Thank you for this - gave me a good laugh. But also a good reminder of how the general public does not understand what is going on in real estate and thus why so many get caught offsides when the tides go out. Not even trying to make a dig, but will provide some insight below. Keep in mind, keeping this very simple and high level.
Valuations
Commercial real estate valuations are based on capitalization rates, which are just inverse multiples. So a 20x EM is the same as a 5.00% capitalization rate (1/20). Capitalization rates for stabilized assets are generally priced on an equity risk premium spread to the risk free rate. The US10Y is often used. The capitalization rate is applied to net operating income which in its simplest terms is revenue minus expenses.
So let's make some basic assumptions: NOI is $10, NOI is flat y-o-y, and Class A MF in DF/W trades at 180 bps spread to the US10Y. Well what just happened in the last 18 months? The US10Y went from 1.5% to 3.8%. So market capitalization rates went from 3.3% to 5.6%. So the value of the property went from $300 to $180, (40%). This is purely a function of the capital markets.
Net Operating Income
Market rent growth remains positive and vacancy remains very low. But, many owners are getting killed by year-over-year increases in property tax and property insurance. As a result, net operating income year-over-year is negative - further hurting valuations.
Financing
This is where the rubber meets the road. Because all of the above is pure accounting and on paper until the property has a transaction. If you're a current owner, why would you sell today unless you have to? Well, here we go...
Commercial loans are term loans with covenants. The most common terms are 3 and 5-years. Lots and lots of transaction in 2020 and 2021 were done with 3-year term paper because a lot of buyers through rates would stay very, very low. So let's say a buyer bought a property for $100 with $75 of debt and $25 of equity. Today all of the equity is gone AND $15 / $75 is gone on the debt. When the term matures, the lender comes and wants to be made whole. The owner has two options. First, they can do a "cash-in refinance" meaning they need to go back to their investors and ask them for a 60% ($15 / $25) equity injection via a capital call. The second is they can't achieve this and they have to default.
The other issue with financing today is the same borrowers that were using high leverage, 3-year debt were the most likely to take on floating rate debt with rate caps. As those rate caps have been expiring they have been seeing massive increases in their debt service because their effective rate went from say 3% to 8% overnight. The property can not service the debt and they go into technical default, which then has to be worked out.
There's obviously much more to this. But needless to say, these is a massive capital markets issue out in the market that isn't being discussed fully. There's way too much on the shitty fundamentals of office and not enough people understand there's too much leverage in MF and industrial. It takes time for this all to play out and as more borrowers come under pressure as their debt rolls over, the worse it will get. The "maturity wall" as it was really kicks off later this year through 2025.
Hence you will have a new "survive to '25" mantra in CRE which was an inside joke back during the savings and loan crisis: "survive to '96".