Weekend Interview: LightBox's Manus Clancy On Why 'Survive Till '25' Is Too Pessimistic

This series goes deep with some of the most compelling figures in commercial real estate: the deal-makers, the game-changers, the city-shapers and the larger-than-life personalities who keep CRE interesting.

This interview has been edited for length and clarity.

Data has scarcely been more crucial to success in the commercial real estate industry than in the years since the pandemic hit. And as rising interest rates have made the waters choppier than they have been in more than a decade, the need for data, especially on distressed property, has only grown.

With distress growing across the market, one trusted source of that data is Manus Clancy, who earlier this month left his position of nearly three decades at Trepp to take a senior management position at commercial real estate data and analytics company LightBox.

Clancy worked extensively on the CMBS market at Trepp, but at LightBox he will extend his scope beyond CMBS, a market he says represents only about 15% of the debt in CRE. At LightBox, he'll focus on building new tools to look at and understand a broader swath of CRE data for a variety of clients.  

Bisnow spoke with Clancy in his first week in his new position about the turmoil the market has faced and why he has some optimism about 2024.

Bisnow: You made the move from Trepp to head of data strategy at LightBox. How is what you're doing at LightBox different than what you did at Trepp, if it's different at all? 

Manus Clancy: It is different. At Trepp, much of my role was writing, research, following the capital markets and really leaning in on the CMBS market. I have been doing that for a long time. I really enjoyed it and the people at Trepp were terrific. At LightBox, [I'll be] expanding beyond the CMBS and securitization space. 

Over the last several years, I have seen that CRE market participants want access to broader sets of data linked together in order to improve risk management and investment returns. My position at LightBox will enable me to do two things I really love: work with clients directly to solve their CRE data and technology issues, and build groundbreaking tools for an industry I really enjoy being part of.

Bisnow: You were a guest on our podcast back in May, and, speaking about the office market, you told us that an unknown part of the equation of how the turmoil in the office market would shake out was whether office owners would dig in like retail owners did in 2017 and 2018 or not. Do you feel like we have a better handle on that now? 

Clancy: It's still early, though we have more clues than we did in the spring of 2023. We do see that there are some that are digging in, working on extending their debt. The Aon Center in Chicago was one of those assets where the borrower negotiated an extension and is willing to lean in and fight for the property. But we've seen examples elsewhere where the borrower has already indicated they plan to transition the asset to the lender and are effectively throwing in the towel, if you will. 

A lot of the story remains to be written, but there have been enough negative examples of borrowers giving up that makes me concerned that it'll be a higher percentage than what we saw during the last five years for malls.

Bisnow: Speaking of distress, a lot of eyes are on the multifamily market, which is exhibiting some warning signs on the debt side as well as facing increasing operating expense costs. Do you see any cause for concern there? 

Clancy: In the office space, what you're looking at is decimation of demand. But with multifamily, the distress really has to do with the way that property buyers over the last three or four years financed themselves. The demand side of the equation is quite strong. Fundamentally, there are no problems with multifamily, per se. The problem comes more from the fact that borrowers overpaid for properties in 2021 and early 2022, and they financed those purchases with floating-rate debt. Now, interest rate costs have exploded and at the same time, labor costs have gone up considerably, utility costs have gone up, insurance costs have gone up.

It's not a case of demand not being there. You have a situation where the financing side of it was almost an unforced error. People paid too much for their properties, financed them with floating-rate debt and are now paying the piper.

Bisnow: Does it matter, though, why a property is in distress? If the distress is bad enough and they are heading for foreclosure, does it matter why? 

Clancy: It does. Take office. There's kind of no salvation for the office space right now other than a resetting of value.

On the other side of the equation, the multifamily side, there is a salvation in the sense that if the Fed lowers rates in 2024, if the debt service costs that these borrowers are paying on their properties goes from 7% or 8% down to 5% or 6%, that is salvation. 

None of this would be a problem in multifamily right now if everybody who had been buying properties in 2021 had used fixed-rate debt. You just wouldn't have this concern at this point.

Bisnow: That's a scenario that could play out soon. The Federal Reserve has dropped hints that rate cuts could be on the way. When those cuts begin, how long do you expect it will be before we start to see the impact? 

Clancy: There are two answers to that question. One: Every 25 basis point cut that the Fed gives us in 2024 provides some bit of help to people that have floating-rate debt. It reduces their debt service costs, helps them become more cash flow positive. So every little bit helps in that regard.

Two is the psychological part of the answer, which is: When you started seeing rates go up almost two years ago, there was probably a lot of despair among borrowers wondering, "How are we going to service this debt? We're going cash flow negative. This is brutal." Now, you're about 20 months past that original spike of interest rates. If you haven't given up yet, why would you give up now? You've stomached this much pain for this long, and you now are starting to see the light at the end of the tunnel. 

Bisnow: If the Fed were to do nothing, which is not what is expected, I should say, what do you think would happen? 

Clancy: The conventional wisdom is sometime in March or April, the Fed will make its first interest rate cut. If we're talking in July or August and the Fed hasn't cut by then, defying expectations, I think you would see a really negative reaction in all of the markets. I think you would see property values retest their lows. I think you'd see the stock market sell off. In general, the market reaction would be quite severe. I think people are really counting on the Fed loosening the reins in 2024. If that did not happen, I think the reaction would be pain across all asset classes.

Bisnow: CRE has already seen a lot of pain, and in many ways is staring down a generational shift away from asset classes and property types that for so long were considered not only a safe bet for investment, but maybe the best bet for investment. What asset classes are you seeing attract more investment dollars now and where are you anticipating that money will go over the next few years?

Clancy: There are certainly things that are in favor right now that people have seen perform extraordinarily well and for which they think prospects remain really high. It's not an insignificant list of asset types.

As you said, office is really down and it's hard to see sentiment around office coming back anytime soon. I think that that narrative remains quite negative and, aside from brand-new product and high-end assets, I think that narrative continues for several years. On the positive side, industrial has seen really no distress at all. It's a tremendous asset class, valuations remain very high. Life science is still very popular and an area of growth for the market. Data centers, warehouses, distribution centers, logistics centers, all things like that support the new economy. 

Bisnow: We're in what seems to me to be a particularly volatile time geopolitically and we're in an election year. As CRE tries to bounce back, how much do you think these macro trends will impact the market and where people put their money?

Clancy: Volatility is not the friend of the commercial real estate market. 

After the [Global Financial Crisis], in the early days of Covid, when inflation started to really tick up, when the war in the Ukraine started — when that happens, people tend to pull back. People become more risk averse. Markets tend to contract and the velocity of transactions tends to really slow down.

The commercial real estate market is one that depends on transactions, activity, leasing and buyers deciding to pull the trigger on acquiring assets. When volatility spikes, that slows down considerably.

If we were to see the U.S. get drawn in further into the Ukraine or into the Middle East, they would all be considered short-term negative for the commercial real estate market and potentially long term negative if those events took a long time to resolve.

Bisnow: As the new year unfolds, what trends are you keeping an eye on and what's a bold prediction you have for 2024?  

Clancy: I think my bold prediction would be: A lot of people use the term "survive until '25" for CRE. We're going through a turbulent time, it will be painful, economic activity in CRE will be muted. But I am more optimistic than most. We've already seen the yield on the 10-year Treasury drop 100 basis points. Short-term interest rates should start to come down. I think that we see a modest pickup in CRE economic activity in the first half of 2024 and a nice acceleration in the second half. I don't think we're talking about a lengthy and painful process like we saw in 1990 or in 2008. I think we bounce back sooner and, other than in office, the pain is shallower than sentiment would suggest. 

Bisnow: In other words, if you heard "survive until '25" and thought you might not make it, you might get lucky? 

Clancy: I think the green shoots that we're going to see in the market will start appearing sooner rather than later, and I think that the level of economic activity, the percentage of sales, that rebound in values will surprise people to the upside. This isn't the Roaring '20s again, but I think we'll surpass some of the dire predictions that are out there.

Bisnow: What is your weekend routine or favorite weekend activity? 

Clancy: It's not a weekend thing, but my favorite noncommercial real estate activity is playing recreational hockey with a bunch of ladies and gents in South Carolina on Monday nights. That's my nonwork-related passion: getting out there on the ice, breaking a sweat and hanging out and talking sports with 15 or so great guys and gals. Our team is in Greer, South Carolina. We're the Sloths.