Quinn Barton Is a True Expert of CMBS

Quinn Barton is a certified expert of commercial mortgage-backed securities. As the head of CMBS & CRE strategy at 400 Capital Management, a $7.5 billion structured products investment manager, Barton oversees asset-backed investments of single-family mortgages, CMBS, CLOs, asset-backed securities, and high-yield credit bonds. 

Barton sat down with Commercial Observer to discuss his three-decade career, primarily how he’s seen CMBS evolve from the ground floor, and what concerns him about the rate of distress across the sector today, where he opined on capital markets, pricing, and current risk-management practices. 

This interview has been edited for length and clarity.

Commercial Observer: What is the background of your career? And how did it lead you to where you are today? 

Quinn Barton: It’s been a pretty straight line, actually. Coming out of college, I got into a bank training program for real estate credit, and I’m still at it. I initially worked at First Union, in the credit training program, before I transitioned to National Cooperative Bank in Washington, D.C., where I started working on the securitization of multifamily co-op loans that the bank was originating. Upon finishing business school in 1994, I moved to New York and onto Wall Street, and have basically been in finance, trading, investment management ever since. I’ve been with some large sell-side shops, as well as most recently, really the last 16 years, on the buy side. My last sell-side job was running the CMBS trading desk at Bank of America, which I exited in 2009. After that, I spent 11 years at a real estate private equity firm called Carmel Partners, which is an apartment sharpshooter, and I oversaw all their debt investment activity, including buying the B-piece investments from Freddie Mac K-deals, doing distressed note purchases. Five years ago, I transitioned over to 400 Capital, where I oversee all of our CMBS and CRE strategy. 

You’ve been on both the buy side and the sell side. Could you tell our readers about the differences between those perspectives?

It’s an interesting question. So in 1994, I joined J.P. Morgan Chase’s securitization program when it was at Chemical Bank, and that business unit was really borne out of the fact that the bank had a lot of real estate owned credit problems stemming from the recession of the early 1990s. That issue is really what was part of the advent of the securitization program. And so, all across Wall Street, that’s when CMBS was invented, and I was also on the ground floor of that. It was a matter of underwriting for a securitization exit versus a long-term portfolio hold. So my sell-side experience was on both the origination side, as well as the secondary trading, and primary issuance of CMBS bonds. 

And so, the securitization business has been a very robust way of just allowing loan originators to transfer the risk to the ultimate holders or buyers of that risk. On the sell side, you’re really renting that risk or housing it on a short-term basis. On the buy side, you’re going to ultimately live with all the outcomes over a much longer time horizon. That’s the biggest delta, just the length, or the tenor, of the overall period during which you’re underwriting and holding that risk. 

How have you seen CMBS evolve over these last 30 years?

There’s been CMBS 1.0, CMBS 2.0., and now we’re kind of in CMBS 3.0. It’s not perfect, but there are advances and lessons learned at every point along the way. The one big defining moment for CMBS was the GFC [in 2008-2009]. The piling on and the resecuritizations and the really frothy appetite for risk, and this idea that outcomes are always gonna be fine. That proved not to be the case, and there were significant loan losses that bore out as a result of the GFC. This period saw really aggressive lending terms, where you were thinking about cash flows as being pro forma (i.e. hypothetical), instead of what was actually in place, the underwriting of pro forma income became more prevalent. That was dangerous because not only did a lot of cash flows fail to meet what the pro forma income was underwritten as, but it actually went backwards the other way in the post-GFC recession environment that we had. So that just helped exacerbate what the losses were. The big lesson learned from GFC is that it’s not a good idea to underwrite pro forma income. 

What about CMBS 2.0?

And then, obviously, with CMBS 2.0, you had Dodd-Frank [Wall Street Reform and Consumer Protection Act of 2010], and the idea that the risk should not just be about Wall Street repackaging it, and fracturing it, and selling it to different people. The purpose of that legislation was to ensure, for the benefit of all constituents, that the first-lose buyer will have done their homework, and was willing to hold that risk, because other people might be relying on it up the stack. So it just gave a little bit of a better safety net, if you will, to the quality of the strength of the subordination. 

During that period, from 2009 to 2021, we were living with effectively near zero percent interest rates. So the Fed’s monetary policy started changing in 2022, with the last of the raises occurring in 2023, and it created a sea change of effects on real estate valuations, and therefore, the outcomes on loans, because cap rates went way up. With a higher cap rate, the real estate will be worth less. So a lot of things were underwritten or purchased to the idea that interest rates would just be at just these very, very low single digits forever, and we all knew that wouldn’t be the case, but it finally changed course when inflation reared its head. 

What is the state of CMBS today? CMBS 3.0, if you will.  

It’s doing well, it’s robust, but you have a big bifurcation now between SASB (single asset, single borrower) and conduit. So the overwhelming lion’s share of CMBS, in terms of volume, is getting done by large sponsor deals. A lot of bigger, more capable sponsors rely on SASB, and those deals are done on a best-efforts basis. So at one point, Wall Street was principal to a lot of that risk. The bank might make a $200 million or $300 million loan back in the day, and own the residual risk, and hopefully, they made profit, but if spreads moved, things didn’t go well, then they lost money. So today, all that SASB loan production volume is really done by the street on a best-effort basis (i.e. the ultimate pricing to the borrower is going to be based exclusively on the price at which the bonds are sold). That’s one big sea change. 

What about the conduit business?

The conduit business is becoming a much smaller fraction of the overall CMBS volume, it continues to be moderate in size, especially because it doesn’t have what are called big fusion loans, or the pools, which fused large loans with just generic conduit. But a lot of the large loan business has been taken aside.  

CMBS delinquencies are at an all-time high of 13 percent. Are you concerned?

It’s very disconcerting. It’s not healthy. So when I say the CMBS market is healthy or robust, I’m more referring to new production. A two-way flow exists today. Two or three years ago, borrowers would tell you it was nearly impossible to get a real estate loan, especially during the Fed rate-hike cycle. Some of the ice thawed, so it’s much easier today to get a loan. It still not easy, because the underwriting for new production is a lot more stringent than it was at different points in cycles. And when there are losses, when there are bad outcomes, the first thing is the street’s gonna pull back and say, “We have to be quite careful,” and it’s almost like walking on eggshells to make sure that there’s no bad loans being originated. 

What is the source of the problems?

Bonds are being placed and sold without issue, and a lot of deals are oversubscribed, but that’s all new production stuff. Take everything that was originated pre-2021, at historically low cap rates, there are a lot of bad outcomes because there are a lot of loans that were made under the assumption that trees grow to the sky. And so, when loans are maturing, and the new loan does not provide sufficient proceeds to pay off the old loan, the buyer is faced with a decision: Do they put in new capital to resize the loan they can get, or do they decide that their equity may be sufficiently impaired that they’re willing to walk away? Of all the loans are maturing, 65 percent are paying off on time as agreed, 35 percent were finding their way into special servicing. But what’s quite alarming is the outcomes of so many of the liquidations coming out of special servicing are unfavorable, and they’re oftentimes surprising to the downside, which is to say, the loss severity.

Is this a slow-moving crisis?

I would say that it’s buyer beware for deep credit buyers and holders of bonds that are credit bonds from the 2012-2014 pools have been cleaned out. There are a few straggler loans, and some of those notes have been extended. But it’s certainly a cause for concern for loans that originated in the zero percent interest rate cycle, and the pre-work-from-home era. That older vintage, it’s called the seasoned vintage. The office outcomes in those are particularly troublesome, in many cases, because of the large capital costs when you lose tenants, and the cost for loans in special servicing can be quite high, the loss severities can be quite alarming.

What is one trend that you have your eye on in 2026 above all? 

It’s the credit outcomes. We’re a credit shop. We’re analyzing a lot of collateral. And so, it’s just paying attention to valuations for the underlying real estate that’s backing the loans in the pools and the direction in which some of those real estate valuations are taking. We anticipate a little more moderate, or easing, Federal Reserve policy. So that may help on the margin with cap rates, but we’ve got our eye on outcomes for larger loans, ones that are more significant exposures than pools paying off on time. 

What’s the best advice you’ve got in your commercial real estate career? 

It’s really about attention to detail. Keep digging into another layer. There are so many things that can go wrong, so risk mitigation is the most important takeaway to offer somebody. And so, it’s really just understanding the property type, the markets, the submarkets, the borrower, just the nuances of the tenants and the leases. Credit underwriting and risk management is what I would articulate. 

Brian Pascus can be reached at bpascus@commercialobserver.com.