Richard Trepp on Linking CRE Risk, Markets, and Data Through Rockport’s Platform

It is key to encompass all the risk that you can think of, but at the same time, you've got to provide substantial configurability to what you produce. We segment our view of the market into four quadrants. The debt market, the equity market, both from a public issuance point of view, and a private issuance. Once upon a time, they were separate quadrants. Today, they're blended. After we first formed the firm, the debt finance for commercial real estate was done through institutions that were looking for long term loans, such as life insurance companies.

So, a life insurance company would make a loan on a property, could be a thirty-year loan, and that's how the property was financed. Today, the insurance company, if they would like to, can buy bonds in the public market, which are backed by the cash flow of a pool of loans. Those pool of loans are in fact mortgages on commercial real estate. That commercial real estate can be office, retail, industrial, can be multifamily, every property type effectively. And if that's not enough, it can be blends of multiple different types of property called mixed use.

Today, that building where once upon a time there'd be a mortgage on it, today that building is probably, a good part of it, will be financed in the public markets through the issuance of CMBS. And if you look at the risk inherent for the investors, you've got the investor in the bonds where once upon a time they would buy them based on being rated bonds today, have to look at what is the risk which means they have to understand everything there is to understand about the loans and everything there is understand about the properties below that.

And in the case of office, all the underlying leases, who the obligors are on those leases, who the tenants are, and what is the economics of the city or the economics relative to interest rates. And the interesting thing is on each of those levels, there's many to many relationships. So, it gets complicated quickly. What we must do and what we've done within the Rockport platform is make the links between all those levels and the relationships between the many to many. It's very interesting.

If you look at the risk inherent in lending to commercial real estate or owning commercial real estate, you really have three risks. You have initially upfront, you must look at all the detail, everything that you can learn about, let's say, an office property, all the leases, all the tenants, etcetera, and you must do a detailed, detailed analysis. And these tend to be 30-year amortizing loans with 10-year balloon. During the term of the loan, you have risk of industry moving out of a town or into a town, which substantially changes, alters your potential term risk.

But then the real catch is what are interest rates likely to be and what is the condition, the building you're dealing with in a year ten when there's a large balloon payment that has to be made so that you really have to look at the risk inherent at that point in time. So that what we've done is we've built that into Rockport. But given that you have such a time period and given the way people look at things differently and you've got different types of buildings, you have to create substantial configurability to the platform so that platform so that people can look at it and run it the way they look at their analysis.

So, it is key to encompass it, all the risks that you can think of, but at the same time, you've got to provide substantial configurability to what you produce.