UBS’s Nick Galeone On CMBS Financing’s Potential Next Year (Yes, Including in Office)

After a difficult 2023, commercial lending markets bounced back in 2024. Everyone’s in agreement on that. The real debate surrounds what happens in 2025. 

For his part, Nick Galeone, a managing director of UBS, sees further improvement next year, particularly after the Federal Reserve cut its benchmark interest rate in mid-September. Galeone had already seen a sharp increase in volumes of lending involving commercial mortgage-backed securities (CMBS).

“The table is set for 2025,” Galeone told Commercial Observer in an interview last week. “There’s anywhere from $500 billion to $1 trillion of commercial real estate debt maturing, so you have that backdrop. There’s over $100 billion of CMBS alone that needs to be refinanced.”

After graduating from the University of Notre Dame — Galeone is a lifelong fan of the school’s storied football program — he jumped straight into the CMBS market. He joined UBS in 2002, left briefly after the Great Recession, then returned to the bank in 2013.

The following interview has been edited for length and clarity.

Commercial Observer: Give us the overview: What are you seeing in the CMBS market?
Nick Galeone: We’re seeing volumes increase, at least on the front end, pretty substantially. This year has been good because we’ve gotten some stability in rates and spreads. The numbers are solid. We’ve had about $23 billion of conduit CMBS volume so far, and a total of a little over $75 billion of volume. That is significantly above where we were last year — 145 percent of last year. 

The key thing to me has been the number of securitizations on the conduit side. In conduit, already year-to-date we’ve had 26 securitizations. All of last year, we had 26 deals priced.

That’s something that’s beneficial on a number of fronts. It allows for lenders to have clear exits, more frequent de-risking opportunities and velocity in terms of turning over the book. The credit side of the business is a little bit more disjointed than we’re used to. Having frequent investment opportunities is beneficial and healthy for the market.

The office market has gotten a lot of attention. Are you lending on office?
It’s interesting. There’s obviously significant fundamental challenges in the office sector generally. I think there are more bright spots than common perception. The media helps to fan the flames. The benefit for us has been that with the pullback from other lending sources — namely regional banks — that had been big financing sources for office properties, CMBS lenders now have a lot more opportunities and the ability to be a lot more selective in terms of which offices we do finance. You’ve seen pretty steady contributions of office in conduit CMBS pools. It’s reduced, so, obviously as an industry, we’re kind of restricted by concentration levels in conduit pools. 

There’s more conservative debt metrics that are being targeted for office properties than we’re used to, more conservative underwriting around new leasing costs. That used to be pretty standard across the board. Now people are pretty focused around it. We’ve been very active in the office space over the past few years, both on balance sheet and in CMBS. We look at every opportunity from a conservative vantage point. We’re probably most heavily focused on the combination of submarket dynamics, recent leasing trends at the property and sponsorship.

That can be a combination of equity at stake and the experience of the sponsor. How much has the buyer really been putting into the property? Have they modernized it? What does the traffic look like from a leasing standpoint? From a submarket standpoint, is it a submarket that’s attracting new tenants generally, not just to the building? There are certain larger metropolitan areas that are perceived to be bad markets for office, but there are pockets in those markets that are real bright spots. They’re seeing increasing rents, increasing occupancy trends. It’s looking at each property on a case-by-case basis.

Can you point to examples of office submarkets that are surprisingly strong?
It’s very hard to pinpoint. The Uptown submarket of Dallas has seen some solid demand. There are pockets within Los Angeles where you’ve seen solid demand. We’ve lent in the Bay Area. You’re starting to see activity in Silicon Valley again. New York has pockets depending on the asset class itself. Everybody says the Class A-plus properties of newer vintage are going to do the best, but there’s an opportunity for Class B office, too.

The consensus is that well-amenitized, Class A office buildings are performing the best.
Over the past year, the biggest trend is the ability to finance not just super-trophy, Class A-plus properties within CMBS. Some of it is a function of what’s available. It’s not just the building — it’s also the surrounding area. A Class B building just offers a tenant an opportunity to have lower rent. We’ve probably financed more Class B buildings than Class A. 

To clarify, you can have a Class B building that’s amenitized, that has what the tenant needs. The properties that are less financeable, less attractive to new tenants are those where the sponsor hasn’t put capital in, are not refreshing, are not well located within a broader mixed-use area. That’s the caveat. You’re seeing pretty high rents on some of these trophy, Class A-plus properties that not every tenant can afford. You do have a tiering of what tenants want to pay. 

What are you seeing in other property sectors?
Every sector has its soft spots right now. Retail is the highest exposure in terms of concentration in conduit CMBS. Malls are not non-financeable, but it has to be the right story, the right sponsorship, the right trends. Multifamily has really become a significant component of conduit CMBS. Multifamily has its own challenges right now, with a fair bit of negative news around allegations of fraud. There are things you have to be careful of. 

Industrial is interesting. It went through a period where it was kind of the golden child, and we had really significantly compressing cap rates. Now we’re seeing less of the big-box, brand-new industrial properties, and more of your manufacturing or typical distribution centers that are Class B, middle-market properties. Those cap rates didn’t compress as much. 

Hospitality has been great. There’s still some room in that sector. At this point, we’re starting to see the bifurcation between the properties that are going to continue to do well versus those that have not yet recovered to pre-COVID levels. The headwind for that sector is where there is going to be a pullback in travel given macroeconomic trends.

The Fed just made its long-awaited shift on rates. How does that affect the CMBS market?
Obviously, positively. Everybody’s been kind of waiting for that, particularly on the borrower front. You’ve seen more sales happening. Now, with rates coming down, that pushes things even more for the refinancing side of things. Buyers may have been on the fence — Do I take the extension or do a bridge loan? Now, it’s a little more attractive to lock in that fixed-rate permanent financing. 

Add to all that the fact that the CMBS market has evolved and now offers a five-year product. That gives borrowers more incentive to close into a fixed-rate permanent loan. 

What’s your outlook for 2025?
The first half of 2024 really laid the groundwork with stable capital markets. Rates are going to incentivize borrowers to move into permanent financing. My optimism in CMBS is because of how constructive the cap market side has been this year. There’s solid demand from investors. Spreads have been functioning normally and consistently. That sets the right backdrop for the market to be productive. You add to that reducing base rates, and now you’re bringing more borrowers to the table. 

What’s your biggest challenge?
Underwriting. You have a very constructive capital markets environment. The deals are available, based on upcoming maturities. There are deals that need to be refinanced. The stability in the market has brought more transactional financing. The pullback by other lenders obviously helps CMBS.

The biggest challenge is underwriting. You have a lot of these things you haven’t dealt with in a  while. Typically, having a large concentration of multifamily loans is a good thing. It’s a stable asset class. But when you have this microscope on the financials and making sure everything is clean because of some of the news and allegations, that’s just another nuance you have to work through — making sure that while volume picks up dramatically, we’re also able to maintain the same level of diligence.

How has CMBS changed during your time in the industry?
The obvious change is the addition of a five-year product. That’s been a huge change to the benefit of CMBS. That makes us more flexible, more dynamic as a lending source. The level of diligence has changed. Compared to the front end of my career, pool sizes are a lot smaller, so exposures to each individual loan are enhanced. 

What sets UBS apart from other CMBS players?
We’ve been in the business for a very long time. We’ve never tried to be, and our goal isn’t to be, one of the market leaders in volume. But we try to evolve with the market and be adaptive to various trends. 

After COVID, we shifted our strategy to one more of velocity — contributing loans into various deals. We’re a good partner to other issuers. We’re not focused on generating top five, top 10 volume. But we look at every deal. We’re not afraid of hairy deals. We have the talent and experience to underwrite deals that are challenging on the surface, and to find a good solution to some of those challenges. Our strength is that. We’re a nimble team.