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Speaker 2: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney. Alongside
Speaker 2: my co host Matt Miller.
Speaker 1: Every business day we bring you interviews from CEOs, market pros,
Speaker 1: and Bloomberg experts, along with essential market moven News.
Speaker 2: I'm the Bloomberg Markets podcast called Apple Podcasts or wherever
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Speaker 2: podcast it is I guess kind of m and a Tuesday,
Speaker 2: Just Choice Hotels launches a hostile bid for Windom. You
Speaker 2: don't see this very often, so are you gonna exchange
Speaker 2: off for Gone? I don't know what's going on.
Speaker 3: With the Wall Street Journal putting out the story?
Speaker 2: Yep, Jody Lourie. She joins she's a credit analyst for
Speaker 2: Bloomberg Intelligence. Jody, can you explain what's happening here with
Speaker 2: Choice Hotels and Windom?
Speaker 4: Sure, Paul, So, I think the Choice situation is one
Speaker 4: of the more interesting ones that we've been following. Just
Speaker 4: as a quick recap, since the spring, Choice has been
Speaker 4: trying to court Windom into merging and Wyndham has said
Speaker 4: no multiple times. October seventeenth, they made it public and
Speaker 4: Wyndham said absolutely not. And now they're they're doing the
Speaker 4: nineteen eighty style hostile takeover. They're doing, you know, they're
Speaker 4: they're asking shareholders to feel free to exchange and get
Speaker 4: some cash or get stocked for the new company, and
Speaker 4: we'll see what happens.
Speaker 3: If you look at Wyndham stock ticker symbol w H here,
Speaker 3: it's just down about five tenths of a percent, up
Speaker 3: all about eleven percent year to deep. The walk is
Speaker 3: through the thought prop of shareholders right now.
Speaker 4: I mean, I think shareholders have to decide really what
Speaker 4: at the end of the day they want to get
Speaker 4: out of it. You know, if they think this is
Speaker 4: a good exit point, they'll they'll do it. If they
Speaker 4: really think that it's something that they'd rather just continue
Speaker 4: staying with Wyndham, they will.
Speaker 5: I mean from the bondholder's perspective, the key is.
Speaker 4: That for Choice, it's definitely a much less savory situation
Speaker 4: for bondholders because obviously they're going to take on debt
Speaker 4: in order to finance this, So they don't have enough
Speaker 4: cash on the Ballanjeet, nor do they generate enough cash
Speaker 4: flow to be able to pay for this. I mean,
Speaker 4: we're talking four or five could be up to seven
Speaker 4: or eight billion dollars if you know, in theory, if
Speaker 4: the whole entire offer gets accepted, you know, and they
Speaker 4: need to pay it in cash.
Speaker 5: I don't think it would get to that point.
Speaker 4: We've been saying about four billion dollars and we're talking
Speaker 4: about six times leverage at least.
Speaker 2: Wow, that's higher than I'm sure you would like, and
Speaker 2: a lot of the bondholders would like, what's this, what's
Speaker 2: the rationale for Windom rebuffing Choice Hotels here?
Speaker 4: So I think for it's a less slam dunk of
Speaker 4: a situation, not that it's necessarily some dunk for Choice,
Speaker 4: but they see themselves as having a better company to
Speaker 4: some extent, you know, at least from a margin perspective.
Speaker 5: From a global reach, they definitely have different brands. You know, Choice.
Speaker 4: Choice is a little bit more concentrated in the US,
Speaker 4: and so for Choices perspective, they're saying, Okay, how do
Speaker 4: we grow globally? Well, Windom's a natural step for Windom,
Speaker 4: They say, well, we don't really see that as as
Speaker 4: much of an attractive situation for US, just to be
Speaker 4: the biggest in the US and then also have some
Speaker 4: international presence not really as compelling.
Speaker 3: What could be the potential regulatory issues that would be
Speaker 3: required for a potential combination like this?
Speaker 4: Sure, and Brian Eger and Jenrie actually wrote something on
Speaker 4: antitrust a few months ago, which is a fantastic piece,
Speaker 4: basically talking about the fact that you know, the deal
Speaker 4: might not go through.
Speaker 5: From that standpoint.
Speaker 4: Choice has made comments that they've been talking with the
Speaker 4: FTC and sort of trying to put that to rest, saying, hey, listen,
Speaker 4: this could get blessed by the trust regulator. Gods, But
Speaker 4: I think the key concern here is when you deal
Speaker 4: with hotels, if you have a consolidation of hotels, It
Speaker 4: certainly could potentially affect the consumer, right, the end consumer
Speaker 4: has less choice in the matter, no pun intended.
Speaker 2: Right, So I mean, just give us a what would
Speaker 2: this balance sheet look like if you were to kind
Speaker 2: of merge these two companies, because I'm just looking at
Speaker 2: it now, it looks like they're kind of three three
Speaker 2: and a half times that the ebitthought today. But what
Speaker 2: would it look like pro forman? Is that a problem?
Speaker 5: Sure?
Speaker 4: So, you know, we did a calculation a few weeks
Speaker 4: ago where you were talking about choice, just the inevitable
Speaker 4: potential that they could fall to high yield. And one
Speaker 4: of the things we looked at is from a leverage standpoint.
Speaker 4: If you look at Bloomberg's MDL screen, So if you
Speaker 4: look at what consensus estimates are for twenty twenty four
Speaker 4: to twenty five, on the high end, we have over
Speaker 4: six times. Low end mid five times, both of which
Speaker 4: are above what the raiders have as their you know,
Speaker 4: their their threshold into high yield. And so that's you know,
Speaker 4: if we assume that four times that four billion dollars
Speaker 4: of debt that they could take on that could easily
Speaker 4: get them there. That would take quite a few years
Speaker 4: to repay, and I don't know if the regulators would
Speaker 4: be as or sorry the raiders would be as accepting
Speaker 4: of their story as they were with with Hyatt when
Speaker 4: Hyatt did the Apple Leisure acquisition.
Speaker 3: How would this merger better position the potentially combined company
Speaker 3: to better compete with other larger lodging rivals, including Marriott
Speaker 3: as well as Hilton.
Speaker 4: That is a great question, just so I think really
Speaker 4: at the end of the day, when you think about
Speaker 4: what's going on in this mid tier low tier, Marriott
Speaker 4: and Hilton are really expanding in big ways, both internationally
Speaker 4: as well as domestically, and they have been really just
Speaker 4: taking on three hundred four hundred new locations easily over
Speaker 4: the next year or so, and the brand new businesses
Speaker 4: that they have, and so they are blanketing the space
Speaker 4: and trying to really aggressively enter it. On the flip side,
Speaker 4: Choice has been entering the upscale, and so we have
Speaker 4: been seeing that a little bit mid tier upscale. You know,
Speaker 4: they bought Ratus in Americas. That was a big win
Speaker 4: for them in terms of that. But I think the
Speaker 4: industry as a whole is definitely getting a bit more competitive,
Speaker 4: particularly as we get to this post COVID time and
Speaker 4: consumers preferences has changed, Right, consumers are looking at airbnbs,
Speaker 4: but they're looking at these ability to be able to
Speaker 4: live in a more comfortable environment, have a kitchen if
Speaker 4: they want to have a little bit more affordability in
Speaker 4: terms of what they're doing. So I think we're seeing
Speaker 4: this amalgamation of businesses across the board. No one's going
Speaker 4: to stay in that upper tier only. They're going to
Speaker 4: try to span the whole entire economic scale.
Speaker 2: So stepping back, I mean I just booked a trip
Speaker 2: for Ireland in September of next year and there's only
Speaker 2: one slot left. I mean, it is out of control.
Speaker 2: So what generally speaking, I'm going back to the Homeland
Speaker 2: to see this. The peeps, yeah, they're psyched. I'm sure.
Speaker 2: Talk to us about the hotel business in general here,
Speaker 2: where are we now and kind of the recovery So, Paul, I.
Speaker 5: Mean, I think for hotels.
Speaker 4: So first of all, you bring up a good point
Speaker 4: that people are definitely international traveling much more this year
Speaker 4: into next year than they were last year. Right, people
Speaker 4: feel much more comfortable getting on the road going internationally
Speaker 4: and are doing so significantly while they can get you know,
Speaker 4: do it while you can and while you're living and healthy.
Speaker 4: So that said, I mean, I think for hotels, a
Speaker 4: lot of them were affected very quickly by the pandemic,
Speaker 4: but recovered pretty quickly by the pandemic. Case in point, Marriott, Hilton, Hyatt,
Speaker 4: they all levered up with their revolvers and then.
Speaker 5: Quickly paid them back.
Speaker 4: Now, Hilton has stayed high yield rated because they haven't
Speaker 4: really made the commitment to want to be investment.
Speaker 5: Grade, but Hyatt and Marriott have.
Speaker 4: Gotten multiple notches of upgrade and have been in a
Speaker 4: much better spot. That said, there is some concern for
Speaker 4: the overall industry, particularly in the US, about financing. So
Speaker 4: these hotel companies are you know, they're just brands. They're
Speaker 4: managing these businesses, right, most of them are so asset light,
Speaker 4: I mean choices one hundred percent asset light. But Marriott
Speaker 4: and Hilton and Hyatt have moved that way and are
Speaker 4: about ninety or so you know in terms of assets
Speaker 4: that they don't own but manage. That said, they are
Speaker 4: all sort of looking at ways to sort of grow
Speaker 4: their businesses, think about their businesses and think about their
Speaker 4: ballon sheets at the same time, but also trying to
Speaker 4: help out the the hotel owners, meaning those you know
Speaker 4: a mom and popper rite who owns a hotel decides
Speaker 4: to go with Marriott. Marriott then manages it. They have
Speaker 4: to get financing. They do it from local banks and
Speaker 4: credit unions, and so earlier this year we definitely saw
Speaker 4: a little bit of a concern related to them getting financing.
Speaker 4: That is certainly eased, but it's in the back of
Speaker 4: people's minds.
Speaker 3: Talk to us about how much the extended stay and
Speaker 3: economy lodging competition has heated up.
Speaker 4: Yeah, so extended stay and economy lodging certainly areas of
Speaker 4: growth these days. Maybe less so as we head into
Speaker 4: next year the following year, but there is that narrative
Speaker 4: around the infrastructure bill and the fact that we'll have
Speaker 4: so many people working on projects and using these extended
Speaker 4: stays as that option.
Speaker 5: There's different types of extended stays.
Speaker 4: There's the one that are ten days or more, and
Speaker 4: then there's the ones that are more shorter term extended stays.
Speaker 4: A lot of people like to lump them in together.
Speaker 4: Choice and Windham like to talk about how their extended
Speaker 4: stay is different than what Marriott and helt in our building,
Speaker 4: but I think it's a matter of time before you
Speaker 4: have these larger companies sort of looking into those areas.
Speaker 2: Jody, thanks so much for joining us. I always appreciate
Speaker 2: getting your thoughts there. Jody Louri. She's a credit analyst
Speaker 2: a Bloomberg Intelligence covering the lodging space, amongst others.
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Speaker 2: We all learned a new term, which is supply chain,
Speaker 2: and how fragile the global supply chain is, and we
Speaker 2: had no idea what was going on. Thankfully, we started
Speaker 2: talking to somebody he really does and he was very
Speaker 2: very good to us during the whole pandemic, giving us
Speaker 2: kind of a real explanation what's going on the global
Speaker 2: supply chain. That person is Gene Soroka. He's the executive
Speaker 2: director of the Port of Los Angeles. He joins us
Speaker 2: live here in the Bloomberg Interactive Brokers studio. Port of
Speaker 2: Los Angeles, the busiest container port in North America, so
Speaker 2: absolutely right on the front lines. Jane, thanks so much
Speaker 2: for joining us here. It seems like, well, let me
Speaker 2: ask you, are we back to quote unquote normal in
Speaker 2: terms of that global supply chain?
Speaker 7: Yeah, Happy holidays, just and Paul. Great to be back
Speaker 7: in New York. Generally speaking, Yes, All the vital statistics
Speaker 7: in Los Angeles, just use that as a barometer of
Speaker 7: the nation's supply chain look great. Cargo is flowing smoothly,
Speaker 7: and there is capacity available as the market picks up,
Speaker 7: which we project at will again in twenty twenty four.
Speaker 7: Overall global trade is down about five percent. Here in
Speaker 7: the US, imports are down about eighteen percent. So some
Speaker 7: of the entanglements we witness during the pandemic have been
Speaker 7: worked out. A lot of thought went into it, but
Speaker 7: also eased by that lower volume gives us a chance
Speaker 7: to kind of catch our breath and fix some of
Speaker 7: the things that needed work.
Speaker 3: What does holidays shipping look like right now? And what
Speaker 3: does that tell us about the direction of the economy.
Speaker 7: Yeah, compared to years pastes even in recent memory, inventory
Speaker 7: levels across the nation look good. In store fulfillment. Fulfillment
Speaker 7: centers themselves also look good as far as getting the
Speaker 7: products that we want when we order them or go
Speaker 7: to the store. At the Port of Los Angeles, we've
Speaker 7: seen four consecutive months of year on year gains, steady
Speaker 7: improvement trying to fuel that US economy and what we
Speaker 7: hear from the retailers, we had a good Thanksgiving weekend
Speaker 7: from Black Friday through Cyber Monday, about an eight percent uptick,
Speaker 7: and those experts are calling for about a three to
Speaker 7: four percent gain in overall holiday sales when everything is
Speaker 7: said and done.
Speaker 2: So we hear on Global Wall Street have been hearing
Speaker 2: about a recession for eighteen months that hasn't really shown up.
Speaker 2: What do you see in your data? What do your
Speaker 2: customers tell you?
Speaker 7: We don't And if you keep talking about it, you
Speaker 7: probably talk yourself into it, as you both have seen
Speaker 7: for a long time. But by technical standards and the definition,
Speaker 7: we had a recession last year Q one and Q
Speaker 7: two with GDP declines in that first and second quarter.
Speaker 7: Since then, the numbers are all over the board, unlike
Speaker 7: what we've witnessed in recent memory. But the jobs report
Speaker 7: easing inflation. We think that interest rates have peaked now
Speaker 7: and with eight point seven million jobs open around the country,
Speaker 7: although off their highs, still a lot for that US
Speaker 7: economy to fuel in servicing those of us who are
Speaker 7: buying and going out for experiential plans with our family
Speaker 7: and friends.
Speaker 3: What lingering issues still haven't been resolved yet from COVID
Speaker 3: when it does come to those supply chains.
Speaker 7: The interconnectivity, the dependencies that we all have on each
Speaker 7: other in our business jes, there are about twelve nodes
Speaker 7: in the supply chain that have an impact of what
Speaker 7: we do with the ports, yet we're so visible, So
Speaker 7: drawing people together for better collaboration absolutely key. We cannot
Speaker 7: work in silos. Second, this information sharing concept that we
Speaker 7: pioneer at almost a decade ago has to become mainstream.
Speaker 7: And if you're going to share information to make sure
Speaker 7: that those handoffs are succinct, you've got to protect that
Speaker 7: data through cybersecurity and resiliency.
Speaker 3: All right.
Speaker 2: Map go, which was just critical during the pandemic. We're
Speaker 2: talking about the supply chain. You can filter it to
Speaker 2: see the ships at port all around the world, including
Speaker 2: Los Angeles and Long Beach. You guys look pretty good there.
Speaker 2: I mean, it's a wholly different story than what it was.
Speaker 2: You know, at the peak of the supply chain issue.
Speaker 2: Talk to us about that. When stuff gets on the
Speaker 2: gets into your port, I kind of forgotten you, you explained
Speaker 2: to us before it's got to get loaded, unloaded, put
Speaker 2: on a transport. How is that whole supply chain working,
Speaker 2: getting stuff once it's off one of those big ships
Speaker 2: out to America.
Speaker 7: Yeah, better, Paul, but still a lot of work to do.
Speaker 7: And if you've seen one port, you've seen one port.
Speaker 7: We're a gateway. We unload that entire vessel when it
Speaker 7: comes in, load it back up to head to Asia.
Speaker 7: Our productivity at twelve thousand container units loaded on and
Speaker 7: off a vessel at Los Angeles is the best in
Speaker 7: the business today. But that cargo has to move off
Speaker 7: that terminal tarmac, and with the benefit of history, that's
Speaker 7: what slowed us down the most. During COVID, cargo was
Speaker 7: sitting at the port. Some used it as a warehouse
Speaker 7: because they were buying their goods just in case, not
Speaker 7: necessarily just in time. But all the vitals today look great.
Speaker 7: If we can get that cargo off the property in
Speaker 7: two to four days by rail and truck, then you're
Speaker 7: really starting to see the capacity gains that we all look.
Speaker 3: For when it comes to inflation, everyone talks about obviously
Speaker 3: goods versus services. Do you have a gauge whenever it
Speaker 3: comes to shipping to tell us what exactly that looks
Speaker 3: like when it comes to the difference between those two
Speaker 3: and how that obviously impacts inflation.
Speaker 7: Yeah, big topic today just supply versus demand to capacity.
Speaker 7: Right now, we've got the liner shipping companies who are
Speaker 7: based in Asia and Europe bringing in new capacity, larger ships,
Speaker 7: more fuel efficient, more clean for the environment, and those
Speaker 7: purchases were made with a cycle time of about three
Speaker 7: and a half four years. We're starting to see that
Speaker 7: tonnage come in as global trade has moderated and in
Speaker 7: some cases declined. So you've got excess capacity, lower demand.
Speaker 7: Prices are in the favor of the American importer and
Speaker 7: exporter this coming year.
Speaker 2: So, Gene, you guys at your port have a great
Speaker 2: view on China. So much of that trade comes into
Speaker 2: your port from China. It's route. What's your view? What
Speaker 2: are you seeing from China in the activity coming out
Speaker 2: of China in terms of trade.
Speaker 7: Yeah, on the business side, many of the folks that
Speaker 7: we deal with are talking about a China plus one strategy,
Speaker 7: not putting all your eggs in one basket. The geopolitical
Speaker 7: issues scare a lot of people and make them nervous,
Speaker 7: but also just good business practice, says I got to
Speaker 7: be able to move my sourcing out a little bit,
Speaker 7: similar to when I lived in China during SARS twenty
Speaker 7: years ago, a lot of the same discussion. So we
Speaker 7: are seeing growth in Southeast and South Asia. The Port
Speaker 7: of Los Angeles year end twenty twenty two, about fifty
Speaker 7: seven percent of all of its cargo emanated from her
Speaker 7: was destined to China. We'll close this year at about
Speaker 7: fifty three percent of our business with China, so it's
Speaker 7: moved down a little bit, but has not fallen off
Speaker 7: a cliff like some had imagined.
Speaker 3: What about Europe?
Speaker 7: Europe very small percentage. Our theater is the Transpacific. Second
Speaker 7: market is the West coast of South America. With respect
Speaker 7: to perishable fruits and vegetables, that's really our strong point.
Speaker 7: About three to four percent of all the products that
Speaker 7: we move in and out emanate from Europe. More natural
Speaker 7: trade lane is across the Atlantic to the East Coast
Speaker 7: and Gulf Coast ports of the US.
Speaker 2: So when the West Coast ports were having some challenges
Speaker 2: with pro productivities. I remember you coming in here saying
Speaker 2: some shippers were even going to take the extra costing
Speaker 2: maybe go through the Panama Canal and go to the
Speaker 2: eastern ports, like you know, Savannah or New York or whatever,
Speaker 2: New Orleans A. Have you got that business back, because
Speaker 2: we were just mentioning off air. I just saw a
Speaker 2: photo of a gazillion ships trying to get in and
Speaker 2: out of the Panama Canal because it's low water level.
Speaker 2: So that's not an option anymore, is it really?
Speaker 6: Now?
Speaker 7: Issues are popping up left and right, and now we're
Speaker 7: just a little more attuned to them in the supply
Speaker 7: chain with so many eyes on the system. We completed
Speaker 7: a thirteen month contract negotiation with our dock workers back
Speaker 7: in the summertime. Since that contract was ratified, we've seen
Speaker 7: about four and a half to five points of market
Speaker 7: share come back to the West coast of the US.
Speaker 7: There is good events from importers that they're moving a
Speaker 7: little bit more cargo via the West Coast because the
Speaker 7: transit uncertainty going through the canal with its low water
Speaker 7: levels right now is a little bit too much of
Speaker 7: a risk. Even though you can buy yourself up in
Speaker 7: the queue A little bit. That doesn't apply to everybody
Speaker 7: going through there, and coming up election year, a lot
Speaker 7: of folks will be looking at that policy and perspective.
Speaker 7: And the dock workers on the East and Gulf Coast
Speaker 7: will be negotiating their contract coming up this summertime. So
Speaker 7: a lot to keep in view, right.
Speaker 3: Especially when it comes to those contract negotiations. Do you
Speaker 3: see any sort of sticking points that could cause any
Speaker 3: sort of concerns and potentially what that can affect when
Speaker 3: it comes to obviously the port and what that means
Speaker 3: for shipping.
Speaker 7: Well across America, we saw a summer of discontent Jess,
Speaker 7: and a lot of final negotiations and contracting in the
Speaker 7: favor of labor and the employee. I don't see that
Speaker 7: any different on the East Coast. It's folks that work
Speaker 7: through the pandemic day and night, fearless of health and
Speaker 7: safety issues, trying to keep the American economy moving, and
Speaker 7: their payday is due.
Speaker 2: Yep, thirty seconds. What brings you to New York Other
Speaker 2: than New York?
Speaker 7: A couple of industry events wanted to talk with you
Speaker 7: all and kind of give you a layout here of
Speaker 7: what we're looking like towards the end of the year,
Speaker 7: the holiday season, and I'm optimistic about twenty twenty four.
Speaker 7: We've got a relatively early lunar New Year February tenth,
Speaker 7: and I see the calendar of supply chain falling a
Speaker 7: little bit more normally next year with an uptick in
Speaker 7: cargo through the port of La.
Speaker 2: Jeane Sroka, thank you so much for joining us. We
Speaker 2: really appreciate you coming in today and during really the
Speaker 2: last several years when everybody was trying to get a
Speaker 2: handle on what the supply chain issues, what the issues were,
Speaker 2: and how they were going to play out. Jeans Chorroka,
Speaker 2: Executive Director, Report of Los Angeles.
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Speaker 2: So, Jess, when I bought the Jersey Shore compound earlier
Speaker 2: this year, I mortgage rate six percent.
Speaker 8: I feel like a knucklehead. But now they got to
Speaker 8: over eight pretty good. Now, yeah, I'm like, I'm a
Speaker 8: real estate mogul. They're back down to seven point three
Speaker 8: to two percent. That's the h the bankrate dot Com
Speaker 8: thirty year fixed.
Speaker 2: So turning down a little bit better about I don't
Speaker 2: know what's happening out there, because nothing's moving out there
Speaker 2: because nobody's gonna get out of their three percent mortgage
Speaker 2: and go take on a seven point three percent mortgage.
Speaker 2: Let's talk to somebody who does this stuff for a living,
Speaker 2: a professional. Cory Sas Hour principal broker Compas joins us
Speaker 2: here in a Bloomberg Interactive Broker studio, suspicious last name.
Speaker 2: I'm just gonna assume there's nerve relation for the best
Speaker 2: sold for the best that she doesn't talk, you know,
Speaker 2: emerging markets, Corey. So there's just nobody's selling their house.
Speaker 2: I mean, what do you say to us, somebody that
Speaker 2: you're trying to get drum up some business here because
Speaker 2: they're sitting on a mortgage that's three or four percent
Speaker 2: and if they go anywhere then I have to pay
Speaker 2: so much more. How does that? How's that market playing out?
Speaker 9: Absolutely so, a lot of those guys are going into rentals,
Speaker 9: and that's kind of what they're doing. There's a lot
Speaker 9: of rentals out there. The rental price says have definitely
Speaker 9: come down because more people are developing rentals. So what
Speaker 9: we're doing is we're going into listing presentations and we're
Speaker 9: talking to them and they're worried that their house is
Speaker 9: at its height right now, that the most money they're
Speaker 9: going to get is right now.
Speaker 10: They're afraid that it's going to get less.
Speaker 2: Do you think that's that's a fair way to think
Speaker 2: about it.
Speaker 10: I think in the next few years.
Speaker 9: I don't think right away we are in a massive
Speaker 9: underbuilding situation. There's not enough homes for the people that
Speaker 9: need it. So I think it depends on your location
Speaker 9: real estate. If I've learned anything in my many years,
Speaker 9: and it is super hyper local, so every market is different.
Speaker 10: You know, I'm really speaking more Tri State area.
Speaker 9: But we say, all right, they're ready to go, they
Speaker 9: can't do the stairs anymore, or they kind of want
Speaker 9: to get out. They want to make their money somewhere else.
Speaker 9: So we're putting them into rentals while they figure out
Speaker 9: what the right lifestyle is. Are they going to write size?
Speaker 9: Do they want a different house, they want to go
Speaker 9: near their kids. Do they want to go somewhere warm
Speaker 9: or do they want to go somewherehere the tax rates
Speaker 9: are more favorable, So they need to kind of figure
Speaker 9: out their life and a rental is the best option
Speaker 9: for them to do that. And you know, they'll do
Speaker 9: six month rentals, a year rental, and they have a
Speaker 9: good idea a year where they really want to go.
Speaker 3: Talk to us more about the low inventory that you
Speaker 3: were alluding to you, because that was an issue well
Speaker 3: before the pandemic coming out of the Great Financial Crisis,
Speaker 3: but obviously was exacerbated by the pandemic. What kind of
Speaker 3: regions have more issues when it comes to low inventory
Speaker 3: or is it more broad based around the country where
Speaker 3: it's a problem.
Speaker 9: Yeah, so I don't think it's broad based. I think
Speaker 9: there are some areas that inventory. I think in the
Speaker 9: Tri State area, our inventory is really really tight. We
Speaker 9: sold twenty five percent less as a county. And that's
Speaker 9: not because the demand was lower up in Westchester. And
Speaker 9: that's not because the demand was lower. It's really because
Speaker 9: there wasn't enough houses to go around, so there was
Speaker 9: bidding wars everywhere. The prices have definitely gone up, and
Speaker 9: they've maintained that prices that are price Homes that are
Speaker 9: priced right are going way above asking, hundreds of thousands
Speaker 9: over asking. If they're overpriced, they're sitting people. Do not
Speaker 9: overprice your house. Price it right, you will get a
Speaker 9: bidding war. It happens every time. But if it's overpriced,
Speaker 9: it sits. So it's still happening. Contingencies in our area
Speaker 9: are still being waved. People are very used to the
Speaker 9: no mortgage contingency anymore, and appraisal contingencies are going away
Speaker 9: because now we have two years of strong data of
Speaker 9: home sales that are higher priced.
Speaker 10: In the beginning of the pandemic, it was harder.
Speaker 9: Homes weren't appraisings because yeah, because you know, we didn't
Speaker 9: have any data. It was so much lower than it
Speaker 9: was six months ago. Now houses are really appraising, so
Speaker 9: people are willing to wave those contingencies, telling my guys
Speaker 9: get in now. When the rates start going down, there's
Speaker 9: going to be even more demand and you can refinance
Speaker 9: as time goes on, a lot of the lenders are
Speaker 9: now offering one free refinance within the year that you
Speaker 9: lock into a rate. So if rates do go down
Speaker 9: a half a point, you can refinance without all the
Speaker 9: extra costs.
Speaker 2: So is there a rate I mean, when you sit
Speaker 2: around with your real estate buddies talking about the biz,
Speaker 2: is there a rate on the mortgage that you think
Speaker 2: will magically cause sellers to say, okay, now I'll put
Speaker 2: my house on the market if it's I don't know
Speaker 2: if that rate. Again, we're still north of seven percent
Speaker 2: on the thirty year fixes that six percent? Is that
Speaker 2: five percent right the catalyst rate?
Speaker 6: Yes?
Speaker 9: Right, absolutely, yeah, I think it's like five and a half. Okay,
Speaker 9: I think that's kind of the magic number. The seven
Speaker 9: year arms are at six percent now or even a
Speaker 9: little bit lower. You can get it if you can
Speaker 9: put money into a bank. You know, they give you
Speaker 9: like a favorable discount. So there's a lot of lenders
Speaker 9: out there, there's a lot of people. It's a very
Speaker 9: competitive marketplace right now. You can definitely get a better
Speaker 9: rate than what you're hearing on like the national average.
Speaker 9: And it's very county based, so some counties have lower
Speaker 9: rates than others. But I think five and a half
Speaker 9: is like the right number where you're going to see
Speaker 9: kind of the floodgates open up.
Speaker 10: But people still have to move.
Speaker 9: People are getting married, people's homes are you know, families
Speaker 9: are expanding, people have job changes, so there is still
Speaker 9: always going to be an influx and flow.
Speaker 10: But my advice would always be to geta county.
Speaker 2: It's such a great place to live. It always has
Speaker 2: been a great place to live in a metro New
Speaker 2: York area. Did you see a meaningful during a pandemic.
Speaker 2: I'm just going down to Florida. I'm done, I'm done
Speaker 2: with west Chester, I'm done with Connecticut.
Speaker 11: Yeah.
Speaker 9: Absolutely, anybody's who jobs who can take them where they
Speaker 9: didn't have to be in the office, or they had
Speaker 9: more flexibility. People were going for a better quality of life,
Speaker 9: warmer weather, lower you know, taxes. Yeah, a lot of people,
Speaker 9: everybody was going down to Florida. We've had a ton
Speaker 9: of people come back though the real world to set
Speaker 9: in you know, New York is where it's at.
Speaker 3: Sorry, I was curious about how have they shifted then,
Speaker 3: from a lot of people and a lot of peak
Speaker 3: of COVID to now.
Speaker 9: Yeah, a lot of people have come back in our area,
Speaker 9: and a lot of people kind of made poor pandemic
Speaker 9: choices and now they're kind of fixing that. So they're changing,
Speaker 9: They're not necessarily happy. They were going wherever they could
Speaker 9: get a house.
Speaker 3: One thing I'm curious about, because Paul brings us up
Speaker 3: about in office, how much has that changed when people
Speaker 3: are coming back who may have left, who were called
Speaker 3: back to come in.
Speaker 9: Yes, it definitely changes a lot, and it changes how
Speaker 9: north people are willing to go. So you know, we
Speaker 9: had people that'd be willing to commute an hour, an
Speaker 9: hour and forty five minutes. Now they want to go
Speaker 9: back to the towns that are maybe thirty minutes on
Speaker 9: the train. So those I think there's actually, if I
Speaker 9: had a higher priced home in the more northern towns,
Speaker 9: I would be more concerned about my value than I
Speaker 9: would if I was in a more southern town. Given
Speaker 9: the fact that most companies are making people come in forties.
Speaker 2: That sounds like a more normalized metro New York kind
Speaker 2: of market.
Speaker 10: Exactly.
Speaker 2: All right. So but again you're up there in Westchester,
Speaker 2: one of the it's always been in great demand here.
Speaker 2: You know, if I put a house on the market,
Speaker 2: reasonably priced, how fast will it solve?
Speaker 10: Do you think within a week?
Speaker 11: Really?
Speaker 9: Yeah, Wow, we'll put it on the market. You know,
Speaker 9: we'll do a coming soon on a Monday. We'll make
Speaker 9: it live on Thursday. We just did this last week.
Speaker 9: We had thirty offers and when two hundred and fifty
Speaker 9: over ask no contingencies and it went to contract within
Speaker 9: twenty four hours.
Speaker 10: Accepted offer.
Speaker 9: All it depends on the price plank, right, So I
Speaker 9: think it's first time home buyers. It's people trying to
Speaker 9: look to move up because they kind of grew out
Speaker 9: of their house or there maybe in an area that they,
Speaker 9: you know, want to be in a different area, better
Speaker 9: commutable area.
Speaker 10: I think the drive the.
Speaker 9: First time home buyers are the drivers of the buying market.
Speaker 9: And then the sellers are the downsizers or we call
Speaker 9: them right sizers. You know, they're not necessarily down sizing
Speaker 9: their house. They're just going to a house that makes
Speaker 9: more sense for their current lifestyle.
Speaker 3: So, if you're a potential buyer and we only have
Speaker 3: about thirty seconds left, what do you think are the
Speaker 3: top things they really need to be aware of right now?
Speaker 10: They need to get a pre approval.
Speaker 9: If they can get it under it in I think
Speaker 9: that would be amazing, so they know exactly how much
Speaker 9: they can spend, and they should go see every house
Speaker 9: that's out there, because they may not know what they
Speaker 9: like until they see enough things.
Speaker 10: They need to be ready to rock when it's time.
Speaker 2: That sounds like a season real estate right ready to go?
Speaker 2: Think So, Yeah, I sold my the Summit place right
Speaker 2: at the beginning of a pandemic, and the salesperson the
Speaker 2: industry didn't really have a firm grip on where the
Speaker 2: market was. Yeah, so I took their number, I put
Speaker 2: twenty percent on top of it, and I still got out,
Speaker 2: still really came in over the top of that. It
Speaker 2: was crazy. Now I think there's a lot of comps
Speaker 2: and people have a better sense of what's going on.
Speaker 2: Cory Sasaur, principal broker Compass up there in West Cheshire,
Speaker 2: talking about a market. It's still very robust out there,
Speaker 2: and I can tell you the same thing in Jersey.
Speaker 2: So again, good time to sell.
Speaker 6: You're listening to Take Cats are live program Bloomberg Markets
Speaker 6: weekdays at ten am Eastern on Bloomberg Radio, the tune
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Speaker 2: Brad Case joins us. Chief economists and director of Research
Speaker 2: at Middleburg Communities joins us here in our Bloomberg Interactive
Speaker 2: Brokers studio. Brad, you were just saying off Era that
Speaker 2: you guys at Middleburg Communities have sold most of your communities,
Speaker 2: most of your assets, most of your inventory. To tell
Speaker 2: us about that decision.
Speaker 12: Yeah, we're very active developers of rental housing communities. We've
Speaker 12: and we've been in that situation, you know, we've been
Speaker 12: around doing that for seventeen years something like that. But
Speaker 12: twenty twenty one and early twenty twenty two was kind
Speaker 12: of a golden moment to be selling assets. So we
Speaker 12: sold literally everything we owned, and we are still actively developing.
Speaker 12: We've got about a dozen under construction of the moment,
Speaker 12: or at least I think under construction. But yeah, we
Speaker 12: sold at the top of the market.
Speaker 11: That was nice.
Speaker 2: That was I mean, I thought I sold at the
Speaker 2: top of hey, But that is I mean, that's unusual,
Speaker 2: isn't No.
Speaker 12: And honestly, it is a little bit unusual because developers
Speaker 12: love their buildings and a lot of them just don't
Speaker 12: want to sell even if the prices are great. So
Speaker 12: one of the things that I really like about this
Speaker 12: company is that they're in it to make money.
Speaker 11: They're not in it to show off their trophies.
Speaker 2: So what's the typical community for middle bird communities? What's
Speaker 2: the typical type of development?
Speaker 12: So we call the middle market class A. They're not luxury,
Speaker 12: they're not high rise, they're not like located on the beach.
Speaker 12: They are in sort of suburban areas of major cities
Speaker 12: in the southeastern part of the country. It'll be like
Speaker 12: eight buildings with two hundred and fifty rental housing units,
Speaker 12: and some of them are multi families, some of them
Speaker 12: are single family. You know, build to rent where it's
Speaker 12: not scattered site. You're not owning a house, you're you
Speaker 12: were renting a house within a community with the same sorts.
Speaker 3: Of You had a piece that you sent to us
Speaker 3: talking about how if you look back over the past
Speaker 3: fifty years of data that you were crunching, renting is
Speaker 3: usually better investment than when it comes to buying. But
Speaker 3: isn't there an investment case when it comes to buying.
Speaker 12: Oh, absolutely there is, But people tend to forget that
Speaker 12: if you buy, you are taking a big chunk of
Speaker 12: money and paying it to some money for a down payment,
Speaker 12: and that's money that you could otherwise be investing in
Speaker 12: the stock market. And so when you rent, you don't
Speaker 12: have to give up that big pile of money in
Speaker 12: the market in the beginning. So you can rent a
Speaker 12: place and take that big down payment and instead put
Speaker 12: it in the stock market, and typically you've been better
Speaker 12: off historically speaking. And so people have to understand that
Speaker 12: when they are making a decision to buy or to rent,
Speaker 12: it's not just that, it's is there another good use
Speaker 12: for this money?
Speaker 11: You know? Right now, for example, the only.
Speaker 12: Thing that makes buying look good is that the stock
Speaker 12: market is so overvalued.
Speaker 11: If the stock market.
Speaker 12: We're more fairly valued, then you'd really want to rent,
Speaker 12: because you wouldn't want to be giving up that money
Speaker 12: that you could be putting into stocks.
Speaker 2: All right, So let's talk about your call in the economy.
Speaker 2: Here we're going to hear from the Fed tomorrow. Inflation
Speaker 2: is trending down. I don't see in a recession. What
Speaker 2: am I missing?
Speaker 12: So I think there's a there's not a very strong
Speaker 12: probability of a recession. And this is something I've been saying
Speaker 12: for two years and a lot of people have been
Speaker 12: calling recession and there just simply hasn't been data suggesting
Speaker 12: a recession. What we had last month, though, is one
Speaker 12: of the most important variables, which is housing construction has
Speaker 12: really been on a downward trend, and historically speaking, that's
Speaker 12: one of the things that does tend to predict a recession.
Speaker 12: So just over the last few days, I've updated my
Speaker 12: recession forecasting model, and the probability that a recession will
Speaker 12: start in the next year went up from about thirty
Speaker 12: three percent to forty seven percent.
Speaker 3: Okay, looking at your bio, you used to be working
Speaker 3: on the Federal Reserve Board as an economist. Can you
Speaker 3: walk us through typically when there's a two day meeting
Speaker 3: at the Federal Reserve, how that process goes on in
Speaker 3: the presentations that go forward as far as trying to
Speaker 3: gauge the economy. Since this is the meeting, we'll get
Speaker 3: the quarterly updates for the economy as well as the
Speaker 3: dot plots.
Speaker 12: Yeah, you have to know that that at the FED
Speaker 12: there is something like two hundred and fifty PhD economists,
Speaker 12: and at the various other Federal Reserve banks around the
Speaker 12: country they also have economists on staff. And they're trying
Speaker 12: to look at all parts of the economy. I remember
Speaker 12: once when I was in a meeting and Alan Greenspan
Speaker 12: was the chair of the FED at that time, and
Speaker 12: he and there was.
Speaker 3: Something indicator, Yeah, exactly.
Speaker 12: There was something that had happened with beef prices. And
Speaker 12: he said, you know, who can tell me why beef prices.
Speaker 11: Have been doing this?
Speaker 12: And an economy a PhD economist stood up and said,
Speaker 12: I am the specialist on beef herds. It's just it
Speaker 12: just blows your mind to understand. It's like two hundred
Speaker 12: and fifty people are forming their opinion about the overall economy.
Speaker 12: They're forming their opinion about one tiny piece of it
Speaker 12: and feeding it to the decision makers.
Speaker 11: So it really is.
Speaker 12: An extraordinarily extraordinary amount of data and expertise sort of
Speaker 12: helping them understand what are the stakes in the decisions
Speaker 12: they're making.
Speaker 2: So what do you think the economists are telling Fitscherman
Speaker 2: Palazy gets ready for his meeting.
Speaker 12: Well, there are real risks in the economy. One of
Speaker 12: the most important is the housing market.
Speaker 3: You know.
Speaker 12: The Dallas Fed, for example, produces what they call an
Speaker 12: exuberance indicator, and that shows whether the housing market seems
Speaker 12: to be in a bubble, and yeah, it's flashing red
Speaker 12: or the last few months, it's been flashing the last
Speaker 12: few quarters. It's been flashing red or yellow every quarter.
Speaker 12: So that is a risk that they look at.
Speaker 2: Because we just had a real estate agent here and
Speaker 2: she covers Westchester County Scars Elves from very very good areas,
Speaker 2: and she said, it is still crazy bidding wars.
Speaker 12: Absolutely, and that's that's what was happening back in two
Speaker 12: thousand and five, two thousand and six before the big
Speaker 12: mortgage market meltdown. So one of the real risks is
Speaker 12: that house prices start going down again. I don't think
Speaker 12: it would be anything like what we saw in two
Speaker 12: thousand and seven to two thousand and nine because we
Speaker 12: haven't had the kind of the kind of idiocy that
Speaker 12: we had back then. But that is one of the
Speaker 12: risks to the economy.
Speaker 3: How challenging is it coming out of the pandemic when
Speaker 3: there's really not a lot of historical precedence to give
Speaker 3: this because it seems like everybody's gotten it wrong as
Speaker 3: as far as their calls to be in a recession.
Speaker 3: Over the past eighteen months, Paul and I have talked
Speaker 3: so much about and people have been so wrong about it.
Speaker 12: Yeah, you know, it's one of the things that you
Speaker 12: have to keep in mind when things are disrupted is
Speaker 12: that the data that the FED members are using to
Speaker 12: keep track of the economy that gets disrupted too. That's
Speaker 12: in fact, one of the things that you know, if
Speaker 12: the federal government goes into a shutdown like like there
Speaker 12: is some concern that they may do early next year,
Speaker 12: that's one of the set gets affected by a shutdown.
Speaker 12: So the pandemic really disrupted the flow of data that
Speaker 12: the FED uses to make decisions, but also that people
Speaker 12: like my company use to make that kind of decision too.
Speaker 3: So there's an ECFC function in the terminal that is
Speaker 3: the consensus for economists that are pulled by Bloomberg. There's
Speaker 3: still a fifty percent chance when you're looking at this
Speaker 3: of a probability of a recession, which seems relatively high
Speaker 3: compared to estimates, say Ah Goldman Sachs economists and some
Speaker 3: other firms on Wall Street. What is the catalyst that
Speaker 3: is making people so pessimistic Because when you're looking at
Speaker 3: consumer spinning numbers, it's obviously more than two thirds of
Speaker 3: what's powering. The economy still very strong and resilient.
Speaker 12: Look, the most important piece of the economy is the
Speaker 12: labor markets, and they have continued to be strong and resilient,
Speaker 12: and that drives income growth, that drives consumption growth. So
Speaker 12: you're right, those are the most important things, and they're
Speaker 12: very healthy. As I said that, sort of the weakest
Speaker 12: thing that I'm seeing right now is the construction numbers,
Speaker 12: the housing construction numbers, both single family, but especially over
Speaker 12: the last few months, multifamily, and that's nationwide, and that's
Speaker 12: and part of that is because interest rates have gone up.
Speaker 12: But honestly, the bigger problem is that for years, interest
Speaker 12: rates were so low that any idiot could get into
Speaker 12: the housing construction business, and plenty of them did, and
Speaker 12: so and so if we go into recession over the
Speaker 12: next year, it seems to me the most likely reason
Speaker 12: is that there were too many things, too many houses
Speaker 12: built by those idiots back in those days, and that
Speaker 12: weakens the entire economy. So actually, you don't want to
Speaker 12: be in a situation where where interest rates are especially low.
Speaker 12: You want to be in a situation where it's hard
Speaker 12: to figure out, like it's hard to make a project
Speaker 12: work because in that case, the idiots are out of
Speaker 12: the market. The only people who make the projects work
Speaker 12: are the people who can do it well and can
Speaker 12: do it even when the economy turns south.
Speaker 2: So just about thirty seconds, you guys are constructing some
Speaker 2: properties now, but you're financing at a higher rates, right.
Speaker 12: Absolutely, it's it's we're we're financing a high rates and
Speaker 12: the big biggest problem is it's just more difficult to
Speaker 12: get the financing, so we have to work harder.
Speaker 11: That's the way it should be. It shouldn't be easy
Speaker 11: for us to get financing.
Speaker 12: But you know, one of our really good projects, for example,
Speaker 12: is in a secondary market, and some of the financing
Speaker 12: sources to say we want to be only in the
Speaker 12: biggest cities now, yep.
Speaker 2: Interesting, Brad Case, thanks so much for joining us. Brad Case.
Speaker 2: He's the chief economist and director of research at Middleburg
Speaker 2: Communities and it's just a fascinating story. They were sellers
Speaker 2: in twenty two, as was I. I thought I was
Speaker 2: the only smart person out there. But again, a good
Speaker 2: move there.
Speaker 1: Thanks for listening to the Bloomberg Markets podcasts. You can
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Speaker 1: at Matt Miller nineteen seventy three.
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