Speaker 1: You're listening to Bloomberg Business Week with Carol Messer on
Speaker 1: Bloomberg Radio. All right, everybody, we've got um a cool
Speaker 1: sixty minutes coming your way to areas that have definitely
Speaker 1: been impacted when it comes to COVID nineteen. We're talking
Speaker 1: about real estate and also retail. We'll get to retail
Speaker 1: a little bit later on, but first up, I do
Speaker 1: want to talk a little bit about real estate. Check
Speaker 1: out the Bloomberg Barkley's Reat Index. It's done about eight
Speaker 1: percent so far this year. We know the real estate
Speaker 1: industry is grappling with people moving out of cities, working
Speaker 1: from home, increases in demand for distribution centers and more.
Speaker 1: There is a lot of churn. If you will so
Speaker 1: timely to have back with us. Scott crow He is
Speaker 1: managing director and chief investment Strategist at Center Square Investment Management.
Speaker 1: It's a global investment manager focusing on actively managed real
Speaker 1: estate and infrastructure strategies and they manage, according to their website,
Speaker 1: roughly eleven bill lead in assets for institutional and private investors.
Speaker 1: And Scott joins us on the phone on this Tuesday,
Speaker 1: and I believe you're in Philadelphia, Is that right? I
Speaker 1: guess that's we're in base. Take Carol. Good to be
Speaker 1: with you again. Yeah, great to have you here. How
Speaker 1: are you? I've think good. It's been a while. Lot's
Speaker 1: happened since we last spoke, and it's had had a
Speaker 1: lot of ramifications for real estate, because real estate that
Speaker 1: it's hard is you know where people meet, congregate and
Speaker 1: you know, how how are you? Things that have happened
Speaker 1: in the world, and a lot of that's changed, some
Speaker 1: of it, you know, temporary, some of it probably permanent.
Speaker 1: Well let's get into that, Scott, what do you think
Speaker 1: is temporary? Like, let me throw something at you. Working
Speaker 1: from home temporary or it's going to be around forever
Speaker 1: or at least for a long time. Alright, both. Right,
Speaker 1: So here's the stat um prior to COVID, the average
Speaker 1: utilization of an office asset. There's four point six days
Speaker 1: out of five a week right now. Right now it
Speaker 1: can be down to like one one and a half.
Speaker 1: And where where does that end up sort of post COVID,
Speaker 1: post vaccine um. It's probably somewhere in the middle three
Speaker 1: to I would say, three to four days a week.
Speaker 1: And the reason for that is that what COVID's forced
Speaker 1: us to do is pick up and utilize a lot
Speaker 1: of technologies that we've we've had in the past, but
Speaker 1: haven't been forced to use and really explore. And it's
Speaker 1: also broken down some social norms as it relates to
Speaker 1: sort of zooming it in or calling it in um
Speaker 1: And so I think some of those habits are gonna
Speaker 1: stick because what we've learned is that we can be
Speaker 1: efficient working from home and there may be a different balance.
Speaker 1: And so that doesn't mean office is you know, obsolete,
Speaker 1: but it does mean that it probably translates to a
Speaker 1: call at demn shock to office demand and that is
Speaker 1: going to have ramifications for office, particularly older stock, on
Speaker 1: a permanent basis. And I think what's more temporary is
Speaker 1: you know, the shutdown of major urban centers like you know,
Speaker 1: New York and San Francisco and other places. Because I
Speaker 1: say that because the big pain point there is a
Speaker 1: a less the density of the office. It's a density
Speaker 1: of the transportation like m T A ridership is tracking
Speaker 1: about what it was a year ago, for instance, and
Speaker 1: that's the thing we've got to solve, and we'll probably
Speaker 1: solve it in the next bit of six and twelve months. Yeah,
Speaker 1: because I have to say. We just did the Blueberg
Speaker 1: New Economy Forum and one of the things we talked about,
Speaker 1: one of the pillars is city isn't. Just had a
Speaker 1: whole day of conversations about that, and you know, one
Speaker 1: of the things that came up was that concept of
Speaker 1: fifteen minute cities where basically you're in a major urban
Speaker 1: area and you can get to everything you need in
Speaker 1: fifteen minutes. And you know, people people, and we've talked
Speaker 1: about demise of cities before. People love cities. I love
Speaker 1: a city. My daughter, who is a seventeen year old,
Speaker 1: loves the city and plans to go, you know, that's
Speaker 1: where she wants to ultimately live. So I feel like
Speaker 1: that pushback against cities, um, you know, we've heard it
Speaker 1: before and it's not going to happen. But that doesn't
Speaker 1: mean the way we use our urban space doesn't change,
Speaker 1: right absolutely, And look, you know, the death of cities
Speaker 1: is being you know, talked about, as you said, for
Speaker 1: a long time. Look think about it. You cities have
Speaker 1: gone through riots and plagues and wars and over the
Speaker 1: eons and they've always come back to you not only
Speaker 1: come back, but they've become more relatively important and what
Speaker 1: does that matter. Well, density is convenient, it's fine, it's exciting,
Speaker 1: but it's also efficient and productive. But you know, COVID
Speaker 1: is the enemy of density for now right, which is
Speaker 1: why those cities have been hit so hard. But interestingly,
Speaker 1: if you look at the apartment space in Manhattan as
Speaker 1: a very good leading indicator, look rents it down on
Speaker 1: the year, Um, you know, uh, concessions of increased. But
Speaker 1: we've already seen about a thirty percent for the month
Speaker 1: of October at increase in applications for apartments in Manhattan.
Speaker 1: And as you're alluding to before with your daughter, the
Speaker 1: people that are coming back the soonest are the young people,
Speaker 1: and they're they're taking a bite of the apple pun intended,
Speaker 1: and you know, nibbling back at New York because they
Speaker 1: would rather live there. There are more people that want
Speaker 1: to live in New York in their apartments. And as
Speaker 1: the prices of fallen, people are already starting to look
Speaker 1: through the winter and and least space. So what does
Speaker 1: it mean that for office space? So the do the
Speaker 1: older buildings. We had a story about New York where
Speaker 1: they were thinking about summer office buildings in Midtown repurposing
Speaker 1: it into apartments essentially like what happened to that office
Speaker 1: space cut. Well, one of the things that we've been
Speaker 1: avoiding at Center Square is older office stock because and
Speaker 1: it's generally true across most real estate types of to day,
Speaker 1: the way we we live, work, and play, the impact
Speaker 1: of technology, demographics, preferences means that the functionality of real estate,
Speaker 1: the way we use it and valued has really changed.
Speaker 1: And it's very hard for old stock to compete in
Speaker 1: any sector, but particularly in office. And there's only so
Speaker 1: much you can do to an older office asset to
Speaker 1: bring it up to end it into a modern standard.
Speaker 1: And so you know, a lot of that if it
Speaker 1: could be converted to residential, would be fantastic. There's a
Speaker 1: huge delta in terms of dollar per square foot between
Speaker 1: the value of residential and office in the favor of residential.
Speaker 1: But that's going to take a lot of a lot
Speaker 1: of time, you know, with the planning departments and and
Speaker 1: and getting the right entitlements. So we'll have to see
Speaker 1: I think it has to become probably empty for a
Speaker 1: while and a bit of an issue, and then you'll
Speaker 1: see planning laws change and it be able to be repurposed.
Speaker 1: I mean, similar argument you can make for the mall space.
Speaker 1: Talk to us about cold storage because I think, you know,
Speaker 1: we are watching what's going on with the COVID nineteen
Speaker 1: vaccine and thinking about and we've done the stories about
Speaker 1: the logistics, the infrastructure, everything that's needed to make sure
Speaker 1: that that vaccine gets out to the people who need
Speaker 1: it around the globe. Well culture is a great example
Speaker 1: of I think things that I was just listening to us.
Speaker 1: You're talking to Charlie talking about your time at ups
Speaker 1: and the way that we're all getting stuff at home.
Speaker 1: The fact that stocks are uh are up on the
Speaker 1: back of everyone buying new PCs and upgrading their hard workers.
Speaker 1: They're working from home, and this is basically just highlighting
Speaker 1: the fact that these knee sectors like cold storage, industrial
Speaker 1: warehouse distribution, even things like data centers and cell towels,
Speaker 1: which are basically the physical infrastructure fueling all this ability
Speaker 1: to work from home is really where the actions at
Speaker 1: in the real estate market. And so we've been responding
Speaker 1: to that as our clients have looked to shift away
Speaker 1: from traditional asset classes like retail and office towards these
Speaker 1: knee sectors, and one of them is cold storage. In fact,
Speaker 1: We just made at a hundred sixty million dollar investment
Speaker 1: in Lineage. It's the largest private operator of cold storage
Speaker 1: United States. And why do we do that? Well, there's
Speaker 1: there's It wasn't just vaccine related. The first reason is
Speaker 1: that as we become more affluent, we are ingesting more
Speaker 1: fresh goods and less process dried and can goods. And yeah,
Speaker 1: so you know, whether it's at a restaurant or at
Speaker 1: home right reading, more fresh and a cold storage assets
Speaker 1: basically a huge fridge with a freezer at the back
Speaker 1: and a fridge at the front. And why that's become
Speaker 1: even more interesting now with COVID is how do we
Speaker 1: distribute hundreds of millions of vaccines to people around the
Speaker 1: United States? And the answer is probably going to be
Speaker 1: the same way we get our ice cream, which is
Speaker 1: through those cold storage assets. So this is going to
Speaker 1: become a very important part of the logistics of curing COVID.
Speaker 1: What's the infrastructure when it comes to cold storage? Right now?
Speaker 1: How behind are we? Well we are, We're we're catching up.
Speaker 1: I mean, Lineage and others have been developing these assets
Speaker 1: now for you know, for decades. The big game has
Speaker 1: been changing how efficient we run these assets, and that's
Speaker 1: really come down to the use of technology and the
Speaker 1: ability to run these assets very efficiently. But it has
Speaker 1: necessitated quietly in the background as we've been building out
Speaker 1: distribution centers and other other asset classes. You know this
Speaker 1: quiet niche sector of cold storage which you know literally
Speaker 1: thirty foot high. You know, refrigerators near infrastructure. If you're
Speaker 1: driving past New Jersey, it past the Newark Airport, um,
Speaker 1: and you're going north, you'll look on your right hand
Speaker 1: side and you'll see a couple of there for instance. Yeah,
Speaker 1: it's pretty interesting. Um, And I do wonder about and
Speaker 1: I have to say, in addition to the vaccine, I
Speaker 1: find it fascinating what you're saying about that we're all
Speaker 1: eating more fresh stuff, right, and we also live in
Speaker 1: a world where seasonally, Remember we used to eat apples
Speaker 1: at a certain time of the year and peaches at
Speaker 1: a certain time of the year. But because of the
Speaker 1: global food market, stuff can move around and get to markets.
Speaker 1: But you need cold storage in order for it to work. Well,
Speaker 1: yeah you do. And actually one of the interesting fun
Speaker 1: facts about COVID is that there's been a huge blood
Speaker 1: of French fries. Apparently we eat eat a lot more
Speaker 1: of those at restaurants that we do at home. So
Speaker 1: that's the French fried market is oversupplied in the cold
Speaker 1: storage world. Well, listen, French fries come with everything. And
Speaker 1: do you ever say would you like fries with that? No?
Speaker 1: Of course you say yes, it makes complete sense. So
Speaker 1: tell me about your investors at this point. Are they
Speaker 1: willing to commit new money? Have they been willing to
Speaker 1: commit new money? Especially when I think about there's some
Speaker 1: real estate distressed assets out there, whether it's in the
Speaker 1: retail world. You know, what are the trends that you
Speaker 1: think are happening now that are here to stay and
Speaker 1: that you're seeing kind of investor move money kind of
Speaker 1: reflect that. Well, people are very cautious about buying into
Speaker 1: core real estate today because it's really reflecting a stale valuation.
Speaker 1: So the first markets to reprice are going to be
Speaker 1: your liquid markets, your read markets, your traded debt markets,
Speaker 1: and the read markets pricing in about a ten percent
Speaker 1: decline in commercial real estate values, which is probably about right.
Speaker 1: It's very bifurcated though, between winners and losers. The sunbuilt
Speaker 1: apartment in in in the in the suburbs, in a
Speaker 1: place like Phoenix is worth more today than it was
Speaker 1: pre COVID. An industrial warehouse asset is worth more today
Speaker 1: than it is pre COVID. And there's big question marks
Speaker 1: about parts of retail, particularly the more space. We've seen
Speaker 1: a number of players file for bank see there. Uh
Speaker 1: and you know other assets to like New York apartment
Speaker 1: so New York office um and and so I think
Speaker 1: people are very cautious about investing into the private space.
Speaker 1: But what they're doing is investing into those asset classes
Speaker 1: that have had some price discovery within real estate, which
Speaker 1: is really reads and real estate debt. The question is
Speaker 1: what is value right, It's going to be very much
Speaker 1: a K shape recovery. UM, it's potentially not mean reverting
Speaker 1: for some areas. So you know, we continue to be
Speaker 1: very very cautious as a related to to mall's secondary
Speaker 1: shopping centers, UM, you know, older office stock. But you
Speaker 1: know what what where we have been uh, I guess
Speaker 1: looking for value is in the apartment space. We talked
Speaker 1: about major cities like San Frd and New York. Those
Speaker 1: assets will come back. That is more of a temporary phenomena,
Speaker 1: but it's going to be very hard over the next
Speaker 1: five years to bet against the huge institutional wave of
Speaker 1: capital as going to be looking for these growth asset
Speaker 1: classes like life science, cold storage, industrial warehouse, data centers,
Speaker 1: and cell towers. And the problem the institutional real estate
Speaker 1: world has is that they own the best footprint of
Speaker 1: yesterday and maybe not the best footprint for the next
Speaker 1: ten years. And we're responding to that by investing in
Speaker 1: these you know what, had been alternative asset classes. But frankly,
Speaker 1: what's more important to a company today? It's office building
Speaker 1: or data center? Yeah, exactly right. It tells something very clearly.
Speaker 1: Scott always learned something with you, so thank you so much,
Speaker 1: Scott Crow. Have a good holiday, a safe holiday, and
Speaker 1: hopefully we can talk with you uh in the new
Speaker 1: year as well. Scott Crow he's managing director, Chief Investment
Speaker 1: Strategies at Center Square Investment Management. Joining us on the
Speaker 1: phone from Philadelphia.