WEBVTT - Markets Price in the Fed's Rate Cut 0:00:02.520 --> 0:00:07.040 Bloomberg Audio Studios, podcasts, radio news. 0:00:12.480 --> 0:00:16.560 This is the Bloomberg Surveillance Podcast. Catch us live weekdays 0:00:16.560 --> 0:00:19.840 at seven am Eastern on Apple CarPlay or Android Auto 0:00:19.880 --> 0:00:23.200 with the Bloomberg Business app. Listen on demand wherever you 0:00:23.239 --> 0:00:26.280 get your podcasts, or watch us live on YouTube. 0:00:26.360 --> 0:00:29.680 One of my favorite economists of all times, Lena Shilia Tava, 0:00:29.920 --> 0:00:32.680 senior US economists at the conference sport. Elena, thanks so 0:00:32.760 --> 0:00:35.040 much for joining us here. What did you make of 0:00:35.680 --> 0:00:38.200 the Fed's move this week? Was that appropriate? 0:00:38.200 --> 0:00:38.560 Do you think? 0:00:39.720 --> 0:00:40.199 I think so. 0:00:40.560 --> 0:00:43.960 I think there's a lot of tension. Obviously, it was 0:00:44.080 --> 0:00:50.680 not an easy decision. You absolutely hear that in the 0:00:50.720 --> 0:00:54.760 press conference. A lot of tension going on between the 0:00:54.760 --> 0:01:01.040 inflation goal and the maximum employment target. But I think 0:01:01.600 --> 0:01:04.640 they did what they did was appropriate. We think that 0:01:05.120 --> 0:01:09.200 they will continue to cut rates this year. We have 0:01:09.280 --> 0:01:13.280 two more cuts in our FOCUST, and we also have 0:01:13.360 --> 0:01:16.720 to focus to cuts in the beginning of next year. 0:01:17.120 --> 0:01:21.559 I think it's a risk management decision. It was all 0:01:22.120 --> 0:01:27.360 very clear throughout Chiair Powell's speech of the press conference 0:01:28.240 --> 0:01:30.840 that it was a risk management decision. A lot of 0:01:30.920 --> 0:01:34.040 people said that there was a lot of tension between 0:01:34.800 --> 0:01:40.520 upgrading the economic projections and the rate cut. But actually, 0:01:40.600 --> 0:01:44.160 if you look at the materials to the summary of 0:01:44.160 --> 0:01:49.080 economic projections and you look deeper into the risk section, 0:01:49.760 --> 0:01:55.520 the risks to the labor market increased substantially, while the 0:01:55.640 --> 0:02:00.720 risks to the inflation mandate as a perception between the 0:02:00.800 --> 0:02:05.520 FORMC members actually declined, and that is what drove the 0:02:05.640 --> 0:02:10.959 rate cut. It's the balance of risks shifting, not necessarily 0:02:11.160 --> 0:02:13.080 their projections for the economy. 0:02:13.480 --> 0:02:16.440 But Elena Powell said himself, this is not a bad 0:02:16.440 --> 0:02:19.280 economy right now with unemployment at four point three percent, 0:02:19.720 --> 0:02:21.440 the economy is still growing at about one and a 0:02:21.480 --> 0:02:25.280 half percent. So how many rate cuts do you think 0:02:25.320 --> 0:02:28.520 we should be not will get, but should get in 0:02:28.560 --> 0:02:29.520 twenty twenty six. 0:02:30.400 --> 0:02:33.880 But we're still in a restrictive territory, he said, right 0:02:34.200 --> 0:02:38.840 at the same time, So it's not necessarily like cutting 0:02:38.919 --> 0:02:47.000 rates to boost economic growth. It's really removing that access restrictiveness. 0:02:47.639 --> 0:02:48.760 From interest rates. 0:02:49.240 --> 0:02:53.079 I think you know we're expecting four more cuts and 0:02:53.320 --> 0:02:56.120 for the FED to stop at three percent and see 0:02:56.120 --> 0:02:59.640 and assist what is happening in the beginning of next year. 0:03:00.280 --> 0:03:03.120 Why the beginning of next year, it's going to be 0:03:03.160 --> 0:03:07.240 a really pivotal moment for the economy. We think that 0:03:07.320 --> 0:03:11.520 we have not seen most of the impact from terriffs 0:03:11.720 --> 0:03:15.960 just yet. There's a lot of discussion on Bloomberg TV 0:03:16.120 --> 0:03:21.120 and Bloomberg Radio about how tariffs have not yet fully 0:03:21.200 --> 0:03:23.760 been felt throughout the economy. 0:03:23.760 --> 0:03:24.919 I totally agree with that. 0:03:25.440 --> 0:03:28.640 It's going to be the holiday season that will be 0:03:28.720 --> 0:03:33.239 a huge test for the US consumer in terms of 0:03:33.639 --> 0:03:37.760 their tolerance to higher prices. I think that's when we're 0:03:37.800 --> 0:03:43.839 going to see how consumers are doing. And in our 0:03:43.920 --> 0:03:48.000 own projections, we see a significant slowdown in the economy 0:03:48.040 --> 0:03:50.440 towards the end of the year just because of that 0:03:51.040 --> 0:03:55.920 and going into twenty twenty six. So that's when we 0:03:56.000 --> 0:04:00.960 are going to see the significant impact on tariffs, which 0:04:01.000 --> 0:04:05.000 will probably not be fully upset by fiscal policy and 0:04:05.040 --> 0:04:06.320 that a lot of people talk. 0:04:06.240 --> 0:04:10.880 About Yalan the FED seems to be I focused maybe 0:04:10.920 --> 0:04:14.400 a little bit more on the labor side of their mandate. 0:04:14.440 --> 0:04:16.960 What's your view of the labor market these days? 0:04:17.880 --> 0:04:23.200 It's healthy, you know, it's weaker, but it's still healthy. 0:04:23.400 --> 0:04:26.640 And that's why I think the next payrolls report will 0:04:26.680 --> 0:04:30.880 be really key to what the FED does at the 0:04:30.960 --> 0:04:34.719 October meetings. So and it's not going to be about payrolls, 0:04:34.880 --> 0:04:40.280 and again Powell alluded to that. He was kind of like, Okay, yeah, payrolls, 0:04:40.360 --> 0:04:43.279 we agree that, you know, that may not be the 0:04:43.279 --> 0:04:48.880 perfect indicative labor market health. It's going to be about 0:04:48.920 --> 0:04:52.800 the unemployment rate. He did say a couple of times 0:04:52.920 --> 0:04:54.480 during his press conference. 0:04:55.120 --> 0:04:57.840 That is a key measure. 0:04:57.600 --> 0:05:01.160 For the FED to see what is happening in the 0:05:01.240 --> 0:05:05.560 labor marcket if the unemployment rate rises, and we will 0:05:05.600 --> 0:05:10.120 be very much looking at the details below, you know, 0:05:10.279 --> 0:05:14.400 the unemployment rate itself, what drove it up, and things 0:05:14.520 --> 0:05:18.120 like that. But if that rises, I think the FIT 0:05:18.200 --> 0:05:23.080 will continue to remove that restrictiveness from interest rates. 0:05:23.640 --> 0:05:26.240 Elena, you were talking about the consumer and consumer spending 0:05:26.240 --> 0:05:29.960 a moment ago. You know, despite some consumer confidence reports 0:05:29.960 --> 0:05:32.720 that show confidence as lagging, we're still spending right And 0:05:32.760 --> 0:05:34.800 today there was even a report from the National Retail 0:05:34.839 --> 0:05:38.640 Federation saying they expect records spending on Halloween this year. 0:05:39.160 --> 0:05:41.840 So when are we going to start to see the 0:05:41.880 --> 0:05:44.480 consumer pulled back in some sort of a meaningful way, 0:05:44.520 --> 0:05:47.400 because let's admit, they've really been the pillar of this economy, 0:05:47.440 --> 0:05:51.760 despite the tariffs, despite geopolitical uncertainty. They're hanging in there. 0:05:53.000 --> 0:05:56.679 Well, you asking a question, and as a consumer, I 0:05:56.760 --> 0:06:01.840 can absolutely understand it. Like me myself shopping for school 0:06:01.880 --> 0:06:06.880 supplies earlier this year, it was like, you know, little 0:06:06.960 --> 0:06:11.440 note pads and things that went in price so much. 0:06:11.520 --> 0:06:12.280 I was shocked. 0:06:12.720 --> 0:06:15.279 Obviously I'm not happy about it, but I was still 0:06:15.320 --> 0:06:20.120 buying it. So this is like a question about that 0:06:20.640 --> 0:06:25.880 consumer tolerance level that I think we will be testing 0:06:25.920 --> 0:06:28.239 towards the end of the year when we get into 0:06:28.320 --> 0:06:33.120 that important holiday shopping season. I think, you know, to 0:06:33.200 --> 0:06:37.960 a degree, we're already cutting on services spending to buy 0:06:38.040 --> 0:06:41.279 those essential goods. And that's why I will be looking 0:06:41.320 --> 0:06:44.880 at the Personal Income and Spending report towards the end 0:06:44.960 --> 0:06:49.400 of the months on September twenty six to see what 0:06:49.560 --> 0:06:53.839 the split is between the services side and. 0:06:54.120 --> 0:06:55.080 The goods side. 0:06:55.400 --> 0:06:59.520 I think that we have already, like the data shows 0:06:59.560 --> 0:07:03.560 that we have already diminished I was spending on, you know, 0:07:03.640 --> 0:07:05.840 particularly discretionary services. 0:07:06.320 --> 0:07:09.520 Let's see that trend continues. All right, Elena, thank you 0:07:09.560 --> 0:07:10.640 so much. We appreciate that. 0:07:11.080 --> 0:07:14.360 One of my all time favorite economists, Elaine issue li Teva, 0:07:14.560 --> 0:07:18.120 senior US economists at the conference board here. 0:07:18.240 --> 0:07:21.360 Stay with us. More from Bloomberg Surveillance coming up after this. 0:07:27.600 --> 0:07:31.160 You're listening to the Bloomberg Surveillance podcast. Catch us Live 0:07:31.240 --> 0:07:34.440 weekday afternoons from seven to ten am Eastern Listen on 0:07:34.480 --> 0:07:38.160 Applecarplay and Android Auto with the Bloomberg Business app, or 0:07:38.320 --> 0:07:39.800 watch us live on YouTube. 0:07:40.000 --> 0:07:42.240 Let's see what's happening in this market here again, a 0:07:42.240 --> 0:07:44.800 little bit lifted market. We had a nice trading day yesterday, 0:07:44.800 --> 0:07:47.440 a little bit delayed response to the Fed cut. 0:07:47.440 --> 0:07:47.640 Here. 0:07:48.040 --> 0:07:50.200 Let's talk to somebody who actually is a professional in 0:07:50.240 --> 0:07:51.200 this stuff. That's Sarah Hunt. 0:07:51.200 --> 0:07:54.520 She's a partner in chief market strategist at Alpine Saxon Woods. 0:07:54.520 --> 0:07:57.120 We just kind of pretend here, but Sarah's the pro here. Sarah, 0:07:57.160 --> 0:07:59.520 what did you hear from your Federal Reserve this week 0:07:59.560 --> 0:08:02.880 and did it alter the way you're thinking about allocated 0:08:02.920 --> 0:08:03.480 capital here? 0:08:04.280 --> 0:08:06.440 Well, I think that they did the best job that 0:08:06.480 --> 0:08:08.880 they could in a circumstance that's challenging for a lot 0:08:08.880 --> 0:08:12.120 of reasons. Because you've got the labor market doing one thing, 0:08:12.160 --> 0:08:15.120 You've got potential inflation coming back on the other side. 0:08:15.280 --> 0:08:17.520 You've got a lot of different things going on at 0:08:17.800 --> 0:08:19.560 are we too restrictive. 0:08:19.080 --> 0:08:19.480 Are we not? 0:08:20.000 --> 0:08:22.320 Is a lack of restriction actually going to be helpful 0:08:22.360 --> 0:08:24.920 for businesses and whether or not that goes anywhere. I 0:08:24.920 --> 0:08:29.880 think that there's no actual next step. The expectation is 0:08:29.880 --> 0:08:31.920 they're going to continue cutting, but you've got some data 0:08:31.960 --> 0:08:33.959 in between now and then, So I think I think 0:08:34.000 --> 0:08:35.760 they did the best they could in a situation that's 0:08:35.800 --> 0:08:37.240 quite tough, and it's only going to be tougher as 0:08:37.280 --> 0:08:38.280 the meetings go from here. 0:08:38.520 --> 0:08:40.520 You know, I think getting lost in the sauce guys 0:08:40.600 --> 0:08:43.520 is that there is a government shutdown looming. If that 0:08:43.679 --> 0:08:47.600 were to happen at the end of the month, how 0:08:47.600 --> 0:08:49.439 does that play into I mean, it's really on the 0:08:49.440 --> 0:08:51.280 back burner right now, but if it were to happen, 0:08:51.679 --> 0:08:53.680 how does that inform your decisions on the market. 0:08:54.440 --> 0:08:57.000 I have to say that generally speaking, a lot of 0:08:57.040 --> 0:09:01.440 that political conflagration doesn't always come through in markets because 0:09:01.480 --> 0:09:04.840 they assume that it's going to get solved, and historically 0:09:04.880 --> 0:09:07.520 speaking it has been. We're also on the year thirty 0:09:07.559 --> 0:09:10.360 of continuing resolutions, right If you and I did that, 0:09:10.400 --> 0:09:13.520 our budgets would be completely a disaster. So the idea 0:09:13.559 --> 0:09:15.520 that all of a sudden, this one is the worst 0:09:15.559 --> 0:09:18.640 one that we've had. Is we'll see how that plays out. 0:09:18.720 --> 0:09:21.160 It certainly could add to volatility at a time when 0:09:21.160 --> 0:09:23.640 people are expecting volatility, and so far in September we 0:09:23.679 --> 0:09:25.600 haven't really gotten very much of it. So it could 0:09:25.600 --> 0:09:28.559 certainly add to uncertainty, which would potentially be an issue 0:09:28.559 --> 0:09:29.160 for investors. 0:09:29.320 --> 0:09:30.240 At record highs. 0:09:30.360 --> 0:09:33.840 Red headline crossing the Bloomberg terminal. President she President Trump 0:09:33.880 --> 0:09:36.800 holding a phone call. That's according to the CCTV. 0:09:36.920 --> 0:09:39.320 We'll have more reporting on that. 0:09:39.880 --> 0:09:40.120 Sarah. 0:09:40.200 --> 0:09:43.000 Talk to us about just kind of how do you 0:09:43.000 --> 0:09:43.760 think about. 0:09:43.679 --> 0:09:46.280 US versus rest of the world in terms of opportunities, 0:09:47.080 --> 0:09:48.680 because we saw earlier in this year a lot of 0:09:48.679 --> 0:09:51.960 folks kind of leave the US maybe kind of back 0:09:51.960 --> 0:09:54.480 away from that American exceptionalism a little bit like I 0:09:54.480 --> 0:09:56.520 got to own everything, the dollar, I got own the 0:09:56.600 --> 0:09:59.120 US equities, US bonds, kind of back away from that. 0:09:59.160 --> 0:10:02.040 How do you guys think about it that now we tend. 0:10:01.840 --> 0:10:04.240 To be fairly US centric, and I think the tricky 0:10:04.240 --> 0:10:06.240 thing about backing away from it, there are periods of 0:10:06.280 --> 0:10:08.560 time at which different markets will do better than the 0:10:08.640 --> 0:10:10.959 US for any number of reasons. I mean, I think 0:10:11.040 --> 0:10:13.920 China with stimulants. The Chinese market's actually done quite well 0:10:13.920 --> 0:10:16.520 this year, But I think that the problem becomes if 0:10:16.520 --> 0:10:18.640 the US has a problem, the rest of the world 0:10:18.679 --> 0:10:19.400 tends to have a. 0:10:19.280 --> 0:10:20.120 Problem as well. 0:10:20.480 --> 0:10:24.200 Most of the large technology juggernauts are in the United States. 0:10:24.240 --> 0:10:26.720 Most of that cast generation is coming from there, so 0:10:26.800 --> 0:10:29.080 it's difficult to walk away from the US. It's more 0:10:29.080 --> 0:10:31.560 of an and than an ore as far as we're concerned. 0:10:31.720 --> 0:10:34.880 There are places where you can find pockets of timing 0:10:34.880 --> 0:10:36.840 where you can make more money, but the US markets 0:10:36.880 --> 0:10:39.520 really tend to be a place for investors to sort 0:10:39.559 --> 0:10:41.040 of stay and hold those stocks. 0:10:41.320 --> 0:10:43.480 Are you surprised by the strength you're seeing in China 0:10:43.559 --> 0:10:45.360 right now, in the low inflation you're seeing in China, 0:10:45.400 --> 0:10:48.960 given all that's coming at them right especially from the US, I. 0:10:48.960 --> 0:10:51.560 Think it's a surprise. I mean, this year has been 0:10:51.760 --> 0:10:54.480 such a challenge to try to parse out where things 0:10:54.480 --> 0:10:56.920 are going because you've had this moving, tear up situation. 0:10:57.160 --> 0:10:59.280 You've had a lot of that that makes it. 0:10:59.320 --> 0:11:01.920 Very difficult for people to figure out exactly where things 0:11:01.920 --> 0:11:03.480 are going to go. So I think you look into 0:11:03.520 --> 0:11:06.280 twenty twenty six and it's as confusing. What's going to 0:11:06.280 --> 0:11:08.800 happen next year. But China has certainly been trying to 0:11:08.840 --> 0:11:11.000 do work on their own economy and that's been a 0:11:11.040 --> 0:11:13.000 sort of a perennial. But this year does seem to 0:11:13.040 --> 0:11:14.440 have been a little better for them. 0:11:15.200 --> 0:11:17.360 Sarah, what do you talk to your clients about is 0:11:17.559 --> 0:11:20.400 when they say, well, I'm concerned about this concentration risk 0:11:20.480 --> 0:11:22.600 in this market. I mean, it seems like all the 0:11:22.640 --> 0:11:25.320 performance is driven by a handful of names. But yeah, 0:11:25.360 --> 0:11:27.000 I know most of the earnings are coming from a 0:11:27.000 --> 0:11:30.640 handful of names, and but that, boy, we just haven't 0:11:30.760 --> 0:11:33.199 seen it like this for such a long time. Tom 0:11:33.280 --> 0:11:35.000 King would go back to the nifty to fifty back 0:11:35.040 --> 0:11:35.480 in the day. 0:11:35.640 --> 0:11:35.959 It is. 0:11:36.080 --> 0:11:38.760 That is also a very big challenge, and the problem 0:11:38.960 --> 0:11:43.000 is that it's almost the momentum has been driving a 0:11:43.000 --> 0:11:45.240 lot of that, but it's also the cash flow and 0:11:45.280 --> 0:11:47.200 the earnings that have been driving that. It is hard 0:11:47.200 --> 0:11:49.760 to see where you can look at ancillary areas, and 0:11:49.800 --> 0:11:52.440 we've talked about this before in the space of infrastructure 0:11:52.480 --> 0:11:55.920 build out for AI, but there's also that spending is 0:11:56.080 --> 0:11:57.079 enormous right now. 0:11:57.200 --> 0:11:58.559 That spending doesn't look. 0:11:58.400 --> 0:12:00.520 Like it's slowing down, when it does look like it's 0:12:00.520 --> 0:12:02.120 going to slow down. I think you're going to see 0:12:02.160 --> 0:12:04.080 a lot of wobbles. And every time we think that 0:12:04.160 --> 0:12:06.880 there might be a pullback in AI spending, that part 0:12:06.880 --> 0:12:09.600 of the market has wobbled. But it's difficult because that 0:12:09.760 --> 0:12:11.960 is where the performance is, and that is where the 0:12:11.960 --> 0:12:14.240 concentration in the S and P is too. So if 0:12:14.240 --> 0:12:16.760 you're going up against the market quote unquote with as 0:12:16.760 --> 0:12:19.440 the S and P five hundred, that concentration in top 0:12:19.520 --> 0:12:22.440 names is enormous in that index, and that is historically. 0:12:22.080 --> 0:12:26.839 Unusual headwinds in this market. I mean, besides maybe valuations 0:12:26.880 --> 0:12:29.720 being a little frothy in some areas. What's your biggest 0:12:29.760 --> 0:12:31.520 what's the biggest headwind to the market. 0:12:31.679 --> 0:12:33.920 I think the biggest headwind to me is any kind 0:12:33.920 --> 0:12:37.200 of risk to earnings growth, because the valuations in and 0:12:37.240 --> 0:12:39.920 of themselves are usually not the problem. The problem is 0:12:39.960 --> 0:12:42.960 when something changes and if that delta in that change 0:12:42.960 --> 0:12:45.760 in earnings direction goes the other way, it's either negative 0:12:45.800 --> 0:12:47.439 or it starts to slow down. That's going to be 0:12:47.440 --> 0:12:50.319 a problem because of where valuations are. But the valuations 0:12:50.360 --> 0:12:52.240 in and of themselves are not as much of the issue. 0:12:52.280 --> 0:12:54.480 What would be the impetus to make those earnings go down. 0:12:54.640 --> 0:12:55.319 So this is the. 0:12:55.280 --> 0:12:57.240 Problem of where do we end up with the tariffs 0:12:57.280 --> 0:13:00.520 and what happens with margins, because margins are a big problem. 0:13:00.600 --> 0:13:03.280 If you are worried that input prices is going up, 0:13:03.480 --> 0:13:04.920 are going up, then you have a problem with the 0:13:05.000 --> 0:13:07.480 labor market because that's usually how people solve margin part. 0:13:07.559 --> 0:13:07.719 Right. 0:13:08.280 --> 0:13:11.760 I mean, the second quarter earnings were I'm gonna really good, 0:13:11.880 --> 0:13:13.800 I mean, much better than people would expect it. But 0:13:13.840 --> 0:13:17.760 I keep waiting for the tariffs to really bite earnings 0:13:18.000 --> 0:13:19.720 or we just haven't seen it. 0:13:19.760 --> 0:13:22.080 Really, It's that shoe that people are either waiting to 0:13:22.160 --> 0:13:24.120 drop or assuming is not going to drop because it 0:13:24.120 --> 0:13:26.200 hasn't dropped thus far. And I think that's where the 0:13:26.240 --> 0:13:30.160 problem is. And with the moving rules and timing, you know, 0:13:30.200 --> 0:13:32.360 you can just keep pushing things forward and then people 0:13:32.400 --> 0:13:35.400 keep bringing forward their activity because I'd rather buy it 0:13:35.440 --> 0:13:37.920 now than pay an extra twenty percent on it. At 0:13:37.920 --> 0:13:40.600 some point that script either flips or it doesn't work 0:13:40.679 --> 0:13:42.920 quite as well. And we haven't gotten there, which is 0:13:42.960 --> 0:13:45.120 why earnings were so great and people were surprised, and 0:13:45.120 --> 0:13:47.720 those upside surprises were I think the expectation is that 0:13:47.760 --> 0:13:49.520 earnings are going to be higher in twenty twenty six. 0:13:49.640 --> 0:13:52.080 If that expectation changes, I think that's where you start 0:13:52.080 --> 0:13:53.440 to see the cracks in the firmament. 0:13:53.520 --> 0:13:54.880 I think it all comes down to the consumer. 0:13:54.960 --> 0:13:55.080 Right. 0:13:55.120 --> 0:13:56.920 We were all buying up cars early in the year 0:13:56.920 --> 0:13:58.360 to get ahead of the towers. I mean, once the 0:13:58.360 --> 0:14:01.520 consumer starts to pull back, if the job market cracks 0:14:01.520 --> 0:14:04.440 in a larger way, right, that's when the dominoes will 0:14:04.440 --> 0:14:04.960 start to fall. 0:14:04.960 --> 0:14:06.840 That's part of the problem, and that's part of what 0:14:06.880 --> 0:14:09.199 everybody's been waiting for. And there is a striation between 0:14:09.280 --> 0:14:11.720 upper end consumer and lowering consumer, and the lowering consumer 0:14:11.920 --> 0:14:14.240 has been hurting for quite some time. The upper and 0:14:14.280 --> 0:14:15.600 consumer continues to spend. 0:14:16.200 --> 0:14:17.200 Sarah Hunt, thank you so much. 0:14:17.240 --> 0:14:20.160 Appreciate it as always, Sarah Hunt, she was on television earlier. 0:14:20.440 --> 0:14:23.240 Nass already do it at all Multimedia. We'll get to 0:14:23.240 --> 0:14:25.000 get on a podcast or whatever the kids are doing 0:14:25.040 --> 0:14:27.480 these days. Sarah Hunt, partner and chief market strategists at 0:14:27.480 --> 0:14:31.560 out Pine Sex. What's giving us her thoughts on these markets? 0:14:31.640 --> 0:14:34.680 Stay with us. More from Bloomberg Surveillance coming up after this. 0:14:40.960 --> 0:14:44.560 You're listening to the Bloomberg Surveillance podcast. Catch us Live 0:14:44.600 --> 0:14:47.760 weekday afternoons from seven to ten am Eastern. Listen on 0:14:47.880 --> 0:14:51.520 Applecarplay and Android Auto with the Bloomberg Business app, or 0:14:51.680 --> 0:14:52.760 watch us live on. 0:14:52.720 --> 0:14:56.200 YouTube Asamnaji, President CEO of Marcus and Milkjob joins us 0:14:56.200 --> 0:14:59.480 here in our studio in New York City. As some 0:14:59.600 --> 0:15:02.320 talk those, we've got commercial real estate business here today. 0:15:03.280 --> 0:15:04.280 How are things out there? 0:15:04.800 --> 0:15:08.040 Good morning, Great to be with you again. We have 0:15:08.120 --> 0:15:10.320 come a long way since the shock of a five 0:15:10.400 --> 0:15:16.640 hundred basis point interest rate factor completely destroyed any notion 0:15:16.800 --> 0:15:19.520 of underwriting or how you value commercial real estate in 0:15:19.520 --> 0:15:22.600 twenty twenty three. Twenty four was a little bit of 0:15:22.640 --> 0:15:26.120 a regrounding all those values, and twenty five is now 0:15:26.160 --> 0:15:29.840 moving forward into a new cycle, and the Fed's move 0:15:29.960 --> 0:15:34.520 yesterday continued that process. For this industry. Prices have adjusted, 0:15:34.640 --> 0:15:37.640 which is a really important reason why capital is coming 0:15:37.680 --> 0:15:42.080 back into commercial real estate on a replacement cost and 0:15:42.800 --> 0:15:47.640 alternative asset bases. Today's commercial real estate is far more 0:15:47.680 --> 0:15:50.560 compelling as an investment than it was even a year ago, 0:15:50.960 --> 0:15:54.320 especially with the head the FED now becoming much more dubbish. 0:15:54.720 --> 0:15:57.640 We're also seeing a big pullback in new construction starts, 0:15:58.160 --> 0:16:01.960 especially for multi family housing, which had record production, and 0:16:02.040 --> 0:16:05.320 that draw up in new supply will give the market 0:16:05.400 --> 0:16:06.280 some time to recover. 0:16:06.920 --> 0:16:09.400 Let's talk office vacancy rates, right, because there was all 0:16:09.440 --> 0:16:11.320 that doom talk, nobody's ever going to go back to 0:16:11.360 --> 0:16:14.160 the office. People are going back to the office, mainly 0:16:14.240 --> 0:16:15.960 because a lot of companies are saying if you don't, 0:16:16.040 --> 0:16:18.840 you know, you can hit the road. Where are office 0:16:18.920 --> 0:16:21.640 vacancy rates now, because I know across much of the 0:16:21.640 --> 0:16:23.400 country they were at record high as recently. 0:16:24.200 --> 0:16:28.840 Great question about a property type that has really suffered 0:16:28.960 --> 0:16:33.880 from the post pandemic ripple effect that is now finally 0:16:33.920 --> 0:16:37.280 starting to recover. You're right. Overall vacancies that are around 0:16:37.320 --> 0:16:41.440 seventeen seventeen and a half percent nationwide, down from north 0:16:41.440 --> 0:16:44.000 of twenty percent just a couple of years ago. In 0:16:44.160 --> 0:16:48.920 New York City, those vacancies are accelerating on their way down. Now. 0:16:49.280 --> 0:16:52.800 We're seeing a full percentage point drop in vacancies over 0:16:52.920 --> 0:16:57.040 last year, record absorption in Q four and Q three 0:16:57.080 --> 0:17:00.640 of last year, leading to a really strong twenty five 0:17:00.920 --> 0:17:06.600 for the market. What's interesting is that the daily attendance 0:17:06.760 --> 0:17:09.840 of office workers is now at eighty percent of pre 0:17:09.920 --> 0:17:13.119 pandemic levels. Lisa mattail from seventy percent last year and 0:17:13.160 --> 0:17:16.240 fifty seven percent the year before. I call that resilience, 0:17:16.440 --> 0:17:19.320 Yes it is, but there's been a lot of pain 0:17:19.359 --> 0:17:21.800 in the process. A lot of properties have defaulted on 0:17:21.840 --> 0:17:26.719 their loans, and the bifurcation of older obsolete buildings versus 0:17:26.720 --> 0:17:31.000 class A newer, more modern buildings is huge. Vacancies in 0:17:31.040 --> 0:17:35.840 the class A newer product is you know, eleven twelve 0:17:35.880 --> 0:17:39.639 percent or so, and by comparison, you're looking at twenty five, 0:17:39.800 --> 0:17:43.040 thirty thirty five percent vacancies in older, more obsolete properties, 0:17:43.119 --> 0:17:46.880 especially in urban markets. So it's a tale of two cities. 0:17:47.480 --> 0:17:51.600 And the reaction from the market to commercial real estate 0:17:51.640 --> 0:17:54.720 being the next shoe that falls because of office defaults 0:17:54.800 --> 0:17:57.680 was way over exaggerated. I've been on this program saying 0:17:57.760 --> 0:17:59.920 that for a couple of years now, and that's proof 0:18:00.119 --> 0:18:02.280 to be right. We're working our way through it. 0:18:03.040 --> 0:18:03.439 How about the. 0:18:04.920 --> 0:18:08.439 Financing side of the commercial real estate business? Are the 0:18:08.520 --> 0:18:11.080 banks playing? Are they where if I want to go 0:18:11.200 --> 0:18:14.240 develop something or redevelop something and I want to put 0:18:14.280 --> 0:18:16.800 some capital into commercial real estate, where am I going 0:18:16.840 --> 0:18:17.000 to go? 0:18:17.000 --> 0:18:18.360 Am I going to go to my local bank? Where 0:18:18.359 --> 0:18:19.000 am I going. 0:18:19.280 --> 0:18:24.119 Normally, the private investor sub ten fifty million dollars price 0:18:24.200 --> 0:18:28.440 point heavily relies on banks and credit unions, especially regional 0:18:28.400 --> 0:18:31.159 and local banks. In twenty twenty three, after the Silicon 0:18:31.240 --> 0:18:34.760 Valley banking crisis and first half of twenty four, banks 0:18:34.760 --> 0:18:38.880 were not lending. Underwriting was very tight. That has changed 0:18:38.920 --> 0:18:42.960 significantly this year, so the banks are much more active. 0:18:43.359 --> 0:18:48.080 The normal rotation of loans being paid off maturing is 0:18:48.240 --> 0:18:51.600 finally starting to recover. That opens room on their balance 0:18:51.600 --> 0:18:55.280 sheets for new loans, and that's another reason we're bullish 0:18:55.560 --> 0:19:00.720 for twenty twenty six in terms of more transactions and refinancing. 0:19:01.160 --> 0:19:04.080 You mentioned a moment ago about how these older buildings 0:19:04.880 --> 0:19:07.800 are having a hard time finding attention in the market. 0:19:08.040 --> 0:19:11.440 A number of cities are turning those buildings into those 0:19:11.480 --> 0:19:14.760 commercial buildings into residential buildings. We're seeing that in Cleveland, 0:19:14.760 --> 0:19:17.520 We're seeing that in Boston. Is that a trend that 0:19:17.560 --> 0:19:19.000 you think is sustainable. 0:19:19.359 --> 0:19:22.200 It's a one off trend because the cost of those 0:19:22.240 --> 0:19:26.520 conversions and the practicality of most of the footprints that 0:19:26.600 --> 0:19:30.600 were designed for office use into a true residential use 0:19:31.040 --> 0:19:34.520 is very limited. But there are some successful examples. What 0:19:34.600 --> 0:19:38.600 we're seeing broadly, is the reuse of old retail. For example, 0:19:39.119 --> 0:19:41.600 shopping malls that are obsolete are a lot easier to 0:19:41.640 --> 0:19:45.720 either demolish or convert to something else than urban, especially 0:19:45.840 --> 0:19:46.959 urban office buildings. 0:19:47.240 --> 0:19:49.760 Where are you guys seeing the best value out there today? 0:19:49.760 --> 0:19:52.480 Where are you guys seeing, well, maybe some of the 0:19:52.520 --> 0:19:54.320 smart money going, if you will, the. 0:19:54.440 --> 0:19:58.480 Multi family rentals. You know, apartment buildings were so much 0:19:58.760 --> 0:20:02.040 priced to perfection before or the FED interest rate hikes 0:20:02.600 --> 0:20:07.600 that were affected pretty severely. So was industrial warehouses. Those 0:20:07.600 --> 0:20:12.000 were the two most let's say, price to perfection property 0:20:12.000 --> 0:20:15.560 types that were affected dramatically by the interest rate factor. 0:20:15.960 --> 0:20:19.480 It's now two and a half years after that shock, 0:20:19.960 --> 0:20:25.800 prices have adjusted and because of the replacement cost comparison 0:20:25.880 --> 0:20:31.200 being so much higher than the existing valuation of existing assets, 0:20:31.760 --> 0:20:34.439 those two property types are still getting a lot of attention. 0:20:34.520 --> 0:20:38.040 And believe it or not, retail is the comeback kit. Really, 0:20:38.080 --> 0:20:43.680 fifteen years of e commerce revolutionizing how consumers basically buy 0:20:43.760 --> 0:20:49.080 things made brick and mortar retail go through a massive 0:20:50.320 --> 0:20:56.040 repositioning and today's retail has less footprint, more of a 0:20:56.400 --> 0:21:01.000 customer focus and experiential retail focus, and it's doing very well. 0:21:01.200 --> 0:21:04.080 I would say it's the most desired property type of 0:21:04.119 --> 0:21:06.040