Speaker 1: This is Master's in Business with Barry Ridholds on Bloomberg Radio.
Speaker 1: This week on the podcast, I have an extra special guest.
Speaker 1: Kathy Marcus is co CEO and Global COO of Pigium
Speaker 1: real Estate, a two hundred and eight billion dollar investor
Speaker 1: in real estate, part of the giant real estate investment
Speaker 1: firm Pigium. She has had a number of different positions
Speaker 1: within Pigium, including managing their flagship Core real Estate fund
Speaker 1: before she moved into management. She has been on all
Speaker 1: of the big lists, Baron's one hundred most Influential Women
Speaker 1: in US finance, lots and lots of others. There are
Speaker 1: few people in the world better situated to discuss commercial
Speaker 1: real estate investing from every perspective. They do debt, they
Speaker 1: do equity, they invest in public real estate, invest in private.
Speaker 1: She has lived and invested through not just a great
Speaker 1: financial crisis, but the SNL crisis and a number of
Speaker 1: other fascinating experiences in real estate. If you're at all
Speaker 1: interested in learning how a large investor in global real
Speaker 1: estate operates, then you're going to really enjoy this conversation.
Speaker 1: With no further ado. My discussion with pgem's Kathy Marcus.
Speaker 2: Thank you.
Speaker 1: It's good to have you here. So let's dive into
Speaker 1: your background, starting with your undergraduate work. You study real
Speaker 1: estate finance and entrepreneurial management at Wharton. As an undergraduate,
Speaker 1: you go to NYU to get a master's in real
Speaker 1: estate investment and development. So you knew from when you
Speaker 1: were essentially a teenager you wanted to be working in.
Speaker 2: Real estate, and I'm very fortunate that it worked out
Speaker 2: because there's no plan B there. You can see. I
Speaker 2: did not study anything else. So people often ask me
Speaker 2: how at the age literally of seventeen, I knew that
Speaker 2: I wanted to be in real estate, and I think
Speaker 2: that I kind of triangulated on it. I have no
Speaker 2: family history, I have no I knew a real estate
Speaker 2: developer I thought was really great. I knew I wanted
Speaker 2: to do something in business. I was always good at math,
Speaker 2: but I really I just didn't relate to things that
Speaker 2: were more esoteric bonds options. It just wasn't doing it
Speaker 2: for me. And I always really loved the built environment.
Speaker 2: I like architecture. I like as a real estate person
Speaker 2: you walk through your assets, you can touch and feel things.
Speaker 2: I love to see things developed. I like the idea
Speaker 2: of kind of urban planning. I always say, if I
Speaker 2: hadn't been a real estate investor, I would have loved
Speaker 2: to have studied more about urban planning. I like placemaking.
Speaker 2: So really, if you combined wanting to be an investor
Speaker 2: with liking architecture design placemaking, it really leads you to
Speaker 2: real estate.
Speaker 1: You anticipated one of my questions, which was was anyone
Speaker 1: in the family in real estate? My mom was a
Speaker 1: real estate agent, like home to everything from home designs
Speaker 1: and renovation to pricing and financing. Was dinner table conversation
Speaker 1: in my house. Nothing like that from you. This just
Speaker 1: wholly sprung up out of Nowah pretty much.
Speaker 2: I mean, my dad was a small entrepreneur and did
Speaker 2: invest in some commercial real estate, but really not in
Speaker 2: a primary way. And my mom is a speech pathologist,
Speaker 2: So our dinner table conversation definitely had a business orientation,
Speaker 2: especially a small business owner, and so I definitely learned
Speaker 2: a lot there. And I think it also my dad's
Speaker 2: business was global, and so it pequked an interest in
Speaker 2: me in working internationally. But the real estate thing was
Speaker 2: kind of out of the blue.
Speaker 1: So you graduate both undergrad and graduate with just real
Speaker 1: estate related training. What were your first few jobs after school?
Speaker 2: Like I had a very traditional start, I started off
Speaker 2: as an analyst and I worked initially. My first two
Speaker 2: jobs were with syndicators, essentially in a business that doesn't
Speaker 2: exist anymore as it did. I worked for a very
Speaker 2: large syndicator right out of school, which was right around
Speaker 2: the time the tax laws changed and so that whole
Speaker 2: business was upended.
Speaker 1: And before you go further define what a syndicator is
Speaker 1: for people who may not remember sure.
Speaker 2: Essentially you buy assets. It could be all kinds of assets.
Speaker 2: The company that I worked for was called Integrated Resources,
Speaker 2: and we did a lot of real estate, but also
Speaker 2: things like airplane leasing and movies. In fact, Dirty Dancing
Speaker 2: was one of the big movies that we financed while
Speaker 2: I was there, and so they needed people to help
Speaker 2: acquire the real estate and then also one of my
Speaker 2: primary jobs was to help capitalize it and find financing
Speaker 2: for it, because the idea of syndication is that you
Speaker 2: make a giant purchase and then you sell it off
Speaker 2: in smaller units to really more of a retail investor.
Speaker 2: And in those days, it could be as small as
Speaker 2: like a twenty five to fifty thousand dollars unit that
Speaker 2: would be sold through a broker dealer, a Sharson Lehman.
Speaker 2: Lots of people who are no longer in the game,
Speaker 2: and it was a way for individual investors to a
Speaker 2: own assets in a small slice they could never access themselves.
Speaker 2: But in those days, they were very tax driven, very.
Speaker 1: Favorable treatment of those purchases, not like regular stocks and
Speaker 1: bonds exactly, And all that went away with a couple
Speaker 1: of tax changes. First Reagan and then I think it
Speaker 1: was Clinton did some changes as.
Speaker 2: Well, exactly as did Integrated Resources. Yeah, exactly.
Speaker 1: Oh that's very funny. So you end up at PGUM eventually,
Speaker 1: and you start out, did you start out at the
Speaker 1: flagship core equity real estate fund or did you work
Speaker 1: your way towards that, because eventually you were running that
Speaker 1: for a few years.
Speaker 2: I did. I worked my way toward that. I had
Speaker 2: two stops before that. I worked in sort of a
Speaker 2: quasi portfolio management role for like a single client account
Speaker 2: type business. And then I went to be the chief
Speaker 2: under writer for the US investments and really got to
Speaker 2: underwrite all new investments in the US, all across the country,
Speaker 2: all asset classes. It was a tremendous experience for me,
Speaker 2: something that we often have had as a rotational position.
Speaker 2: So I did it for three years and it was
Speaker 2: a really great growth exit.
Speaker 1: Now when you say all asset classes.
Speaker 2: Sorry, all sectors of real estate.
Speaker 1: Oh okay, so not because at one point in time
Speaker 1: you were doing something with equity.
Speaker 2: Is that right, head of head of us equity at
Speaker 2: Pigeon real Estate meeting equity versus debt, not equities versus
Speaker 2: got it all right.
Speaker 1: I want to think you. So it's been real estate
Speaker 1: all the way down.
Speaker 2: That's the real estate through and through equity, debt, private, public,
Speaker 2: but always real estate.
Speaker 1: So tell us a little bit about the experience of
Speaker 1: running the Core Flagship real Estate Fund. What was that Like?
Speaker 1: You did that for like eight years? Is that right?
Speaker 2: I did it for longer. It was over ten, and
Speaker 2: it was a tremendous experience. And actually you had asked,
Speaker 2: you know, whether that was my first stop at pg
Speaker 2: in real estate formally Prudential real Estate Investors, and it wasn't.
Speaker 2: But it was the job that I wanted when I
Speaker 2: took the job. My first job at PGM. Essentially the
Speaker 2: person who was running the Core fund at the time
Speaker 2: was someone who I sought out as a mentor because
Speaker 2: I knew that that was the job that I wanted,
Speaker 2: and I worked toward that. So I was on that
Speaker 2: fun team for over ten years, spanning kind of the
Speaker 2: run up to the GFC, so lots of good times
Speaker 2: for only about two to three years of my first
Speaker 2: couple of years there, and then I worked on it
Speaker 2: throughout the GFC and then became the senior portfolio manager
Speaker 2: during the recovery period. It was quite a time to
Speaker 2: be running that kind of a fund, or even just
Speaker 2: working on that kind of fund. It was a you know,
Speaker 2: I had seen other crises. I mean, the SNL crisis
Speaker 2: in the real estate business was something that was a
Speaker 2: very pivotal learning experience for me, and I came into
Speaker 2: the GFC with some of those skills from working through
Speaker 2: the SNL crisis. But every crisis is different, and you know,
Speaker 2: when I was working through the SNL crisis, I was
Speaker 2: much more junior, so someone else, you know, was worried
Speaker 2: about what would happen. They just told me what to do,
Speaker 2: and now this time I had to worry about what
Speaker 2: would happen, and it was it was a great experience.
Speaker 1: So when I hear GFC and SNL crisis, I think workouts, reorgs,
Speaker 1: and distressed investing. Did you do all of that? What
Speaker 1: did you actually do in the eighth nine era, maybe
Speaker 1: even a little before when Short said rolled over.
Speaker 2: Well, in the SNL crisis, I was doing primarily workouts,
Speaker 2: both debt and equity workouts, and I learned so much
Speaker 2: doing that, and was also in a big dispositions role
Speaker 2: in terms of real estate owned that have been foreclosed upon,
Speaker 2: but also performing and unperforming loans, commercial mortgage securitization, and
Speaker 2: even residential mortgage securitization. So I was very, very distressed
Speaker 2: oriented during the SNL crisis, and I would recommend to
Speaker 2: anyone who wants to learn about a business, work through
Speaker 2: a major crisis, and you're going to get fifteen years
Speaker 2: of experience in three years. That was my experience.
Speaker 1: To be fair, the SNL crisis, I don't want to
Speaker 1: downplay it too much, but it almost seems quaint, yes,
Speaker 1: compared to the GFC. It was. You didn't get that
Speaker 1: sense of free fall. It was clearly a mess, but
Speaker 1: it was like, all right, we'll figure this out. The
Speaker 1: GFC in real time was like holy cow, this thing
Speaker 1: is we're off the rails here.
Speaker 2: Very different, right, and in particular in real estate because
Speaker 2: the SNL crisis. You could certainly make an argument that
Speaker 2: we shot ourselves in the foot in the SNL crisis.
Speaker 1: Yeah, but that was really all the banks that were
Speaker 1: doing it.
Speaker 2: It was the banks, But there were a lot of
Speaker 2: empty buildings. I mean, we were building and building building.
Speaker 1: Texas notorious for see through.
Speaker 2: Building building things exactly, so, so that was very different.
Speaker 2: And you're right, it felt like real estate was in
Speaker 2: free fall, and clearly the banking system was in free fall,
Speaker 2: but the government was there with you know, the big
Speaker 2: RTC bailout, and it didn't feel like the world was
Speaker 2: falling apart, right. The GFC felt like the world was
Speaker 2: falling apart, and it was very difficult to understand. I
Speaker 2: think that the S and L crisis, you could understand
Speaker 2: that the banks were just lending, lending, lending and building building,
Speaker 2: and we had empty buildings, and even if you're not
Speaker 2: in real estate, you understood what that was about. The
Speaker 2: GFC was really a lot of esoteric financial products that
Speaker 2: you know, the average person didn't understand. It actually ended
Speaker 2: up that a lot of financial professionals didn't understand them either.
Speaker 2: We didn't know that at the time, but it really
Speaker 2: felt so much more systemic, and it felt like this
Speaker 2: you know, giant thing that was almost not understandable to
Speaker 2: many people had gone awry, good good times.
Speaker 1: You know, those of us who were working in the
Speaker 1: world defying then if you were not on the wrong
Speaker 1: side of what was going on, it was endlessly fascinating
Speaker 1: and just you know, a graduates degree and if you
Speaker 1: were in charge of assets that were collapsing, it had
Speaker 1: to be just nightmarish every day. It was relentless and
Speaker 1: just never seemed to end. So that was you know,
Speaker 1: all the people I know who started working in the
Speaker 1: industry after that, it's like, oh, you guys missed the
Speaker 1: big party.
Speaker 2: It's amazing exactly well, you see that now you can
Speaker 2: tell who missed the party, because it took a lot
Speaker 2: of people who had you know, ten or twelve experience
Speaker 2: years of experience in our business. It took them way
Speaker 2: too long to figure out that the world had changed
Speaker 2: because they hadn't experienced the world changing. And you know,
Speaker 2: those of you, those of us who've been through it
Speaker 2: a few times, you start to get that spidey sense
Speaker 2: that things are not as they should be, and you
Speaker 2: kind of go right into that mode of like, okay,
Speaker 2: stop spending money, shut down all the deals. And that's
Speaker 2: much more difficult for some one who hasn't experienced.
Speaker 1: Immediate sur violence things exactly. And you know, the ironic
Speaker 1: thing is there's a generation who only last year discovered, hey,
Speaker 1: you know the rates can go up also, right, That
Speaker 1: was like an you know, an epiphany for a subgroup
Speaker 1: of people who it's like, oh, I didn't know they
Speaker 1: could raise rates. I thought they can only cut. So
Speaker 1: now you're really in a management position. What was that
Speaker 1: transition like from being a real estate investor to managing
Speaker 1: a very large real estate group of professionals.
Speaker 2: It was a much more complicated transition than I had
Speaker 2: expected it to be. You know, it's an interesting story
Speaker 2: that I tell, which is that our CEO at the
Speaker 2: time came to me, this is when I was running
Speaker 2: our largest fund. I had only been an investor in
Speaker 2: my entire career, and he said, I'd really like for
Speaker 2: you to be my chief operating officer. And I actually said,
Speaker 2: which is, you know, embarrassing, but it is unfortunately some
Speaker 2: that women, especially if my age, do I said, oh, actually,
Speaker 2: I'm not qualified for that job. I only took, you know,
Speaker 2: three accounting classes, and I'm you know, I don't think
Speaker 2: i'm your person. And he said, if I wanted an accountant,
Speaker 2: I wouldn't have come to you. I'm looking for a partner.
Speaker 2: I'm looking for someone who wants to learn how to
Speaker 2: run a global business. And I said, well, you know,
Speaker 2: I feel like I kind of know how to run
Speaker 2: a business. I'm running the largest fund. You know, there's
Speaker 2: lots of people working on this fund, huge revenues. I
Speaker 2: know what I'm doing. And he said, you know what,
Speaker 2: I tried for three years, and I bet you're going
Speaker 2: to learn a lot. And he was one hundred percent right,
Speaker 2: you know, learning how to keep the trains on the
Speaker 2: tracks when you're an investment professional. And I was the worst.
Speaker 2: I was a massive prima donna. I had no appreciation
Speaker 2: for went on behind the scenes. If there was an
Speaker 2: error in a report or a number, I went ballistic.
Speaker 2: I had no understanding of what it takes to deliver operationally.
Speaker 2: And I learned quite a bit about that and it's
Speaker 2: really been terrific, and I recommend it to all investors
Speaker 2: who want to ultimately run a business. Take on an
Speaker 2: operational role, because you will be shocked by how much
Speaker 2: you learn.
Speaker 1: So there's so much stuff to unpack there. I have
Speaker 1: to work my way back to your initial response when
Speaker 1: offered the operating position. It's kind of funny because you're
Speaker 1: pointing out like this inherent difference between men and women.
Speaker 1: Men are just clueless as to her own lack of skills,
Speaker 1: but oh sure, what the hell, how hard can it be?
Speaker 1: Let's rush in. Whereas and I don't want to man
Speaker 1: explain sexism to you, but it seems that women are
Speaker 1: more thoughtful and saying, hey, I don't know if I'm
Speaker 1: qualified for this, whereas a dude is just like, sure,
Speaker 1: well i'll give that a wait, fight a bear with
Speaker 1: my bear. Okay, where do I go? Men? Men are
Speaker 1: just the sort of self confidence, unjustified. I wonder how
Speaker 1: much that explains what we've seen, especially in finance, in
Speaker 1: the gender gap at senior levels, which is certainly getting better.
Speaker 1: It is point at present. But I'm just curious if
Speaker 1: that philosophical difference is why men rush in and women
Speaker 1: sort of think about and say, well, that's really weigh the.
Speaker 2: Pros and cons one hundred percent, and you know Interestingly,
Speaker 2: you would certainly not be the first man to man
Speaker 2: explain sexism to me. It happens all the time, which
Speaker 2: just kind of goes back to the self awareness. It
Speaker 2: happens constantly. But I will say things have gotten a
Speaker 2: lot better, but you know, somewhere in the middle is
Speaker 2: probably you know, a much better place to be, because
Speaker 2: I will say that, you know, women have a tendency
Speaker 2: if there are a hundred things that you need to
Speaker 2: have for a job, if they have ninety nine, you
Speaker 2: think they're not qualified, myself included. Right, I think I've
Speaker 2: gotten better. But you know, if there are a hundred
Speaker 2: things and a man might say, you know what I
Speaker 2: could do sixty or seventy percent of that, that's probably
Speaker 2: good enough.
Speaker 1: Right, I think you're being generous. I think, like, you know,
Speaker 1: I know a dude who's in that space. I could
Speaker 1: do what he does. I think it's like that sort
Speaker 1: of you know, not to overstate mail arrogance and recklessness,
Speaker 1: but there is certainly a degree of Hey, worse comes
Speaker 1: to worse, I land on my face, and I think
Speaker 1: to some degree that's positive but often leads to the
Speaker 1: Peter principle.
Speaker 2: So exactly, and I do hope that you know, younger
Speaker 2: women in business broadly and in finance, you know, can
Speaker 2: can learn from those lessons. That's why I is embarrassing
Speaker 2: of a story as it is. I always tell it,
Speaker 2: especially to younger women, because I don't want them to
Speaker 2: make that same mistake. I was very fortunate that, you know,
Speaker 2: I had a boss who really pushed me, because that
Speaker 2: I wouldn't have taken it necessarily my own volition.
Speaker 1: Huh. Really really interesting. So let's talk a little bit
Speaker 1: about that giant portfolio of investments. What type of real
Speaker 1: estate does PGIUM invest in? Do you have specific geography
Speaker 1: sized types, what.
Speaker 2: Do you think of We have a very very broad
Speaker 2: investing mandate. We invest in in the US, in Latin America,
Speaker 2: which is really primarily Mexico at this point, across Europe,
Speaker 2: the UK, and across Asia, so we really hit all
Speaker 2: the major markets and all the major geographies. And also
Speaker 2: we invest in pretty much all the major food groups
Speaker 2: and even some of the alternative food groups. In real estate,
Speaker 2: so everything from very traditional office which I'm sure we'll
Speaker 2: talk more about, all kinds of residential retail, data centers,
Speaker 2: industrial manufactured housing, seniors housing, you name it, and we
Speaker 2: probably have a bucket of capital for it.
Speaker 1: So let's dive into those sectors. I didn't hear you
Speaker 1: mention laboratory or medical, which I know is an up
Speaker 1: and coming area. Is that a space you guys are
Speaker 1: in as well? Warehouses is another definitely fast growing space.
Speaker 1: Let's break those down. Let's start with office. What's going
Speaker 1: on in the world of office investing. Are there certain
Speaker 1: things you guys like to invest office wide? Are there
Speaker 1: areas you stay away from what's happening in that space?
Speaker 2: So right now I'm going to talk about traditional office,
Speaker 2: not about medical office or lap science, but in the
Speaker 2: traditional office space. We're not investing in a tremendous amount
Speaker 2: of office right now like everyone else. We're in a
Speaker 2: little bit of a wait and see. We have an
Speaker 2: existing office portfolio that we're dealing with, and you know,
Speaker 2: I'm sitting here in your Bloomberg office and it's a
Speaker 2: buzzing hive of lots of people. There are many office
Speaker 2: buildings you could walk into in any city around the
Speaker 2: world where that would not be the case.
Speaker 1: So this is clearly a Class A building. And when
Speaker 1: we look at other Class A buildings on Park Avenue,
Speaker 1: they seem to be fairly you know, seventy five to
Speaker 1: eighty percent buzzing. I don't even want to say occupied.
Speaker 1: But once you drop to the class B buildings, it's
Speaker 1: a whole different story. How do you think about the
Speaker 1: different quality of real estate investing and is that reflected
Speaker 1: in their prices?
Speaker 2: Yet so in particular in office, you know there are
Speaker 2: going to be winners and losers, and the winners are
Speaker 2: going to be I wouldn't even say just A not
Speaker 2: all the A inventory is really going to be a winner.
Speaker 2: You have to be kind of a high A. You
Speaker 2: have to be an A that isn't just an A
Speaker 2: because of its location. It's an A because it also
Speaker 2: has esg attributes. It has wellness attributes, It has things
Speaker 2: that draw employees back to the office and make them
Speaker 2: want to be there. And you have to in these days.
Speaker 2: When I was young, the office was shelter and a
Speaker 2: place where people could make sure you worked all day.
Speaker 2: Now the office is it has to be better than
Speaker 2: your home or people are not going to come. So
Speaker 2: here in your office there's lots of free food and
Speaker 2: free snacks, and it's nice and bright, and there's lots
Speaker 2: of vibrant and smart people walking around, that's a draw.
Speaker 2: But if you're in an old office building without light,
Speaker 2: you have low ceilings, you have no amenities, you don't
Speaker 2: have a lot of wellness attributes to your building. You're
Speaker 2: not in your public transportation, You're going to have a
Speaker 2: hard time attracting people to come to your office, particularly
Speaker 2: younger people. And if you don't have the ESG qualifications,
Speaker 2: it's even worse.
Speaker 1: So we'll talk more about ESG later. Tell us about wellness.
Speaker 1: How does a building contribute to overall wellness?
Speaker 2: Many ways, but I would say that the primary way
Speaker 2: that really has been underscored, even more so since COVID
Speaker 2: is in air quality. And air quality is huge, and
Speaker 2: there is a lot of data around employees feeling better,
Speaker 2: not getting sick, as often having more energy, not being exhausted.
Speaker 2: That's around air quality and fresh air in particular is
Speaker 2: very very important.
Speaker 1: And that's not an expensive or difficult retrofit, is it.
Speaker 1: That's something that could be done fairly easily. If I
Speaker 1: think it was sixty minutes or somebody talked about that
Speaker 1: not too long long ago.
Speaker 2: That assumes you have modern systems, So that's a big assumption.
Speaker 2: Not all buildings have the systems that would make that
Speaker 2: an easy conversion. But there's lots of other things you
Speaker 2: could do. You could have a gym, you could you know,
Speaker 2: encourage your employees to get outside, you know, not in
Speaker 2: the city as much, but other places, and increasingly in Manhattan,
Speaker 2: people have outdoor spaces for their employees so they can
Speaker 2: get out and get some fresh air, get some sunshine.
Speaker 2: You know, instead of drinking coffee in a cold dark room,
Speaker 2: you could sit on a patio. It's those types of
Speaker 2: things that are good for your physical health and your
Speaker 2: mental health.
Speaker 1: Huh, really interesting. Let's talk about some other sectors you
Speaker 1: mentioned medical, office and lab space. Yes, what's going on
Speaker 1: in there? Is that still a growth area?
Speaker 2: It's still a growth area. I would say that some
Speaker 2: of the hype, particularly of the lab space, has been
Speaker 2: taken out, and I think that's a good thing. For
Speaker 2: a while, people were buying what I would say would
Speaker 2: be subpar office buildings turning them into lab buildings. And
Speaker 2: lab buildings are best purpose built. There's a lot of
Speaker 2: extra bills and whistles that you need for a lab building.
Speaker 2: If you think of like the absolute perfect lab building,
Speaker 2: it's going to have you know, a lot more load
Speaker 2: bearing because you're gonna have really heavy machinery, it's going
Speaker 2: to have higher ceilings, it's going to have a lot
Speaker 2: of natural light, it's going to have extra water, it's
Speaker 2: going to have redundant electricity. There are experiments being run
Speaker 2: in these spaces that if you know, you have a
Speaker 2: power outage, you could lose fifteen years worth of work
Speaker 2: and data. So you really have to have you know,
Speaker 2: a lot of redundancies in your systems. Is very expensive
Speaker 2: to build, but the good thing is that it's very reusable.
Speaker 2: If you have one tenant and they leave, you can
Speaker 2: pretty much have a plug and play with the next tenant.
Speaker 2: So I think it's great that there's less of this
Speaker 2: kind of conversion into lab space than there had been.
Speaker 2: But the reality is that a lot of things that
Speaker 2: are really demographic trends, an aging population, people living longer,
Speaker 2: you know, advances in healthcare, needing to have green energy sources,
Speaker 2: needing to be able to create you know, clean water.
Speaker 2: A lot of this experimentation and a lot of the
Speaker 2: venture capital funding is all occurring in these lab buildings.
Speaker 1: Really interesting you mentioned converting offices to lab buildings. There's
Speaker 1: been a lot of chatter about converting all of the
Speaker 1: excess office space to residential. Some people say that's much
Speaker 1: harder than it appears, especially with some of the bigger
Speaker 1: citywide block buildings that are from the sixties and seventies.
Speaker 1: They don't have the light and don't have the access
Speaker 1: to windows. What's the prospect for those sort of conversions.
Speaker 1: And let me just throw in, I remember Post nine
Speaker 1: to eleven, the whole Lower Manhattan or a ton of
Speaker 1: those offices got converted to residential very very successfully. What
Speaker 1: are the odds of that happening in other city centers.
Speaker 2: So we did some of those projects in Lower Manhattan
Speaker 2: and or Manhattan. The floor plates tend to be smaller,
Speaker 2: the buildings are smaller, they're thinner, and they're they're taller, right.
Speaker 1: So you're never too far from a window, never too.
Speaker 2: Far from a window, So it is a little bit easier,
Speaker 2: especially some of the historic buildings downtown. One of the
Speaker 2: ones that we converted into high end condos, you know,
Speaker 2: had been an old JP Morgan building. It was where
Speaker 2: his office was. So those buildings were just smaller by definition,
Speaker 2: smaller floor plates, more windows. There's a lot of capital
Speaker 2: being raised to convert office to residential, And it's a
Speaker 2: really kind of a romantic notion that we have too
Speaker 2: much office and we have a structural shortage of housing.
Speaker 2: Wouldn't it be like the nicest thing in the world
Speaker 2: if you could take all of this you know, bad office,
Speaker 2: if you will, and convert it into affordable housing. Wouldn't
Speaker 2: that be fantastic. First of all, the numbers don't work.
Speaker 2: The physical structures don't lend themselves that well. There's probably
Speaker 2: you know, under five percent of the office stock that
Speaker 2: would lend itself to that. And it's very expensive in
Speaker 2: a way. You would have to be able to get
Speaker 2: the land for free, and someone would have to pay
Speaker 2: to demolish the existing office building. So it's it's really
Speaker 2: very very.
Speaker 1: Talking about converting. You're talking about knocking down a functional
Speaker 1: but unattractive building and putting up a brand new high road.
Speaker 2: In many ways, that would be actually the cheaper route
Speaker 2: to go, because you might say a functional building, it's
Speaker 2: not functional for residential. It doesn't have the windows, it
Speaker 2: doesn't have the plumbing. You know, you have to break
Speaker 2: things into units. You don't want units that look like
Speaker 2: bowling alleys. You need more elevators. I mean, there's just
Speaker 2: lots of stuff that you need. So there will be
Speaker 2: some of that done, and some of it's happening, some
Speaker 2: of it's happening right now in Lower Manhattan and other
Speaker 2: cities in DC in particular, but it's not going to
Speaker 2: be a whostsale solution.
Speaker 1: So you mentioned ESG earlier. How does pgium integrate ESG
Speaker 1: factor into their investment process? What does that mean for
Speaker 1: real estate investment?
Speaker 2: We integrate ESG into everything that we do, from the
Speaker 2: very beginning of identifying a potential investment, through acquisition, through operations,
Speaker 2: and through disposition. And you know, there is a lot
Speaker 2: of you know, political consternation, a lot of a divide,
Speaker 2: particularly in the United States around ESG, where there are
Speaker 2: there's a politicization of ESG in real estate. We're actually
Speaker 2: very fortunate because there's really no conflict with you know, ESG,
Speaker 2: especially the E in real estate investing. If you have
Speaker 2: a more sustainable building, you're using less energy, you're using
Speaker 2: less water, you have more efficient systems, you are in
Speaker 2: near public transportation, you have an ESG certification, you're going
Speaker 2: to have higher income, therefore a higher value of your asset.
Speaker 2: You're going to be able to track the best tenants,
Speaker 2: the best tenants are not going into a building that
Speaker 2: does not have ESG certification. And if you're in your
Speaker 2: public transportation, you know every tenant is looking for that.
Speaker 2: So I really feel that ESG is just it's just
Speaker 2: table stakes in real estate and investing. So we're fortunate
Speaker 2: that we don't have the controversy.
Speaker 1: It's not just higher income. You're describing much lower costs
Speaker 1: as well. Exactly, So the building is a more profitable
Speaker 1: unit versus a comparable non ESG compliant type of building.
Speaker 1: Is that exactly?
Speaker 2: And you know it's a way if you reduce your
Speaker 2: operating expenses, you're just increasing your bottom line. And if
Speaker 2: you take an older building that is just like you know,
Speaker 2: it's leaking energy all over the place, and you upgrade
Speaker 2: it to have the systems, you have just completely improved
Speaker 2: the value of your asset. Because we value real estate
Speaker 2: based on the net operating income, and that is the
Speaker 2: key to being able to increase value.
Speaker 1: Kind of hard to politicize, improving your bottom line is exactly.
Speaker 1: So let's talk about the target net zero emissions from
Speaker 1: real estate projects by twenty fifty. What does net zero
Speaker 1: mean and how does one get there?
Speaker 2: So there's lots of ways to get there, and net
Speaker 2: zero can mean there are various ways in real estate
Speaker 2: pathways to get to net zero. There are already several
Speaker 2: buildings office buildings around the country that are net zero
Speaker 2: and that was accomplished through a variety of things. One
Speaker 2: using different building techniques, different building materials. You can use
Speaker 2: green concrete, you can have less embedded carbon. For the
Speaker 2: institutional real estate industry, embedded carbon is a huge issue
Speaker 2: because you buy an asset and there's already this giant
Speaker 2: carbon footprint that you had no control over and maybe
Speaker 2: it was created fifty years ago. So that's a whole
Speaker 2: other issue. But things like green concrete, things like different
Speaker 2: sensors that you can use that help you build more efficiently.
Speaker 2: And if you look at you know ESG and its entirety,
Speaker 2: which is also a lot about safety and keeping people
Speaker 2: safe and healthy. That there are lots of new construction
Speaker 2: techniques that it's just safer construction where you might have
Speaker 2: robots doing things that were very unsafe. You might have drones,
Speaker 2: you know, photographing buildings instead of having people having to
Speaker 2: go up on scaffoldings. So we have a lot of
Speaker 2: opportunity in the built environment to mitigate and embedded carbon,
Speaker 2: but also to reduce our use of carbon.
Speaker 1: Huh. Really really interesting. So let's talk a little bit
Speaker 1: about what's been going on the past couple of years
Speaker 1: and what it looks like over the next few years.
Speaker 1: You're not taking out a mortgage to buy a single
Speaker 1: family home, You're doing these big projects. How does the
Speaker 1: dislocation and volatility of the enormous right increases we've seen
Speaker 1: in twenty one and twenty two affect the projects.
Speaker 2: You look at, It actually affects you know, commercial real
Speaker 2: estate investors in much the same way as it would
Speaker 2: a residential investor.
Speaker 1: Just the cost of carry, the cost.
Speaker 2: Of carry, and you know, a lack of liquidity, which
Speaker 2: is much worse in the commercial markets than it is
Speaker 2: in the residential market.
Speaker 1: You can't just have an open house and sell a
Speaker 1: fifty story building over the weekend.
Speaker 2: That doesn't exactly know that, that doesn't work. So the
Speaker 2: lack of liquidity is you know, is often at the
Speaker 2: heart of every real estate crisis that we have, and
Speaker 2: that's really driving you know, a lot of what's going on,
Speaker 2: which is of course all driven by the changes in
Speaker 2: the real in the interest rates and you know, we're
Speaker 2: coming upon six quarters, you know, into this new interest
Speaker 2: rate environment, and we had you know, a nice long
Speaker 2: free money party that was really good for real estate.
Speaker 2: It was fantastic real estate. It was it was great.
Speaker 2: And and so of course, you know, as works in
Speaker 2: real estate, that your interest rates come down and the
Speaker 2: yields on the investments come down, and everyone's expectations are
Speaker 2: you know, not too far off from where you know,
Speaker 2: treasuries used to be, right, and and that is, you know,
Speaker 2: the treasuries were so low that you could be have
Speaker 2: a four percent, five percent yield, even three percent on
Speaker 2: a real estate investment and still have a nice cushion
Speaker 2: over treasury. So it was a very very accommodative environment
Speaker 2: for real estate. And now that has all changed. And
Speaker 2: you know, in private markets the repricing always takes a
Speaker 2: lot longer than public markets. And you even see that
Speaker 2: within real estate looking at the real estate private markets
Speaker 2: and the real estate public markets.
Speaker 1: You guys in both right and public, yes, we do.
Speaker 1: So if tell us a little bit about how they've responded.
Speaker 1: I'm going to assume private markets react a little more
Speaker 1: slowly than public markets do. Tell us about that process.
Speaker 2: The private markets react much more slowly and in a
Speaker 2: much more measured way, and without the same sort of
Speaker 2: level of very very quick reaction and maybe even overreaction.
Speaker 2: You hardly ever see that in the private markets. And
Speaker 2: the reason is you are in the real estate public markets.
Speaker 2: The market, meaning the stock market, is determining value, and
Speaker 2: there's a lot more at play there than just the
Speaker 2: value of the real estate assets, whereas in the private
Speaker 2: markets it's appraisal based, and so it takes a long
Speaker 2: time for appraisals to really reflect market value. And part
Speaker 2: of that is the methodology which has been around forever,
Speaker 2: which really relies very heavily on comparable transactions, and comparable
Speaker 2: transactions in a period of you know, little to no liquidity,
Speaker 2: they're just not happening, and so appraisers need a data
Speaker 2: set and a set of facts to create a record
Speaker 2: in order to substantiate lowering values and increasing yields, and
Speaker 2: they just haven't really had that. Now that's starting to happen,
Speaker 2: and we are seeing a repricing, but it's very very slow.
Speaker 2: It will ultimately probably be a much slower repricing than
Speaker 2: we had in the GFC. The GFC took eight quarters
Speaker 2: in private real estate to completely adjust, but the vast
Speaker 2: majority was a shock in the first two quarters, and
Speaker 2: then it just kind of, you know, eked out over
Speaker 2: several more quarters. We have something totally different here. Where
Speaker 2: the first couple quarters, after the interest rate increases, it
Speaker 2: was almost like people were in denial and nobody really
Speaker 2: knew what to do because we had very little price adjustment.
Speaker 2: And now that you know, some people have a gun
Speaker 2: to their head, there are some transactions that are happening
Speaker 2: or starting to see, you know, a trail if you will,
Speaker 2: of evidence of where values should be. But you know,
Speaker 2: most of these assets are priced quarterly, very different than
Speaker 2: the daily pricing in the stock market. And if it
Speaker 2: takes you know, if it used to take you know,
Speaker 2: call it forty five to sixty days to complete a
Speaker 2: transaction from beginning to end, it's now double or triple that.
Speaker 2: So it's just taking much longer to get the evidence.
Speaker 1: So the October data for single family homes October twenty
Speaker 1: twenty three record low number of transactions. Are you suggesting
Speaker 1: that in the private commercial real estate you're also seeing
Speaker 1: much slower transactions and that's what's causing this lag for
Speaker 1: a repricing. How do you work around that?
Speaker 2: Yes, much, much, much lower transaction activity. And it's interesting
Speaker 2: because you know, for a large owner like us, these days,
Speaker 2: when we're talking about transactions or most talking about dispositions,
Speaker 2: in a normal business cycle, we would, when we say transactions,
Speaker 2: were mostly talking about acquisitions. So it's very, very different,
Speaker 2: and that impacts both the debt and equity sides of
Speaker 2: the business. So on the equity side, we would like
Speaker 2: to sell some assets and improve our liquidity, and there's
Speaker 2: not a lot of buyers there. The buyers that are
Speaker 2: there are generally buying without any debt. So if you
Speaker 2: think about the fact that we're also a lender, that
Speaker 2: really impacts our lending business. Our lending business has much
Speaker 2: lower production values across all asset types than it's had historically,
Speaker 2: and again it's because of the lack of transaction activity.
Speaker 1: So I'm assuming you are both buying and selling within
Speaker 1: the same quarter, within the same month. What's the thought
Speaker 1: process like about what properties you want to sell and
Speaker 1: what Similarly, how do you think about what you want
Speaker 1: to buy at the same time you're really reconfiguring your holdings.
Speaker 2: Yes, i'd say there there's two categories of the types
Speaker 2: of assets we want to sell right now, one is
Speaker 2: you know, kind of just bottom line those that will sell.
Speaker 2: So if we need to raise some capital, if we
Speaker 2: have some debt that we want to pay off, if
Speaker 2: we want to redeploy some capital, you can sell multi
Speaker 2: family in the southeast this is in the US, and
Speaker 2: you can sell industrial. Those are the two things that
Speaker 2: sell right now. And even then you're probably going to
Speaker 2: take a lot longer selling those assets. And very interestingly,
Speaker 2: you might not recognize one name on the list of bidders.
Speaker 2: Oh really, it's not the big institutional names. It's not
Speaker 2: the people like us. It's people who are buying unlevered,
Speaker 2: people with friends and family, family offices. Really more in
Speaker 2: your space than in mind. And very interestingly, we often
Speaker 2: have never heard of the people.
Speaker 1: And they want a hard asset as opposed to a
Speaker 1: cash flow based on all, right, it'll cost us this
Speaker 1: much to borrow, and here's what we'll see income, and
Speaker 1: that's what we a revenue. This is something totally different.
Speaker 1: They want to have a hard asset and actually own it, right.
Speaker 2: And they might want to own it for a very
Speaker 2: very long time, especially you know those kind of owners
Speaker 2: and right now it's an advantage to be an all
Speaker 2: cash buyer, and during this cycle of very low interest rates,
Speaker 2: it was not an advantage to be an all cash.
Speaker 1: Buyer when cash is free. Exactly that, you know who
Speaker 1: doesn't make any difference. Which kind of you're sort of
Speaker 1: describing like the edges of a distressed market. But I
Speaker 1: don't get the sense that the market is fully the
Speaker 1: real estate market is fully distressed. How do you identify, Hey,
Speaker 1: we can pick up stuff really inexpensively. Flip side of
Speaker 1: this is, hey, maybe we're not going to get what
Speaker 1: we want for our holdings. How do you balance that?
Speaker 2: Well, it is a balance, and you know, it is
Speaker 2: true to say that right now, the distress is in
Speaker 2: the capital markets. It's in the ability to get to
Speaker 2: and the ability to find equity if you want to
Speaker 2: do a development. Forget about construction loans, which are almost
Speaker 2: impossible to get right now. But from a fundamentals perspective,
Speaker 2: with the exception of office and in particular traditional office,
Speaker 2: most property types are doing quite well. In industrial warehouses,
Speaker 2: as you mentioned, rents are still going up in most
Speaker 2: markets and are expected to continue. In multifamily rentals, we're
Speaker 2: seeing a little bit of softness in some markets where
Speaker 2: there was a lot of supply, but long term, we're
Speaker 2: not concerned because we know we have a structural lack
Speaker 2: of housing. So there's retail, believe it or not, retail
Speaker 2: who was not everyone's favorite a couple of years ago.
Speaker 2: Even retail assets are doing pretty well right now.
Speaker 1: So the publicly traded real estate investment trusted pretty poorly
Speaker 1: in twenty two and twenty three. Was this a rate
Speaker 1: story or is this just a question of too much
Speaker 1: of one type of product not enough of another.
Speaker 2: The interest rates story definitely played into it. But if
Speaker 2: you think about you know reads and who invest in reads,
Speaker 2: there are definitely pure play real estate investors who invest
Speaker 2: in ates, like us and some of our competitors, but
Speaker 2: there's also lots of individual investors who are investing in reads.
Speaker 2: There's lots of big index funds that are investing in reads,
Speaker 2: so it's not always a you know, a real estate
Speaker 2: decision maker who is influencing the cost of some of
Speaker 2: these stocks. But overall, I would say that if you
Speaker 2: were to take something away from the difference between the
Speaker 2: public markets and the private markets, the public markets react
Speaker 2: very quickly and often overreact and we do think that
Speaker 2: there has been an overreaction here. However, the themes are
Speaker 2: fairly similar. If you look at some of the office rates,
Speaker 2: they've been clobbered, and that's a reflection, of course, of
Speaker 2: people's concerns around the office market. But what's interesting in
Speaker 2: the public space is that the best office rates, meaning
Speaker 2: the office rates that have the highest quality assets the
Speaker 2: kind that I mentioned before, ESG qualifications, modern new near
Speaker 2: public transportation, those have taken about the same hit as
Speaker 2: once with Class B assets, So that doesn't really make sense.
Speaker 2: There is some kind of a play there. Also, if
Speaker 2: you look at alternatives, right some of the self storage,
Speaker 2: data centers, some of the alternative sectors within real estate
Speaker 2: in the public markets have reacted quite differently than you
Speaker 2: might expect and from one another. So you know, right
Speaker 2: now most rates are still selling at a pretty significant
Speaker 2: discount to net asset value, which net asset value would
Speaker 2: be a good proxy for real estate value for the
Speaker 2: actual asset value. So that's an opportunity, you know, for us,
Speaker 2: we see that as an opportunity. And our takeaway is
Speaker 2: that the public markets have overreacted and overshot, and the
Speaker 2: private markets have underreacted and somewhere in the middle is
Speaker 2: the right value. Huh.
Speaker 1: That's really interesting. So with the caveat that Wall Street
Speaker 1: has been wrong about this for two or three years.
Speaker 1: Wall Street is now anticipating at least two rate cuts
Speaker 1: in twenty twenty four. Should real estate investors be thinking
Speaker 1: about this? If that happens, what would the impact be
Speaker 1: and do you think that's a realistic outcome?
Speaker 2: Well, first of all, I think we should all be
Speaker 2: praying for that, because that would be very, very good
Speaker 2: for real estate overall. You know, from a realistic perspective,
Speaker 2: I don't anticipate any of that happening in the first
Speaker 2: half of the year. I anticipate, and I say this
Speaker 2: extremely sadly, I think the first half of the year
Speaker 2: is going to be, you know, more of the same
Speaker 2: of what we've seen, and it's going to be a
Speaker 2: very interesting twenty twenty four. All around the world, you have,
Speaker 2: you know, lots of things going on around interest rates
Speaker 2: and you know, stock markets and business. But underlying all
Speaker 2: of that are a lot of very high profile elections
Speaker 2: around the world, not just the US, and you have
Speaker 2: you know, a geopolitical tinder box in many places. So
Speaker 2: it is going to be very very interesting. If you
Speaker 2: look at you know, what is happening with inflation, what
Speaker 2: is happening you know, if you really interrogate some of
Speaker 2: the jobs numbers and you know where the consumer seems
Speaker 2: to be going, it would lead you to believe. I
Speaker 2: think that you know, we're not going to see any
Speaker 2: more hikes, and that sometime next year we're going to
Speaker 2: start to see, you know, some decreases. Whether we get
Speaker 2: to two, I certainly hope so, And you know it,
Speaker 2: really I think I don't think anyone has the expectation
Speaker 2: that we're going to go back to zero interest rates.
Speaker 2: But if we could just get down to like two
Speaker 2: or three instead of four or five, that would be
Speaker 2: pretty amazing.
Speaker 1: At this point, I would take you know, low fourth,
Speaker 1: that'd be a huge, huge change. But you mentioned something
Speaker 1: that I have to ask about. We have all these
Speaker 1: elects both here and abroad. How do geopolitics and elections
Speaker 1: affect commercial real estate.
Speaker 2: Well, I'm going to come off as very cynical, but
Speaker 2: we keep talking about this recession and when a recession
Speaker 2: is going to come, and I just have a hard
Speaker 2: time believing that we're going to be in a recessionary
Speaker 2: environment facing a presidential election in this country. I think
Speaker 2: that everyone is going to do everything in their power
Speaker 2: for that not to happen.
Speaker 1: Meaning across pulling all the levers from the federal government
Speaker 1: to the federal Reserve. Everybody's looking to avoid a recession,
Speaker 1: especially if inflation keeps falling the way it has been
Speaker 1: over the past year and a half. I mean, you
Speaker 1: could easily look at CPI and say, real estate peaked
Speaker 1: in June twenty twenty two, it's been straight down for
Speaker 1: the next eighteen.
Speaker 2: Months, right, right exactly?
Speaker 1: Huh. Quite fascinating. So your global COO, let's talk a
Speaker 1: little bit about the global stratgy. How does PGEUM, which
Speaker 1: I really think of as a US New Jersey based
Speaker 1: real estate investment company, how do you think about the
Speaker 1: global investing opportunities that are out there.
Speaker 2: Well, it's very interesting that as much as PGEUM is
Speaker 2: a global brand, it does always come down to prudential
Speaker 2: being in New Jersey. It gets discussed all the time,
Speaker 2: But we are, within PGEUM real Estate in particular, a
Speaker 2: very very global company. We operate in fourteen different countries
Speaker 2: and we have been investing in Europe and Asia for
Speaker 2: twenty to twenty five years. We've been at this for
Speaker 2: a very long time. Now, our US businesses are larger
Speaker 2: and more mature, and it's really just because we have
Speaker 2: a long head start in the US over our international businesses.
Speaker 2: But you know, today's investor, especially the most sophisticated investors,
Speaker 2: they're investing globally and they're allocating globally. And it used
Speaker 2: to be, especially from the perspective of an American investor
Speaker 2: in real estate, that in order to leave the home
Speaker 2: country in order to invest in Europe, in order to
Speaker 2: invest in Asia, there have to be a huge return premium.
Speaker 2: It was the way of compensating for the country risk,
Speaker 2: maybe some currency risk, and just the general lack of
Speaker 2: certainty around investing in a market that maybe you don't
Speaker 2: know that much about. And that has completely changed in
Speaker 2: that the driving factor behind people being global investors is
Speaker 2: really around diversification. It's far less around yield premium. Now
Speaker 2: you can certainly chase yield premiums in developing markets, but
Speaker 2: if you're investing in non developing markets outside of your
Speaker 2: home country and their mature markets, you should not expect
Speaker 2: much of a risk premium. At the end of the day,
Speaker 2: it's about diversification, because if you think about it, think
Speaker 2: about the world right now, right now, in the US.
Speaker 2: As much as we may complain about what's going on here,
Speaker 2: most global investors would tell you that the greatest prospect
Speaker 2: for income growth and for economic growth is in the US,
Speaker 2: and you would want to be if you're an Asian investor.
Speaker 2: There's certainly a lot of growth that can go on
Speaker 2: in Asia, but it's a bit more volatile. You might
Speaker 2: want to have some eggs in the US basket, you
Speaker 2: might want to have some eggs in the European basket.
Speaker 2: So global investing is just here to stay. In my view,
Speaker 2: it's much more of a trend. And if you want
Speaker 2: to be a big global player in any particular asset
Speaker 2: class or asset type, you have to be a global provider.
Speaker 1: So let's look around the world and get an assessment
Speaker 1: of what's going on. When I look at Europe, I
Speaker 1: see it not only a very mature area, but I
Speaker 1: also see an economy that hasn't really recovered fully from
Speaker 1: the pandemic or arguably from the Great Financial Crisis.
Speaker 2: And.
Speaker 1: Seems to be rolling from one country's recession to the next.
Speaker 1: Now Germany is looking really soft, what do you see
Speaker 1: in terms of opportunities in Europe.
Speaker 2: We definitely still see opportunity in Europe, but in terms
Speaker 2: of you know, the economies, and you mentioned Germany. Germany
Speaker 2: definitely is you know, is a concern for us, right
Speaker 2: we invest quite a bit in Germany. The UK Rexit
Speaker 2: has not been kind to real estate values in the UK,
Speaker 2: but there are still opportunities and it's a lot of
Speaker 2: the same themes which you know, for us, we really
Speaker 2: think of them around demographics, around digitalization, and around decarbonization,
Speaker 2: and if you really think about demographics, there's a lot
Speaker 2: of the same story, which you know also often leads
Speaker 2: you to the living sectors. We think about for young
Speaker 2: people needing affordable first time apartments. For families, maybe with
Speaker 2: interest rates where they are and with housing costs where
Speaker 2: they are not being able to afford that to buy
Speaker 2: a single family home, maybe they want to rent a
Speaker 2: single family home. Young professionals maybe remaining renters for much
Speaker 2: longer than they used to because the barriers to home
Speaker 2: ownership are so much higher. We have an aging population,
Speaker 2: we need seniors housing. There's so many different aspects of
Speaker 2: housing that we just don't have enough of, particularly at
Speaker 2: the affordable end of the spectrum. Affordable housing is a
Speaker 2: crisis almost everywhere in the world, and in particular, affordable
Speaker 2: seniors housing is really in crisis.
Speaker 1: Huh. Really interesting. So let's address Brexit, which hasn't come
Speaker 1: up recently. I was genuinely shocked it even happened because
Speaker 1: it was so obvious the negative economic ramifications that would
Speaker 1: lead from it. How are things in the UK Have
Speaker 1: they recovered from that? Is this still a persistent drag
Speaker 1: on their economy and what does that mean to their
Speaker 1: real estate?
Speaker 2: I think it is still a persistent drag. I think
Speaker 2: that you see evidence of businesses that were from regulatory perspective,
Speaker 2: in London and now maybe they're in Ireland, maybe they're
Speaker 2: in the Netherlands. You definitely have seen a bit of
Speaker 2: a drain from London. There are pockets of the London
Speaker 2: office market that are not doing that well. The good
Speaker 2: news is that London does have a little bit more
Speaker 2: of a modern stock than a lot of other cities
Speaker 2: from an office perspective. But definitely, I mean, inflation has
Speaker 2: really taken a toll on the UK and while it's
Speaker 2: certainly getting better, if you think about kind of just
Speaker 2: you know, constant dominoes falling up Brexit and then the
Speaker 2: pandemic and the war in Ukraine, and inflation and high
Speaker 2: energy costs and the high food costs. It's really noticeable.
Speaker 2: I can tell you. I travel to London quite a bit,
Speaker 2: and even just as a visitor, I notice how much
Speaker 2: more expensive everything is.
Speaker 1: And that traces back to Brexit, not just the reason
Speaker 1: bout them.
Speaker 2: I think it's a combination of things, but I think
Speaker 2: Brexit was the first domino to fall.
Speaker 1: And you mentioned demographics. We know you're investor in Asia.
Speaker 1: Are you an investor in Japan? We are, And what's
Speaker 1: going on there? Their demographics are uniquely.
Speaker 2: Challenging, Yes, uniquely challenging. And you know, if you the
Speaker 2: one very positive thing is that interest rates are still
Speaker 2: relatively low in Japan, still not as low as they
Speaker 2: had been, but they're they're still.
Speaker 1: Low, and they're not negative anymore, right exactly.
Speaker 2: There's still very accommodative of real estate. But you know,
Speaker 2: the demographic story in Japan is very difficult, with just
Speaker 2: a you know, really really a preponderance of the population
Speaker 2: is aging and that just keeps, you know, increasing, you know,
Speaker 2: not a whole lot of immigration into Japan, so definitely
Speaker 2: a problem. And you know, there was a lot of
Speaker 2: hype around the Olympics and what that might mean for Japan,
Speaker 2: and I think a lot of that ultimately, you know,
Speaker 2: didn't come to fruition from a tourism perspective. Now, you know,
Speaker 2: it's sad to say for my Japanese colleagues, but you know,
Speaker 2: the yen is quite weak, and so I think that
Speaker 2: there has been an increase in tours. I was recently
Speaker 2: in Japan and I saw a lot of American families
Speaker 2: traveling there. It used to be cost prohibitive to bring
Speaker 2: a family to Tokyo and now it's not. So hopefully
Speaker 2: there's some kind of a jump start there, but definitely
Speaker 2: the aging population in Japan is tough in the fact
Speaker 2: that there's been very very little real wage growth there.
Speaker 1: Huh, really really interesting. Let me throw you a curveball.
Speaker 1: Tell us about Real Asset X. What's going on there?
Speaker 1: This is almost like a skunk Works project, you guys have.
Speaker 2: Real Asset X is our innovation lab that we recently launched,
Speaker 2: and the purpose of it is really to help to
Speaker 2: advance technology and innovation, particularly around ESG in the real
Speaker 2: estate industry. Not just for our portfolio, but for the
Speaker 2: industry more broadly. And you know, we're really looking at
Speaker 2: kind of two different sides of our lab. One is
Speaker 2: a bit more operational, where we're thinking of ways to
Speaker 2: more efficiently run our own business, more efficiently run our
Speaker 2: own properties, to use our data in ways that help
Speaker 2: us to run the business, help us to serve our
Speaker 2: clients better. On the other side of the lab is
Speaker 2: a bit more aspirational of what could we do with
Speaker 2: all that data, What better investment outcomes could we have
Speaker 2: by leveraging our data. You know, I mentioned that our
Speaker 2: US businesses are very mature. We launched our core open
Speaker 2: end fund that I used to manage. We launched that
Speaker 2: in nineteen seventy. We have data going back that far
Speaker 2: and we have lots of data. And in our lending business,
Speaker 2: we've been lending for way longer than that, so we
Speaker 2: have lots of data that we can leverage and so
Speaker 2: we're very excited about that. We have several university partnerships
Speaker 2: where we are working on certain problem statements, and we
Speaker 2: have them all around the world. So that's very very exciting.
Speaker 2: And you know, it's a journey, right I'll tell you
Speaker 2: that our first problem statement we worked on with one
Speaker 2: of our university partners here in the United States, was
Speaker 2: really around trying to predict multi family rents, and you know,
Speaker 2: using artificial intelligence, using some machine learning, using our own data,
Speaker 2: but other data as well. And at the end of
Speaker 2: the day, you know, we didn't come up with a
Speaker 2: great answer, but now we have you know, a lot
Speaker 2: of new information that we're going to ask the question
Speaker 2: differently as we continue to pursue this. So it is
Speaker 2: definitely a trial and error and I think that when
Speaker 2: people give the impression that they kind of plugged in
Speaker 2: the AI machine and all of a sudden they have,
Speaker 2: you know, really really great answers, that's not how it works.
Speaker 2: It takes a lot of work. And I think our
Speaker 2: launching of our lab and our outreach to our university
Speaker 2: partners is our way of acknowledging that this is a process,
Speaker 2: and it's a learning process, and it takes more than
Speaker 2: just a real estate investment manager to make progress. There.
Speaker 1: Sounds really exciting, all right, I only have you for
Speaker 1: a few more moments, so let me jump to our
Speaker 1: favorite questions that we ask all of our guests, starting
Speaker 1: with what have you been streaming lately. Give us your
Speaker 1: favorite Netflix or Amazon or podcast, whatever's keeping you entertained.
Speaker 2: Sure. I recently finished Daisy Jones on the sixth, which
Speaker 2: was recommended to me by another woman in the business,
Speaker 2: and I'm going to be fifty eight next week. There
Speaker 2: for someone of my age, it just brings you back
Speaker 2: to kind of your middle school and high school years.
Speaker 2: With the music, it's fantastic. It's a little bit of
Speaker 2: the story of Fleetwood Mac not loosely basically fantastic.
Speaker 1: Yeah, the woman who played Daisy Jones, I was I
Speaker 1: don't know a third way through it. When my wife says,
Speaker 1: you know, that's Elvis Presley's daughter, I was like, oh what,
Speaker 1: I had no idea, Right, she was fantastic.
Speaker 2: Fantastic, So I really loved that. And in terms of
Speaker 2: a movie or documentary, also perfect for a woman of
Speaker 2: my age is called Being Mary Tyler Moore, and it's
Speaker 2: about Mary Tyler Moore, and you know, she was such
Speaker 2: an icon for young girls in the seventies of She
Speaker 2: lived on her own, she had this cool job, she
Speaker 2: was intentionally single, she had this social life, she was dating.
Speaker 2: It was really very formative and they speak to a
Speaker 2: lot of women, mostly famous women who were so influenced
Speaker 2: by watching that show. And I definitely was, and she
Speaker 2: was really, you know, very much of a trailblazer and
Speaker 2: a remarkable woman. So I'd recommend that.
Speaker 1: Huh, I'm going to put that on my list. And
Speaker 1: when you were talking earlier, I was thinking of two things.
Speaker 1: I don't know if you spend much time on YouTube,
Speaker 1: but there are some amazing channels. One is Architectural Digest
Speaker 1: does this, so there's lots of house listenings and just stupid,
Speaker 1: you know, spec twenty million dollar mansions in LA's. But
Speaker 1: the thing they do that's so interesting you kind of
Speaker 1: reference this is they'll sit down with an architect and
Speaker 1: he will describe a particular type of architecture that's endemic
Speaker 1: to a specific city, or they'll describe a very specific
Speaker 1: So one guy who does New York, here's the history
Speaker 1: of New York residential apartment buildings and how they've progressed
Speaker 1: over the years. And the one I just I didn't
Speaker 1: see it yet but it just dropped was New York
Speaker 1: Museums and the architecture of Guggenheim, MoMA, the Met and
Speaker 1: Whitney And just like, if you like architecture. It's kind
Speaker 1: of fascinating. The other thing you mentioned that really made
Speaker 1: me think of a different channel was about the ESG
Speaker 1: and the location close to mass transit. There is this
Speaker 1: he's kind of crazy Canadian expat who relocated to the
Speaker 1: Netherlands with his family, and his channel is called Not
Speaker 1: Just Bikes and it's all about how to build a
Speaker 1: city that is not only net zero but just built
Speaker 1: around mass transit, not cars. And it's a again, if
Speaker 1: you're interested in urban planning, the city design and architecture,
Speaker 1: endlessly fascinated. That's great, that's a rabbit hole you can
Speaker 1: talk too. So you mentioned one of your mentors early.
Speaker 1: Tell us about who your mentors were and who helped
Speaker 1: shape your career.
Speaker 2: The person who is most influential in my career from
Speaker 2: a young age is a woman named Yvon Competello, who
Speaker 2: I worked for when I was in my late twenties
Speaker 2: and early thirties, and she taught me everything I know
Speaker 2: about real estate, but also taught me a lot about
Speaker 2: being a woman in this business. She taught me how
Speaker 2: to be a very tough negotiator. She taught me how
Speaker 2: to kind of manage working in a man's world, and
Speaker 2: she always expected a lot of me but also always
Speaker 2: supported me. And I've tried to emulate some of the
Speaker 2: way that she managed me and the way she managed
Speaker 2: and led others. It really was very influential.
Speaker 1: Huh. Very interesting. Let's talk about books. What are some
Speaker 1: of your favorites? What are you reading right now?
Speaker 2: Right now, I'm reading a book called Eligible by Curtis Sittenefeld,
Speaker 2: who she writes a lot of you know, more pop culture,
Speaker 2: I guess type books, but this happens to be a
Speaker 2: modern take on Pride and Prejudice. So Pride and Prejudice
Speaker 2: obviously was very tongue in cheek itself, and this is
Speaker 2: a modern tongue in cheek version of that of, you know,
Speaker 2: an overbearing mother trying to marry off her daughters, et cetera.
Speaker 2: But I'm really enjoying that. I tend to read to escape.
Speaker 2: And I am also just finished a book by Daniel Silva,
Speaker 2: who has written like thirty two books, and I think
Speaker 2: I've read every single one of them. And you know,
Speaker 2: it's a series of spy novels and instead of the Cia,
Speaker 2: it's the Mosad, and the protagonist is, in addition to
Speaker 2: being an amazing masad agent. He's an art historian in
Speaker 2: art and artist and art restorer, so it kind of
Speaker 2: combines things. I'm very interested. When I was young, I
Speaker 2: wanted to be a spy and I love art, So
Speaker 2: for me, those are great books.
Speaker 1: Huh really, what's the name of the silver Book?
Speaker 2: This one I think is called The Collector?
Speaker 1: Huh. Really interesting, And we're down to our final two questions.
Speaker 1: What sort of advice would you give a recent college
Speaker 1: grad interested in a career in real estate investing?
Speaker 2: My greatest advice that I give to everyone is try
Speaker 2: to do a little bit of everything. If you ultimately
Speaker 2: want to specialize, if you ultimately want to only do
Speaker 2: equity acquisitions, that's great. Don't make that decision when you're
Speaker 2: twenty two or twenty three years old. Do a little
Speaker 2: bit of debt, do a little bit of equity, do acquisitions,
Speaker 2: do asset management, do dispositions, do portfolio management. I think
Speaker 2: that especially when you hit a crisis, the most well
Speaker 2: rounded real estate people are the ones who've done a lot,
Speaker 2: and they're the most successful in a down environment. If
Speaker 2: you think about it, when you might not you might
Speaker 2: be an asset manager. But if you've never worked in debt.
Speaker 2: How are you going to know how to do a
Speaker 2: workout of your loan that now is in default. So
Speaker 2: I just think do a little bit of everything. And
Speaker 2: the one regret that I have is that so far
Speaker 2: I've only worked in the US in terms of living
Speaker 2: and working, and I wish I had had an excellent adventure,
Speaker 2: you know, three years in London, three years in Powers,
Speaker 2: something like that, and I would recommend that to all
Speaker 2: young people.
Speaker 1: Very interesting and our final question, what do you know
Speaker 1: about the world of real estate investing today? You wish
Speaker 1: you knew twenty five or so years ago when you
Speaker 1: were first getting started.
Speaker 2: I wish I knew that it would evolve in the
Speaker 2: way that it has. I think that when I got
Speaker 2: into the business, which is thirty five years ago, it
Speaker 2: was far more opaque and less institutional, and I guess
Speaker 2: that for some people that made it feel like, you know,
Speaker 2: it was there were higher barriers to entry to being
Speaker 2: in the business. But I actually really appreciate how much
Speaker 2: more transparent the businesses and how much more institutional it is,
Speaker 2: and the fact that it's more accessible to more people.
Speaker 2: Used to just be only the wealthiest people in the
Speaker 2: world could invest in institutional real estate. I know anybody can,
Speaker 2: and I think that's terrific.
Speaker 1: Huh, very very interesting. Thank you Kathy for being so
Speaker 1: generous with your time. We have been speaking with Kathy Marcus.
Speaker 1: She's co CEO and global Chief Operating Officer at Pgium
Speaker 1: real Estate. If you enjoyed this conversation, check out any
Speaker 1: of the previous five hundred or so we've done over
Speaker 1: the past nine years. You can find those at Apple Podcasts, Spotify, YouTube,
Speaker 1: wherever you find your favorite podcasts. Sign up from my
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