WEBVTT - Why Cold Storage Could Become Hot 0:00:00.000 --> 0:00:03.600 You're listening to Bloomberg Business Week with Carol Messer on 0:00:03.760 --> 0:00:06.800 Bloomberg Radio. All right, everybody, we've got um a cool 0:00:06.800 --> 0:00:09.600 sixty minutes coming your way to areas that have definitely 0:00:09.600 --> 0:00:12.080 been impacted when it comes to COVID nineteen. We're talking 0:00:12.080 --> 0:00:14.240 about real estate and also retail. We'll get to retail 0:00:14.280 --> 0:00:16.720 a little bit later on, but first up, I do 0:00:16.760 --> 0:00:18.720 want to talk a little bit about real estate. Check 0:00:18.760 --> 0:00:21.960 out the Bloomberg Barkley's Reat Index. It's done about eight 0:00:21.960 --> 0:00:24.919 percent so far this year. We know the real estate 0:00:24.960 --> 0:00:27.920 industry is grappling with people moving out of cities, working 0:00:27.960 --> 0:00:31.040 from home, increases in demand for distribution centers and more. 0:00:31.120 --> 0:00:34.280 There is a lot of churn. If you will so 0:00:34.400 --> 0:00:36.400 timely to have back with us. Scott crow He is 0:00:36.720 --> 0:00:40.920 managing director and chief investment Strategist at Center Square Investment Management. 0:00:41.000 --> 0:00:44.639 It's a global investment manager focusing on actively managed real 0:00:44.760 --> 0:00:48.519 estate and infrastructure strategies and they manage, according to their website, 0:00:48.560 --> 0:00:52.360 roughly eleven bill lead in assets for institutional and private investors. 0:00:52.640 --> 0:00:55.480 And Scott joins us on the phone on this Tuesday, 0:00:55.520 --> 0:00:58.920 and I believe you're in Philadelphia, Is that right? I 0:00:58.960 --> 0:01:00.880 guess that's we're in base. Take Carol. Good to be 0:01:01.000 --> 0:01:03.400 with you again. Yeah, great to have you here. How 0:01:03.440 --> 0:01:06.679 are you? I've think good. It's been a while. Lot's 0:01:06.720 --> 0:01:09.320 happened since we last spoke, and it's had had a 0:01:09.400 --> 0:01:13.440 lot of ramifications for real estate, because real estate that 0:01:13.520 --> 0:01:17.000 it's hard is you know where people meet, congregate and 0:01:17.080 --> 0:01:18.880 you know, how how are you? Things that have happened 0:01:18.920 --> 0:01:21.319 in the world, and a lot of that's changed, some 0:01:21.440 --> 0:01:23.800 of it, you know, temporary, some of it probably permanent. 0:01:24.000 --> 0:01:25.679 Well let's get into that, Scott, what do you think 0:01:25.720 --> 0:01:27.800 is temporary? Like, let me throw something at you. Working 0:01:27.880 --> 0:01:30.679 from home temporary or it's going to be around forever 0:01:30.800 --> 0:01:33.720 or at least for a long time. Alright, both. Right, 0:01:33.800 --> 0:01:37.400 So here's the stat um prior to COVID, the average 0:01:37.440 --> 0:01:40.759 utilization of an office asset. There's four point six days 0:01:40.760 --> 0:01:43.160 out of five a week right now. Right now it 0:01:43.200 --> 0:01:45.040 can be down to like one one and a half. 0:01:45.120 --> 0:01:48.880 And where where does that end up sort of post COVID, 0:01:48.960 --> 0:01:52.360 post vaccine um. It's probably somewhere in the middle three 0:01:52.360 --> 0:01:54.320 to I would say, three to four days a week. 0:01:54.400 --> 0:01:59.400 And the reason for that is that what COVID's forced 0:01:59.440 --> 0:02:01.800 us to do is pick up and utilize a lot 0:02:01.840 --> 0:02:05.360 of technologies that we've we've had in the past, but 0:02:05.520 --> 0:02:09.799 haven't been forced to use and really explore. And it's 0:02:09.880 --> 0:02:13.440 also broken down some social norms as it relates to 0:02:13.520 --> 0:02:16.920 sort of zooming it in or calling it in um 0:02:17.120 --> 0:02:19.320 And so I think some of those habits are gonna 0:02:19.440 --> 0:02:22.040 stick because what we've learned is that we can be 0:02:22.120 --> 0:02:25.200 efficient working from home and there may be a different balance. 0:02:25.800 --> 0:02:29.440 And so that doesn't mean office is you know, obsolete, 0:02:29.639 --> 0:02:33.040 but it does mean that it probably translates to a 0:02:33.160 --> 0:02:38.080 call at demn shock to office demand and that is 0:02:38.120 --> 0:02:44.040 going to have ramifications for office, particularly older stock, on 0:02:44.080 --> 0:02:48.080 a permanent basis. And I think what's more temporary is 0:02:48.400 --> 0:02:51.560 you know, the shutdown of major urban centers like you know, 0:02:51.639 --> 0:02:56.200 New York and San Francisco and other places. Because I 0:02:56.320 --> 0:02:59.840 say that because the big pain point there is a 0:03:00.000 --> 0:03:02.720 a less the density of the office. It's a density 0:03:02.800 --> 0:03:06.280 of the transportation like m T A ridership is tracking 0:03:06.280 --> 0:03:09.360 about what it was a year ago, for instance, and 0:03:09.520 --> 0:03:11.359 that's the thing we've got to solve, and we'll probably 0:03:11.360 --> 0:03:13.560 solve it in the next bit of six and twelve months. Yeah, 0:03:13.560 --> 0:03:15.160 because I have to say. We just did the Blueberg 0:03:15.160 --> 0:03:17.320 New Economy Forum and one of the things we talked about, 0:03:17.320 --> 0:03:19.239 one of the pillars is city isn't. Just had a 0:03:19.240 --> 0:03:21.919 whole day of conversations about that, and you know, one 0:03:21.919 --> 0:03:23.800 of the things that came up was that concept of 0:03:23.840 --> 0:03:27.760 fifteen minute cities where basically you're in a major urban 0:03:27.800 --> 0:03:29.280 area and you can get to everything you need in 0:03:29.320 --> 0:03:32.679 fifteen minutes. And you know, people people, and we've talked 0:03:32.680 --> 0:03:36.000 about demise of cities before. People love cities. I love 0:03:36.040 --> 0:03:38.520 a city. My daughter, who is a seventeen year old, 0:03:38.760 --> 0:03:40.480 loves the city and plans to go, you know, that's 0:03:40.480 --> 0:03:43.240 where she wants to ultimately live. So I feel like 0:03:43.320 --> 0:03:47.280 that pushback against cities, um, you know, we've heard it 0:03:47.280 --> 0:03:49.920 before and it's not going to happen. But that doesn't 0:03:49.960 --> 0:03:52.960 mean the way we use our urban space doesn't change, 0:03:53.880 --> 0:03:56.600 right absolutely, And look, you know, the death of cities 0:03:56.680 --> 0:03:58.440 is being you know, talked about, as you said, for 0:03:58.480 --> 0:04:00.480 a long time. Look think about it. You cities have 0:04:00.600 --> 0:04:04.560 gone through riots and plagues and wars and over the 0:04:04.640 --> 0:04:07.560 eons and they've always come back to you not only 0:04:07.600 --> 0:04:10.800 come back, but they've become more relatively important and what 0:04:10.920 --> 0:04:14.960 does that matter. Well, density is convenient, it's fine, it's exciting, 0:04:15.040 --> 0:04:19.719 but it's also efficient and productive. But you know, COVID 0:04:19.760 --> 0:04:21.880 is the enemy of density for now right, which is 0:04:21.920 --> 0:04:25.240 why those cities have been hit so hard. But interestingly, 0:04:25.320 --> 0:04:28.480 if you look at the apartment space in Manhattan as 0:04:28.520 --> 0:04:33.120 a very good leading indicator, look rents it down on 0:04:33.200 --> 0:04:37.080 the year, Um, you know, uh, concessions of increased. But 0:04:37.120 --> 0:04:39.800 we've already seen about a thirty percent for the month 0:04:39.880 --> 0:04:45.880 of October at increase in applications for apartments in Manhattan. 0:04:46.320 --> 0:04:50.160 And as you're alluding to before with your daughter, the 0:04:51.440 --> 0:04:55.279 people that are coming back the soonest are the young people, 0:04:55.880 --> 0:04:59.040 and they're they're taking a bite of the apple pun intended, 0:04:59.480 --> 0:05:03.000 and you know, nibbling back at New York because they 0:05:03.040 --> 0:05:05.839 would rather live there. There are more people that want 0:05:05.880 --> 0:05:08.040 to live in New York in their apartments. And as 0:05:08.040 --> 0:05:10.840 the prices of fallen, people are already starting to look 0:05:10.880 --> 0:05:14.520 through the winter and and least space. So what does 0:05:14.560 --> 0:05:16.520 it mean that for office space? So the do the 0:05:16.560 --> 0:05:19.360 older buildings. We had a story about New York where 0:05:19.360 --> 0:05:23.080 they were thinking about summer office buildings in Midtown repurposing 0:05:23.120 --> 0:05:26.560 it into apartments essentially like what happened to that office 0:05:26.560 --> 0:05:31.080 space cut. Well, one of the things that we've been 0:05:31.120 --> 0:05:35.280 avoiding at Center Square is older office stock because and 0:05:35.320 --> 0:05:38.600 it's generally true across most real estate types of to day, 0:05:38.640 --> 0:05:41.719 the way we we live, work, and play, the impact 0:05:41.800 --> 0:05:46.599 of technology, demographics, preferences means that the functionality of real estate, 0:05:46.640 --> 0:05:48.760 the way we use it and valued has really changed. 0:05:48.800 --> 0:05:52.479 And it's very hard for old stock to compete in 0:05:52.560 --> 0:05:56.000 any sector, but particularly in office. And there's only so 0:05:56.120 --> 0:05:59.120 much you can do to an older office asset to 0:05:59.160 --> 0:06:02.560 bring it up to end it into a modern standard. 0:06:02.640 --> 0:06:04.479 And so you know, a lot of that if it 0:06:04.520 --> 0:06:07.480 could be converted to residential, would be fantastic. There's a 0:06:07.600 --> 0:06:10.480 huge delta in terms of dollar per square foot between 0:06:10.520 --> 0:06:14.760 the value of residential and office in the favor of residential. 0:06:15.440 --> 0:06:17.160 But that's going to take a lot of a lot 0:06:17.200 --> 0:06:20.279 of time, you know, with the planning departments and and 0:06:20.279 --> 0:06:23.080 and getting the right entitlements. So we'll have to see 0:06:23.080 --> 0:06:25.240 I think it has to become probably empty for a 0:06:25.279 --> 0:06:28.120 while and a bit of an issue, and then you'll 0:06:28.120 --> 0:06:31.680 see planning laws change and it be able to be repurposed. 0:06:31.720 --> 0:06:33.839 I mean, similar argument you can make for the mall space. 0:06:34.279 --> 0:06:37.000 Talk to us about cold storage because I think, you know, 0:06:37.160 --> 0:06:39.440 we are watching what's going on with the COVID nineteen 0:06:39.520 --> 0:06:41.920 vaccine and thinking about and we've done the stories about 0:06:41.960 --> 0:06:45.320 the logistics, the infrastructure, everything that's needed to make sure 0:06:45.360 --> 0:06:47.200 that that vaccine gets out to the people who need 0:06:47.200 --> 0:06:50.880 it around the globe. Well culture is a great example 0:06:50.920 --> 0:06:53.080 of I think things that I was just listening to us. 0:06:53.080 --> 0:06:55.440 You're talking to Charlie talking about your time at ups 0:06:55.520 --> 0:06:57.800 and the way that we're all getting stuff at home. 0:06:57.880 --> 0:07:00.560 The fact that stocks are uh are up on the 0:07:00.600 --> 0:07:04.599 back of everyone buying new PCs and upgrading their hard workers. 0:07:04.640 --> 0:07:08.520 They're working from home, and this is basically just highlighting 0:07:08.520 --> 0:07:11.560 the fact that these knee sectors like cold storage, industrial 0:07:11.560 --> 0:07:14.440 warehouse distribution, even things like data centers and cell towels, 0:07:14.440 --> 0:07:17.800 which are basically the physical infrastructure fueling all this ability 0:07:17.840 --> 0:07:20.360 to work from home is really where the actions at 0:07:20.400 --> 0:07:23.240 in the real estate market. And so we've been responding 0:07:23.280 --> 0:07:25.280 to that as our clients have looked to shift away 0:07:25.320 --> 0:07:29.240 from traditional asset classes like retail and office towards these 0:07:29.320 --> 0:07:31.800 knee sectors, and one of them is cold storage. In fact, 0:07:31.840 --> 0:07:34.640 We just made at a hundred sixty million dollar investment 0:07:34.800 --> 0:07:38.760 in Lineage. It's the largest private operator of cold storage 0:07:38.840 --> 0:07:41.120 United States. And why do we do that? Well, there's 0:07:41.160 --> 0:07:44.160 there's It wasn't just vaccine related. The first reason is 0:07:44.200 --> 0:07:48.400 that as we become more affluent, we are ingesting more 0:07:48.440 --> 0:07:54.640 fresh goods and less process dried and can goods. And yeah, 0:07:54.800 --> 0:07:57.600 so you know, whether it's at a restaurant or at 0:07:57.640 --> 0:08:01.200 home right reading, more fresh and a cold storage assets 0:08:01.240 --> 0:08:03.640 basically a huge fridge with a freezer at the back 0:08:03.640 --> 0:08:06.280 and a fridge at the front. And why that's become 0:08:06.320 --> 0:08:08.720 even more interesting now with COVID is how do we 0:08:08.840 --> 0:08:13.160 distribute hundreds of millions of vaccines to people around the 0:08:13.240 --> 0:08:15.680 United States? And the answer is probably going to be 0:08:15.720 --> 0:08:17.760 the same way we get our ice cream, which is 0:08:17.840 --> 0:08:20.120 through those cold storage assets. So this is going to 0:08:20.160 --> 0:08:23.800 become a very important part of the logistics of curing COVID. 0:08:24.040 --> 0:08:26.560 What's the infrastructure when it comes to cold storage? Right now? 0:08:26.560 --> 0:08:32.280 How behind are we? Well we are, We're we're catching up. 0:08:32.320 --> 0:08:36.200 I mean, Lineage and others have been developing these assets 0:08:36.240 --> 0:08:39.200 now for you know, for decades. The big game has 0:08:39.280 --> 0:08:43.400 been changing how efficient we run these assets, and that's 0:08:43.440 --> 0:08:46.480 really come down to the use of technology and the 0:08:46.520 --> 0:08:49.480 ability to run these assets very efficiently. But it has 0:08:49.600 --> 0:08:53.120 necessitated quietly in the background as we've been building out 0:08:53.200 --> 0:08:56.640 distribution centers and other other asset classes. You know this 0:08:56.840 --> 0:09:01.080 quiet niche sector of cold storage which you know literally 0:09:01.200 --> 0:09:06.560 thirty foot high. You know, refrigerators near infrastructure. If you're 0:09:06.640 --> 0:09:10.320 driving past New Jersey, it past the Newark Airport, um, 0:09:10.400 --> 0:09:12.320 and you're going north, you'll look on your right hand 0:09:12.320 --> 0:09:15.000 side and you'll see a couple of there for instance. Yeah, 0:09:15.040 --> 0:09:18.719 it's pretty interesting. Um, And I do wonder about and 0:09:18.760 --> 0:09:20.679 I have to say, in addition to the vaccine, I 0:09:20.679 --> 0:09:23.000 find it fascinating what you're saying about that we're all 0:09:23.040 --> 0:09:25.680 eating more fresh stuff, right, and we also live in 0:09:25.679 --> 0:09:29.400 a world where seasonally, Remember we used to eat apples 0:09:29.400 --> 0:09:30.920 at a certain time of the year and peaches at 0:09:30.920 --> 0:09:32.840 a certain time of the year. But because of the 0:09:32.840 --> 0:09:36.480 global food market, stuff can move around and get to markets. 0:09:36.480 --> 0:09:38.720 But you need cold storage in order for it to work. Well, 0:09:39.600 --> 0:09:41.800 yeah you do. And actually one of the interesting fun 0:09:41.880 --> 0:09:44.360 facts about COVID is that there's been a huge blood 0:09:44.360 --> 0:09:47.240 of French fries. Apparently we eat eat a lot more 0:09:47.240 --> 0:09:49.319 of those at restaurants that we do at home. So 0:09:49.360 --> 0:09:52.080 that's the French fried market is oversupplied in the cold 0:09:52.120 --> 0:09:55.000 storage world. Well, listen, French fries come with everything. And 0:09:55.040 --> 0:09:56.960 do you ever say would you like fries with that? No? 0:09:57.320 --> 0:10:00.400 Of course you say yes, it makes complete sense. So 0:10:00.480 --> 0:10:02.760 tell me about your investors at this point. Are they 0:10:02.760 --> 0:10:05.200 willing to commit new money? Have they been willing to 0:10:05.200 --> 0:10:07.400 commit new money? Especially when I think about there's some 0:10:07.480 --> 0:10:09.960 real estate distressed assets out there, whether it's in the 0:10:10.000 --> 0:10:12.760 retail world. You know, what are the trends that you 0:10:12.800 --> 0:10:14.720 think are happening now that are here to stay and 0:10:14.720 --> 0:10:17.160 that you're seeing kind of investor move money kind of 0:10:17.160 --> 0:10:22.200 reflect that. Well, people are very cautious about buying into 0:10:22.400 --> 0:10:26.720 core real estate today because it's really reflecting a stale valuation. 0:10:26.840 --> 0:10:28.880 So the first markets to reprice are going to be 0:10:28.920 --> 0:10:32.760 your liquid markets, your read markets, your traded debt markets, 0:10:32.760 --> 0:10:35.160 and the read markets pricing in about a ten percent 0:10:35.280 --> 0:10:38.720 decline in commercial real estate values, which is probably about right. 0:10:39.160 --> 0:10:42.480 It's very bifurcated though, between winners and losers. The sunbuilt 0:10:42.480 --> 0:10:45.959 apartment in in in the in the suburbs, in a 0:10:46.000 --> 0:10:48.440 place like Phoenix is worth more today than it was 0:10:48.520 --> 0:10:51.959 pre COVID. An industrial warehouse asset is worth more today 0:10:52.000 --> 0:10:54.400 than it is pre COVID. And there's big question marks 0:10:54.440 --> 0:10:57.560 about parts of retail, particularly the more space. We've seen 0:10:57.559 --> 0:11:01.600 a number of players file for bank see there. Uh 0:11:01.600 --> 0:11:04.240 and you know other assets to like New York apartment 0:11:04.360 --> 0:11:08.040 so New York office um and and so I think 0:11:08.040 --> 0:11:11.360 people are very cautious about investing into the private space. 0:11:11.400 --> 0:11:14.319 But what they're doing is investing into those asset classes 0:11:14.600 --> 0:11:18.040 that have had some price discovery within real estate, which 0:11:18.120 --> 0:11:21.600 is really reads and real estate debt. The question is 0:11:21.800 --> 0:11:24.520 what is value right, It's going to be very much 0:11:24.520 --> 0:11:30.040 a K shape recovery. UM, it's potentially not mean reverting 0:11:30.120 --> 0:11:32.680 for some areas. So you know, we continue to be 0:11:32.840 --> 0:11:37.280 very very cautious as a related to to mall's secondary 0:11:37.320 --> 0:11:41.880 shopping centers, UM, you know, older office stock. But you 0:11:41.880 --> 0:11:44.640 know what what where we have been uh, I guess 0:11:44.800 --> 0:11:47.320 looking for value is in the apartment space. We talked 0:11:47.320 --> 0:11:50.559 about major cities like San Frd and New York. Those 0:11:50.559 --> 0:11:54.000 assets will come back. That is more of a temporary phenomena, 0:11:54.440 --> 0:11:56.440 but it's going to be very hard over the next 0:11:56.480 --> 0:11:59.360 five years to bet against the huge institutional wave of 0:11:59.400 --> 0:12:02.480 capital as going to be looking for these growth asset 0:12:02.559 --> 0:12:07.400 classes like life science, cold storage, industrial warehouse, data centers, 0:12:07.400 --> 0:12:11.000 and cell towers. And the problem the institutional real estate 0:12:11.040 --> 0:12:13.839 world has is that they own the best footprint of 0:12:14.000 --> 0:12:17.120 yesterday and maybe not the best footprint for the next 0:12:17.120 --> 0:12:20.640 ten years. And we're responding to that by investing in 0:12:20.679 --> 0:12:23.840 these you know what, had been alternative asset classes. But frankly, 0:12:24.240 --> 0:12:26.920 what's more important to a company today? It's office building 0:12:27.000 --> 0:12:30.720 or data center? Yeah, exactly right. It tells something very clearly. 0:12:30.960 --> 0:12:33.800 Scott always learned something with you, so thank you so much, 0:12:33.800 --> 0:12:36.520 Scott Crow. Have a good holiday, a safe holiday, and 0:12:36.520 --> 0:12:38.920 hopefully we can talk with you uh in the new 0:12:39.000 --> 0:12:41.520 year as well. Scott Crow he's managing director, Chief Investment 0:12:41.559 --> 0:12:44.920 Strategies at Center Square Investment Management. Joining us on the 0:12:45.040 --> 0:12:46.160 phone from Philadelphia.