1 00:00:09,440 --> 00:00:13,000 Speaker 1: Hello, and welcome to another episode of the Old Lots podcast. 2 00:00:13,080 --> 00:00:15,880 Speaker 1: I'm Tracy Alloway and I'm Joe. Wi isn't all Joe? 3 00:00:15,960 --> 00:00:19,280 Speaker 1: People have been asking for this episode for a long time. Yeah, 4 00:00:19,680 --> 00:00:22,639 Speaker 1: there's a lot going on right now, definitely a lot 5 00:00:22,680 --> 00:00:25,000 Speaker 1: of a lot of balls in the air. But there 6 00:00:25,120 --> 00:00:28,520 Speaker 1: is a one topic that one particular topic that's been 7 00:00:28,560 --> 00:00:31,240 Speaker 1: brewing for a while as a source of concern is 8 00:00:31,360 --> 00:00:34,800 Speaker 1: what's going to happen with commercial real estate, particularly office buildings. 9 00:00:35,200 --> 00:00:39,519 Speaker 1: That's right, So we recently had the collapse of Silicon 10 00:00:39,600 --> 00:00:42,920 Speaker 1: Valley Bank and that set off, you know, a little 11 00:00:42,960 --> 00:00:45,680 Speaker 1: bit of a banking crisis. But a lot of people 12 00:00:45,680 --> 00:00:49,920 Speaker 1: are talking about the next shoe to drop really being 13 00:00:50,120 --> 00:00:53,320 Speaker 1: on the property or the real estate side. And obviously 14 00:00:53,400 --> 00:00:56,080 Speaker 1: there's been a lot of concern about what exactly is 15 00:00:56,120 --> 00:00:59,280 Speaker 1: going on with office buildings. But you know, just interest 16 00:00:59,360 --> 00:01:02,720 Speaker 1: rates going up in general tends to be bad for 17 00:01:03,000 --> 00:01:06,200 Speaker 1: real estate as a broader category. So I think this 18 00:01:06,280 --> 00:01:08,839 Speaker 1: is something that we really need to dig into. Yeah, 19 00:01:08,880 --> 00:01:12,720 Speaker 1: I mean right, So obviously real estate, my understanding is 20 00:01:12,760 --> 00:01:16,640 Speaker 1: that it's a highly leveraged industry in almost any factor, 21 00:01:16,680 --> 00:01:19,920 Speaker 1: whether it's malls or office buildings, or apartments or single 22 00:01:19,959 --> 00:01:23,360 Speaker 1: family homes. There's a lot of borrowing. Ergo, I think 23 00:01:23,520 --> 00:01:26,280 Speaker 1: rates matter, and like every other industry, it's dealing with 24 00:01:26,280 --> 00:01:30,119 Speaker 1: this reversal of a long downtrend. And then with office 25 00:01:30,120 --> 00:01:32,640 Speaker 1: reads in particular, we all know that working from home 26 00:01:32,800 --> 00:01:35,000 Speaker 1: is still a thing. Not everyone goes to the office 27 00:01:35,080 --> 00:01:38,959 Speaker 1: every day like they were, and so companies are reducing footprints. 28 00:01:39,160 --> 00:01:42,040 Speaker 1: And so if you are the owner of commercial property, 29 00:01:42,080 --> 00:01:44,600 Speaker 1: you may be looking at a double whammy in which 30 00:01:45,000 --> 00:01:49,080 Speaker 1: a your loan is set to reset or your commercial 31 00:01:49,120 --> 00:01:52,480 Speaker 1: mortgage that you plan to roll over is set to reset, 32 00:01:53,000 --> 00:01:56,200 Speaker 1: and at the same time, because of vacancies, your business 33 00:01:56,280 --> 00:01:58,560 Speaker 1: is not as good as maybe it was in twenty nineteen. 34 00:01:59,120 --> 00:02:02,360 Speaker 1: So potentially a major stress point emerging for a lot 35 00:02:02,400 --> 00:02:04,400 Speaker 1: of players. And the other thing I would say is 36 00:02:04,520 --> 00:02:08,400 Speaker 1: even without the pandemic, and even without the work from 37 00:02:08,480 --> 00:02:13,120 Speaker 1: home trend, there was concern about excess in commercial real 38 00:02:13,240 --> 00:02:16,760 Speaker 1: estate or CRI, you know, even prior to twenty twenty. 39 00:02:16,800 --> 00:02:19,120 Speaker 1: I remember when I was at the Financial Times, I 40 00:02:19,200 --> 00:02:22,240 Speaker 1: was writing a lot about the bond market and credit markets, 41 00:02:22,800 --> 00:02:25,520 Speaker 1: and I used to write a lot of stories about 42 00:02:25,600 --> 00:02:32,119 Speaker 1: you know, subpar underwriting in commercial mortgage backed securities and 43 00:02:32,639 --> 00:02:36,799 Speaker 1: investors really reaching for yield in that sector. And there 44 00:02:36,840 --> 00:02:38,840 Speaker 1: was one person I spoke to quite a lot when 45 00:02:38,880 --> 00:02:41,600 Speaker 1: I was doing those stories, and so I am very 46 00:02:41,639 --> 00:02:44,600 Speaker 1: pleased to say that we do have the perfect guest 47 00:02:44,720 --> 00:02:47,080 Speaker 1: for this episode. We are going to be speaking to 48 00:02:47,280 --> 00:02:50,520 Speaker 1: Rich Hill. I knew him when he was an analyst 49 00:02:50,600 --> 00:02:53,239 Speaker 1: at Morgan Stanley, but he is now over at Cohen 50 00:02:53,280 --> 00:02:56,800 Speaker 1: and Steers as head of real estate strategy and Research. 51 00:02:56,919 --> 00:02:59,560 Speaker 1: So Rich, thank you so much for coming on. All thoughts. Yeah, 52 00:02:59,639 --> 00:03:02,240 Speaker 1: thanks so much for having me. So maybe just to 53 00:03:02,280 --> 00:03:04,640 Speaker 1: begin with you know, Joe kind of alluded to this 54 00:03:04,720 --> 00:03:08,640 Speaker 1: in the intro, but commercial real estate it's not a monolith. 55 00:03:08,919 --> 00:03:13,040 Speaker 1: There are a lot of different subsectors within that broad category, 56 00:03:13,400 --> 00:03:17,640 Speaker 1: and there are a lot of different actors, so lenders, investors, 57 00:03:17,760 --> 00:03:20,200 Speaker 1: things like that. Can you talk to us a little 58 00:03:20,200 --> 00:03:24,480 Speaker 1: bit about the ecosystem What is the ecosystem of CRI 59 00:03:24,800 --> 00:03:27,399 Speaker 1: actually look like? Yeah, it's it's a great question. And look, 60 00:03:27,560 --> 00:03:31,320 Speaker 1: I actually don't disagree with anything you said and your 61 00:03:31,360 --> 00:03:34,280 Speaker 1: remarks to start this, but maybe we start off by 62 00:03:34,320 --> 00:03:37,160 Speaker 1: talking about the size of the commercial real estate market. 63 00:03:37,640 --> 00:03:40,440 Speaker 1: We estimated it's around a twenty trillion dollar market. That's 64 00:03:40,440 --> 00:03:44,200 Speaker 1: a pretty big market. And if you think about commercial 65 00:03:44,200 --> 00:03:46,960 Speaker 1: real estate, everyone thinks about it a singular asset class, 66 00:03:47,280 --> 00:03:51,720 Speaker 1: but it's really fifteen different property types under one umbrella. 67 00:03:51,760 --> 00:03:54,200 Speaker 1: And in many cases those fifteen different property types are 68 00:03:54,200 --> 00:03:56,960 Speaker 1: sometimes like my kidnergartner, they moved to one side of 69 00:03:56,960 --> 00:03:58,280 Speaker 1: the room and then the other side of the room. 70 00:03:58,320 --> 00:04:01,520 Speaker 1: The fundamentals don't necessarily all act the same. So you 71 00:04:01,560 --> 00:04:03,720 Speaker 1: have office for the fun of it, or is there 72 00:04:03,760 --> 00:04:08,040 Speaker 1: a reason why the fundamentals don't move in the same direction, 73 00:04:08,880 --> 00:04:11,440 Speaker 1: why people move around so much? Yeah, well, you know 74 00:04:11,600 --> 00:04:13,880 Speaker 1: what I would Just the point I'm trying to make 75 00:04:13,960 --> 00:04:17,159 Speaker 1: here is that you know, you have office, you have retail, 76 00:04:17,360 --> 00:04:21,039 Speaker 1: you have multifamily. What drives multifamily fundamentals might be much 77 00:04:21,080 --> 00:04:23,920 Speaker 1: different than what drives retail fundamentals. And we haven't even 78 00:04:23,920 --> 00:04:27,039 Speaker 1: really started talking about some of the subsectors like healthcare, 79 00:04:27,120 --> 00:04:30,640 Speaker 1: for instance, or data centers or cell towers. There's a 80 00:04:30,680 --> 00:04:33,400 Speaker 1: whole host of different property types that are out there 81 00:04:33,760 --> 00:04:36,360 Speaker 1: that you know, Yes, commercial real estate is a singular 82 00:04:36,400 --> 00:04:39,120 Speaker 1: asset class, but in many respects you as a as 83 00:04:39,120 --> 00:04:42,760 Speaker 1: a strategist and a researcher, I'm covering fifteen different parts 84 00:04:42,760 --> 00:04:45,880 Speaker 1: of the economy that all have a singular commercial real 85 00:04:46,000 --> 00:04:49,920 Speaker 1: estate umbrella, but they have different fundamental drivers. Right, So 86 00:04:49,960 --> 00:04:53,080 Speaker 1: this is really important. Some sort of midtown office space 87 00:04:53,279 --> 00:04:56,440 Speaker 1: here in New York that maybe in twenty nineteen was 88 00:04:56,560 --> 00:04:59,480 Speaker 1: leasing out to being leased out to like tech startups 89 00:04:59,560 --> 00:05:02,359 Speaker 1: or something is going to be very different from a 90 00:05:02,400 --> 00:05:06,440 Speaker 1: building that's sort of specialized in doctor clinics in which 91 00:05:06,560 --> 00:05:09,440 Speaker 1: probably there is not much like work from home activity 92 00:05:09,480 --> 00:05:12,360 Speaker 1: happening and there, and so they're just too Yes, they're 93 00:05:12,360 --> 00:05:14,520 Speaker 1: both commercial real estate, but they might be very different 94 00:05:14,520 --> 00:05:18,039 Speaker 1: fundamental for sure. And frankly, I'll take that one step further. 95 00:05:18,520 --> 00:05:21,240 Speaker 1: You know that the office property in Tampa, Florida might 96 00:05:21,279 --> 00:05:24,359 Speaker 1: be very different than the office property in New York City. 97 00:05:24,600 --> 00:05:27,239 Speaker 1: Are they going to the office in Tampa, Florida, believe 98 00:05:27,240 --> 00:05:29,159 Speaker 1: it or not, they are going to be dead? What 99 00:05:29,200 --> 00:05:31,960 Speaker 1: are the numbers like? How like you know, I know 100 00:05:32,120 --> 00:05:35,080 Speaker 1: there's like trackers of like different cities, and there's a 101 00:05:35,080 --> 00:05:38,440 Speaker 1: lot of coverage in the media provis reasons because many 102 00:05:38,440 --> 00:05:40,040 Speaker 1: of us are here in New York City. But how 103 00:05:40,080 --> 00:05:41,440 Speaker 1: does New York City like, why don't you talk a 104 00:05:41,480 --> 00:05:43,279 Speaker 1: little bit about what the numbers look like, yeah, if 105 00:05:43,279 --> 00:05:45,680 Speaker 1: you're talking about New York City return to our office, 106 00:05:45,800 --> 00:05:48,520 Speaker 1: we're still well below you know, call it fifty percent, 107 00:05:49,080 --> 00:05:52,200 Speaker 1: you know utility rates, if you will people actually using office, 108 00:05:52,520 --> 00:05:54,520 Speaker 1: call it in the thirty to fifty percent range. But 109 00:05:54,520 --> 00:05:56,400 Speaker 1: if you go to the Sun Belt and there's a 110 00:05:56,400 --> 00:05:58,080 Speaker 1: lot of reasons why this is the case, if you 111 00:05:58,120 --> 00:06:01,320 Speaker 1: go to Sun Belt States, return to office and use 112 00:06:01,360 --> 00:06:03,440 Speaker 1: of office space is a lot higher than that. It's 113 00:06:03,480 --> 00:06:05,680 Speaker 1: not surprising to see at sixty seventy, maybe even a 114 00:06:05,680 --> 00:06:07,920 Speaker 1: little bit higher than that. So there is a big 115 00:06:07,960 --> 00:06:11,920 Speaker 1: difference between how people in maybe let's say New England 116 00:06:11,960 --> 00:06:16,600 Speaker 1: States are using office versus let's just say Tampa, Florida, Austin, 117 00:06:16,960 --> 00:06:19,119 Speaker 1: what have you. So, one of the things I wanted 118 00:06:19,160 --> 00:06:21,359 Speaker 1: to ask you is, in addition to there being a 119 00:06:21,360 --> 00:06:24,840 Speaker 1: lot of subsectors within the umbrella of commercial real estate, 120 00:06:24,880 --> 00:06:28,279 Speaker 1: there are a lot of different ways that people actually 121 00:06:28,360 --> 00:06:32,080 Speaker 1: measure what's going on in that market. So, you know, 122 00:06:32,560 --> 00:06:35,080 Speaker 1: one CRI specific term that you hear a lot is 123 00:06:35,120 --> 00:06:38,400 Speaker 1: cap rates. You obviously have property prices, and then you 124 00:06:38,480 --> 00:06:42,400 Speaker 1: have valuations, and you also have what's going on with 125 00:06:42,440 --> 00:06:46,719 Speaker 1: the mortgage reets. So publicly listed real estate investors, and 126 00:06:47,200 --> 00:06:49,960 Speaker 1: you know, depending on which one of those you look 127 00:06:50,000 --> 00:06:52,599 Speaker 1: at at the moment, you kind of get a really 128 00:06:52,720 --> 00:06:57,240 Speaker 1: mixed picture of what's actually going on with crin. Can 129 00:06:57,279 --> 00:07:01,560 Speaker 1: you explain that, like, why are these different things painting 130 00:07:02,200 --> 00:07:05,920 Speaker 1: a different view of the market. Yeah, it's a it's 131 00:07:05,920 --> 00:07:08,040 Speaker 1: a really great, great question, and I think it's something 132 00:07:08,120 --> 00:07:10,960 Speaker 1: that's maybe sometimes misunderstood. If you were to go back 133 00:07:10,960 --> 00:07:14,000 Speaker 1: to three Q twenty two, so not that long ago, Yeah, 134 00:07:14,080 --> 00:07:17,000 Speaker 1: the riat market was down more than thirty percent year 135 00:07:17,040 --> 00:07:20,600 Speaker 1: to date, but believe it or not, private valuations or 136 00:07:20,640 --> 00:07:23,400 Speaker 1: still up more than ten percent on a year to 137 00:07:23,480 --> 00:07:26,520 Speaker 1: date basis huge divide forty percent divide between what the 138 00:07:26,560 --> 00:07:28,400 Speaker 1: list of market was telling you, what the private market 139 00:07:28,440 --> 00:07:30,920 Speaker 1: was telling you. What happens is the list of market. 140 00:07:31,000 --> 00:07:34,160 Speaker 1: So that's publicly. Trade at rates are always a leading 141 00:07:34,160 --> 00:07:36,840 Speaker 1: indicator for the private market. They go down before the 142 00:07:36,880 --> 00:07:39,320 Speaker 1: private market and they go up before the private market. 143 00:07:39,600 --> 00:07:42,520 Speaker 1: Why is that the case, Well, list it rates, you 144 00:07:42,720 --> 00:07:44,960 Speaker 1: get a mark on them every single day people buy 145 00:07:45,000 --> 00:07:48,520 Speaker 1: and sell stocks. On the other hand, valuing a property 146 00:07:48,600 --> 00:07:50,760 Speaker 1: can be pretty hard. You have to go get an 147 00:07:50,840 --> 00:07:54,200 Speaker 1: appraisal for that, and so there is an inherent lag 148 00:07:54,600 --> 00:07:59,000 Speaker 1: on when private markets actually correct to list it markets 149 00:07:59,360 --> 00:08:02,480 Speaker 1: do they allow hand in hand? Not always. If you 150 00:08:02,520 --> 00:08:05,160 Speaker 1: go back to the late nineteen nineties, post the Russian 151 00:08:05,200 --> 00:08:07,400 Speaker 1: debt crisis and everything that was going on with tech, 152 00:08:07,840 --> 00:08:10,480 Speaker 1: roots were under pressure and the private market kept chugging along. 153 00:08:10,800 --> 00:08:12,960 Speaker 1: I don't think that's going to happen this time around. 154 00:08:13,160 --> 00:08:16,000 Speaker 1: Case in point in four Q twenty two, the nucrief 155 00:08:16,040 --> 00:08:20,000 Speaker 1: Odyssey Index that's a widely followed index of open ended 156 00:08:20,200 --> 00:08:23,600 Speaker 1: mutual funds. This index was down almost five percent in 157 00:08:23,640 --> 00:08:27,000 Speaker 1: the quarter. That is the greatest decline since OZ nine, 158 00:08:27,120 --> 00:08:29,760 Speaker 1: and it's the second greatest decline since nineteen seventy eight. 159 00:08:29,840 --> 00:08:32,360 Speaker 1: So we're talking about almost a twenty percent decline on 160 00:08:32,360 --> 00:08:34,640 Speaker 1: an annualized basis, not that much different than what roats 161 00:08:34,640 --> 00:08:37,640 Speaker 1: were pricing in. Rots were up five percent during that 162 00:08:37,720 --> 00:08:39,679 Speaker 1: quarter as well, So there is a little bit of 163 00:08:39,679 --> 00:08:42,360 Speaker 1: a lead lag relationship that's going on here. We'll see 164 00:08:42,360 --> 00:08:44,600 Speaker 1: what the year holds for us. For listed roots, they're 165 00:08:44,600 --> 00:08:46,920 Speaker 1: about flat on the year after a really good start 166 00:08:46,960 --> 00:08:48,920 Speaker 1: to the year. But I think I think private's going 167 00:08:49,000 --> 00:08:50,520 Speaker 1: to be down, and I wouldn't be surprised to see 168 00:08:50,520 --> 00:08:52,840 Speaker 1: it down ten to twenty. So as you point out, 169 00:08:52,880 --> 00:08:56,040 Speaker 1: like even if my conception of what commercial real estate 170 00:08:56,160 --> 00:08:58,880 Speaker 1: is as New York office buildings, we can't just like 171 00:08:59,000 --> 00:09:01,120 Speaker 1: form a view of all real estate or commercial real 172 00:09:01,200 --> 00:09:04,080 Speaker 1: estate based on that. That being said, like, how much 173 00:09:04,080 --> 00:09:06,200 Speaker 1: of that do you say? Twenty trillion rough VideA is 174 00:09:06,480 --> 00:09:09,400 Speaker 1: how much of that is sort of distressed right now 175 00:09:09,520 --> 00:09:11,719 Speaker 1: or in some sort of trouble and how much is 176 00:09:11,800 --> 00:09:15,080 Speaker 1: sort of chugging along? Like we're of that twenty trillion, 177 00:09:15,120 --> 00:09:17,240 Speaker 1: how much should we be concerned about? Yeah, so it's 178 00:09:17,240 --> 00:09:19,480 Speaker 1: the right question to be asking. And there's a lot 179 00:09:19,520 --> 00:09:22,280 Speaker 1: of different ways you can think about distress. The first 180 00:09:22,360 --> 00:09:25,280 Speaker 1: way we think about distress is distress sales as a 181 00:09:25,280 --> 00:09:28,439 Speaker 1: percent of overall transaction volumes. Before I go there, let 182 00:09:28,440 --> 00:09:30,920 Speaker 1: me also just be clear. Transaction volumes are down pretty 183 00:09:30,960 --> 00:09:34,840 Speaker 1: significantly on a year of year basis, almost seventy percent down. 184 00:09:35,240 --> 00:09:37,840 Speaker 1: I can talk about why that's happening. But distress is 185 00:09:37,880 --> 00:09:40,520 Speaker 1: sort of like someone having to sell a property when 186 00:09:40,559 --> 00:09:43,880 Speaker 1: they don't want to. It's a foreclosure. For instance, Distress 187 00:09:43,920 --> 00:09:46,920 Speaker 1: sales are very very low right now. I don't think 188 00:09:46,920 --> 00:09:48,960 Speaker 1: they're going to stay low. I think they're going to increase. 189 00:09:49,320 --> 00:09:51,719 Speaker 1: But the reason distress sales are really low right now 190 00:09:51,840 --> 00:09:54,280 Speaker 1: is banks haven't started foreclosing on their loans and the 191 00:09:54,360 --> 00:09:57,240 Speaker 1: bid ask spread between buyers and sellers is pretty wide. 192 00:09:57,520 --> 00:10:01,400 Speaker 1: So distress sales are low. We can talk about delink, CMBs, delinquencies, 193 00:10:01,440 --> 00:10:04,280 Speaker 1: bank delinquencies, whatever you want to, but the stress sales, 194 00:10:04,280 --> 00:10:06,160 Speaker 1: which is the first thing I look at, is low. 195 00:10:06,280 --> 00:10:09,040 Speaker 1: It's showing signs of ticking up. I think it's going 196 00:10:09,080 --> 00:10:29,720 Speaker 1: to rise. So just going back to the private valuations 197 00:10:29,760 --> 00:10:31,839 Speaker 1: for a second. You know, this is something I've been 198 00:10:31,840 --> 00:10:34,160 Speaker 1: thinking about and writing about and a lot of other 199 00:10:34,200 --> 00:10:39,079 Speaker 1: people have as well. But how long can private valuations 200 00:10:39,280 --> 00:10:45,120 Speaker 1: kind of resist the gravity of lower prices and maybe 201 00:10:45,480 --> 00:10:49,599 Speaker 1: deteriorating fundamentals, like what is the catalyst or what is 202 00:10:49,640 --> 00:10:53,480 Speaker 1: the process for someone to actually take a hit on 203 00:10:53,520 --> 00:10:58,520 Speaker 1: that property, Because clearly, you know, if you're a big investor, 204 00:10:58,679 --> 00:11:02,800 Speaker 1: you are going to want to resist crystallizing those losses 205 00:11:02,800 --> 00:11:05,559 Speaker 1: for as long as possible, it would seem. Yeah, to 206 00:11:05,600 --> 00:11:08,160 Speaker 1: answer your question upfront, it can take. It can historically 207 00:11:08,240 --> 00:11:11,160 Speaker 1: take twelve to twenty four months for property for private 208 00:11:11,240 --> 00:11:13,920 Speaker 1: property valuations to correct to what the list of markets 209 00:11:13,920 --> 00:11:17,320 Speaker 1: pricing in. Why is that the case? Well, let's talk 210 00:11:17,320 --> 00:11:21,080 Speaker 1: through how private valuations actually correct. The first thing that 211 00:11:21,120 --> 00:11:24,400 Speaker 1: happens is transaction volumes bottom out. You have to see 212 00:11:24,440 --> 00:11:30,319 Speaker 1: transaction volumes decline precipitously before property valuations begin declining. Why 213 00:11:30,360 --> 00:11:32,839 Speaker 1: is that the case. Well, at the early start of 214 00:11:32,880 --> 00:11:35,640 Speaker 1: a correction, sellers don't want to sell at the level 215 00:11:35,640 --> 00:11:37,960 Speaker 1: buyers want to buy. There's just a huge bid ask 216 00:11:38,040 --> 00:11:40,679 Speaker 1: spread between the two. It's sort of like the grieving process. 217 00:11:40,760 --> 00:11:42,440 Speaker 1: I'm not trying to be too flippant about it, but 218 00:11:42,480 --> 00:11:45,120 Speaker 1: there is a grieving process. It's denial. There's anger than 219 00:11:45,120 --> 00:11:48,240 Speaker 1: its acceptance. So we think we're actually starting to get 220 00:11:48,240 --> 00:11:51,199 Speaker 1: to this place with transaction volumes down seventy percent year 221 00:11:51,200 --> 00:11:54,400 Speaker 1: of ear. That starts to feel okay to me. But 222 00:11:54,720 --> 00:11:56,280 Speaker 1: I think this time is going to be different. I 223 00:11:56,320 --> 00:11:59,000 Speaker 1: think the correction and private valuations is going to be 224 00:11:59,080 --> 00:12:01,800 Speaker 1: much much quicker than seen previously for maybe one of 225 00:12:01,800 --> 00:12:04,120 Speaker 1: the reasons that you talked about at the very beginning, 226 00:12:04,400 --> 00:12:08,080 Speaker 1: which is the rise in financing costs. So I'm gonna 227 00:12:08,080 --> 00:12:10,520 Speaker 1: get not try to not get too wonky here. No, 228 00:12:10,640 --> 00:12:12,960 Speaker 1: please get get wonky as you like. Actually are as 229 00:12:13,000 --> 00:12:16,040 Speaker 1: wonky as you. I'll stop you if you if we 230 00:12:16,080 --> 00:12:19,880 Speaker 1: need something clarified, but always yes, all right. So here's 231 00:12:19,880 --> 00:12:22,920 Speaker 1: a great stat for you. Since nineteen eighty prior to 232 00:12:23,080 --> 00:12:25,640 Speaker 1: twenty twenty two. That is, there has been less than 233 00:12:25,920 --> 00:12:28,600 Speaker 1: five years five months since nineteen eighty. That's a lot 234 00:12:28,640 --> 00:12:30,880 Speaker 1: of months where the treasure ten year treasury was not 235 00:12:31,000 --> 00:12:33,959 Speaker 1: lower a decade forward. Something Unpack that and explain to 236 00:12:34,000 --> 00:12:36,640 Speaker 1: you what that means. That means in January nineteen ninety 237 00:12:36,679 --> 00:12:38,600 Speaker 1: the ten year treasury rate was lower than where it 238 00:12:38,640 --> 00:12:41,360 Speaker 1: was in January nineteen eighty, and January two thousand it 239 00:12:41,400 --> 00:12:43,600 Speaker 1: was lower than where it was in January nineteen ninety. 240 00:12:43,679 --> 00:12:46,320 Speaker 1: There has been a secular decline in ten year treasure rates. 241 00:12:46,720 --> 00:12:49,640 Speaker 1: Why does that matter? Well, it matters because, as you 242 00:12:49,760 --> 00:12:53,199 Speaker 1: correctly said, commercial real estates inherently elaborate asset class. There's 243 00:12:53,360 --> 00:12:55,599 Speaker 1: very few owners of commercial real estate that buy a 244 00:12:55,679 --> 00:12:58,160 Speaker 1: property without some amount of debt on it. So, as 245 00:12:58,160 --> 00:13:00,720 Speaker 1: you've been in a secular decline in ten treasury rates, 246 00:13:00,720 --> 00:13:03,640 Speaker 1: and typically commercial real estates finance with tin year debt, 247 00:13:03,840 --> 00:13:06,840 Speaker 1: you have always been able to refinance into lower and 248 00:13:06,880 --> 00:13:10,160 Speaker 1: lower financing costs over time. So this is the idea 249 00:13:10,240 --> 00:13:14,160 Speaker 1: that usually cap rates decline into a rising interest rate environment. 250 00:13:15,200 --> 00:13:17,240 Speaker 1: I sort of say, that's not the right thing to 251 00:13:17,280 --> 00:13:20,720 Speaker 1: be thinking about cap rates decline into a rising instrate environment, 252 00:13:20,760 --> 00:13:24,079 Speaker 1: because historically that rising interest rate environment is symptomatic of 253 00:13:24,120 --> 00:13:26,760 Speaker 1: an improving economy, right at a time that your financing 254 00:13:26,760 --> 00:13:29,400 Speaker 1: costs are actually rolling down, So of course your level 255 00:13:29,480 --> 00:13:33,480 Speaker 1: re turns expand, which allows cap rates to contract. This 256 00:13:33,520 --> 00:13:37,640 Speaker 1: time is much different because financing costs are significantly higher, 257 00:13:37,679 --> 00:13:39,400 Speaker 1: not just because of the risk free rate and widening 258 00:13:39,440 --> 00:13:42,920 Speaker 1: credit spreads, but also because guess what, growth is slowing. 259 00:13:43,240 --> 00:13:47,080 Speaker 1: We were in a stag stag stagflationary environment in twenty 260 00:13:47,240 --> 00:13:50,320 Speaker 1: twenty two that doesn't really exist since like nineteen seventy. 261 00:13:50,320 --> 00:13:52,640 Speaker 1: It's a much different ball game than what we played before. 262 00:13:53,280 --> 00:13:56,760 Speaker 1: So just to do a little Devil's advocate question here, 263 00:13:56,840 --> 00:14:00,520 Speaker 1: but what does the maturity wall actually look like? And 264 00:14:00,640 --> 00:14:03,319 Speaker 1: even though you know, I take the point that financing 265 00:14:03,320 --> 00:14:05,960 Speaker 1: costs are going up, but as long as the market 266 00:14:06,000 --> 00:14:10,520 Speaker 1: remains open, you can still roll over your loan, presumably 267 00:14:11,000 --> 00:14:14,200 Speaker 1: to infinity. And I can't remember the exact saying, but 268 00:14:14,320 --> 00:14:16,560 Speaker 1: you know, there's that old joke about a rolling loan 269 00:14:16,720 --> 00:14:20,120 Speaker 1: gathers no distress or whatever it is. Can people just 270 00:14:20,240 --> 00:14:24,720 Speaker 1: keep rolling these over in theory? Sure, but so let 271 00:14:24,720 --> 00:14:27,800 Speaker 1: me maybe answer your question first. So there's about four 272 00:14:27,800 --> 00:14:31,440 Speaker 1: and a half trillion dollars of mortgage debt outstanding. That 273 00:14:31,520 --> 00:14:34,960 Speaker 1: tells you, on average, the LTV is around twenty five 274 00:14:34,960 --> 00:14:38,440 Speaker 1: percent for commercial real estate. That might sound lower than 275 00:14:38,520 --> 00:14:42,840 Speaker 1: what people think, but reat LTVs or less than thirty percent. 276 00:14:43,160 --> 00:14:45,640 Speaker 1: Then a crief Odyse index which I mentioned previously, which 277 00:14:45,640 --> 00:14:48,560 Speaker 1: is high quality core and core plus properties, that's around 278 00:14:48,560 --> 00:14:52,680 Speaker 1: twenty two percent. So yes, smaller borrowers that don't have enough, 279 00:14:53,040 --> 00:14:55,400 Speaker 1: don't have a lot of capital, will push the LTVs 280 00:14:55,480 --> 00:14:57,440 Speaker 1: up to fifty to sixty percent, which you typically see 281 00:14:57,440 --> 00:15:00,760 Speaker 1: in a CMBs transaction. But debt's around call it twenty 282 00:15:00,800 --> 00:15:03,600 Speaker 1: five percent of that twenty threeion dollars market. What is 283 00:15:03,600 --> 00:15:07,680 Speaker 1: actually maturing well on average, it's about you know, call 284 00:15:07,720 --> 00:15:11,360 Speaker 1: it five hundred billion dollars over the next five years. 285 00:15:11,360 --> 00:15:14,880 Speaker 1: Each year, so you're talking about call it fifteen to 286 00:15:14,960 --> 00:15:18,320 Speaker 1: twenty percent of maturing debt coming due each year over 287 00:15:18,360 --> 00:15:21,480 Speaker 1: the next five years. You're what you should hold up 288 00:15:21,520 --> 00:15:25,240 Speaker 1: five hundred billion per year, five hundred billion per year 289 00:15:25,440 --> 00:15:27,360 Speaker 1: and over the next five years, over the next five years, 290 00:15:27,400 --> 00:15:29,360 Speaker 1: so two and a half threeion dollars over five that 291 00:15:29,360 --> 00:15:32,320 Speaker 1: makes sense. Yeah, cool. So you're talking about, you know, 292 00:15:32,320 --> 00:15:34,600 Speaker 1: call it fifteen twenty percent of debt coming due on 293 00:15:34,640 --> 00:15:37,720 Speaker 1: a pran on basis over the next five years or so. 294 00:15:38,400 --> 00:15:40,280 Speaker 1: And most of the debt that's coming due in two 295 00:15:40,280 --> 00:15:43,400 Speaker 1: thousand and twenty three were either loans that were originated 296 00:15:43,400 --> 00:15:46,760 Speaker 1: in two thousan thirteen or in two thousand eighteen. Now, 297 00:15:46,800 --> 00:15:49,800 Speaker 1: one of the interesting things about this maturity wall that 298 00:15:49,920 --> 00:15:52,920 Speaker 1: I don't think a lot of people are really considering 299 00:15:53,240 --> 00:15:56,920 Speaker 1: is how much property prices generically have risen since two 300 00:15:56,920 --> 00:16:00,080 Speaker 1: thousand and thirteen. Property prices are up a lot. That 301 00:16:00,080 --> 00:16:02,080 Speaker 1: doesn't mean they're up for office, that doesn't mean they're 302 00:16:02,120 --> 00:16:04,120 Speaker 1: up for malls, and we can talk through that, but 303 00:16:04,200 --> 00:16:07,360 Speaker 1: generically they're up a fair amount. So if you happen 304 00:16:07,400 --> 00:16:10,520 Speaker 1: to have originated a loan in twenty twenty two when 305 00:16:10,600 --> 00:16:13,440 Speaker 1: you bought a property, your effective LTV is actually a 306 00:16:13,440 --> 00:16:15,440 Speaker 1: lot lower than fifty to sixty percent right now given 307 00:16:15,440 --> 00:16:18,640 Speaker 1: that property and price appreciation, and even if valuations fall 308 00:16:19,520 --> 00:16:22,640 Speaker 1: ten twenty thirty percent next year, there's a good chance 309 00:16:22,680 --> 00:16:25,720 Speaker 1: these loans are not in the water yet again or 310 00:16:26,040 --> 00:16:28,560 Speaker 1: not underwater. Should I say this is not the case 311 00:16:28,720 --> 00:16:30,840 Speaker 1: for office. I don't want to give you that impression 312 00:16:30,880 --> 00:16:33,440 Speaker 1: that you know, you're talking about effective LTVs that are 313 00:16:33,720 --> 00:16:35,360 Speaker 1: you know, probably going to be a little bit higher 314 00:16:35,360 --> 00:16:37,960 Speaker 1: than that, And it's certainly not the case from malls. 315 00:16:38,040 --> 00:16:41,280 Speaker 1: Malls effective LTVs we think are you know, around ninety 316 00:16:41,360 --> 00:16:43,920 Speaker 1: ninety five percent right now, that's probably a pretty good 317 00:16:43,920 --> 00:16:46,800 Speaker 1: case study, we think for where the office market's going. 318 00:16:47,200 --> 00:16:50,760 Speaker 1: But office, and since this was a focus of this office, 319 00:16:50,840 --> 00:16:54,400 Speaker 1: is only about twenty five percent of that fifteen to 320 00:16:54,440 --> 00:16:58,000 Speaker 1: twenty percent that's coming due? Okay? And who's holding that? 321 00:16:58,120 --> 00:17:00,560 Speaker 1: And like yeah, so who's who's expose to that? So 322 00:17:00,600 --> 00:17:03,680 Speaker 1: it's like, okay, Office, maybe if there's maybe one hundred 323 00:17:03,680 --> 00:17:06,000 Speaker 1: and twenty five one hundred billion coming due over the 324 00:17:06,040 --> 00:17:08,920 Speaker 1: next each year for the next five years, that sound right? Yeah, yeah, yeah, 325 00:17:08,960 --> 00:17:11,960 Speaker 1: that sounds about right. So who is who who holds that? 326 00:17:12,160 --> 00:17:14,199 Speaker 1: Is that it banks? Is it a private funds? Like 327 00:17:14,480 --> 00:17:17,119 Speaker 1: what's the distribution? Yeah? So Tracy mentioned that we we 328 00:17:17,560 --> 00:17:19,440 Speaker 1: talked a lot when we were at when she was 329 00:17:19,480 --> 00:17:21,760 Speaker 1: at the Financial Times, and everyone likes to talk about 330 00:17:21,760 --> 00:17:24,560 Speaker 1: the commercial mortgage backed security market because it's easy to 331 00:17:24,560 --> 00:17:28,520 Speaker 1: look at you get spreads. You know, you understand linquencies. 332 00:17:28,520 --> 00:17:30,520 Speaker 1: You have a lot of really good reporting. The CMBs 333 00:17:30,600 --> 00:17:34,080 Speaker 1: market is at best twenty percent of the lending market. 334 00:17:34,160 --> 00:17:36,879 Speaker 1: It's actually not that big a part of the lending market. 335 00:17:37,480 --> 00:17:39,360 Speaker 1: Not to bury the lead and get where you're going. 336 00:17:39,840 --> 00:17:42,520 Speaker 1: The majority of the debt coming due is held on 337 00:17:42,560 --> 00:17:45,840 Speaker 1: bank balance sheets. Okay, we think you know, call it 338 00:17:45,960 --> 00:17:48,080 Speaker 1: fifty percent. More than fifty percent of the debt coming 339 00:17:48,119 --> 00:17:49,639 Speaker 1: due in two thousand and twenty three is held to 340 00:17:49,680 --> 00:17:52,400 Speaker 1: bank balance sheets. Okay, And that does make some logical 341 00:17:52,440 --> 00:17:55,600 Speaker 1: sense because twenty thirteen, these are ten year loans. In 342 00:17:55,600 --> 00:17:57,720 Speaker 1: the most part, there wasn't a lot of capital markets 343 00:17:57,720 --> 00:18:01,960 Speaker 1: activity in twenty just out of the Great Financial Crisis, 344 00:18:02,000 --> 00:18:05,840 Speaker 1: So if a bank originated a CMBs loan, there's a 345 00:18:05,880 --> 00:18:08,080 Speaker 1: good chance it's still under books. There's a very good 346 00:18:08,160 --> 00:18:10,359 Speaker 1: chance it's still on the books. So most of this 347 00:18:10,440 --> 00:18:12,240 Speaker 1: is held on bank ballot sheets. What sort of comes 348 00:18:12,280 --> 00:18:15,320 Speaker 1: back to your question at the very beginning, like, how 349 00:18:15,320 --> 00:18:18,480 Speaker 1: are we thinking about this risk that has been out 350 00:18:18,480 --> 00:18:20,920 Speaker 1: there but has come a little bit more to the 351 00:18:20,960 --> 00:18:24,040 Speaker 1: forefront over the past couple of days, given some of 352 00:18:24,080 --> 00:18:26,320 Speaker 1: the news with bank collapses can you maybe talk a 353 00:18:26,320 --> 00:18:30,359 Speaker 1: little bit more about underwriting standards throughout the years, because 354 00:18:30,480 --> 00:18:33,840 Speaker 1: this is something that was a big talking point pre pandemic. 355 00:18:34,240 --> 00:18:37,320 Speaker 1: You know, CRI slash CMBs. It was a really hot market. 356 00:18:37,600 --> 00:18:39,679 Speaker 1: You saw a lot of people pouring money into it, 357 00:18:39,760 --> 00:18:43,879 Speaker 1: and so as sometimes happens, you saw some of the 358 00:18:43,960 --> 00:18:47,800 Speaker 1: underwriting standards start to slip. Can you maybe like tell 359 00:18:47,840 --> 00:18:49,840 Speaker 1: us what you saw and give us some examples of 360 00:18:49,880 --> 00:18:52,879 Speaker 1: the kind of deals that you saw coming through that 361 00:18:53,040 --> 00:18:57,639 Speaker 1: could in theory be problematic. Now, there's two ways people 362 00:18:57,640 --> 00:19:00,600 Speaker 1: think about underwriting standards. The first one is sort of 363 00:19:00,600 --> 00:19:03,919 Speaker 1: headline underwriting metrics, things like loan to value, and the 364 00:19:04,040 --> 00:19:07,560 Speaker 1: second thing is all the other things that lenders might 365 00:19:07,760 --> 00:19:11,000 Speaker 1: require or not require to provide a loan to a borrower. 366 00:19:11,320 --> 00:19:14,400 Speaker 1: So let's talk about LTV first and Foremost LTVs are 367 00:19:14,400 --> 00:19:18,160 Speaker 1: actually fairly conservative right now, and certainly we're conservative. Heading 368 00:19:18,160 --> 00:19:22,159 Speaker 1: into the pandemic, they were approaching call it fifty percent LTVs, 369 00:19:22,200 --> 00:19:24,320 Speaker 1: and that's sort of where they stand right now. I 370 00:19:24,359 --> 00:19:26,680 Speaker 1: think that might surprise a lot of people that lending 371 00:19:26,680 --> 00:19:29,840 Speaker 1: standards were actually tightening from a headline perspective. But let 372 00:19:29,840 --> 00:19:32,520 Speaker 1: me explain to you why that's the case in two thousand. 373 00:19:32,760 --> 00:19:35,080 Speaker 1: You know, if you would ask me where the upper 374 00:19:35,160 --> 00:19:38,960 Speaker 1: center of froth was real technical term for lending standards 375 00:19:39,040 --> 00:19:41,840 Speaker 1: post GFC, I would have told you it was around 376 00:19:41,880 --> 00:19:45,919 Speaker 1: twenty fourteen. Two fifteen, things were feeling really good. The 377 00:19:45,960 --> 00:19:49,040 Speaker 1: banks were giving out a lot of money, so much 378 00:19:49,119 --> 00:19:52,440 Speaker 1: so that the regulators and a joint statement came out 379 00:19:52,520 --> 00:19:56,320 Speaker 1: and told lenders, hey, guys, you basically have to slow 380 00:19:56,400 --> 00:19:59,040 Speaker 1: this down, and if you don't slow it down, we 381 00:19:59,160 --> 00:20:02,880 Speaker 1: might have some regulations. And here's that slapping of the rist, 382 00:20:02,920 --> 00:20:05,720 Speaker 1: if you will. Actually sort of worked and banks did 383 00:20:05,800 --> 00:20:09,280 Speaker 1: start to bring in lending standards. It also occurred at 384 00:20:09,280 --> 00:20:12,680 Speaker 1: the same time that risk retention under Dodd Frank was mandated. 385 00:20:12,840 --> 00:20:16,359 Speaker 1: So what's risk retention underd Frank? That basically said CMBs 386 00:20:16,440 --> 00:20:19,000 Speaker 1: issuers had to have skin in the game and they 387 00:20:19,280 --> 00:20:22,520 Speaker 1: or a third party had to retain five percent of 388 00:20:22,560 --> 00:20:24,960 Speaker 1: the entire deal for at least five years. And so 389 00:20:25,000 --> 00:20:27,240 Speaker 1: when you actually have to eat your own cooking, that 390 00:20:27,359 --> 00:20:31,240 Speaker 1: changes things a little bit. So headline LTVs went down, 391 00:20:31,400 --> 00:20:34,480 Speaker 1: headlined dscrs went up. These are all good things, but 392 00:20:35,440 --> 00:20:38,159 Speaker 1: maybe where the devil devils in the details, and you 393 00:20:38,200 --> 00:20:40,399 Speaker 1: were starting to see a lot more io loans, So 394 00:20:40,480 --> 00:20:43,719 Speaker 1: interest only loans. These are loans that don't you know, 395 00:20:43,840 --> 00:20:46,240 Speaker 1: pay down over term and have a blue maturity payment. 396 00:20:46,640 --> 00:20:50,040 Speaker 1: There was you know, certainly reserves for any number of 397 00:20:50,040 --> 00:20:52,080 Speaker 1: different things. This is cash that's put on the sidelines, 398 00:20:52,200 --> 00:20:55,360 Speaker 1: so that those a lot more prevalent pre financial crisis 399 00:20:55,680 --> 00:20:58,440 Speaker 1: interest only loans, Like I feel like you heard about 400 00:20:58,440 --> 00:21:00,960 Speaker 1: commercial mortgages that idea, Yeah, I'm gonna be a little 401 00:21:00,960 --> 00:21:04,080 Speaker 1: bit flipping here, but but anything sort of went prior 402 00:21:04,359 --> 00:21:07,560 Speaker 1: prior to the GFC. But look, ile loans are are 403 00:21:07,640 --> 00:21:10,520 Speaker 1: pretty prevalent over the past couple of years. You know, 404 00:21:10,600 --> 00:21:13,760 Speaker 1: all those all the additional money on the sidelines reserves, 405 00:21:14,000 --> 00:21:16,080 Speaker 1: if you will, those were sort of you know, not 406 00:21:16,400 --> 00:21:19,000 Speaker 1: to say they were waived, but but there was less requirements. 407 00:21:19,400 --> 00:21:23,760 Speaker 1: So while while I think the hard LTVs and dscrs 408 00:21:23,960 --> 00:21:28,119 Speaker 1: were pretty good, maybe the soft underwriting requirements were or 409 00:21:28,280 --> 00:21:31,000 Speaker 1: softer than they had been in the past. So a 410 00:21:31,000 --> 00:21:32,800 Speaker 1: little bit of give and take care, I would say, 411 00:21:32,920 --> 00:21:37,120 Speaker 1: you know, if anything, it's really a question about where 412 00:21:37,160 --> 00:21:39,200 Speaker 1: do you think the debt service coverage ratios are going. 413 00:21:39,520 --> 00:21:42,000 Speaker 1: So coming out of the GFC, there was this concept 414 00:21:42,080 --> 00:21:46,480 Speaker 1: of debt yield that came about. That's how banks underwrite loans. 415 00:21:46,960 --> 00:21:50,240 Speaker 1: Debt yield is effectively inoy divided by your loan balance. 416 00:21:50,720 --> 00:21:53,080 Speaker 1: Prior to the GFC, and certainly the early two thousands 417 00:21:53,080 --> 00:21:56,400 Speaker 1: loans were underwritten on debt service cover ratio. But after 418 00:21:56,440 --> 00:21:59,359 Speaker 1: the GFC, no one was concerned about falling interest rates. 419 00:21:59,400 --> 00:22:02,520 Speaker 1: They were only concerned about falling NI. So you underwrote 420 00:22:02,520 --> 00:22:06,600 Speaker 1: to debt yield. There's a really good scenario that some 421 00:22:06,720 --> 00:22:09,480 Speaker 1: loans with really strong debt yields, because NI is pretty 422 00:22:09,480 --> 00:22:13,560 Speaker 1: good right now, might have pretty poor dscrs in the future, 423 00:22:13,800 --> 00:22:16,400 Speaker 1: given how much interest rates have risen. So I think, 424 00:22:16,480 --> 00:22:19,919 Speaker 1: maybe Tracy, to answer your question about like, what's the 425 00:22:20,119 --> 00:22:22,000 Speaker 1: what's the biggest risk here, I think it's a debt 426 00:22:22,000 --> 00:22:24,800 Speaker 1: service coverag ray shows NI debt yields could still be 427 00:22:24,840 --> 00:22:27,800 Speaker 1: above ten percent twelve percent because NI is pretty strong 428 00:22:27,880 --> 00:22:30,240 Speaker 1: right now. Fundamentals feel pretty good. But if you have 429 00:22:30,280 --> 00:22:33,440 Speaker 1: a big shock to financing costs, your debt service coveragray 430 00:22:33,480 --> 00:22:35,000 Speaker 1: show could be a lot lower than two and a 431 00:22:35,040 --> 00:22:55,200 Speaker 1: half times, which is going to require recapitalization. Let's set 432 00:22:55,240 --> 00:22:57,720 Speaker 1: aside office for a second. Let's set aside some of 433 00:22:57,760 --> 00:23:01,200 Speaker 1: the troubled cities. Are there any old pockets that are 434 00:23:01,359 --> 00:23:05,360 Speaker 1: weak because again, we hear about certain categories of weakness 435 00:23:05,480 --> 00:23:08,240 Speaker 1: that are obvious that we've talked about them office building 436 00:23:08,240 --> 00:23:11,200 Speaker 1: in New York. How are some of these other categories 437 00:23:11,240 --> 00:23:13,119 Speaker 1: I think you said they are like fifteen in total 438 00:23:13,200 --> 00:23:15,200 Speaker 1: or something like that. Are most of the other ones 439 00:23:15,240 --> 00:23:17,520 Speaker 1: still looking pretty good or are their weaknesses elsewhere? I mean, 440 00:23:17,520 --> 00:23:19,720 Speaker 1: you're talking about a reap market that was down twenty 441 00:23:19,760 --> 00:23:21,719 Speaker 1: five percent in two thousand and twenty two, and if 442 00:23:21,760 --> 00:23:24,960 Speaker 1: you believe our views that this leading indicator, you know, 443 00:23:25,400 --> 00:23:28,800 Speaker 1: all the proper types experienced, you know, some level of 444 00:23:29,240 --> 00:23:32,320 Speaker 1: of of weakness to various different degrees. But a lot 445 00:23:32,359 --> 00:23:35,600 Speaker 1: of that presumably was like multiply multiples. Right, but but 446 00:23:35,400 --> 00:23:37,880 Speaker 1: but yes, but multiple is just a fancy way of 447 00:23:37,920 --> 00:23:40,840 Speaker 1: saying valuation terms. You take one, you know, if you 448 00:23:40,840 --> 00:23:43,480 Speaker 1: take the inverse of the multiple, that's capriate. But right, So, 449 00:23:43,520 --> 00:23:45,480 Speaker 1: what I'm saying, are there any other that are sort 450 00:23:45,520 --> 00:23:49,040 Speaker 1: of like clearly seeing poor revenues or poor rental in 451 00:23:49,400 --> 00:23:52,479 Speaker 1: the way an office landlord? Yeah, An, the answer is 452 00:23:52,640 --> 00:23:56,200 Speaker 1: not not really okay, because if you think about NY 453 00:23:56,320 --> 00:24:00,320 Speaker 1: growth overall in twenty twenty two, you at one point 454 00:24:00,359 --> 00:24:03,119 Speaker 1: where plus ten percent plus eleven percent in a Y 455 00:24:03,200 --> 00:24:05,159 Speaker 1: growth on a year of year basis, that's close to 456 00:24:05,160 --> 00:24:08,520 Speaker 1: a historical high. We are obviously seeing deceleration right now. 457 00:24:08,560 --> 00:24:11,359 Speaker 1: We're probably around seven percent right now, and we're underwriting 458 00:24:11,400 --> 00:24:14,400 Speaker 1: even slower in a Y growth in twenty twenty three, 459 00:24:14,520 --> 00:24:17,560 Speaker 1: given recessionary headwinds that we think are real. But a 460 00:24:17,560 --> 00:24:20,840 Speaker 1: lot of what's happening here is actually the refinancing risk, 461 00:24:21,280 --> 00:24:26,200 Speaker 1: and it's because valuations are lower because financing costs are higher. 462 00:24:26,600 --> 00:24:29,399 Speaker 1: I don't want to make two light of this, but 463 00:24:29,680 --> 00:24:33,119 Speaker 1: Office in many many respects is the exception to the 464 00:24:33,160 --> 00:24:36,399 Speaker 1: fundamental story. YEA, many of the other asset classes are 465 00:24:36,440 --> 00:24:39,720 Speaker 1: having quite fine in a Y growth. But I don't 466 00:24:39,720 --> 00:24:42,240 Speaker 1: want to be two probably dogs and rainbows over about 467 00:24:42,240 --> 00:24:45,359 Speaker 1: this because I truly believe that idiosyncratic risks are real. 468 00:24:45,840 --> 00:24:49,240 Speaker 1: You're going to have some multi family properties that were 469 00:24:49,560 --> 00:24:54,159 Speaker 1: purchased that really tight cap rates in advance of improving 470 00:24:54,160 --> 00:24:57,280 Speaker 1: and are accelerating revenue growth, and that business plan is 471 00:24:57,320 --> 00:24:59,840 Speaker 1: not going to come to fruition. So there is there 472 00:24:59,880 --> 00:25:04,000 Speaker 1: is some real risks here beyond just financing that that 473 00:25:04,560 --> 00:25:07,920 Speaker 1: is going to pressure valuations lower across property types. It's 474 00:25:07,960 --> 00:25:11,280 Speaker 1: going to lead to higher distress, lead to higher delinquencies. 475 00:25:11,640 --> 00:25:14,200 Speaker 1: Office is the poster child for this. But I don't 476 00:25:14,320 --> 00:25:16,400 Speaker 1: want to give you the idea that commercial real estate 477 00:25:16,400 --> 00:25:20,359 Speaker 1: fundamentals are uniquely as bad as office because they're not. 478 00:25:20,560 --> 00:25:24,160 Speaker 1: We sort of think office is the exception, not the norm. 479 00:25:25,480 --> 00:25:28,639 Speaker 1: So you mentioned refinancing risk there, and that's exactly what 480 00:25:28,680 --> 00:25:31,080 Speaker 1: I wanted to talk to you about next. And I'm 481 00:25:31,119 --> 00:25:34,560 Speaker 1: trying to avoid um sounding like a Judy Bloom novel 482 00:25:34,640 --> 00:25:37,919 Speaker 1: here or something. But where does refinancing come from? And like, 483 00:25:38,240 --> 00:25:41,360 Speaker 1: is the assumption that I mean, I assume a lot 484 00:25:41,359 --> 00:25:43,520 Speaker 1: of it is from banks. Is the assumption that banks 485 00:25:43,520 --> 00:25:44,879 Speaker 1: are just going to pull back on it in the 486 00:25:44,880 --> 00:25:48,840 Speaker 1: current environment. Yeah, So where does refinancing come from? First 487 00:25:48,840 --> 00:25:53,000 Speaker 1: of all, it's banks, it's insurance companies, it's the CMBs market, 488 00:25:53,440 --> 00:25:56,320 Speaker 1: it's debt funds and mortgage rate it's the GSS in 489 00:25:56,359 --> 00:26:00,680 Speaker 1: the case of multi family and student housing and seniors housing. 490 00:26:01,240 --> 00:26:04,760 Speaker 1: So there is a wide variety of financing sources out there. 491 00:26:04,920 --> 00:26:08,000 Speaker 1: Banks are a big portion of that. Insurance companies are 492 00:26:08,119 --> 00:26:10,800 Speaker 1: are a big portion of that. CMBs is a smaller 493 00:26:10,840 --> 00:26:14,040 Speaker 1: portion of that. But but there's a roide variety of 494 00:26:14,480 --> 00:26:17,560 Speaker 1: of of financing sources. So in terms of refinancing, look, 495 00:26:18,000 --> 00:26:20,800 Speaker 1: I think a lot of people are focusing on the 496 00:26:20,840 --> 00:26:23,480 Speaker 1: cost of financing side because that's real. You can see 497 00:26:23,480 --> 00:26:25,600 Speaker 1: it every day by looking at just where the risk 498 00:26:25,640 --> 00:26:28,000 Speaker 1: free rate has gone. You know it's at call three 499 00:26:28,000 --> 00:26:30,439 Speaker 1: and a half three point six percent today. You know 500 00:26:30,440 --> 00:26:32,520 Speaker 1: it was two hundred basis points lower a year ago. 501 00:26:32,680 --> 00:26:34,440 Speaker 1: That's a big deal. And when you think about where 502 00:26:34,520 --> 00:26:37,280 Speaker 1: credit spreads are going, those are wider as well. Tracy, 503 00:26:37,359 --> 00:26:40,000 Speaker 1: just maybe just give you some live updates on on 504 00:26:40,000 --> 00:26:44,080 Speaker 1: where these things are. The triple A CMBs market is 505 00:26:44,119 --> 00:26:46,679 Speaker 1: pricing about one hundred and thirty basis points over the 506 00:26:46,680 --> 00:26:50,000 Speaker 1: ten year treasury, and the triple B minus market is 507 00:26:50,040 --> 00:26:52,720 Speaker 1: north of nine hundred at this point. So these are 508 00:26:52,760 --> 00:26:55,560 Speaker 1: these are those are much wider spreads. The good news is, 509 00:26:56,000 --> 00:26:58,360 Speaker 1: you know, the CMBs market, the debt markets are actually 510 00:26:58,640 --> 00:27:01,760 Speaker 1: pricing in all these things that we've been talking about. Yeah, 511 00:27:01,800 --> 00:27:04,800 Speaker 1: it's not like the CMBs market is you know, naive 512 00:27:04,880 --> 00:27:07,520 Speaker 1: about this nine hundred over the ten year treasury when 513 00:27:07,560 --> 00:27:09,960 Speaker 1: the ten ye treasures at three fifty you're talking about 514 00:27:10,000 --> 00:27:12,320 Speaker 1: it almost a twelve and a half thirteen percent yield. 515 00:27:12,720 --> 00:27:15,919 Speaker 1: That's a that's a pretty attractive yield given you know 516 00:27:15,960 --> 00:27:19,800 Speaker 1: the risk of loss. So I do think there is 517 00:27:19,400 --> 00:27:21,640 Speaker 1: is a lot in the price of where the spreads 518 00:27:21,640 --> 00:27:25,400 Speaker 1: are right now. But look, availability of debt capital it's 519 00:27:25,520 --> 00:27:28,440 Speaker 1: probably not going to be, you know, as as robust 520 00:27:28,480 --> 00:27:31,400 Speaker 1: as it was last year or even twenty nineteen. So 521 00:27:31,440 --> 00:27:33,080 Speaker 1: when you think about who's gonna be able to get 522 00:27:33,119 --> 00:27:37,119 Speaker 1: debt capital, I think a well qualified a well qualified 523 00:27:37,160 --> 00:27:40,440 Speaker 1: sponsor that's well capitalized with a good business plan, they 524 00:27:40,440 --> 00:27:43,119 Speaker 1: can probably get debt right now, even on an office property, 525 00:27:43,160 --> 00:27:45,959 Speaker 1: believe it or not. The problem with thought with office 526 00:27:46,000 --> 00:27:48,840 Speaker 1: just to use maybe an example, is this binary you 527 00:27:48,840 --> 00:27:52,800 Speaker 1: can get debt at attractive levels or you can't. It's 528 00:27:52,840 --> 00:27:55,560 Speaker 1: it's it's not like an office. A lender is going 529 00:27:55,600 --> 00:27:58,000 Speaker 1: to come back and say, hey, guess what, I don't 530 00:27:58,000 --> 00:28:00,680 Speaker 1: feel really comfortable with you as a sponsor your business plan. 531 00:28:01,200 --> 00:28:03,080 Speaker 1: I'll give that to you at a thirty or forty 532 00:28:03,080 --> 00:28:05,720 Speaker 1: percent LTV instead of a fifty percent LTV. That's not 533 00:28:05,760 --> 00:28:09,360 Speaker 1: the way it works. It's almost like bit out interesting, Wait, 534 00:28:09,400 --> 00:28:10,920 Speaker 1: why is that is that just like a sort of 535 00:28:10,960 --> 00:28:13,600 Speaker 1: like norms and cultural thing, or is it does not 536 00:28:13,720 --> 00:28:17,399 Speaker 1: make business sense to try to deal with someone in 537 00:28:17,840 --> 00:28:21,240 Speaker 1: those marginals. See all of the above. Okay, yeah, it's 538 00:28:21,560 --> 00:28:23,199 Speaker 1: if you're going to if you're a lender and you 539 00:28:23,240 --> 00:28:26,560 Speaker 1: have to go to your investment committee and you're saying, hey, look, 540 00:28:26,760 --> 00:28:29,399 Speaker 1: I'm going to lend on this office property, you gotta 541 00:28:29,720 --> 00:28:31,679 Speaker 1: pretty much make sure your eyes are dotted and your 542 00:28:31,720 --> 00:28:36,280 Speaker 1: teas are crossed. Now. Now, the other reality is lenders 543 00:28:36,280 --> 00:28:38,280 Speaker 1: are really focused on one thing and one thing only 544 00:28:38,280 --> 00:28:40,640 Speaker 1: getting their money back, right. And you know, if you 545 00:28:40,640 --> 00:28:42,400 Speaker 1: don't get your money back, you take a loss. It 546 00:28:42,440 --> 00:28:44,960 Speaker 1: doesn't matter what that spread was, you're not gonna get 547 00:28:44,960 --> 00:28:48,440 Speaker 1: paid enough. So just on office I know, we're sort 548 00:28:48,440 --> 00:28:50,920 Speaker 1: of saying, there's a lot of other categories besides the one. 549 00:28:50,960 --> 00:28:52,560 Speaker 1: The stairs us in the face every day of New 550 00:28:52,640 --> 00:28:56,160 Speaker 1: York real estate. But New York office space, the publicly 551 00:28:56,240 --> 00:28:59,640 Speaker 1: traded instruments that seem to track your office space. I 552 00:28:59,640 --> 00:29:01,760 Speaker 1: mean they look like really dismal. I don't know, I'm 553 00:29:01,800 --> 00:29:04,680 Speaker 1: not asking for your like views unnamed, but like, I know, 554 00:29:04,840 --> 00:29:06,920 Speaker 1: you know, it's like sl Green is a company that 555 00:29:07,240 --> 00:29:08,640 Speaker 1: you see, you owned a lot of buildings in New 556 00:29:08,680 --> 00:29:11,200 Speaker 1: York and they're publicly traded, and that was an eighty 557 00:29:11,240 --> 00:29:14,560 Speaker 1: dollars stock in March of twenty twenty two, and today 558 00:29:14,600 --> 00:29:18,040 Speaker 1: it's a twenty eight dollars stock. Prior to COVID it 559 00:29:18,120 --> 00:29:20,200 Speaker 1: was over one hundred dollar stock. Like, what is the 560 00:29:20,280 --> 00:29:25,120 Speaker 1: market saying, look about this type of property that's getting 561 00:29:25,280 --> 00:29:28,120 Speaker 1: so hard and for not them specifically, but for someone 562 00:29:28,160 --> 00:29:31,360 Speaker 1: who owned property like them, what kind of situation are 563 00:29:31,400 --> 00:29:34,560 Speaker 1: they facing next time they have to refinance a building 564 00:29:34,720 --> 00:29:37,160 Speaker 1: or you know, remortgage your building or whatever. Yeah, well 565 00:29:37,520 --> 00:29:41,040 Speaker 1: let me first you know, yeah, yeah, let first be 566 00:29:41,040 --> 00:29:44,080 Speaker 1: clear that we're pretty cautious on office in our list 567 00:29:44,080 --> 00:29:49,040 Speaker 1: of portfolio. Look, we have very little office exposure. Why 568 00:29:49,120 --> 00:29:51,520 Speaker 1: is that the case? Well, maybe to answer your first question, 569 00:29:52,400 --> 00:29:55,320 Speaker 1: the public markets are telling you that office valuations are 570 00:29:55,320 --> 00:29:59,480 Speaker 1: going to be down substantially. Why is that the case, Well, 571 00:29:59,520 --> 00:30:02,600 Speaker 1: it's the it's for three three reasons. First of all, 572 00:30:02,640 --> 00:30:05,320 Speaker 1: you don't know where the NY growth is going. Okay, 573 00:30:05,520 --> 00:30:09,160 Speaker 1: it's uncertain. Yeah, I just wanted to make sure. Sorry, 574 00:30:09,160 --> 00:30:11,680 Speaker 1: sorry about that, which is basically revenue minus expenses for 575 00:30:11,800 --> 00:30:13,960 Speaker 1: those playing at home. You don't know where your NEBT 576 00:30:13,960 --> 00:30:17,280 Speaker 1: operating income is growing going. You don't know how much 577 00:30:17,360 --> 00:30:21,080 Speaker 1: capex you have to spend to generate that NI, and 578 00:30:21,200 --> 00:30:23,480 Speaker 1: you don't know what amount of debt you can get 579 00:30:23,520 --> 00:30:27,480 Speaker 1: on it. So if you put NY and capex and 580 00:30:27,680 --> 00:30:30,840 Speaker 1: financing into it, that's how you get your leveed IRR 581 00:30:30,880 --> 00:30:33,400 Speaker 1: and cap rates just a product of that. The market 582 00:30:33,480 --> 00:30:35,800 Speaker 1: is telling you that, the list at market is telling 583 00:30:35,840 --> 00:30:38,840 Speaker 1: you that cap rates have to go substantially higher. I mean, 584 00:30:39,040 --> 00:30:41,280 Speaker 1: maybe just to come back and and and and talk 585 00:30:41,320 --> 00:30:44,040 Speaker 1: about this a little bit more. The listed market, on 586 00:30:44,160 --> 00:30:47,920 Speaker 1: average across property types is trading at a high five 587 00:30:47,960 --> 00:30:51,440 Speaker 1: percent implied cap rate right now. The private market, as 588 00:30:51,440 --> 00:30:54,160 Speaker 1: measured by the Newcrief Odyssey Index is still at three nine. 589 00:30:54,720 --> 00:30:58,920 Speaker 1: That's a crazy difference between public and private values. Yeah, 590 00:30:58,960 --> 00:31:02,600 Speaker 1: the listed market is at a high five percent caprate. Okay, 591 00:31:02,680 --> 00:31:04,120 Speaker 1: so last week it was like at five to seven. 592 00:31:04,120 --> 00:31:05,840 Speaker 1: It's gonna be wider than that now. And it cap 593 00:31:05,920 --> 00:31:09,320 Speaker 1: rates is like a inverse P, so that means that's 594 00:31:09,520 --> 00:31:11,960 Speaker 1: that's in stocks, you would call it twenty P. You 595 00:31:12,040 --> 00:31:14,840 Speaker 1: call it a five percent capri. So multiples right now 596 00:31:15,040 --> 00:31:18,040 Speaker 1: for multiples after taking ato account, cap x in the 597 00:31:18,080 --> 00:31:20,200 Speaker 1: reat space around eighteen and a half times, so you're 598 00:31:20,240 --> 00:31:22,680 Speaker 1: pretty close. My only point to you is that there's 599 00:31:22,680 --> 00:31:26,040 Speaker 1: a two hundred bases point difference between where reats are 600 00:31:26,040 --> 00:31:28,880 Speaker 1: pricing cap rates and where the private markets pricing cap rates. 601 00:31:29,240 --> 00:31:31,800 Speaker 1: We think, you know, before before we went on, you're 602 00:31:31,800 --> 00:31:34,080 Speaker 1: asking me, hey, aren't you a little bit more constructive? 603 00:31:34,120 --> 00:31:36,160 Speaker 1: And I was like, well, look, I am constructive on 604 00:31:36,200 --> 00:31:39,000 Speaker 1: reets because I think the entry points are pretty attractive here. 605 00:31:39,440 --> 00:31:42,160 Speaker 1: But the private market, you know, we still think valuations 606 00:31:42,160 --> 00:31:44,400 Speaker 1: are going down. So if you're a legacy holder of 607 00:31:44,480 --> 00:31:48,200 Speaker 1: private valuations, you're still gonna have some headwinds and feel 608 00:31:48,200 --> 00:31:50,400 Speaker 1: some pain in twenty twenty three. But if you have 609 00:31:50,480 --> 00:31:53,320 Speaker 1: new capital to invest in private, that's probably pretty good. 610 00:31:54,320 --> 00:31:56,480 Speaker 1: I want to buy low, sell high. I think that's 611 00:31:56,480 --> 00:31:57,920 Speaker 1: going to happen in twenty three, and I think the 612 00:31:58,240 --> 00:32:01,320 Speaker 1: reat markets pricing in a more pain than private markets 613 00:32:01,360 --> 00:32:04,280 Speaker 1: are pricing in right now. Yeah, it does feel like 614 00:32:04,400 --> 00:32:07,200 Speaker 1: I mean, in addition to interest rates, it feels like 615 00:32:07,240 --> 00:32:12,880 Speaker 1: the wild card here is basically the availability of capital. Sure, 616 00:32:13,000 --> 00:32:15,040 Speaker 1: I mean, I'm not pushing back on that at all. 617 00:32:15,160 --> 00:32:17,360 Speaker 1: I mean, commercial real estate, Tracy, I think you probably 618 00:32:17,400 --> 00:32:20,200 Speaker 1: heard me say this before, it's inherently a level asset class. 619 00:32:20,680 --> 00:32:24,200 Speaker 1: So it's financing cost in the availability of capital. I 620 00:32:24,200 --> 00:32:26,800 Speaker 1: think you're going to quickly figure out who can swim 621 00:32:26,800 --> 00:32:29,520 Speaker 1: really strong against As the tide's going out, why can't 622 00:32:29,520 --> 00:32:31,800 Speaker 1: it keep getting worse? And But the reason I ask 623 00:32:31,960 --> 00:32:33,560 Speaker 1: that is, you know you're like, oh, I want to 624 00:32:33,560 --> 00:32:36,440 Speaker 1: buy low and still high whicheveryone does. And maybe this 625 00:32:36,560 --> 00:32:38,479 Speaker 1: is a moment to buy low because there is clearly 626 00:32:38,480 --> 00:32:42,400 Speaker 1: a lot of distress out there. But you know, again, 627 00:32:42,720 --> 00:32:45,720 Speaker 1: it was the rates move. You know, we had a 628 00:32:45,760 --> 00:32:48,600 Speaker 1: forty year down, we had a forty year decline in rates. 629 00:32:48,640 --> 00:32:50,960 Speaker 1: We're like one and a half years into the increase 630 00:32:51,000 --> 00:32:54,280 Speaker 1: in rates. Why couldn't, Like, do you worry about higher 631 00:32:54,360 --> 00:32:58,080 Speaker 1: and higher for longer? Do you worry that that for offices, 632 00:32:58,160 --> 00:33:00,720 Speaker 1: that there's not a trend that's going to bounce back soon? 633 00:33:00,840 --> 00:33:04,880 Speaker 1: This is like in these distress cities, distress can build 634 00:33:04,920 --> 00:33:07,680 Speaker 1: upon distress. The few people not coming into an office 635 00:33:07,680 --> 00:33:10,400 Speaker 1: can erode an area's tax base and make people wanted 636 00:33:10,400 --> 00:33:13,520 Speaker 1: to stay home too, Like do you worry about acceleration 637 00:33:13,720 --> 00:33:16,560 Speaker 1: of headlands? Are you asking me what keeps me out 638 00:33:16,560 --> 00:33:20,280 Speaker 1: at night? But beyond my forecast, I guess I think 639 00:33:21,000 --> 00:33:23,440 Speaker 1: the single if I was on here a month ago, Yeah, 640 00:33:23,560 --> 00:33:25,920 Speaker 1: I would have been telling you the single biggest risk 641 00:33:26,600 --> 00:33:31,640 Speaker 1: was a stronger economy that begets higher inflation and the 642 00:33:31,800 --> 00:33:35,760 Speaker 1: Fed has to do more and more to temper that. 643 00:33:36,200 --> 00:33:38,520 Speaker 1: And so look, I'll be very clear if you know 644 00:33:38,920 --> 00:33:41,400 Speaker 1: the terminal rate, so that's basically where the Fed Fed 645 00:33:41,400 --> 00:33:43,560 Speaker 1: funds target rates going. If that's closer to six than 646 00:33:43,640 --> 00:33:48,040 Speaker 1: six and a half, tenor treasure rates probably before all 647 00:33:48,040 --> 00:33:49,760 Speaker 1: of this was happening, probably aren't supposed to be at 648 00:33:49,760 --> 00:33:51,120 Speaker 1: three and a half. They're probably supposed to be a 649 00:33:51,120 --> 00:33:53,560 Speaker 1: lot higher than that. And so you know, again I'm 650 00:33:53,600 --> 00:33:55,440 Speaker 1: gonna get wonky here a little bit, but we think 651 00:33:55,600 --> 00:33:59,080 Speaker 1: real rates are really what drive commercial real estate valuations. 652 00:33:59,160 --> 00:34:03,080 Speaker 1: Real rates is the different between nominal rates and inflation expectations. 653 00:34:03,560 --> 00:34:06,000 Speaker 1: I think if real rates go to around one, that's 654 00:34:06,080 --> 00:34:08,920 Speaker 1: probably pretty good for real estate, but if they're going 655 00:34:08,960 --> 00:34:12,080 Speaker 1: to be closer to two, that's actually probably not so 656 00:34:12,120 --> 00:34:14,840 Speaker 1: good for real estate. So yeah, that's absolutely keeping me 657 00:34:14,920 --> 00:34:18,600 Speaker 1: up at night. Our views heading into this year was 658 00:34:18,640 --> 00:34:22,960 Speaker 1: that we were transitioning from a stagflationary to a stagnationary market. 659 00:34:23,200 --> 00:34:25,319 Speaker 1: What does stagnation mean? Well, let me let me first 660 00:34:25,320 --> 00:34:28,560 Speaker 1: of all say what is the stagflationary environment. Stagflation is 661 00:34:28,560 --> 00:34:31,520 Speaker 1: where interest rates are rising and growth are slowing. The 662 00:34:31,560 --> 00:34:34,480 Speaker 1: FED was in a really awkward position in two twenty 663 00:34:34,480 --> 00:34:36,759 Speaker 1: two for reasons that happened in two thousand and twenty one. 664 00:34:36,760 --> 00:34:39,160 Speaker 1: They didn't raise rates fast enough, so inflation was at 665 00:34:39,160 --> 00:34:42,560 Speaker 1: record high levels. They had to raise interest rates at 666 00:34:42,560 --> 00:34:45,120 Speaker 1: a record pace to slow growth in the economy and 667 00:34:45,120 --> 00:34:49,640 Speaker 1: the hopes of taming inflation. That's stagflation. We thought, we think, 668 00:34:50,040 --> 00:34:53,000 Speaker 1: we still think that we're moving into a stagnationary environment. 669 00:34:53,239 --> 00:34:56,080 Speaker 1: That's where interest rates come down and growth slows. That's 670 00:34:56,080 --> 00:34:59,080 Speaker 1: actually really good for listed markets. Not so great for 671 00:34:59,120 --> 00:35:02,040 Speaker 1: private markets because sort of start catching up, but it's 672 00:35:02,080 --> 00:35:05,800 Speaker 1: pretty good for listed markets. You know. Best case scenario 673 00:35:06,200 --> 00:35:09,600 Speaker 1: is that all the Fed's medicine starts to work, inflation slows, 674 00:35:09,719 --> 00:35:13,279 Speaker 1: and they don't have to they stop raising rates, but 675 00:35:13,320 --> 00:35:16,319 Speaker 1: they also don't have to cut interest rates. The other 676 00:35:16,360 --> 00:35:18,000 Speaker 1: thing that's keeping me up at night, to be very clear, 677 00:35:18,080 --> 00:35:21,040 Speaker 1: is that the market's pricing in six interest rate cuts 678 00:35:21,080 --> 00:35:23,719 Speaker 1: over the next eighteen months. I don't want to see 679 00:35:23,760 --> 00:35:26,640 Speaker 1: interest rate cuts. I think about when the Fed cuts 680 00:35:26,640 --> 00:35:29,839 Speaker 1: interest rates, it's because something bad is actually happening. That's 681 00:35:29,880 --> 00:35:32,000 Speaker 1: not a good thing for the market. So you know, 682 00:35:32,440 --> 00:35:35,080 Speaker 1: we actually thought we were, you know, sort of in 683 00:35:35,080 --> 00:35:38,440 Speaker 1: this not too hot, not too cold environment. You know, 684 00:35:39,440 --> 00:35:42,480 Speaker 1: maybe the unintended consequence of these bank failures is this. 685 00:35:42,520 --> 00:35:45,440 Speaker 1: It actually a showing that the FEDS interest rate hikes 686 00:35:45,480 --> 00:35:47,760 Speaker 1: are finally working and it's starting to break some things. 687 00:35:48,120 --> 00:35:51,160 Speaker 1: And that makes me feel, maybe counterintuitively, a little bit 688 00:35:51,200 --> 00:35:54,040 Speaker 1: better about where we're going. I hope it doesn't push 689 00:35:54,120 --> 00:35:56,480 Speaker 1: us into a really deep recession. I think recession is 690 00:35:56,520 --> 00:35:58,919 Speaker 1: our base case, but but you know, it's the two 691 00:35:59,120 --> 00:36:01,759 Speaker 1: extremes that me up at night. A much hotter and 692 00:36:01,800 --> 00:36:04,120 Speaker 1: stronger economy where interest rates have to go higher than 693 00:36:04,160 --> 00:36:07,520 Speaker 1: where they are right now, and a pretty hard recession, 694 00:36:07,719 --> 00:36:10,719 Speaker 1: which you know, I would argue that a recession is 695 00:36:10,719 --> 00:36:14,160 Speaker 1: the base case. It's just a matter of degree. Yeah, 696 00:36:14,239 --> 00:36:16,319 Speaker 1: So there was one thing I wanted to ask you, 697 00:36:16,360 --> 00:36:18,319 Speaker 1: and I think Joe and I are gonna try to 698 00:36:18,360 --> 00:36:22,239 Speaker 1: do an episode that focuses on, I guess the physical 699 00:36:22,400 --> 00:36:27,080 Speaker 1: challenges of converting offices to residential at some point, but 700 00:36:27,719 --> 00:36:32,839 Speaker 1: maybe from a financing market perspective, you know, could you 701 00:36:32,920 --> 00:36:35,799 Speaker 1: have a situation where a lot of these offices do 702 00:36:35,920 --> 00:36:39,880 Speaker 1: get converted to resie and what would that mean first, 703 00:36:39,960 --> 00:36:44,160 Speaker 1: CRI investors and lenders in general. Do you know, do 704 00:36:44,360 --> 00:36:47,640 Speaker 1: CRI people who have a big portfolio of office properties 705 00:36:47,680 --> 00:36:50,680 Speaker 1: do they suddenly become residential lenders? Or I mean, I 706 00:36:50,719 --> 00:36:53,200 Speaker 1: guess they would all be classified as multi family. But 707 00:36:53,320 --> 00:36:55,640 Speaker 1: how would that work exactly? Yeah, it's sort of a 708 00:36:55,680 --> 00:36:58,239 Speaker 1: good tie into some of the other podcasts that you've 709 00:36:58,280 --> 00:37:01,000 Speaker 1: done over the past a couple of weeks. Look, let 710 00:37:01,320 --> 00:37:03,479 Speaker 1: me say in an outset, we do not have enough 711 00:37:03,760 --> 00:37:06,000 Speaker 1: housing in the United States. I think you've covered that 712 00:37:06,040 --> 00:37:08,399 Speaker 1: in prior podcasts. We can debate why that's the case. 713 00:37:08,440 --> 00:37:10,239 Speaker 1: I think you've already covered it, But we don't have 714 00:37:10,360 --> 00:37:13,319 Speaker 1: enough housing in the United States. So the highest and 715 00:37:13,360 --> 00:37:15,560 Speaker 1: best use for a lot of these office properties is 716 00:37:15,600 --> 00:37:18,480 Speaker 1: not office. And you could make a case in New 717 00:37:18,560 --> 00:37:22,759 Speaker 1: York City that we are have a significant shortage of 718 00:37:22,880 --> 00:37:26,640 Speaker 1: affordable housing in New York City. So it does make 719 00:37:26,680 --> 00:37:28,959 Speaker 1: sense if I could make way my magic Verry Wand 720 00:37:28,960 --> 00:37:32,800 Speaker 1: and say convert from office to multifamily. You're probably supposed 721 00:37:32,800 --> 00:37:35,840 Speaker 1: to do that for a variety of reasons. It's actually 722 00:37:37,000 --> 00:37:41,000 Speaker 1: it's actually much easier said than done. For a whole 723 00:37:41,040 --> 00:37:44,279 Speaker 1: host for different reasons, including zoning. It's not like all 724 00:37:44,280 --> 00:37:47,200 Speaker 1: of these properties are zoned from multifamily, and so again 725 00:37:47,320 --> 00:37:49,399 Speaker 1: you could come back to how do you think about 726 00:37:49,400 --> 00:37:51,920 Speaker 1: commercial real estate. It's a single asset class with a 727 00:37:51,920 --> 00:37:54,600 Speaker 1: lot of different property types. All these different municipalities have 728 00:37:54,640 --> 00:37:56,879 Speaker 1: different zoning laws, and so you have to go through 729 00:37:56,960 --> 00:37:59,600 Speaker 1: a rezoning. It's sort of like the same reason why 730 00:38:00,080 --> 00:38:02,839 Speaker 1: prior to COVID we were talking. There was talk about, well, 731 00:38:02,880 --> 00:38:06,319 Speaker 1: let's just make all of these malls industrial facilities. It's 732 00:38:06,400 --> 00:38:09,719 Speaker 1: just not so easy. There is one off examples where 733 00:38:09,760 --> 00:38:11,200 Speaker 1: you can get it done, and it makes a lot 734 00:38:11,280 --> 00:38:14,239 Speaker 1: of sense, but again it's it's not a cure for 735 00:38:14,280 --> 00:38:18,359 Speaker 1: everything yet. All right, Rich, we're going to leave it there. 736 00:38:18,400 --> 00:38:21,319 Speaker 1: That was such a good overview of the space, and 737 00:38:21,440 --> 00:38:23,799 Speaker 1: you know clearly there's a lot going on, but you 738 00:38:23,840 --> 00:38:26,040 Speaker 1: were very good at walking us through the nuance of 739 00:38:26,040 --> 00:38:28,520 Speaker 1: the different subsectors and the different way of looking at 740 00:38:28,960 --> 00:38:32,080 Speaker 1: prices and valuation at the moment. So thank you so much. Sure, 741 00:38:32,120 --> 00:38:34,160 Speaker 1: thanks for having me again. Thanks Rich, that was great. 742 00:38:47,600 --> 00:38:50,160 Speaker 1: So Joe, I thought that was a really good walk 743 00:38:50,200 --> 00:38:54,200 Speaker 1: through through all of these different parts and for me, 744 00:38:54,280 --> 00:38:56,600 Speaker 1: I guess the most salient thing is what rich was 745 00:38:56,640 --> 00:39:00,640 Speaker 1: talking about, the discrepancy between the public and private valuations 746 00:39:00,680 --> 00:39:02,400 Speaker 1: at the moment, because you have seen a lot of 747 00:39:02,440 --> 00:39:06,439 Speaker 1: the mortgage rates just collapse in recent months, you haven't 748 00:39:06,440 --> 00:39:09,319 Speaker 1: seen the same pressures on the private side. Although you know, 749 00:39:09,719 --> 00:39:13,200 Speaker 1: I guess the clues in the name those particular valuations 750 00:39:13,200 --> 00:39:16,200 Speaker 1: aren't quite as transparent right now. I mean, if you 751 00:39:16,239 --> 00:39:17,880 Speaker 1: look at like some of them, I mean, you know, 752 00:39:18,120 --> 00:39:21,440 Speaker 1: listeners like pull up a chart of like Vornado or 753 00:39:21,640 --> 00:39:23,480 Speaker 1: sell Green, like some of these names, I mean they're 754 00:39:23,520 --> 00:39:26,920 Speaker 1: real dismal, like below the COVID lows when people were 755 00:39:26,920 --> 00:39:28,560 Speaker 1: talking about oh, no one would ever go into an 756 00:39:28,600 --> 00:39:33,719 Speaker 1: office ever. Again, so like between the interest rate increases, 757 00:39:33,800 --> 00:39:37,759 Speaker 1: between concerns about just like the actual net income and 758 00:39:37,800 --> 00:39:40,480 Speaker 1: so forth, the public market is given clearly a very 759 00:39:40,520 --> 00:39:43,799 Speaker 1: grim assessment. Yeah. And then also the definition of CRIS 760 00:39:43,880 --> 00:39:48,480 Speaker 1: sort of a leveraged bet on interest rates and availability 761 00:39:48,680 --> 00:39:50,919 Speaker 1: of capital. I think that's going to be a really 762 00:39:50,920 --> 00:39:54,400 Speaker 1: good way to frame it going forward, because even before 763 00:39:55,239 --> 00:39:58,520 Speaker 1: recent events and the collapse of Silicon Valley Bank and 764 00:39:58,600 --> 00:40:03,520 Speaker 1: worries over the wider banking system, there was obviously concerned 765 00:40:03,520 --> 00:40:05,880 Speaker 1: about what was going on in CRE And it's going 766 00:40:05,920 --> 00:40:09,720 Speaker 1: to be really interesting to see how this financial crisis 767 00:40:09,760 --> 00:40:13,400 Speaker 1: shakes out, because if it leads to the FED cutting 768 00:40:13,400 --> 00:40:16,840 Speaker 1: interest rates, well maybe that would be better from a 769 00:40:17,040 --> 00:40:21,560 Speaker 1: purer financing cost perspective, but to Rich's point, it would 770 00:40:21,560 --> 00:40:24,000 Speaker 1: mean something bad is going on in the economy, and 771 00:40:24,040 --> 00:40:26,640 Speaker 1: it would probably mean that there was less brisk appetite 772 00:40:26,680 --> 00:40:29,200 Speaker 1: in general out there. Yeah. Right. You know, it's the 773 00:40:29,440 --> 00:40:32,600 Speaker 1: same intuition with stocks, which is that if the FED 774 00:40:32,840 --> 00:40:36,680 Speaker 1: is cutting rates, it's probably at a time when revenues 775 00:40:36,719 --> 00:40:39,279 Speaker 1: are coming down, when net incomes are coming down, Like 776 00:40:39,360 --> 00:40:41,719 Speaker 1: it's often the case that it goes hand in hand. 777 00:40:41,719 --> 00:40:44,480 Speaker 1: So ostensibly it seems bullish, you know. I guess to 778 00:40:44,600 --> 00:40:47,640 Speaker 1: my mind, the question is like, yes, there's going to 779 00:40:47,680 --> 00:40:50,640 Speaker 1: be some cyclical shift at some point, but you know, 780 00:40:50,760 --> 00:40:53,040 Speaker 1: this is an area if it's so rate sensitive, well 781 00:40:53,080 --> 00:40:55,239 Speaker 1: we're coming off like you know, the forty year rate 782 00:40:55,360 --> 00:40:59,080 Speaker 1: bull market, and it could be that these sort of 783 00:40:59,080 --> 00:41:02,239 Speaker 1: elevated rates not just stay elevated for years. Maybe they're 784 00:41:02,239 --> 00:41:04,399 Speaker 1: going to keep getting elevated. I don't think we really 785 00:41:04,440 --> 00:41:07,600 Speaker 1: have like any I don't think anyone like knows for sure. 786 00:41:07,680 --> 00:41:10,200 Speaker 1: I mean you could see why it's a stressed area. 787 00:41:10,280 --> 00:41:12,520 Speaker 1: I did appreciate though, and I do think it is 788 00:41:12,560 --> 00:41:14,320 Speaker 1: easy for us in New York to think that all 789 00:41:14,400 --> 00:41:16,960 Speaker 1: commercial real estate is like a handful of half empty 790 00:41:17,000 --> 00:41:21,120 Speaker 1: buildings and they're like clinics and data center totally. Although 791 00:41:21,200 --> 00:41:24,240 Speaker 1: Jim Chano's you know, he's he's short the data centers, 792 00:41:24,320 --> 00:41:26,320 Speaker 1: or he at least was, so he has negative aspects 793 00:41:26,320 --> 00:41:30,320 Speaker 1: of those. But there's data centers that's its own distinct area. 794 00:41:30,440 --> 00:41:34,120 Speaker 1: You know, There's there's a you know, assisted living spaces 795 00:41:34,120 --> 00:41:37,120 Speaker 1: that in commercial real estate, so all kinds of categories. 796 00:41:37,160 --> 00:41:40,000 Speaker 1: It is crazy to think that with you know, the 797 00:41:40,040 --> 00:41:43,399 Speaker 1: pace of interest rate hikes last year, you still saw 798 00:41:43,520 --> 00:41:48,000 Speaker 1: commercial property prices go up as a total, and that, 799 00:41:48,440 --> 00:41:51,279 Speaker 1: you know, that is because it is not a monolithic 800 00:41:51,440 --> 00:41:56,319 Speaker 1: sector and it is not just massive office buildings in Manhattan. 801 00:41:56,520 --> 00:41:58,920 Speaker 1: So I'm sure we're gonna end up talking more about 802 00:41:58,960 --> 00:42:01,080 Speaker 1: this topic, but for now, shall we leave it there? 803 00:42:01,320 --> 00:42:04,360 Speaker 1: Let's leave it there. Hey, this has been another episode 804 00:42:04,440 --> 00:42:07,080 Speaker 1: of the Odd Thoughts podcast. I'm Tracy Alloway. You can 805 00:42:07,120 --> 00:42:10,040 Speaker 1: follow me on Twitter at Tracy Alloway, and I'm Joe 806 00:42:10,120 --> 00:42:13,640 Speaker 1: wisn't Thal. You can follow me on Twitter at the Stalwart. 807 00:42:13,960 --> 00:42:18,279 Speaker 1: Follow our producers Carmen Rodriguez at Carmen Arman and Dash 808 00:42:18,320 --> 00:42:21,960 Speaker 1: Bennett at Dashbot. Check out all of our podcasts on 809 00:42:22,000 --> 00:42:25,399 Speaker 1: Twitter under the handle at podcasts, and for more Odd 810 00:42:25,480 --> 00:42:28,520 Speaker 1: Lots content, go to Bloomberg dot com slash odd Lots, 811 00:42:28,840 --> 00:42:31,080 Speaker 1: where we post transcripts. We have a blog and a 812 00:42:31,160 --> 00:43:00,520 Speaker 1: weekly newsletter comes out every Friday. Thanks for listening. Two