1 00:00:03,120 --> 00:00:10,559 Speaker 1: Bloomberg Audio Studios, podcasts, radio news. You know, one of 2 00:00:10,600 --> 00:00:12,360 Speaker 1: the things that kind of surprised me is there was 3 00:00:12,400 --> 00:00:16,680 Speaker 1: all that concern about commercial real estate and specifically office buildings, 4 00:00:17,000 --> 00:00:19,640 Speaker 1: and instead we've seen it feels like we've seen more 5 00:00:19,680 --> 00:00:21,720 Speaker 1: stress in the multifamily space. 6 00:00:21,960 --> 00:00:24,000 Speaker 2: Yeah, that's a good point. I don't know, Like I'm 7 00:00:24,040 --> 00:00:27,040 Speaker 2: still worried because I still see these numbers, at least 8 00:00:27,080 --> 00:00:31,080 Speaker 2: an aggregate of vacancies not improving. And I sort of thought, 9 00:00:31,480 --> 00:00:33,920 Speaker 2: you know, about six months ago there was another rash 10 00:00:34,000 --> 00:00:37,640 Speaker 2: of headlines about companies calling workers back to the office. 11 00:00:37,640 --> 00:00:40,880 Speaker 2: But I'm not sure if there's improvement. Like I'm still anxious. 12 00:00:41,000 --> 00:00:43,479 Speaker 2: I'm not comfortable saying coast is clear yet. 13 00:00:43,479 --> 00:00:46,680 Speaker 1: But what do I know? You're caveating yourself caveat I 14 00:00:46,720 --> 00:00:47,879 Speaker 1: feel like that's what you're doing. 15 00:00:50,320 --> 00:00:55,600 Speaker 2: I did a deadlift one. 16 00:00:53,280 --> 00:00:57,360 Speaker 3: Okay, barges. 17 00:00:57,520 --> 00:00:59,520 Speaker 2: This isn't after school special, except. 18 00:00:59,280 --> 00:01:01,800 Speaker 1: I've decided I'm in a base my entire personality going 19 00:01:01,840 --> 00:01:05,080 Speaker 1: forward on campaigning for a strategic pork reserve in the US. 20 00:01:05,160 --> 00:01:06,880 Speaker 2: Where's the best with imposta? 21 00:01:07,080 --> 00:01:09,640 Speaker 1: These are the important question? Is that robots taking over 22 00:01:09,680 --> 00:01:09,960 Speaker 1: the world. 23 00:01:10,120 --> 00:01:12,960 Speaker 2: No, I think that, like in a couple of years, 24 00:01:13,120 --> 00:01:15,440 Speaker 2: the AI will do a really good job of making 25 00:01:15,440 --> 00:01:18,800 Speaker 2: the Odd Lonch podcast and people today, I don't really 26 00:01:18,800 --> 00:01:20,680 Speaker 2: need to listen to Joe and Tracy anymore. 27 00:01:20,880 --> 00:01:26,959 Speaker 1: We do have touching. You're listening to lots more where 28 00:01:27,000 --> 00:01:30,440 Speaker 1: we catch up with friends about what's going on right now, because. 29 00:01:30,160 --> 00:01:33,040 Speaker 2: Even when the Odd Lots is over, there's always lots more. 30 00:01:33,440 --> 00:01:39,080 Speaker 1: And we really do have the perfect guest. So Rich, 31 00:01:39,200 --> 00:01:41,959 Speaker 1: we had you on basically a year ago talking about 32 00:01:42,000 --> 00:01:45,520 Speaker 1: where stress is in the massive market for commercial real estate. 33 00:01:45,520 --> 00:01:46,640 Speaker 1: What have we seen since then? 34 00:01:46,760 --> 00:01:48,200 Speaker 3: Yeah, well, first of all, it sort of feels like 35 00:01:48,320 --> 00:01:50,760 Speaker 3: dejean vous all over again. For me. There was a 36 00:01:50,760 --> 00:01:53,400 Speaker 3: bunch of three bank failures this time last year. Right 37 00:01:53,560 --> 00:01:55,520 Speaker 3: fast forward a year we didn't have any, and then 38 00:01:55,520 --> 00:01:59,160 Speaker 3: suddenly we have another bank failure or another bank stress test, 39 00:01:59,200 --> 00:02:01,720 Speaker 3: if you will, So look, maybe I'll start with office. 40 00:02:01,760 --> 00:02:04,640 Speaker 3: I think I'm certainly tired of talking about office. I 41 00:02:04,640 --> 00:02:09,280 Speaker 3: think most people understand that office valuations are down rather significantly. 42 00:02:09,600 --> 00:02:12,359 Speaker 3: We think office valuations generically are down around thirty five 43 00:02:12,360 --> 00:02:14,880 Speaker 3: percent or so, and peak to trough that'll probably be 44 00:02:14,960 --> 00:02:17,560 Speaker 3: down closer to fifty percent. So I think most people 45 00:02:17,680 --> 00:02:20,480 Speaker 3: understand that at this point, I do think there's still 46 00:02:20,520 --> 00:02:22,120 Speaker 3: a little bit of debate and a little bit of 47 00:02:22,160 --> 00:02:25,680 Speaker 3: misunderstandings about well, not all office is bad. New clean 48 00:02:25,720 --> 00:02:28,400 Speaker 3: and green office even in New York city's doing exceptionally well. 49 00:02:28,760 --> 00:02:31,359 Speaker 3: And then maybe some of the Sunbell office properties where 50 00:02:31,360 --> 00:02:34,560 Speaker 3: you're seeing strong demographic shifts, those are working working as well. 51 00:02:34,960 --> 00:02:37,440 Speaker 3: But are people willing to step their toes in? Probably not. 52 00:02:37,600 --> 00:02:39,880 Speaker 3: I think they share share your views. 53 00:02:39,760 --> 00:02:44,160 Speaker 1: They share Joe's tendency towards self cavitation. That's a word 54 00:02:44,240 --> 00:02:46,640 Speaker 1: that I just came up with. We're speaking with Rich Hill. 55 00:02:46,960 --> 00:02:49,440 Speaker 1: He is the head of real estate strategy and Research 56 00:02:49,520 --> 00:02:52,680 Speaker 1: over at Cohen and Steers, formerly of Morgan Stanley, which 57 00:02:52,720 --> 00:02:56,040 Speaker 1: is how I met you and read your research for 58 00:02:56,120 --> 00:02:59,240 Speaker 1: a number of years. One thing I wanted to get 59 00:02:59,280 --> 00:03:02,680 Speaker 1: your sense on. We have seen a rally in broad 60 00:03:03,120 --> 00:03:07,160 Speaker 1: cre since sort of November December. How much of that 61 00:03:07,280 --> 00:03:10,840 Speaker 1: is just echoing the expectation for rate cuts? And I 62 00:03:10,880 --> 00:03:13,600 Speaker 1: feel like I feel like I should add a caveat here, 63 00:03:13,680 --> 00:03:16,440 Speaker 1: which is that we're recording this on March twentieth, the 64 00:03:16,520 --> 00:03:19,560 Speaker 1: day of the Fed interest rate decision, so who knows 65 00:03:19,840 --> 00:03:22,440 Speaker 1: what will happen, but the expectation is still for cuts, 66 00:03:22,440 --> 00:03:25,160 Speaker 1: So how much of that is feeding into the rally? 67 00:03:25,360 --> 00:03:28,200 Speaker 3: Yeah, so maybe just a level set. The trough in 68 00:03:28,320 --> 00:03:31,840 Speaker 3: listed rates listed real estate was October twenty fifth of 69 00:03:31,840 --> 00:03:35,480 Speaker 3: twenty twenty three. Since that time, listed reads are up 70 00:03:35,520 --> 00:03:38,120 Speaker 3: more than twenty percent. November was one of the best 71 00:03:38,160 --> 00:03:41,440 Speaker 3: months ever. December was pretty strong as well, top ten 72 00:03:41,520 --> 00:03:43,680 Speaker 3: month ever. So you bring up a good question how 73 00:03:43,720 --> 00:03:46,800 Speaker 3: much of this is just driven by rate cuts? So 74 00:03:46,920 --> 00:03:48,840 Speaker 3: let me let me unpack that a little bit for you. 75 00:03:49,040 --> 00:03:50,360 Speaker 3: And I think I'm going to be a little bit 76 00:03:50,400 --> 00:03:52,200 Speaker 3: wonky here, but I think that's probably that's great. That's 77 00:03:52,240 --> 00:03:54,880 Speaker 3: what we like. First and foremost listed reads do really 78 00:03:54,920 --> 00:03:58,800 Speaker 3: well in the aftermath of the FED stopping hiking interest rates. 79 00:03:59,120 --> 00:04:01,560 Speaker 3: Usually on the next twelve month basis, they put up 80 00:04:02,400 --> 00:04:05,880 Speaker 3: double digit returns. So what we've seen happen is consistent 81 00:04:05,920 --> 00:04:08,480 Speaker 3: with what we've seen happen with history. But I also 82 00:04:08,560 --> 00:04:11,320 Speaker 3: think there's a few other things that are maybe not 83 00:04:11,440 --> 00:04:13,520 Speaker 3: as well understood, where I would say this is not 84 00:04:13,720 --> 00:04:15,640 Speaker 3: all about rate cuts, and I'll come back to that 85 00:04:15,640 --> 00:04:18,839 Speaker 3: in a second. October twenty fifth marked the high for 86 00:04:18,880 --> 00:04:21,520 Speaker 3: the tenure Treasury rate. It peaked a little bit above 87 00:04:21,560 --> 00:04:24,160 Speaker 3: five percent. At that point in time, people were really 88 00:04:24,200 --> 00:04:26,240 Speaker 3: concerned that the tenure Treasury rate was probably going to 89 00:04:26,279 --> 00:04:29,680 Speaker 3: be closer to six percent than four percent. Fast forward, 90 00:04:29,760 --> 00:04:32,400 Speaker 3: in the tenure treasury is now closer to four percent 91 00:04:32,480 --> 00:04:34,960 Speaker 3: than six percent. So I think that took a lot 92 00:04:35,000 --> 00:04:37,640 Speaker 3: of fear off the table. The second thing that we've 93 00:04:37,640 --> 00:04:42,640 Speaker 3: seen is we've actually seen lending conditions not begin to loosen, 94 00:04:42,760 --> 00:04:45,400 Speaker 3: because linding conditions are still tightening, but they're not tightening 95 00:04:45,400 --> 00:04:47,719 Speaker 3: as much as they used to, and so that basically 96 00:04:47,720 --> 00:04:50,680 Speaker 3: means linding conditions, the worst for lending conditions are behind us. 97 00:04:51,040 --> 00:04:53,640 Speaker 3: The second erouder has started to improve. The third point 98 00:04:53,680 --> 00:04:55,920 Speaker 3: I would make to you is that guess what in 99 00:04:56,000 --> 00:04:59,000 Speaker 3: AY growth net operating income growth for real estate is 100 00:04:59,040 --> 00:05:01,640 Speaker 3: holding up really, really well. It's actually one of the 101 00:05:01,640 --> 00:05:03,680 Speaker 3: few sectors of the S and P five hundred where 102 00:05:03,680 --> 00:05:06,839 Speaker 3: you're seeing revisions higher not lower. That's interesting, and there's 103 00:05:06,839 --> 00:05:08,800 Speaker 3: a couple of reasons for that. But I think what 104 00:05:08,800 --> 00:05:11,040 Speaker 3: I would ultimately say here is listed reads are leaning 105 00:05:11,040 --> 00:05:14,320 Speaker 3: indicator in downturns and recoveries, and what I think we're 106 00:05:14,320 --> 00:05:16,840 Speaker 3: starting to see is maybe some of the fear that 107 00:05:16,920 --> 00:05:20,120 Speaker 3: was in the market was it was turning out to 108 00:05:20,160 --> 00:05:22,000 Speaker 3: be not as bad as feared, and that's led to 109 00:05:22,000 --> 00:05:22,560 Speaker 3: a rally. 110 00:05:22,680 --> 00:05:25,400 Speaker 2: So it always helps, even if things are bad, if 111 00:05:25,400 --> 00:05:27,760 Speaker 2: they're going to be less bad because that's helped. 112 00:05:27,839 --> 00:05:29,320 Speaker 1: The direction of travel is good. 113 00:05:29,440 --> 00:05:33,040 Speaker 2: Yeah, the direction of travel is good, better than expectations 114 00:05:33,400 --> 00:05:35,720 Speaker 2: all the worst not being priced in. One of the 115 00:05:35,720 --> 00:05:39,080 Speaker 2: things that's come up in our past CRI episodes just 116 00:05:39,160 --> 00:05:42,479 Speaker 2: this gap between where people think the market might be 117 00:05:43,000 --> 00:05:44,880 Speaker 2: and where the market actually is, which we have a 118 00:05:44,920 --> 00:05:47,040 Speaker 2: hard time knowing because there is just not a lot 119 00:05:47,080 --> 00:05:49,719 Speaker 2: of transaction period. So you can have these models and 120 00:05:49,760 --> 00:05:52,400 Speaker 2: you can have expectations or maybe price something off the 121 00:05:52,400 --> 00:05:55,400 Speaker 2: one building that did move. Are we seeing on the 122 00:05:55,480 --> 00:05:58,599 Speaker 2: non listed side, on the private side, are we seeing 123 00:05:58,640 --> 00:06:00,919 Speaker 2: any sort of pickup in transaction activity. 124 00:06:00,960 --> 00:06:04,600 Speaker 3: Yeah, it's a super fascinating conversation that we're having right now, 125 00:06:04,640 --> 00:06:06,839 Speaker 3: and I think it's the very most important question that 126 00:06:06,839 --> 00:06:09,240 Speaker 3: people can be asking right now. Let me explain how 127 00:06:09,240 --> 00:06:14,559 Speaker 3: the transition mechanism usually works in fire cycles, transaction volumes fall, 128 00:06:14,880 --> 00:06:18,480 Speaker 3: they trough because when they're falling, there's a big spread 129 00:06:18,480 --> 00:06:20,560 Speaker 3: between where sellers want to sell and our buyers want 130 00:06:20,600 --> 00:06:23,840 Speaker 3: to buy. There's no transaction activity. Then as transaction volumes 131 00:06:23,880 --> 00:06:27,120 Speaker 3: trough and begin to rise, property valuations begin to fall. 132 00:06:27,200 --> 00:06:30,400 Speaker 3: Transaction property valuations begin to fall, and then about twelve 133 00:06:30,440 --> 00:06:34,520 Speaker 3: months later, appraisal valuations follow. What we're seeing this cycle 134 00:06:34,640 --> 00:06:37,800 Speaker 3: is dramatically different than that it's actually flipping on its head. 135 00:06:38,279 --> 00:06:43,880 Speaker 3: Appraisals are actually leading transaction volumes significantly right now. You're right, transactions, 136 00:06:43,920 --> 00:06:46,800 Speaker 3: there's very little transparency in the transaction market. I just 137 00:06:46,920 --> 00:06:50,520 Speaker 3: got some updated numbers for February of twenty twenty four, 138 00:06:50,640 --> 00:06:53,320 Speaker 3: and the number of transactions that sold it looks like 139 00:06:53,400 --> 00:06:56,120 Speaker 3: it's back to COVID lows. So there is still a 140 00:06:56,160 --> 00:07:00,480 Speaker 3: pretty big bid asque spread. But appraisals, appraisal valueuas we 141 00:07:00,560 --> 00:07:03,120 Speaker 3: think are down generically around twenty percent right now peak 142 00:07:03,160 --> 00:07:05,360 Speaker 3: to trough. We think they'll be down twenty five to 143 00:07:05,480 --> 00:07:09,520 Speaker 3: thirty once everything goes through. But why are appraisal valuations 144 00:07:09,600 --> 00:07:12,160 Speaker 3: leading right now? What has everything to do with higher 145 00:07:12,200 --> 00:07:14,960 Speaker 3: interest rates and higher discount rates, and appraiser has no 146 00:07:15,200 --> 00:07:17,520 Speaker 3: choice but to deal with that. So this cycle is 147 00:07:17,520 --> 00:07:20,880 Speaker 3: a little bit different where transactions are just now beginning 148 00:07:20,920 --> 00:07:23,040 Speaker 3: to catch up to where appraisals are so. 149 00:07:23,600 --> 00:07:26,360 Speaker 1: We're talking about sales transactions. But the other thing that's 150 00:07:26,400 --> 00:07:29,200 Speaker 1: happened in the market is you've had a lot of 151 00:07:29,480 --> 00:07:33,320 Speaker 1: new financing. So call it what you will extend and 152 00:07:33,400 --> 00:07:38,280 Speaker 1: pretend or amend and extend. There's different names, different pseudonyms 153 00:07:38,320 --> 00:07:41,080 Speaker 1: for this activity, but that feels like it's one of 154 00:07:41,160 --> 00:07:44,480 Speaker 1: the things that has really given the market a little 155 00:07:44,520 --> 00:07:47,600 Speaker 1: bit of breathing room. So it's odd lots tradition to 156 00:07:47,920 --> 00:07:51,600 Speaker 1: talk about the looming maturity wall, but the looming maturity 157 00:07:51,680 --> 00:07:53,960 Speaker 1: wall is not so looming anymore. It's more of a 158 00:07:54,160 --> 00:07:57,119 Speaker 1: three foot privacy shrub. I think I've joked before. 159 00:07:57,400 --> 00:07:59,000 Speaker 3: Yeah, if you guys can see me on the podcast, 160 00:07:59,000 --> 00:08:00,560 Speaker 3: I have a big smile on my face because this 161 00:08:00,680 --> 00:08:03,480 Speaker 3: is one of my favorite topics. First of all, look, 162 00:08:03,560 --> 00:08:05,840 Speaker 3: I push back on the idea of a maturity wall. 163 00:08:06,040 --> 00:08:08,640 Speaker 3: Earlier in my career, I always talked about maturity walls 164 00:08:08,640 --> 00:08:11,880 Speaker 3: because it gets a lot of clicks. But let's be clear. 165 00:08:12,160 --> 00:08:15,600 Speaker 3: Commercial mortgages have a seven year wall that means fifteen 166 00:08:15,640 --> 00:08:18,440 Speaker 3: percent of loans come due on average every single year, 167 00:08:18,880 --> 00:08:21,000 Speaker 3: which means over a three year time period, you should 168 00:08:21,000 --> 00:08:23,520 Speaker 3: expect forty five percent of loans to come due guess what, 169 00:08:23,680 --> 00:08:25,680 Speaker 3: forty two percent of loans are coming due over the 170 00:08:25,760 --> 00:08:28,400 Speaker 3: next three years. Not shocking at all, that's just sort 171 00:08:28,400 --> 00:08:31,160 Speaker 3: of math. Is it great that they're coming due right 172 00:08:31,240 --> 00:08:34,000 Speaker 3: now at this point of distress in the commercial real 173 00:08:34,080 --> 00:08:36,520 Speaker 3: estate market. No, but that was inevitably going to happen 174 00:08:36,600 --> 00:08:39,240 Speaker 3: at some point in the cycle. So that's point number one. 175 00:08:39,400 --> 00:08:42,000 Speaker 3: Point number two is a statistic that's getting a ton 176 00:08:42,040 --> 00:08:45,120 Speaker 3: of headlines right now that there's almost a trillion dollars 177 00:08:45,160 --> 00:08:47,800 Speaker 3: of loans coming due in twenty twenty four. That is 178 00:08:48,000 --> 00:08:50,600 Speaker 3: factually true. But this time last year there was only 179 00:08:50,640 --> 00:08:52,559 Speaker 3: a little bit more than six hundred billion dollars of 180 00:08:52,640 --> 00:08:55,360 Speaker 3: loans coming due in twenty twenty four. Like, you don't 181 00:08:55,480 --> 00:08:58,000 Speaker 3: just make up four hundred billion dollars of loans. Why 182 00:08:58,040 --> 00:09:01,040 Speaker 3: did that increase? Well, loan Behold, a lot of loans 183 00:09:01,080 --> 00:09:04,120 Speaker 3: that were maturing in twenty twenty three were amenda and 184 00:09:04,240 --> 00:09:08,600 Speaker 3: extended into twenty twenty four and beyond. Now, we actually 185 00:09:08,720 --> 00:09:11,000 Speaker 3: think that same strategy is going to play out in 186 00:09:11,040 --> 00:09:13,640 Speaker 3: twenty twenty four as well. But what you're starting to 187 00:09:13,679 --> 00:09:17,200 Speaker 3: see is this prisoner's limb are being solved. Borrowers are 188 00:09:17,240 --> 00:09:18,920 Speaker 3: not in a good position lenders are not in a 189 00:09:18,960 --> 00:09:21,040 Speaker 3: good position. They're sort of forced to work with each 190 00:09:21,080 --> 00:09:24,040 Speaker 3: other right now. And I think your point about you know, 191 00:09:24,200 --> 00:09:27,079 Speaker 3: call it what you will, modifications and extensions, what it's 192 00:09:27,160 --> 00:09:28,719 Speaker 3: doing is that it's providing a little bit of a 193 00:09:28,800 --> 00:09:32,000 Speaker 3: safety net for commercial real estate valuations, where whereby we 194 00:09:32,080 --> 00:09:33,839 Speaker 3: think valuations are going to be down twenty five to 195 00:09:34,000 --> 00:09:37,240 Speaker 3: thirty percent instead of like thirty five to forty like 196 00:09:37,320 --> 00:09:39,160 Speaker 3: we saw during the GFC. And it's because this is 197 00:09:39,200 --> 00:09:41,600 Speaker 3: a little bit more orderly process than what people feared 198 00:09:41,600 --> 00:09:42,040 Speaker 3: a year ago. 199 00:09:42,480 --> 00:09:44,959 Speaker 2: By the way, I just want to say Tracy that 200 00:09:45,080 --> 00:09:47,439 Speaker 2: I'm really glad and thank you rich for saying that 201 00:09:47,720 --> 00:09:50,000 Speaker 2: when you're on the cell side and getting clicks, because 202 00:09:50,040 --> 00:09:54,720 Speaker 2: I've always had this intuition that journalists in cell side 203 00:09:54,800 --> 00:09:57,319 Speaker 2: analysts are basically in the same job, and we sort 204 00:09:57,360 --> 00:10:00,719 Speaker 2: of compete with each other for people's scarce attention. It's 205 00:10:00,840 --> 00:10:03,319 Speaker 2: not that different. In fact, I would say, as I 206 00:10:03,679 --> 00:10:06,079 Speaker 2: progressed in my journalism career, I felt I learned a 207 00:10:06,160 --> 00:10:08,760 Speaker 2: lot from reading cell side research, both in terms of 208 00:10:08,880 --> 00:10:11,360 Speaker 2: content but also in like, yeah, your job is, you know, 209 00:10:11,400 --> 00:10:13,280 Speaker 2: people have a million emails and you want them to 210 00:10:13,360 --> 00:10:14,959 Speaker 2: open yours instead of the next guys. 211 00:10:15,360 --> 00:10:18,199 Speaker 1: So I feel no one will know your research is 212 00:10:18,240 --> 00:10:19,160 Speaker 1: good if they don't read it. 213 00:10:19,240 --> 00:10:20,839 Speaker 3: If they don't read it, yes, you got a in 214 00:10:20,880 --> 00:10:24,040 Speaker 3: a northern around time is spent on titles, and oh yeah. 215 00:10:23,880 --> 00:10:26,160 Speaker 2: I know they're getting really they've got they've gotten so good. 216 00:10:39,840 --> 00:10:41,880 Speaker 2: If I own a building and it's one of these 217 00:10:42,400 --> 00:10:46,000 Speaker 2: not on a B tier offices in New York City 218 00:10:46,760 --> 00:10:50,559 Speaker 2: and I still have a bunch of empty units and 219 00:10:50,880 --> 00:10:53,800 Speaker 2: the people who were my tenants aren't bringing their employees back, 220 00:10:54,080 --> 00:10:56,480 Speaker 2: wish do I want? Do I want them to bring 221 00:10:56,559 --> 00:10:59,120 Speaker 2: their employees back? Or do I want right cuts? 222 00:10:59,559 --> 00:11:02,760 Speaker 3: You want rate cuts first and foremost, first and foremost. 223 00:11:02,840 --> 00:11:06,240 Speaker 3: We had this debate internally at Colin Steers relatively recently. 224 00:11:06,840 --> 00:11:09,160 Speaker 3: What are we rooting for? And I think everyone in 225 00:11:09,240 --> 00:11:12,040 Speaker 3: there in the room said rate cuts. And so let's 226 00:11:12,160 --> 00:11:15,480 Speaker 3: maybe explain what that means. Commercial real estates inherently elevered 227 00:11:15,480 --> 00:11:19,559 Speaker 3: asset class. Yeah, very few people buy commercial real estate 228 00:11:19,600 --> 00:11:23,040 Speaker 3: building and don't put debt on it, so the cost 229 00:11:23,120 --> 00:11:26,480 Speaker 3: of financing actually really matters. I would much prefer right 230 00:11:26,559 --> 00:11:29,880 Speaker 3: now a hard landing scenario, believe it or not, where 231 00:11:30,040 --> 00:11:32,880 Speaker 3: real rates interest rates go much lower and grow slows 232 00:11:32,880 --> 00:11:36,679 Speaker 3: and credit spreads widen than a no landing scenario, whereby 233 00:11:37,240 --> 00:11:39,199 Speaker 3: rates sort of stay where they are in growth and 234 00:11:39,200 --> 00:11:41,360 Speaker 3: credit spreads are just eh. I know, that's weird to 235 00:11:41,400 --> 00:11:42,000 Speaker 3: get your arms. 236 00:11:41,880 --> 00:11:43,920 Speaker 2: Rud No, I believe it, but it still blows my mind. 237 00:11:44,360 --> 00:11:46,720 Speaker 3: It's inherently a level asset class. What matters more than 238 00:11:46,720 --> 00:11:48,920 Speaker 3: anything else is the cost of financing. 239 00:11:49,120 --> 00:11:50,880 Speaker 1: Wait, so, on that note, I want to go back 240 00:11:50,920 --> 00:11:54,000 Speaker 1: to what we were talking about, the refinancing, the amend 241 00:11:54,240 --> 00:11:57,040 Speaker 1: and extend dynamic that we've seen in the market. Who 242 00:11:57,280 --> 00:12:01,040 Speaker 1: is refinancing? Is it the existing finance years Because as 243 00:12:01,120 --> 00:12:03,920 Speaker 1: you mentioned, they basically don't want to take the marks 244 00:12:04,000 --> 00:12:06,240 Speaker 1: on their portfolio or they don't want to have a 245 00:12:06,280 --> 00:12:09,360 Speaker 1: catalyst that causes them to record that loss. Who's actually 246 00:12:09,440 --> 00:12:09,719 Speaker 1: doing it? 247 00:12:09,960 --> 00:12:11,959 Speaker 3: Yeah, So let me first of all give you a 248 00:12:12,040 --> 00:12:15,160 Speaker 3: stat that's I think really remarkable. If you looked at 249 00:12:15,320 --> 00:12:18,120 Speaker 3: commercial mortgage backed securities, the loans that we're maturing in 250 00:12:18,160 --> 00:12:22,079 Speaker 3: twenty twenty three, eighty percent of them paid off at 251 00:12:22,240 --> 00:12:26,040 Speaker 3: or before their maturity date. Eighty percent. Now, some of 252 00:12:26,080 --> 00:12:29,280 Speaker 3: them obviously paid off before their maturity date. You'll hear 253 00:12:29,440 --> 00:12:31,840 Speaker 3: much lower statistic for loans that were still outstanding at 254 00:12:31,880 --> 00:12:34,280 Speaker 3: their maturity date. But those loans still outstanding have inherent 255 00:12:34,360 --> 00:12:36,360 Speaker 3: negative selection. If you didn't pay off your loan prior 256 00:12:36,360 --> 00:12:38,160 Speaker 3: to the maturity date, there's probably something wrong with it. 257 00:12:38,360 --> 00:12:41,120 Speaker 3: So let me answer your question directly though, and I'm 258 00:12:41,120 --> 00:12:44,160 Speaker 3: going to focus on banks first and foremost. Why would 259 00:12:44,160 --> 00:12:48,679 Speaker 3: a bank want to extend a loan, well, particularly. 260 00:12:48,320 --> 00:12:51,559 Speaker 1: After March's banking drama and the expectation that there was 261 00:12:51,679 --> 00:12:53,559 Speaker 1: going to be more pressure in terms of regulation. 262 00:12:53,760 --> 00:12:56,520 Speaker 3: There's two reasons, well three reasons. First of all, they're 263 00:12:56,559 --> 00:12:59,959 Speaker 3: not in the interest of owning properties. That's one number two. 264 00:13:00,679 --> 00:13:03,319 Speaker 3: They actually don't want to sell a distress property into 265 00:13:03,320 --> 00:13:05,920 Speaker 3: a distress market. But there's an even more important point 266 00:13:06,000 --> 00:13:08,719 Speaker 3: here that I don't think people are focusing on the 267 00:13:08,880 --> 00:13:13,280 Speaker 3: capital charges for modifying a loan at a new ninety 268 00:13:13,320 --> 00:13:16,480 Speaker 3: percent LTV or actually lower than owning that property on 269 00:13:16,559 --> 00:13:20,559 Speaker 3: your balance sheet. Oh, they're incentivized, assuming that they have 270 00:13:20,640 --> 00:13:25,479 Speaker 3: appropriate reserves and the borrower has a plan, they're incentivized 271 00:13:25,559 --> 00:13:27,559 Speaker 3: right now to actually extend that loan. I come back 272 00:13:27,559 --> 00:13:30,120 Speaker 3: to the point I made previously. This is like classic 273 00:13:30,200 --> 00:13:33,200 Speaker 3: prisoner's dilemma stuff. The barrower is not in a good spot, 274 00:13:33,600 --> 00:13:37,320 Speaker 3: the lender doesn't want the property back. They're actually coming 275 00:13:37,400 --> 00:13:39,559 Speaker 3: together and finding a solution. And I don't think this 276 00:13:39,720 --> 00:13:42,199 Speaker 3: is necessarily to kick the can down the road like 277 00:13:42,280 --> 00:13:45,000 Speaker 3: we've seen in the past. They're getting some pretty decent paydowns. 278 00:13:45,360 --> 00:13:47,959 Speaker 3: They're actually not increasing their rate too much. It is 279 00:13:48,000 --> 00:13:48,800 Speaker 3: a prisoner's dilemma. 280 00:13:49,320 --> 00:13:51,839 Speaker 1: One thing I've come to realize in my own career 281 00:13:51,880 --> 00:13:54,199 Speaker 1: as a financial journalist is that kicking the can down 282 00:13:54,240 --> 00:13:57,240 Speaker 1: the road has all these terrible connotations, especially since two 283 00:13:57,240 --> 00:13:59,520 Speaker 1: thousand and eight, but actually it kind of worked right. 284 00:13:59,840 --> 00:14:02,880 Speaker 1: We had a bunch of home loan modifications after two 285 00:14:02,920 --> 00:14:05,959 Speaker 1: thousand and eight, and you know, real estate recovered. 286 00:14:06,200 --> 00:14:09,240 Speaker 2: I have come to the conclusion that all of human 287 00:14:09,400 --> 00:14:11,800 Speaker 2: history is just a big hand ticket. We need to 288 00:14:11,880 --> 00:14:14,920 Speaker 2: destigmatize that concept forever. We're just going to be kicking 289 00:14:15,000 --> 00:14:17,559 Speaker 2: the can for thousands of years to come. Put it 290 00:14:17,640 --> 00:14:19,720 Speaker 2: off to the next generation and they'll do the same. 291 00:14:20,120 --> 00:14:23,240 Speaker 2: Your point about there's something wrong if you don't prepay 292 00:14:23,440 --> 00:14:26,080 Speaker 2: your loan like this is because real estate investors are 293 00:14:26,080 --> 00:14:28,320 Speaker 2: allergic to building up equity. The moment they have a 294 00:14:28,360 --> 00:14:30,520 Speaker 2: little bit of equity in the building, they want to 295 00:14:30,520 --> 00:14:32,080 Speaker 2: pull it out and buy the next building. 296 00:14:32,280 --> 00:14:36,120 Speaker 3: That's that's that's not wrong. Yeah, it's constantly refinancing. And 297 00:14:36,360 --> 00:14:38,400 Speaker 3: now some of this is because we've been a secular 298 00:14:38,400 --> 00:14:40,880 Speaker 3: decline in ten your treasure eight since nineteen eighty. You 299 00:14:41,000 --> 00:14:43,600 Speaker 3: could always refinance into a lower and lower and lower 300 00:14:43,680 --> 00:14:45,840 Speaker 3: interest rate month after month after month. 301 00:14:45,960 --> 00:14:47,920 Speaker 2: So someone I was talking to was explain to me, 302 00:14:48,040 --> 00:14:50,480 Speaker 2: like some of the banking issues that we've seen with 303 00:14:50,600 --> 00:14:53,120 Speaker 2: some of the community banks. Part of it, I mean, 304 00:14:53,520 --> 00:14:55,680 Speaker 2: we hit did an episode on Newyor Community Bank and 305 00:14:55,800 --> 00:14:58,240 Speaker 2: the issues that they've had in like the rent regulated 306 00:14:58,400 --> 00:15:00,840 Speaker 2: multifamily area. But the part of it is that a 307 00:15:00,920 --> 00:15:03,480 Speaker 2: lot of these banks just made a bunch of money 308 00:15:03,600 --> 00:15:06,280 Speaker 2: on prepayment penalties. I don't know if they're called penalties, 309 00:15:06,280 --> 00:15:09,080 Speaker 2: but those prepayment fees, and then the moment rates shot 310 00:15:09,160 --> 00:15:11,280 Speaker 2: up shoot up for the first time in forty years, 311 00:15:11,640 --> 00:15:13,800 Speaker 2: you just get that big slow down in Yeah. 312 00:15:13,920 --> 00:15:16,560 Speaker 3: I mean, well, it's probably fairly nuanced, but when you 313 00:15:16,760 --> 00:15:20,480 Speaker 3: prepay a fixed rate loan, you have a prepayment penalty 314 00:15:20,560 --> 00:15:24,880 Speaker 3: which basically compensates the lender for the interest cost that 315 00:15:24,960 --> 00:15:27,200 Speaker 3: they otherwise would have received over the life of the loan. 316 00:15:27,720 --> 00:15:29,920 Speaker 3: So there's a lot of different. There's a lot of 317 00:15:29,920 --> 00:15:32,360 Speaker 3: different reasons. I mean, I think the real issue that 318 00:15:32,440 --> 00:15:35,320 Speaker 3: the market's dealing with is a return to the old normal. 319 00:15:35,400 --> 00:15:36,960 Speaker 3: I get asked all the time, what do you think 320 00:15:37,000 --> 00:15:40,000 Speaker 3: about this new normal environment? It's not new normal environment. 321 00:15:40,400 --> 00:15:43,080 Speaker 3: What was weird was the last ten years where interest 322 00:15:43,160 --> 00:15:46,920 Speaker 3: rates were historically low, inflation was historically low. That created 323 00:15:47,120 --> 00:15:49,800 Speaker 3: a lot of weird dynamics for the commercial real estate market. 324 00:15:50,040 --> 00:15:52,000 Speaker 3: All the markets dealing with is a return to the 325 00:15:52,080 --> 00:15:54,960 Speaker 3: old normal and what that does for valuations. Valuations being 326 00:15:55,040 --> 00:15:57,520 Speaker 3: down twenty five to thirty percent. That's huge on a 327 00:15:57,560 --> 00:15:59,720 Speaker 3: headline basis, but if you actually think about what it 328 00:15:59,760 --> 00:16:02,680 Speaker 3: means in terms of how much valuations have increased over 329 00:16:02,680 --> 00:16:05,440 Speaker 3: the past ten years, it's really nothing. This is just 330 00:16:05,520 --> 00:16:07,840 Speaker 3: a deflating of the balloon that should occur from time 331 00:16:07,880 --> 00:16:08,160 Speaker 3: to time. 332 00:16:08,320 --> 00:16:10,160 Speaker 1: Yeah, And this is where I have to say, like, 333 00:16:10,320 --> 00:16:13,880 Speaker 1: even before the twenty twenty pandemic, there was talk about 334 00:16:14,040 --> 00:16:19,120 Speaker 1: underwriting standards slipping in CRE and CMBs specifically, I wanted 335 00:16:19,160 --> 00:16:21,600 Speaker 1: to ask you one more thing. So one of the 336 00:16:21,640 --> 00:16:24,480 Speaker 1: themes that comes up on all these cre episodes is 337 00:16:25,080 --> 00:16:28,680 Speaker 1: this is not a monolithic asset class. So you obviously 338 00:16:28,840 --> 00:16:34,000 Speaker 1: have office, multifamily retail. So you have that segmentation. But 339 00:16:34,080 --> 00:16:38,320 Speaker 1: then even within those categories there's additional segmentation. So Joe 340 00:16:38,560 --> 00:16:41,120 Speaker 1: mentioned the idea of a Class B office, you would 341 00:16:41,160 --> 00:16:44,200 Speaker 1: also have fancy offices that are Class A. You might 342 00:16:44,280 --> 00:16:47,520 Speaker 1: have a really nice shopping mall and then a zombie 343 00:16:47,560 --> 00:16:50,640 Speaker 1: one that's going out of business. I wanted to ask 344 00:16:51,480 --> 00:16:54,920 Speaker 1: in retail on shopping malls we heard recently in an 345 00:16:54,920 --> 00:16:58,240 Speaker 1: episode we did with Tom McGee from the International Council 346 00:16:58,280 --> 00:17:01,120 Speaker 1: of Shopping Centers, he would I was talking about there's 347 00:17:01,160 --> 00:17:04,280 Speaker 1: sort of a revival of demand for shopping centers and 348 00:17:04,320 --> 00:17:07,640 Speaker 1: that there's a structural lack of supply in certain types 349 00:17:07,680 --> 00:17:09,880 Speaker 1: of shopping centers. Is that something that you've seen as well. 350 00:17:10,119 --> 00:17:12,680 Speaker 3: Yeah, Look, we really like open air shopping centers, and 351 00:17:12,800 --> 00:17:15,080 Speaker 3: we like them for a couple different reasons. First of all, 352 00:17:15,160 --> 00:17:18,120 Speaker 3: we think institutional investors in private real estate are under 353 00:17:18,200 --> 00:17:19,000 Speaker 3: index to them. 354 00:17:19,520 --> 00:17:21,840 Speaker 1: Is that a result of like the shopping mall fears 355 00:17:21,960 --> 00:17:22,400 Speaker 1: of the time. 356 00:17:22,480 --> 00:17:25,359 Speaker 3: Yeah, they're just redline. I mean, no one wanted to 357 00:17:25,400 --> 00:17:28,680 Speaker 3: buy a retail property from twenty ten until twenty twenty 358 00:17:28,720 --> 00:17:33,080 Speaker 3: because it was going through clickbait so called retail apocalypse. 359 00:17:33,440 --> 00:17:36,520 Speaker 3: That's not a great environment. So you've actually seen institutional 360 00:17:36,600 --> 00:17:40,960 Speaker 3: ownership of retail go down, while institutional ownership of multifamily 361 00:17:41,040 --> 00:17:45,760 Speaker 3: industrial has risen significantly. But there's actually something really interesting 362 00:17:45,800 --> 00:17:48,840 Speaker 3: that's happening. Two things in particular, no one was really 363 00:17:49,000 --> 00:17:51,560 Speaker 3: dumb enough to buy to build a new retail property 364 00:17:52,320 --> 00:17:55,080 Speaker 3: host the Great Financial Crisis because there was this big 365 00:17:55,160 --> 00:17:58,679 Speaker 3: shakeout coming, so there's been no new supply of shopping centers. 366 00:17:58,960 --> 00:18:01,760 Speaker 3: At the same time, you had this great Darwinistic event 367 00:18:01,880 --> 00:18:04,520 Speaker 3: that happened in COVID where maybe I'm going to use 368 00:18:04,560 --> 00:18:06,879 Speaker 3: to bold of retirement, but it killed all the stuff 369 00:18:06,960 --> 00:18:09,560 Speaker 3: that wasn't you know, it was cuspy. So now you 370 00:18:09,680 --> 00:18:12,560 Speaker 3: actually have an environment that's right size from a supply 371 00:18:12,680 --> 00:18:16,359 Speaker 3: standpoint at a time that retailers e commerce companies have 372 00:18:16,440 --> 00:18:18,720 Speaker 3: actually realized that they can do micro fulfillment through the 373 00:18:18,840 --> 00:18:23,320 Speaker 3: retail stores. Consumer likes it. So you're actually seeing vacancies 374 00:18:23,640 --> 00:18:27,440 Speaker 3: for things like neighborhood centers, community centers, power centers actually 375 00:18:27,520 --> 00:18:30,800 Speaker 3: near historical lows. We haven't seen an environment like this before, 376 00:18:31,000 --> 00:18:33,920 Speaker 3: so it's actually a really strong asset class that people 377 00:18:33,960 --> 00:18:35,080 Speaker 3: aren't paying enough attention to. 378 00:18:35,600 --> 00:18:39,000 Speaker 2: So I take this key point that Okay, there's been 379 00:18:39,240 --> 00:18:42,200 Speaker 2: part of this story is that there's been this game 380 00:18:42,280 --> 00:18:46,680 Speaker 2: theory cooperation from lenders and borrowers to avoid pain. I 381 00:18:46,760 --> 00:18:48,400 Speaker 2: take this point that there are some in New York 382 00:18:48,480 --> 00:18:51,440 Speaker 2: City even that there are prime offices that are doing 383 00:18:51,600 --> 00:18:54,760 Speaker 2: very well, and that not you know, CIRI and even 384 00:18:54,880 --> 00:18:57,399 Speaker 2: office is not a monolith. On the other hand, it 385 00:18:57,520 --> 00:19:00,399 Speaker 2: does seem as though in many cities that there is 386 00:19:00,440 --> 00:19:04,920 Speaker 2: still just a lot of empty square footage within buildings, 387 00:19:05,040 --> 00:19:07,159 Speaker 2: and I don't think people know what is going to 388 00:19:07,560 --> 00:19:10,400 Speaker 2: happen with it, or whether it's you know, where that's going. 389 00:19:10,520 --> 00:19:12,960 Speaker 2: And there's still you know, obviously there are some fancy 390 00:19:13,000 --> 00:19:14,840 Speaker 2: buildings in New York City, but there's a lot that's 391 00:19:14,880 --> 00:19:17,800 Speaker 2: just done between every block where it's just old and 392 00:19:17,920 --> 00:19:21,080 Speaker 2: shabby and you just see clearly not a lot of activity. 393 00:19:21,400 --> 00:19:23,560 Speaker 2: What is happening with that? And of course in some cities, 394 00:19:23,600 --> 00:19:26,040 Speaker 2: you know, there's this fear of the urban death spiral, 395 00:19:26,240 --> 00:19:28,760 Speaker 2: which would be a very good headline for a research 396 00:19:28,880 --> 00:19:31,359 Speaker 2: piece or for a clickbait piece. But I guess the 397 00:19:31,480 --> 00:19:34,119 Speaker 2: retail apocalypse of the twenty tens has been replaced by 398 00:19:34,200 --> 00:19:36,840 Speaker 2: the urban death spiral that you have people are coming 399 00:19:36,880 --> 00:19:38,880 Speaker 2: back to work, that you have dropped the tax base, 400 00:19:38,960 --> 00:19:40,800 Speaker 2: that the restaurants closed down and people don't want to 401 00:19:40,840 --> 00:19:42,520 Speaker 2: come back to work, et cetera. And then you just 402 00:19:42,600 --> 00:19:44,480 Speaker 2: have this sort of you know, like something out of 403 00:19:44,520 --> 00:19:47,040 Speaker 2: a horror movie or a zombie movie. What are people 404 00:19:47,080 --> 00:19:48,080 Speaker 2: saying about that these days? 405 00:19:48,160 --> 00:19:49,600 Speaker 3: Yeah, Well, the first point I would make is the 406 00:19:49,920 --> 00:19:52,880 Speaker 3: professor I think. I think he went to a professor 407 00:19:52,960 --> 00:19:56,080 Speaker 3: from NYU that coined the death spiral for New York 408 00:19:56,119 --> 00:19:58,760 Speaker 3: City actually came back relatively recently and said, I was wrong. 409 00:19:59,200 --> 00:20:02,600 Speaker 3: That's not playing out like the way I thought it was. Okay, 410 00:20:03,359 --> 00:20:06,080 Speaker 3: So look, the cliche answer is you take all these 411 00:20:06,200 --> 00:20:11,639 Speaker 3: dead dead, take all these underutilized office buildings and confront 412 00:20:11,640 --> 00:20:14,919 Speaker 3: them a multifamily. Guess what, guys, That's easier said than 413 00:20:15,000 --> 00:20:17,840 Speaker 3: done for a lot of different reasons. So I think 414 00:20:17,880 --> 00:20:21,199 Speaker 3: the real answer is people don't know, and that's one 415 00:20:21,240 --> 00:20:24,000 Speaker 3: of the reasons that people are unwilling to step into 416 00:20:24,040 --> 00:20:26,439 Speaker 3: the office sector right now, even though valuations have come 417 00:20:26,480 --> 00:20:29,040 Speaker 3: down a lot. What do I think. I actually think 418 00:20:29,200 --> 00:20:31,560 Speaker 3: this is a once in a generation opportunity, once in 419 00:20:31,600 --> 00:20:35,520 Speaker 3: a lifetime opportunity for public and private stakeholders. To come 420 00:20:35,560 --> 00:20:39,280 Speaker 3: together and rethink how these cities should work. So it 421 00:20:39,359 --> 00:20:42,919 Speaker 3: probably requires a master plan where you actually redevelop all 422 00:20:43,000 --> 00:20:45,640 Speaker 3: of these into I hate to say work, live, play, 423 00:20:45,920 --> 00:20:48,320 Speaker 3: but there's a real opportunity to do that. And so 424 00:20:48,440 --> 00:20:51,360 Speaker 3: could you imagine like walking down New York City where 425 00:20:51,480 --> 00:20:54,000 Speaker 3: it used to be all these Class B office buildings 426 00:20:54,040 --> 00:20:55,600 Speaker 3: that no one really wanted to work in, and now 427 00:20:55,680 --> 00:21:00,960 Speaker 3: suddenly it's like vibrant parks, it's restaurants. Well, I think 428 00:21:01,080 --> 00:21:03,240 Speaker 3: that's going to solve the world's problems apparently. 429 00:21:03,160 --> 00:21:05,960 Speaker 1: Cos I think New York should let us redesign the city. 430 00:21:06,119 --> 00:21:09,440 Speaker 2: I'm done. By the way, Tracy, the NYU professor the 431 00:21:09,520 --> 00:21:13,280 Speaker 2: Rich mentioned, I'm pretty sure Arbat Gupta, who who has 432 00:21:13,320 --> 00:21:15,719 Speaker 2: been to our odd lotch trivia event, we really need 433 00:21:15,800 --> 00:21:18,160 Speaker 2: to have him on the show because he was talking 434 00:21:18,160 --> 00:21:21,200 Speaker 2: about the urban doom loop. So there's a message to 435 00:21:22,200 --> 00:21:25,000 Speaker 2: us basically that we really got to book the ARPIT episode. 436 00:21:25,080 --> 00:21:25,720 Speaker 1: Yeah, let's do it. 437 00:21:30,480 --> 00:21:33,560 Speaker 2: Lots More is produced by Carmen Rodriguez and dash Ol Bennett, 438 00:21:33,600 --> 00:21:35,760 Speaker 2: with help from Moses Ondam and Kill Brooks. 439 00:21:36,200 --> 00:21:39,320 Speaker 1: Our sound engineer is Blake Maples. Sage Bauman is the 440 00:21:39,359 --> 00:21:40,680 Speaker 1: head of Bloomberg podcasts. 441 00:21:41,400 --> 00:21:44,720 Speaker 2: Please rate, review, and subscribe to Odd, Lots and Lots 442 00:21:44,760 --> 00:21:46,959 Speaker 2: More on your favorite podcast platforms. 443 00:21:47,680 --> 00:21:50,399 Speaker 1: And remember that Bloomberg subscribers can listen to all our 444 00:21:50,480 --> 00:21:55,080 Speaker 1: podcasts ad free by connecting through Apple Podcasts. Thanks for listening.