Barclays CMBS Research Chief Lea Overby On the Issuance Boom and More

Fittingly, Overby has her plate pretty full today. After all, while impressive new issuance figures set the table for a return to some form of normalcy in the commercial real estate industry, the ongoing onslaught of special servicing transfers and loan workouts from legacy deals are the indigestion that won’t abate. 

The industry veteran arrived at Barclays three years ago, following roles at Wells Fargo, Morningstar, Nomura and BNY Mellon. She hit the ground running— to say the least— and hasn’t looked back. 

This interview has been edited for length and clarity. 

Commercial Observer: You joined Barclays three years ago. What sparked the initial decision to move? 

Lea Overby: I was previously employed at Wells Fargo, and Wells Fargo decided to have a reduction in force that I got caught up in October 2020. It was the middle of the pandemic and I found myself officially on the job market, but I was very blessed to have a good acquaintance who worked at Barclays on the CMBS trading team. Very quickly after the news became public, he asked if I would be interested in a CMBS research role at Barclays. 

Again, this was the middle of the pandemic and things were crazy, but I said “Sure!” and it’s been very exciting since. 

You moved to Boston around the same time. Did the move coincide with taking the Barclays role? 

It was actually the other way around. We were in New York when the pandemic hit — me, hubby, kiddo and a dog — in a small apartment on the Upper West Side. It was awful [laughs]. My husband had a good friend who offered us a place to stay in Boston in March 2020, about a week after the city shut down, so we took it because we just needed more space. We were both trying to work from home, our kiddo was four and a half at the time, and we just had to do something different for our own sanity. So we picked up and moved to Boston to our friend’s home, which he’d been using as an Airbnb. 

We arrived thinking we would be here a few weeks — and here we still are. When I started at Barclays, I really thought we would move back to New York, that was the plan, but by the time all of the return-to-office policies were worked out we’d gotten settled in Boston and my kid was in school there. Barclays has a Boston office, so I asked Barclays if I could be officially transferred up here, and they generously agreed.

These past few years have been an active time for the CMBS market, with well-publicized ups and downs. How was the experience of tracking it all? 

I hit the ground running, that’s for sure. I was very lucky in that Barclays had a senior CMBS analyst [Anuj Jain] already on staff, because there’s been so much to cover. Anuj and I bonded very quickly, and we’ve been incredibly busy on both the new issuance and surveillance fronts. 

On one hand, for the last three years issuance has been so heavy, and there’s this pipeline of new originations and new securitizations where things are new and shiny and great. At the same time, there’s a lot of surveillance stories from things that have gone very wrong. Some of the loans that were made right at the start of COVID are now surveillance problems. We’re stretched thin, to be honest, because both good and bad things are happening in the industry. Most of CMBS history has been very much a new issue story, with the surveillance piece being relatively light. This time has been different as both sides have been busy. 

CMBS issuance has ballooned this year, but much of our content is also focused on that surveillance piece you mentioned. It seems there are two different worlds within CMBS right now, so I imagine you’re constantly pulled in two directions!

It’s interesting — investors have the exact same problem. On one hand, they’re looking to put their money to work in new deals, but at the same time everybody has a handful of problem children that require extra reporting and due diligence and all those sorts of things. So it is an interesting split, and it’s also interesting to think about lessons learned. It’s easy to come out of the COVID experience and say, “Well, office is terrible because of COVID,” or “CRE CLOs blew up because of post-COVID exuberance.” 

We put it all in the COVID bucket, but we can’t just not look at it, because there are still lessons to be learned in terms of how loans should be underwritten. Also, within commercial real estate, if we have a big blowup every 10 years, should that really be all that surprising at this point? Perhaps we need to be thinking about commercial real estate as a more volatile asset than the way we have thought about it in the past.

From your perspective, what are the most prevalent CMBS themes of 2024? 

Increased issuance and an uptick in delinquencies are the big two. 

The other one, and this is more of a commercial real estate thing rather than the CMBS thing, is we are starting to see some price stability, and so we are starting to see an uptick in transaction volume. It started probably over the last two to three months, with the Federal Reserve really telegraphing that the interest rate-cutting cycle was starting, and it does feel like there are more things moving as a result. 

When I look at the surveillance side, borrowers are more inclined to transact rather than sit there today, and I think a lot of it is because the rate environment is improving, and the soft landing narrative seems to be coming true. It’s giving borrowers and new investors the confidence to go and put money into these assets, whereas before maybe they were sitting on the fence. I hate to say it feels good out there [laughs] but it does feel like we’re at least close to some stability in terms of where prices are, the direction of the overall economy and investor appetite — which definitely makes the market feel a lot better as a whole.

In terms of new issuance, any big surprises this year?

I think the thing that surprises me is that office loan origination hasn’t been zero. It’s way down this year compared to where it has been historically, and it’s lower this year than it was last year, but it is still around 15-ish percent of CMBS pools. The other thing I notice with office is that a lot of it is getting reclassified as “mixed-use” because there’s, say, a Starbucks in the base. 

So, people just really don’t want to see the O-word in prospectuses? 

Exactly [laughs] so now it’s “mixed use.” And the mixed-use percentage has been pretty stable, so there could be some office deals that are also getting done that way. 

The other trend that has really surprised me this year, which I also think is healthy, is the multifamily percentage in conduit deals has really jumped up. Historically, Fannie Mae and Freddie Mac took the best multifamily loans, which makes sense. They’re competitive on rates, and, as long as borrowers can meet the agency targets or the agency hurdles, then it’s a good loan for a borrower. With rates coming up, essentially what that has meant is that the agencies have very fixed debt service coverage ratio targets — very fixed — and so many of these borrowers have been unable to get the proceeds that they have wanted by going the agency route. So now they’re going to CMBS. 

On the office side, we’re hearing a lot about the length of time for workouts within CMBS, which can be 18 months or sometimes two years. 

Yes. The thing that I tell people when they start talking about workouts, though, is there was a mall that was securitized in a 2006 deal that just got securitized in a brand-new deal. It matured in 2016, so the thing got extended past maturity for eight years! 

In CMBS we like to think that things are going to move along fairly rapidly, but, when there’s a backup, it just takes time. And when it comes to office, what are the alternative options for that building? 

Indeed. Conversions don’t always work and are super costly.

Absolutely. And on top of that, whenever you start talking conversions, the existing lender is going to take a bath. Whoever’s buying that building is not going to pay much, because they’ll have to put in the extra $300 million to convert it. It’s going to need to happen, of course, but for the lenders who are on the back end of this, there’s going to be a lot of pain.

We’ve been covering some of the distress in the CRE collateralized loan obligation (CLO) side. Seems like a lot of chickens are coming home to roost there, with delinquencies creeping up.

The problem is that most CRE CLO loans are floating and they’re transitional, and rates have risen so much that CRE CLO borrowers don’t have the proceeds or the properties don’t produce enough income to be able to refinance into a fixed-rate loan at rates where they are today. It’s not easy for them to go the conduit or Freddie and Fannie route. This is a real test for that segment of the market, in terms of how many of these issuers can make it through. It seems evident that some will, while some may not. 

So many CMBS issuers are cuckoo for Cocoa Puffs when it comes to data center deals today. What’s your take on this coveted asset class? 

It’s a really good question, because it’s not just CMBS that’s focused on data centers today — everybody is into them at the moment. Here at Barclays, we have a separate team that has taken a hard look at what’s driving the momentum. 

Data centers, like any trend, have a lot of tailwinds — but I also don’t want to stretch that too far, because we’re starting to see the placement of data centers change.

A few years ago, most of these centers would be near large metropolitan areas with this idea of being able to connect very quickly with your user base. The Washington, D.C., area, for instance, is a major location for data centers. Most of them are still there, but they’re also all up and down the Eastern Seaboard, near population centers. The constraint today is around power, so now they’re being put in places where power is easier to come by, which is farther from population centers. So the question is: Will that work? 

I don’t have a good answer, but looking at it from a commercial real estate perspective, I like my assets to have some sort of intrinsic value, and it’s kind of hard to make that argument, watching what happened to the office sector. If you have a data center in D.C. and something goes wrong and you need to go after the land, that land has some value — there’s some intrinsic value to it. Even if you need to tear down the box, the land itself is worth something.

Similarly, somebody will pay $95 million for a building in New York because of the land value. But when you put something in a place that is not near a population center, your next highest and best use is … what? So, I have concerns about those data centers going through CMBS if they start to be more concentrated in non-urban areas.

We’ve seen a couple of industrial properties transfer to special servicing lately. Is this a trend or one-off issues?

I hope it’s one-off. The industrial sector, similar to the multifamily sector, got a lot of deals done in 2020 and 2021. Those borrowers took advantage of really cheap financing, and they took out floating-rate mortgages, and they just haven’t been able to grow cash flows as fast as they would have liked. 

The thing about the industrial sector, though, is that while multifamily rents reset every year, it’s really hard to push rents. You just can’t, and, on top of that, there are affordability issues.There are 1,000 reasons why it’s hard to push rents really fast in multifamily, but in the industrial sector, even when rents have peaked, they can still reset higher. And, so, you can get this rent boost within the industrial sector that you can’t get in multifamily.

I love your research reports and their creative, food-themed titles. Who came up with that idea?

Anuj is a total foodie. He loves good food. So, we started this thing with a food-oriented approach. We have the CMBS Smorgasbord, the Weekly Spreads & Jams — quick one-offs — and then the SASB Scoop, like an ice cream scoop. We never want to be too cheeky with research, of course, because we’re covering important topics that need to be discussed. But, on the other hand, keeping it a little light is sometimes the best thing you can do to turn lemons into lemonade. 

What’s your favorite part of your job today? 

The diversity of it all. You have this as a reporter, where you talk to people, and then you go back and you do your work, and there’s this process that’s involved with taking what you hear and what you learn and turning it into something that people enjoy reading. There’s also the feedback loop that comes with it, and I really enjoy that whole process from beginning to end. 

So, it’s not easy for me to answer the question in terms of what I like best, because I think if I did any one part of this job all the time, I wouldn’t enjoy it nearly as much as I do.