the public side.

But office is certainly one of those asset classes where there's still a lot of distress to be worked out, especially in major US markets. New York has obviously come back very strong. San Francisco has certainly seen tailwinds from AI and technology-driven leasing. Sunnyvale, for example, Bellevue. There are positive trends in certain markets, but nowhere close to where values were in 2019, 2021.

So there's still a lot of stress playing out. There's just a lot of defaulted assets. There's a lot of defaulted loans that are still on balance sheets that need to be sold. Where does that buyer come in? One positive trend for office that's playing out over time is the amount of conversions taking place in certain submarkets. You're seeing millions of square feet being converted to multifamily in Philadelphia.

You're seeing downtown New York, especially on Broad Street, has seen multiple conversions, multiple planned conversions that have been announced. So you are seeing some of the more what people had called obsolete office being taken out, and over time that should help. But the one thing that no one really knows the answer to is what are the impacts from AI on office leasing?

New York probably continues to do very well as the financial center of the world. That's a market that has separated itself. But as you start to see headcount reductions, whether they're real or not, to date based on pure AI economics and AI impact is probably a topic we could spend an hour on in and of itself. But I think that's the one asset class that is probably most negatively affected by AI if you extrapolate to headcount reductions.

And so office is a bit all over the place. There's a lot of stress that needs to be worked out. That incremental buyer who has to make the math work on a conversion or wants to operate that class B, class C asset, you're still trying to find the bottom on some stuff. And so I think that's a story that's going to play out for the next, honestly, two to four years.

I mean, we said survive to ‘25 in 2022, 2023, and that just did not play out. It's going to take some time. As Seray well knows, the nature of CRE workouts, the can has been kicked for a lot of lenders. And it's going to take several years to work out of the distress that is on balance sheets and in securitizations.

SERAY INCOGLU: I actually think AI is going to be a game changer for office. And we're talking about that in investment committee, heated discussions around office.

I was in meetings with financial advisors and someone said that their wife is a partner at a law firm in New Jersey, and they just let go of 40 paralegals. And so what does that mean for office use for law firms in the future, which are one of the largest users of class A office space? So I think the verdict is still out.

What I'll say is in terms of have we been looking at office, we made our first real estate credit investment in an office where we made a loan most recently after three and a half, four years of not really touching office. And that was actually a great profile. It was a single-tenant user.

And we had a lot of intel through our credit research analyst team to look at the financials of the tenant and rated as a shadow rating investment grade. So long-term lease, investment-grade cash flows where you're getting paid potential low double-digit returns at 60% LTVs. That's the profile in office that we will continue to do. But obviously the profiles are not only there. There's a vast majority of outcomes.

GREG HALL: Yeah. It's fascinating. And of course we're starting to see the real-world implications for paralegals and other job profiles. So you guys will be looking at that, and then I think combined with Matt's commentary, there's just no one approach to the office market that really makes sense. It sounds like it's not even sensible to talk about it as a single market in the way that we were probably pretty comfortable doing leading up to COVID.

That's interesting. You mentioned conversions, Matt. What are we turning office buildings into if they are no longer office buildings? I enjoy a good game of pickleball. I've been happy to see a couple of buildings in New York City get converted into sports centers with pickleball courts. But I don't think that will sustain the world economy for the next century. So what are we seeing?

MATT TUTEN: That sounds like when struggling malls added trampoline parks into vacant anchor spaces. It's not going to save the mall, but it's fun to talk about and drives a little bit of foot traffic.

GREG HALL: Yeah. And it's not bad for the orthopedic surgeons either when everybody—

MATT TUTEN: Those Achilles. Yeah. I hear you. Look, it's a mix, but it's mostly multifamily. I'd say we're definitely looking at some assets that are being converted into hospitality. There's some assets in New York that we were a part of that are going to be—it depends on the layout.

It's very interesting to look at some of these studies that are done to see what a building can be converted into, because it really depends on the floor plates and obviously depends on where you are and where the demand is. So most of it is multifamily. Some are multi-use. Some are converting ground-floor retail, maybe some office in the lower floors where they don't have great views, and then going either hotel or multifamily on the top.

But it's a lot of multifamily, and it makes sense in New York because of how strong the multifamily market in general has been there. Obviously ignoring the rent-controlled, rent-stabilized that is currently undergoing a lot of distress and political tension. But the market-rate units in New York have continued to be very strong. So you see why people have been making that bet.

But the one thing I'd say about conversions is that's not going to save the lender. That's just going to take supply out because conversions, you're trading at really low basis versus where these loans were made and where these assets were purchased.

You're talking about values down 70–80%. Even though the value they're paying for the building or the land can be a fraction of the overall conversion costs, it's really going at pretty distressed value. So it's not something that's going to save a lender in most cases where an asset can be converted. But for taking supply out of the market and maybe offsetting a little bit of some of the AI disruption concerns or just vacancy and sub-vacancy in the market, it can be helpful on the margin, but it's certainly not going to save office assets.

GREG HALL: Have we seen lenders, either in bank form, capital markets, or private, have they acknowledged that, or is that still sitting on the books at par for the most part awaiting a transaction that would force them to acknowledge it?

SERAY INCOGLU: Most have acknowledged by this point. Now the extent of the acknowledgement I think will vary depending on the lender.

GREG HALL: Yeah. I mean, is it marked right? That's the thrust of my question.

SERAY INCOGLU: Yes. I mean, I think the mark sometimes can vary. I'll say that. So let's say there's contractual cash flow today that implies a strong mark. Now the re-leasing potential of that building is really what you should be marking to. And all the noise that we talked about, the impacts of AI, I don't think has made its way into the valuations yet.

GREG HALL: Right. That's interesting. So you've got a legacy tenant who might be running out the last bit of their lease. The monthly rent rolls look fine right now, but either you've got to release it as an office or you're going through a conversion that adds a lot of risk.

SERAY INCOGLU: That's right.

GREG HALL: So you just don't know what the offtake is. It could be great, but you're taking risk and lenders haven't acknowledged that. So that's interesting. So on the one hand, you guys are both pretty comfortable that equity values on average have gotten down to a level you feel is underwritable, but there's still legacy issues on the debt side working their way through the legacy lenders.

SERAY INCOGLU: That's right. I mean, I don't think real estate can be painted with a broad brush. I think people have gotten lucky and ridden out the wave, but I think it requires a lot of data analytics and research and strong underwriting and outlook assumptions. It's not really about making a heroic call on rates and the markets today.

It's really focusing on non-discretionary, durable cash flows in markets where there's strong in-migration and strong macro-level trends. And that's not easy, but it's also very exciting. I think the uncertainty investors don't like, but there's also a lot of opportunity that comes with uncertainty if you have the right framework and then the active asset management piece of it.

MATT TUTEN: I think also something that impacts a lot of what you're talking about, mark-to-market, is that because transaction volumes have been relatively low, because lenders or borrowers have kicked the can the last few years, part of the issue is that a lot of people have valued commercial real estate historically on a cap rate basis. Some of the market has simply changed to a per-pound basis, a per square foot basis.

And where is replacement cost and where could you build something today versus where you could buy this? And the cap rate may not make sense to you. You may have thought you were marking something at a 7, 8, 9 cap, trades at a 13 cap because your in-place rents are significantly above market.

GREG HALL: So just for advisors listening, I mean, again, I think most advisors listening probably, you know, commercial real estate's been an investable asset class, I mean, forever. And for a lot of advisors it's a big part of what they do, but cap rate just being essentially, it's like the earnings yield of the building, right? It's your rents minus your expenses over the value you assign to the property.

It's the opposite of the PE multiple, right? The same way we'd look at a dividend yield versus a PE multiple in stocks. And what you're saying is that people don't feel like they can quite predict what they're going to get paid in rent. They can't quite predict their expenses. So they're literally just asking themselves, what would it cost me to build this building today?

MATT TUTEN: Yeah, there's a lot of opportunities that are being pitched as you can buy this at a discount to replacement value, not that you can pick it up at a 10% cap rate. It's really what the land's worth. And that's not a great starting point if you're a lender hearing that on the value of your asset.

GREG HALL: If you've already lent to the asset, but if you're a prospective lender and you're looking at it for the first time, I would imagine that's a pretty conservative underwriting under most circumstances.

MATT TUTEN: No, that's right. And especially on the equity side, it can allow you to outperform your underwriting too, because you're going in with relatively conservative assumptions.

And that's what creates these opportunities because a lot of people aren't, unlike 2021 multifamily at a 3% cap rate where people were assuming really high growth rates into perpetuity, now people are assuming zero to 3% rent growth. And that provides opportunity to outperform on the upside. And so I think the equity underwriting is really what has changed a little bit versus pre-rate rise.

GREG HALL: Nice. So we have diminished expectations. We've gone through a cyclically low period. It's reset everybody's expectations to things that are at least more realistic, if not even possibly a little too conservative in some places. So when you guys step in as an equity buyer or as a lender, because we can do both, you're doing so against a backdrop that's a lot more conducive to generating returns.

How do we feel about equity versus debt right now? The last time we talked, Sarai, we were still very focused on lending as our primary activity. We just felt like that's where you created the outcomes that you wanted without taking on risk that you didn't want. And we were waiting for the market to find its bottom in a more high-conviction way. Is that still the case today?

SERAY INCOGLU: We've seen a lot more opportunity, I'll say we've always seen opportunity, but a lot more interesting opportunity in the equity space where we've participated. So when I look at our credit portfolio last year, if I looked at the last 20 payoffs, 19 of them had come from refinances and only one had come from sales.

And that number has really shifted now where you're seeing maybe one-fourth of the portfolio payoffs come from sales, which means that transaction activity has picked up and then people are seeing opportunity, and so are we. So most recently we purchased a multifamily asset that was really driven by a motivated seller that needed the cash to fix issues in some other parts of their portfolio.

And we were able to acquire this at 30% below where the sales comps were trading, and the in-place rents were 14% below the current market. And that was because the sponsor had liquidity issues. He didn't have the right payroll and the right staffing to really operate and lease the project. So you're seeing a lot of opportunities stemming from distress, but in an excellent submarket where there's not a lot of supply, where market vacancy is 5%.

So it doesn't mean that the real estate in and of itself is in distress, but sometimes you can have these situations. And the best part of it all is it had assumable debt of 12 years fixed at 2.8%. So you can find these really interesting equity-type opportunities in the market.

And I think it will continue to be the case. I like real estate credit. I think it should always have a space in investors' portfolios just because of the historical track record, low loss probabilities. When I look at our credit book, it has withstood COVID, multiple wars, rates, and it's quite phenomenal because it had this 30–40% subordination and now you're actually still getting paid for that risk.

Now other people have figured out that that's a great opportunity, so you have to pick your spots and have your competitive edge, but I think it should always be a part of a normalized portfolio.

GREG HALL: Yeah. So a more balanced approach between equity and debt, which is great. I think in many of our strategies we're always trying to look at relative value between different asset classes and then different parts of the capital structure of the asset classes that we look at.

And we've been waiting for real estate equity to not just unlock value but also for transaction volume to pick up, where people, like you said, a bad holder of a good building acknowledges, cries uncle and says, I just need to move on. I need to sell this to somebody who wants to own it. And the fact that you grabbed that with assumable debt, that's a foreign concept.

We talk about this in the context of the US housing market and I'm sure folks listening who may be looking to buy a house, there's not a lot for sale, or they're looking to sell a house. It is kind of hard when you can't sell the mortgage that you refinanced in 2021 or 2022 with it at a two and change rate. So that sounds like a great buy.

We'll see, of course. Matt, one of the things I wanted to talk to you about as we were thinking about doing this podcast was right now the direct lending market is going through a rationalization. The market is trying to figure out what the right risk level is for these private credit portfolios that have been put together over the last five or six years and may have too much software exposure, maybe grew a little too quickly to have the best underwriting standards.

But the story there has been one of a disconnect between private markets and public markets. The public BDCs that are the analog to the private direct lending funds have been trading at significant discounts to NAV for some time now. And now the private vehicles are seeing redemptions as investors conclude that they shouldn't be holding the same risk for a dollar in one place and 80 cents in another.

What have you seen in REITs versus private real estate markets? What are you seeing in public versus private credit in real estate? And how would you explain to advisors how to think about relative value between public and private.

MATT TUTEN: I'd say there are a lot better opportunities right now in what I'd call the private markets, but also in the hybrid markets that we've been involved with for decades, which people are acting like is a relatively new sector, but is really taking private assets, turning them into public securities or more liquid securities. We've been doing, Jason Steiner has been doing that on the resi side for a decade-plus--

GREG HALL: He was on our show. We did one on asset-based finance with Steiner and Ben Ensminger-Law. So that’s a good call out, Matt.

MATT TUTEN: Yeah, love those guys. They're really good at what they do, and they've led the development of our ability to appropriately structure these complicated transactions.

You think a couple of years ago when the banking crisis happened, we were taking loan portfolios out of regional banks and turning them into our own bespoke CMBS, effectively with CMBS-like structure. But we were sourcing it at a private level, private opportunities at wider levels for liquidity and then capturing that liquidity premium by turning them into liquid securities.

And most recently we've been doing that as well. I'm sure everyone's aware we've been relatively involved in certain digital infrastructure deals that are sort of quasi public-private, where we're able to pick up significant spread versus public securities but still retain that liquidity. And so that's something we've been focused on for several years across asset types. Public CMBS, I would say for us, is not that interesting right now compared to private opportunities we're seeing on the real estate side.

Levels are relatively tight. Structures are relatively weak. Our private opportunities, especially on the credit side, tend to have much stronger lender protections. You also get a lot more time to underwrite these opportunities.

And also I'd say in the CMBS side, it's traded along with the rest of the public markets where we are actually back to the tights of the year we sit today. And a lot of the CMBS market, similar to equities being at all-time highs, similar to a lot of public markets that have rallied significantly despite some of the left-tail risks that still exist with the ongoing conflict, while the private markets have just generally been more interesting and more opportunity there.

So that's why it's so important for advisors to be in flexible strategies that can go across public and private, or can go across equity and debt.

Because there are times when publics are really interesting. You think about 2020, late 2022, all of 2023, that was the time to buy a lot of public CRE debt because that is what was on sale. The transaction volumes on the private side fell down 85% across the market while all the action was on the public side.

And to be able to have dedicated teams and scale in these markets across public and private equity and debt along with our dedicated REIT team that is constantly looking at REIT preferreds and REIT equity is a big advantage for us. And that's what advisors should be focused on. Because again, going back to my point earlier, nobody wanted hotels in 2021, then everyone wanted hotels in 2023.

GREG HALL: And so I think—it's, I just want to underscore that I do think we've got a really good platform. I think we've got a big platform. But I think the mentality that you're describing is actually a really important shift that the market may find itself contending with in the next few years. Most of these private lending businesses that have been created since the financial crisis have been monolithic, one business line.

We lend, we do three-year floating-rate transitional loans to commercial buildings. We make short-term corporate loans to LBO-backed or sponsor-backed businesses. They've been very very narrow in their focus, and you keep doing them over and over and over again. And eventually, like the hammer looking for a nail, you're not really looking around you to see if it's cheap or rich relative to other things you could be doing.

You just keep doing it over and over again until the music stops. And then you realize that you've gone past your sell-by date. And I think what you're describing is something that, frankly, hasn't been the most commercial decision or the most commercial thing that we as a firm could have done over the last decade.

We could have raised probably a lot more money if we'd been willing to go super narrow and keep doing the same thing over and over again. But that discipline, when you want to buy a building, Seray, okay, but do I want to lend instead? Do I get more return for less risk by lending? Okay, but do I want to do that in New York, Washington, DC, Chicago, or San Francisco?

Do I want to compare that to multifamily or a warehouse on the outskirts of Abilene, Texas? The ability to hold all that and make the right decision about relative value, or at least trying, right, that's a framework that I don't think we've seen a lot of people employ over the last decade or so.

SERAY INCOGLU: I'll say it is so important to have Matt in these conversations when we're talking about private credit, just because he has the day-to-day real-time data on what's happening in the public markets to ensure that we're getting paid a premium on the private side.

And so it's great to have the strength of the platform to be able to make those relative value calls.

GREG HALL: Yeah. And it's not lost on us, right? Matt, who has broader responsibilities here, but your day job is working in the public side on the commercial mortgage-backed securities markets, and you just said for all the world to hear that you see less opportunity in your space than what we're doing on the private side.

And that ability to give and take for you guys and for the PIMCO platform as a whole, I think is important. Let's spend, just to round out the private side of things a little bit before we call this for time, I do want to talk a little bit about private REITs. They've gone through a bit of their own reckoning going back to 2022. Maybe they're coming out of it now.

Advisors listening are probably curious about coming off the bottom in real estate right now and opportunities, but also a little timid given what's going on in direct lending. That's not the second category of quote unquote semi-liquid wealth strategies to come under huge redemption pressure. How would you comfort them about real estate versus corporate direct lending as an asset class in these structures?

MATT TUTEN: Well, I mean, one key difference is we kind of already had our recession.

GREG HALL: In real estate?

MATT TUTEN: In real estate. You had Lotfi a couple weeks ago, and he pointed out that CRE had already undergone its own recession back in late '22, early '23. And I think the big difference is where we're lending today, where we're buying assets today is a completely reset basis.

And we're also doing it in this environment with the unknowns from AI, with the rate path being what it looks like, much higher than people expected two years ago. And that's driving us to make decisions today. And so I think one thing for me that I struggle with in the comparison is some of these companies, their major asset is IP in direct lending. And so my confusion is, what's the downside?

What's your worst-case scenario there for recoveries versus you're doing CRE credit, you have picking up transaction volumes, you have what replacement cost is, you have examples from the global financial crisis, and you can underwrite what I think my downside case is appropriately. I think in the direct lending market, when some of these deals go into default, we're still going to see that play out.

And we're very early innings in terms of at least from, you know, the experts at PIMCO's opinion of what this default cycle could look like in direct lending. And for me it's what do the true downsides look like? And when you hit some of those downsides, what happens to that market in general?

Everybody piled into direct lending a couple years ago because they were getting 9, 10, 11-plus percent levered IRRs. But you're getting very similar type risk in CRE now with more identifiable downside. And for me, that's the biggest difference.

You're lending on an asset where, if you're doing your job, it's going to have value at the end of the day, whether you have to reposition it or not. And so it's a very durable asset class that has already undergone a massive reset and basis, undergone COVID, rates, various shocks that have occurred over the last—I’ve been here at PIMCO for seven years—I feel like I've undergone three different commercial real estate crises in my seven years here.

And so you're lending on durable assets that have undergone a lot of pain. And I think that's very different than what the direct lending market is doing or has been doing.

GREG HALL: We've thrown a lot at the asset class over the course of your time here. There's nothing better though than a couple of good crises to get trained extraordinarily well as you're kind of in the first half of your career. Anything you want to add, Seray?

SERAY INCOGLU: All of my conversations this morning were around financial advisors asking about doing the reversal, meaning real estate was out of favor, everyone flowed into direct lending, and that capital now wants to come back, given all the things that we talked about. So that's what their clients are asking.

I think the biggest differential is, yes, reset valuations, but also there's been discipline in real estate. We've improved covenant structures. Leverage levels are lower by five to 10 percentage points. And you have actually really great enforcement rights. You have a mortgage, you can do foreclosure, you have UCC foreclosure remedies.

So you can get to the asset quickly and control your own destiny versus some of these issues that are going to pop up within direct lending. Capital markets is a solution to fix, but you don't have as robust enforcement rights, exit out of those situations. In real estate, you have that.

GREG HALL: So to Matt's point, not only do you have a hard asset underlying your loan, but you've got a piece of paper that legally entitles you to certain acts. It's not a contract, it's something that's a recognized—what do they call it?—a perfected lien in your business. So does that—

MATT TUTEN: And we're still very early stages too, right, of that rotation of capital. I mean that's institutional investors coming back into the real estate space, you're still early stages. So we would expect that to continue to pick up. So that's just going to continue to provide tailwinds.

GREG HALL: It was fascinating to hear you talk about—so I'm glad you spent the morning with advisors. So you came to the podcast—I oftentimes find myself wanting to represent the advisor's point of view, but today you can do that because you're even more current than I am, having been out there this morning.

But that's actually really—that sounds very rational, very disciplined. I'm really glad to hear that the folks that you spoke to this morning are thinking, as they get their money out of direct lending—and they'll get gated, so it won't come as quickly as maybe they had hoped—but thinking about then redeploying that into another value-added strategy. That's terrific. That's fantastic for the advisor community.

Hopefully it's great for their clients. And it certainly will help to reallocate capital in the economy in a way that's hopefully conducive for all of us. So that's a nice note to end on. Thank you both for being part of this today. We've ranged really broadly across the CRE landscape.

If any of you listening want to double-click on any of these topics, want to read some of our broader research on the commercial real estate market or how it compares to other income-producing strategies around the world, please do visit us at pimco.com in the United States or whichever country's website you tend to frequent. If you identify yourself as a financial advisor, you'll be taken to Advisor Forum.

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