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Speaker 2: for Carol Master this afternoon, on this Netflix earnings day,
Speaker 2: we are seeing shares of Netflix actually move lower in
Speaker 2: the after hours after an initial mounts higher, down right
Speaker 2: now by one point seven percent. The company did report
Speaker 2: results that exceeded investor expectations in every major metric, revenue
Speaker 2: growing to eleven point one billion dollars, earnings jumping from seven,
Speaker 2: earn is jumping two rather seven dollars, and nineteen sense
Speaker 2: per share. The company also raised its forecast for full
Speaker 2: year sales and profit margins. It expects to generate up
Speaker 2: to forty five point two billion dollars in sales and
Speaker 2: have an operating margin of twenty nine point five percent.
Speaker 3: Let's bring in Mark.
Speaker 2: Douglass, the CEO, of the publicly traded advertising and marketing
Speaker 2: company Mountain ticker MNT, and he joins us from Miami.
Speaker 2: Mark always good to check in with you. I want
Speaker 2: to focus specifically with you on the ads supported element
Speaker 2: of this. I was telling Nora earlier. You know, I'm
Speaker 2: old enough to remember when Netflix said they would never
Speaker 2: do ads, they would never do live content, they would
Speaker 2: never do news, they would never do sports. Now they
Speaker 2: do all of those things, And is the in more?
Speaker 2: Is the ads business working?
Speaker 4: I think the ad business is off to a start.
Speaker 4: It can grow so much bigger, and you know, it's
Speaker 4: obviously growing. I think they're saying that they expect a
Speaker 4: lot more growth, but it's also in a competitive space.
Speaker 4: They're competing with Disney with Peak, with Paramount, Warner Brothers and.
Speaker 3: Those big spenders.
Speaker 4: Those big brands, they don't really increase their budget, so
Speaker 4: if you want to come into that space, you have
Speaker 4: to take market share from someone else. Netflix is what
Speaker 4: I would expect over time, is that whatever percentage of
Speaker 4: viewership they have is what percentage of the ad market
Speaker 4: they can get, So they have a lot of room
Speaker 4: to grow. It is working, but it's still relatively small
Speaker 4: compared to where it can be.
Speaker 5: I find it really interesting.
Speaker 6: We were discussing how people are willing to pay for
Speaker 6: these subscriptions even if they do contain ads. I can
Speaker 6: literally remember when you would watch Netflix all the way through,
Speaker 6: no gaps at all. But it seems as though this
Speaker 6: is a really thriving part of their business here.
Speaker 3: Yeah.
Speaker 4: Well, I mean why did they add the ads Because
Speaker 4: their customers wanted a lower price point, and so it's
Speaker 4: a simple trade off. We'll give you the lower price
Speaker 4: point if you'll let advertisers pay for part of your subscription.
Speaker 4: That's effectively what's happened opening, and so the customer is
Speaker 4: getting what they want and Netflix is getting the revenue
Speaker 4: they need know in order to make that possible. So
Speaker 4: it is a win win. I'm not sure everyone that
Speaker 4: gets ads thinks it's a win, but it's certainly a
Speaker 4: win that they don't have to pay as much to
Speaker 4: get the content.
Speaker 2: So I'm looking at the different plans and pricing for
Speaker 2: Netflix here in the US. There's the standard with ads,
Speaker 2: there's standard, there's premium, so it starts with seven ninety
Speaker 2: nine a month. You can go for premium up to
Speaker 2: twenty five dollars a month. Again, this is here in
Speaker 2: the US. There are different intricacies to this because you
Speaker 2: can pay for extra members and the like. Netflix has
Speaker 2: gotten really good at as my brother likes to remind
Speaker 2: our entire family understanding, if you're sharing an account and
Speaker 2: now everybody kind of needs their own accounts. Is there
Speaker 2: from the perspective of actual growth here in a saturated
Speaker 2: market in the US, is there a concern or is
Speaker 2: this by design that if Netflix raises the premium price
Speaker 2: then there will be a small portion of the folks
Speaker 2: who don't want to pay twenty five dollars a month
Speaker 2: or whatever, and instead they'll drop down to that ad
Speaker 2: supported model. Is that the strategy?
Speaker 3: I think yeah.
Speaker 4: I think worldwide Netflix maybe last quarter the quarter before Essential,
Speaker 4: the last time they were reporting subscriber numbers, they said
Speaker 4: the number one, you know, kind of tier that people
Speaker 4: were buying was the ad supported tier. I think it
Speaker 4: was as much as half of all new subscribers. And
Speaker 4: so people want it. They want that price point. I
Speaker 4: think what's really interesting is the way to think of
Speaker 4: it is Netflix is building a backlog of future revenue, so,
Speaker 4: in other words, they bring on the subscribers that they
Speaker 4: are essentially under monetizing. They're charging them seven ninety nine,
Speaker 4: and they're getting relatively few ads. And as Netflix increases
Speaker 4: the ad load and essentially makes more money, that is
Speaker 4: just like pure like that's going to flow directly bottom line.
Speaker 4: I would Netflix's earnings to outstrip their revenue growth literally
Speaker 4: for years to come. It's somewhat similar to the password backlog,
Speaker 4: where they knew all these people were sharing the passwords
Speaker 4: and at any time they can just kind of kind
Speaker 4: of get more serious about that and all of a
Speaker 4: sudden it produced all this additional revenue. That's what's going
Speaker 4: to happen with Netflix is advertising. And I think I
Speaker 4: have never seen a company this large that I would
Speaker 4: say should be treated as a high growth stock. That's
Speaker 4: the potential in the app business, right Mark.
Speaker 6: One thing that was interesting to me as we're parsing
Speaker 6: through this earnings was the fact that Netflix boosted its
Speaker 6: full year revenue primarily due to US dollar depreciation. What's
Speaker 6: your takeaway from.
Speaker 4: That, Well, I mean, the their global business. I mean,
Speaker 4: I think that's for financial analysts to really to really
Speaker 4: look at. I mean, obviously they don't want to be
Speaker 4: fluctuating their price points based on the way financial markets
Speaker 4: are valuing the dollar.
Speaker 3: And other things.
Speaker 4: But I think the I think most investors are going
Speaker 4: to look at the growth in revenue, growth and earnings,
Speaker 4: continue expansion in national and I think the most important
Speaker 4: value for Netflix, which is not really explicitly measured in numbers,
Speaker 4: is they, through surveys, they are the first place people
Speaker 4: go when they turn on their TV. Is they turn
Speaker 4: on Netflix. And the amount of power that gives this
Speaker 4: company is it's almost hard to state that. That's how
Speaker 4: they can turn you know, like fights into like numbers
Speaker 4: that rival some of the biggest sporting events, or turn
Speaker 4: WWEE into you know, big show on Netflix where one
Speaker 4: has been as big as another channel. And if I'm
Speaker 4: gonna investor, I'm gonna be as long as Netflix is
Speaker 4: the first place people go, It's going to be the
Speaker 4: first stock I want to invest in that. I think
Speaker 4: that's the biggest correlation.
Speaker 2: Hey, hey, Mark, since you are focused on the ads business,
Speaker 2: in your view, what's a more profit subscriber for Netflix?
Speaker 2: Is it the one who's paying seven ninety nine a
Speaker 2: month for the ad supported version, or is it the
Speaker 2: premium subscriber at twenty five bucks or the standard subscriber
Speaker 2: at eighteen bucks.
Speaker 4: I think the premium is probably the most profitable, but
Speaker 4: I think then the AD supported has the potential to
Speaker 4: become the second most profitable. I don't think it's there
Speaker 4: yet because they simply are not monetizing all those entertainment
Speaker 4: consumers at the level they could be. But when they are,
Speaker 4: they're doing seven ninety nine on that price point. Who knows,
Speaker 4: it might be eight ninety nine next year or something
Speaker 4: like that, and they can make probably equal to that
Speaker 4: in terms of AD dollars per user, and maybe even
Speaker 4: a bit more than equal to that in AD dollars
Speaker 4: per user. And you see that's what Amazon did with Prime,
Speaker 4: where they just flipped the entire customer base in the
Speaker 4: AD supported. So that AD supported in terms of volume,
Speaker 4: because most of the subscribers I think will be AD
Speaker 4: supported over time, is the most profitable just share dollars.
Speaker 4: Right now, it's probably the premium twenty five dollars mark.
Speaker 6: I mean, when you think about Netflix historically, they were
Speaker 6: initially felt like the leader, but you're seeing a lot
Speaker 6: of these other companies in here trying to additionally monopolize
Speaker 6: the space. But that being said, we did see some
Speaker 6: news earlier that Comcast is raising the price of its
Speaker 6: Peacock streaming service by three dollars a month. Very fitting
Speaker 6: today when we have Netflix earnings. How are you thinking
Speaker 6: about Netflix as a potential leader right now in this space?
Speaker 4: Yeah, I mean that losing that leadership position is going
Speaker 4: to be hard for them because they just have to
Speaker 4: keep investing in content, and they're profitable and very profitable,
Speaker 4: so they can afford to keep doing that. But I
Speaker 4: think what you're seeing happening is the other networks are
Speaker 4: fighting back. Peacock with Love Island just massive show over
Speaker 4: the last month from what I know, did incredibly well
Speaker 4: advertise in terms of revenue generation. I think it's the
Speaker 4: number one reality show in the world. Plus they have
Speaker 4: Bravo and others. You have Disney with all the children's content,
Speaker 4: Star Wars contentes PN now going in a live sports
Speaker 4: I think all the networks have gone way more serious
Speaker 4: about about competing and they're bringing out their own hit content.
Speaker 4: But as long as Netflix is number one, I think
Speaker 4: it's hard for them to lose that spot. Probably the
Speaker 4: only company that can really truly challenge them is Disney.
Speaker 6: Absolutely, it's interesting. We were just talking about Love Island.
Speaker 4: I am.
Speaker 6: I'm a watcher of Love Island, so I see how
Speaker 6: they were able to skyrocket here.
Speaker 2: Somebody who I'm co anchoring with today went to like
Speaker 2: a Love Island premiere watch party, watch party or one
Speaker 2: you hosted a.
Speaker 3: Watch party of my own two days later.
Speaker 2: Meanwhile, I've never even seen an episode of whatever you
Speaker 2: guys are talking about.
Speaker 3: Mark Douglas.
Speaker 2: Always good to see you fly on up here to
Speaker 2: New York next time so we can hang out in
Speaker 2: the studio. Mark Douglas is CEO of the publicly traded
Speaker 2: advertising and marketing company Mountain.
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Speaker 2: Well signs at the US economies holding up just lifting
Speaker 2: stocks this afternoon, as we heard from Charlie. This coming
Speaker 2: just a day after speculation about the fedhare.
Speaker 3: Really rattled markets.
Speaker 2: Better than estimated retail sales and a drop in jobless
Speaker 2: claims pointed economic resilience driving the S and P five
Speaker 2: hundred toward fresh all time highs. Let's bring in Molly Smith.
Speaker 2: She's Bloomberg News Economics editor. She joins us here in
Speaker 2: the Bloomberg BusinessWeek Studio. I want to start with retail
Speaker 2: sales because a big rebound in June, a broad advance.
Speaker 2: Ten out of thirteen categories posted an increase. Does this
Speaker 2: answer all questions about the health of the US consumer?
Speaker 3: Are we all good?
Speaker 4: God?
Speaker 5: I wish it was that easy, Tim It's not. I
Speaker 5: wouldn't be here if it were that easy. I explained
Speaker 5: it was, so I like to caveat by saying that,
Speaker 5: like retail sales is, I would say, like a relatively
Speaker 5: narrow look at consumer spending, that this is a report
Speaker 5: that mostly captures just spending on goods like physical stuff,
Speaker 5: but that's really just that's a third of overall consumer
Speaker 5: spending in our economy.
Speaker 3: I think this is a really important point.
Speaker 2: The consumer powers the economy, but services are what they
Speaker 2: spend their money on, bing go, Okay, yes.
Speaker 5: So not to say that a third of consumer spending
Speaker 5: is nothing, but it is not the majority of where
Speaker 5: consumer spending is really directed at. So that's one thing.
Speaker 5: Second thing, these are not inflation adjusted, so when you
Speaker 5: see these increases, you can kind of do a little
Speaker 5: bit of the math, since we did just get the
Speaker 5: CPI to see where prices were rising or not. But generally,
Speaker 5: if you see a number that's up, it could be
Speaker 5: up because prices are up, or because actual spending activity
Speaker 5: is up, or both. So in this case, there's probably
Speaker 5: a bit of a mix of that, and either way, though,
Speaker 5: the takeaway from economists was definitely positive that, you know,
Speaker 5: we just had two months of declines in retail sales
Speaker 5: coming into June, so to see a rebound, especially of
Speaker 5: this magnitude, was definitely reassuring in some ways, you know
Speaker 5: that maybe tariffs are not totally sapping consumer demand at
Speaker 5: least as of yet, but.
Speaker 6: Not the end all be all here, which you've clearly
Speaker 6: spelled out for us here. What were some of the
Speaker 6: highlights that you saw in this print.
Speaker 5: I think I don't know if I would call it
Speaker 5: a highlights so much as a surprise that that motor
Speaker 5: vehicle sales were up as much as they were, especially
Speaker 5: because we saw the administrative data from Ward's Automotive groups
Speaker 5: showed that car sales dropped again in June, and the
Speaker 5: CPI report showed that car prices were down, So that
Speaker 5: to me would spelled, you know, an overall negative for
Speaker 5: car sales a commist you're saying, probably a seasonal adjustment issue,
Speaker 5: because I'm not really sure how else you would get
Speaker 5: a positive number out of that.
Speaker 2: But there was also this pull forward in the earlier
Speaker 2: part of the year because consumers are very worried about
Speaker 2: what tariffs would do to automobiles. Is that part of
Speaker 2: this equation at all? Is that why it's surprising too.
Speaker 5: I think that there's probably still you know, there's been
Speaker 5: so many obviously, as we know, whiplash with tariffs. Are
Speaker 5: they on, are they not? Is it delayed?
Speaker 4: What date?
Speaker 3: So I think, you know.
Speaker 5: There was a bit of a pullback in June when
Speaker 5: like we had, you know, put to rest the idea
Speaker 5: of one hundred plus percent tariffs on China. You know,
Speaker 5: that was like a pact that was reached in early May,
Speaker 5: and that we've had a bit of this pause until
Speaker 5: the now we had this announcement in the past week
Speaker 5: that the real mayly more significant tariffs are going to
Speaker 5: kick in next month. At least that's the plan right now.
Speaker 5: So who knows, we could be going through another one
Speaker 5: of those you know lulls right now with the tariff
Speaker 5: talk that could be boosting spending and sentiment. In the meantime, Well, let's.
Speaker 6: Talk about the job market right now. Of course, we
Speaker 6: got that weekly print that we always get, which is
Speaker 6: jobless claims data that came out today. We saw that
Speaker 6: the estimates were two hundred and thirty three thousand, but
Speaker 6: it actually came in at two hundred and twenty one thousand,
Speaker 6: So a slight miss here. But what are you really
Speaker 6: seeing when we think about the broader economy as it
Speaker 6: relates to jobless claims.
Speaker 5: Well, it's a good thing when we see a miss
Speaker 5: on jobless claims froming a point that how these fewer
Speaker 5: people are filing for unt employment, So that's a good thing. Plus, yeah,
Speaker 5: assuming that we're in the camp of not wanting people
Speaker 5: to lose their jobs, so that's good. And at that
Speaker 5: level of overall claims of where the initial ones have
Speaker 5: been coming in in this like two hundred and twenty
Speaker 5: thousand area, that's very much in line with like the
Speaker 5: pre COVID economy and would suggest like a pretty solid
Speaker 5: labor market overall. Granted, where more of the concern is
Speaker 5: happening is in continuing claims. So these are people who
Speaker 5: are continually receiving unemployment benefits, whereas the other number is
Speaker 5: just new filers. So the continuing claims number has kind
Speaker 5: of been flirting with around like that two million number
Speaker 5: for a while now kind of like up around the
Speaker 5: highest levels. Since the end of twenty twenty one, that
Speaker 5: one has definitely been trending in a worse direction.
Speaker 6: So for a while it used to be bad news
Speaker 6: is good news? Where do we sit now? What are
Speaker 6: we say?
Speaker 5: Oh gosh, I want to say that good news is
Speaker 5: good news. I mean it's I think, well a lot
Speaker 5: of it is because you're thinking from the perspective of,
Speaker 5: like what happens to FED rates? Right, So I mean,
Speaker 5: right now, all of this data is telling you that,
Speaker 5: like the economy is solid and that this is all
Speaker 5: also supporting why we're not expecting to see ray cuts
Speaker 5: in July, at least July for now, who knows. September
Speaker 5: still seems to be a wild guard.
Speaker 2: Okay, So on this I just want to end with
Speaker 2: you on the FED and play some sound from one
Speaker 2: of the Kevins who is a vying to be the
Speaker 2: next chair of the FED. Kevin Walsh, former FED governor,
Speaker 2: was on CNBC earlier today.
Speaker 7: I think the President's language is this could be a
Speaker 7: golden age, and frankly, I think they.
Speaker 3: All could be right.
Speaker 7: Good policies could advance this US economy. What we'd call
Speaker 7: AI in a couple of years will just call business,
Speaker 7: and AI is going to make almost everything costs less
Speaker 7: and the US can be a big winner. If I
Speaker 7: were the president, what I'd be worried about is a
Speaker 7: central bank that doesn't see any of that, a central
Speaker 7: bank that is stuck with models from nineteen seventy eight,
Speaker 7: governance from a prior period and don't recognize we could
Speaker 7: be at the front end of a productivity boom, and
Speaker 7: if I were the president, I'd be worried that they might.
Speaker 8: Not see it.
Speaker 2: Kevin Walsh, a former FED governor, on CNBC earlier today, Molly,
Speaker 2: I want to ask you about this idea that a
Speaker 2: central bank with this dual mandate, in Kevin Warsh's view,
Speaker 2: might be stuck on old models and old priorities.
Speaker 3: What's your view on this.
Speaker 5: I mean, I still think the priority for the FED
Speaker 5: is definitely the dual mandate, as you said, so that's
Speaker 5: ensuring price stability and maximum employment, and I think those
Speaker 5: are still good goals to have, no matter if you're
Speaker 5: in nineteen seventy or if you're in twenty twenty five.
Speaker 5: There are a lot of central banks that don't have
Speaker 5: both of those, you know, they just have an inflation
Speaker 5: mandate or an employment mandate, but not both. So I
Speaker 5: think that, you know, and that's also something that for
Speaker 5: us comes from Congress. That's not the Fed's own idea.
Speaker 5: This is a mandate from Congress as to what they're
Speaker 5: meant to achieve here. That said, I mean, yeah, the
Speaker 5: economy is rapidly evolving. AI certainly has a lot of promises,
Speaker 5: but I don't think that's really had any widespread impact
Speaker 5: yet in terms of like taking out jobs that were
Speaker 5: you know, at a really widespread level here. I think
Speaker 5: it's just so far been like pretty concentrate and we
Speaker 5: haven't yet seen all of that, and of course when
Speaker 5: those things are going to be happening a bit more notably, Yes,
Speaker 5: the FED wants to be acting forward looking, but like
Speaker 5: you can't also be like, you know, acting in advance
Speaker 5: of like if this is still perhaps years or decades
Speaker 5: away from now, who knows our.
Speaker 3: Good place to end it?
Speaker 2: Molly Smith, Bloomberg News Economics editor joining us here in
Speaker 2: the Bloomberg Business Week a studio.
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Speaker 6: Let's talk about commercial real estate today. We had pro
Speaker 6: Lodge's shares that gained in yesterday's session. Those they're down today.
Speaker 6: The industrial real estate investment trust industry and that company
Speaker 6: in particular, that company delivered a beat and raised earnings
Speaker 6: report for the second quarter and beat consensus expectations for
Speaker 6: the second quarter. There, that's industrial commercial real estate and
Speaker 6: that can certainly tell us one thing. For a view
Speaker 6: on the office market, we bring in John Gates, CEO
Speaker 6: of Leasing Advisory America's at JLLL. The offer real estate
Speaker 6: and investment management services around the world, so it's got
Speaker 6: a great view on different economies and if we're indeed
Speaker 6: getting back to the office, talk to us John a
Speaker 6: bit about what the landscape is like right now for
Speaker 6: the office space in the United States. Are people coming
Speaker 6: back to the office.
Speaker 8: They are thank you for having me by the way,
Speaker 8: and good afternoon.
Speaker 9: Yes, unequivocally, we see increasing numbers of organizations ask their
Speaker 9: people to come back and in fact tell them to
Speaker 9: come back to the office an increasing number.
Speaker 8: Of days a year.
Speaker 9: It's been more of a step function, I would say,
Speaker 9: than a leap, if you will.
Speaker 8: That's been happening and building for quite some time.
Speaker 2: John, where are we compared to let's say, January twenty twenty, though.
Speaker 9: You know a year if you said twenty twenty, we're
Speaker 9: getting closer, but we're not in the same place. So
Speaker 9: fifty four percent, I think of the fortune one hundred
Speaker 9: have said you're in the office five days a week,
Speaker 9: and that was probably ninety percent then. But hybrid policies,
Speaker 9: you know, have people in the offices three to four
Speaker 9: days a week. So it's you know, somewhere in between,
Speaker 9: but far closer than we were a year ago.
Speaker 2: What about from the perspective of inventory and how much
Speaker 2: leased inventory you have versus what you had back then.
Speaker 9: There's a lot of ways to segment buildings for that question.
Speaker 9: I think the easiest way to do it is the
Speaker 9: new higher quality product and then everything that's say pre
Speaker 9: twenty fifteen, and the first category is leasing very very
Speaker 9: well at record rents, and occupancy levels are very high,
Speaker 9: and vacancy levels are low.
Speaker 8: We don't have a lot of construction. We're going to
Speaker 8: run out of space.
Speaker 9: The older product is a different story, and leasing volumes
Speaker 9: there are nowhere near as high, and that's where the
Speaker 9: majority of any increasing vacancy is coming from older product.
Speaker 6: John I cover commercial real estate stock for our US
Speaker 6: equities team here at Bloeberg News, and we talk a
Speaker 6: lot about the bifurcation in quality office space in the
Speaker 6: United States. You have the Class A buildings, You've got
Speaker 6: buildings that are lower tier, and of course you see
Speaker 6: a lot of these big corporations going for the higher
Speaker 6: quality buildings. As we look at the broader country and
Speaker 6: what it looks like for the office real estate space,
Speaker 6: where are you seeing areas for opportunity?
Speaker 9: Well, I think well positioned assets that are a little older,
Speaker 9: meaning a good location and good bones and a good
Speaker 9: footprint because they would trade at a really meaningful discount.
Speaker 9: So you have in the old days we called that
Speaker 9: neurovalue ad play. But you invest some money, you're below
Speaker 9: brand new replacement cost and you've got a very leasable
Speaker 9: building because you've spent a lot of money on us.
Speaker 8: I would view that as an opportunity.
Speaker 9: And then I think at the high end, well located sites,
Speaker 9: you all would be familiar with the all street phenomenon,
Speaker 9: a lot of financials moving jobs here. As an example,
Speaker 9: if someone were to break ground on a top of
Speaker 9: the market off US building, my belief is in Dallas
Speaker 9: it would lease quickly. So some of us where you are,
Speaker 9: New York is very solid right now, and in general,
Speaker 9: the cities across the south are very.
Speaker 6: Solid, and I know Park Avenue in particular. Here we
Speaker 6: are seeing a bit of a tailwind here in New
Speaker 6: York City. But let's talk about the West Coast. Of course,
Speaker 6: we have a lot of those remote workers. We've got
Speaker 6: the tech industry that started going a bit more virtual,
Speaker 6: not paying as much. They're not seeing these companies forcing
Speaker 6: people as much back into the office as other industries.
Speaker 6: What is the West Coast office demand looking like right now?
Speaker 9: You know, location, location, location has always been a thing
Speaker 9: in real estate, right and we call that sub markets
Speaker 9: in our space.
Speaker 8: Some markets matter a lot.
Speaker 9: In Northern California, dramatic change really started a year ago.
Speaker 9: And it's not necessarily big tech driven, but it's AI
Speaker 9: spawned industries and organizations at startups. So absorption of space
Speaker 9: has been very healthy in the Bay Area. LA is
Speaker 9: highly concentrated on the west side of LA if you
Speaker 9: wille Orange County would be more typical. And then SEE
Speaker 9: has been lagging, but we're starting to see recovery as
Speaker 9: Amazon and Microsoft and other great big name companies have said,
Speaker 9: we're coming back to the office. You just don't see
Speaker 9: the job growth right now in the largest tech companies.
Speaker 9: It's more in the startup community, so that's overweighted to
Speaker 9: Northern California.
Speaker 2: You know, John we you mentioned that New York is
Speaker 2: strong right now, and that's where Nora and I are located.
Speaker 2: That's where our headquarters is here at Bloomberg, and I
Speaker 2: wanted to ask you a question about this region, specifically
Speaker 2: in regard to the mayoral election that's coming up. There's
Speaker 2: been some concern, especially from business leaders, that Zorroon Mamdani
Speaker 2: might drive away business as a result of wanting to
Speaker 2: raise taxes on the wealthy and wanting to raise taxes
Speaker 2: on businesses.
Speaker 3: And he did meet with.
Speaker 2: A bunch of leaders Hunter business leaders from the Partnership
Speaker 2: for New York City earlier this week to.
Speaker 3: Talk with them.
Speaker 2: Are you looking at that at all as being a
Speaker 2: risk to New York City commercial real estate?
Speaker 9: Yes, I mean would be the one word to answer.
Speaker 9: I'll draw I think a direct comp for you. Last
Speaker 9: fall in San Francisco, in the city proper, we had
Speaker 9: a local election, as you too would be aware, and
Speaker 9: we had some of our agency professionals, people who represent
Speaker 9: the owners of the buildings, had leases ready for signature,
Speaker 9: and the tenants said, I want to see the outcome
Speaker 9: of the local election, and based on the way it
Speaker 9: went there, they ended up signing the leases and putting
Speaker 9: their people in the city.
Speaker 8: And I know, I.
Speaker 9: Do believe that could happen in New York, but that
Speaker 9: doesn't mean it will as a certainty.
Speaker 8: I would take people at their word, though.
Speaker 2: Well.
Speaker 6: Talking a bit more about this mom Donnie and the
Speaker 6: impact that it's having on markets here. Of course, we
Speaker 6: know that part of his campaign has been to freeze
Speaker 6: rents in New York City, so we did see apartment reads,
Speaker 6: especially that have exposure to New York City falling after
Speaker 6: the news. But I want to talk about office conversion
Speaker 6: because of course, we are also dealing with the housing shortage,
Speaker 6: and a lot of the conversation in the real estate,
Speaker 6: in the real estate industry has been about whether or
Speaker 6: not we're able to convert some of these office spaces
Speaker 6: into multifamily apartment properties. Is that something that you all
Speaker 6: are thinking about and what is the leatest status with that?
Speaker 9: Oh, it's accelerating, and it's happening at a pace we've
Speaker 9: never seen in the commercial history.
Speaker 8: You know.
Speaker 9: Again, as you know, Nora, absolute real estate is not
Speaker 9: a new thing. People see houses torn down that are
Speaker 9: old and build bigger, shinier ones, and so that can
Speaker 9: happen and all the asset classes, and we see that
Speaker 9: happening now. Now, as you know, not all office buildings
Speaker 9: lend themselves to being multi family. The floor plate configuration
Speaker 9: matters a lot, and obviously the location in a given
Speaker 9: city matters a lot. But we do see unprecedented amounts
Speaker 9: in terms of numbers of building and total aggregates square
Speaker 9: footage that are being converted to another use hospitalities and
Speaker 9: other likely candidate that's probably the two most meaning multifamily
Speaker 9: and hospitality. And we do have an affordable housing challenge.
Speaker 3: So that's good John.
Speaker 2: You guys are with a two q US office market
Speaker 2: Dynamics report, and one thing that you argue in the report,
Speaker 2: based on the data that you found, is that there's
Speaker 2: essentially this turning a corner for the US office market.
Speaker 2: What's the evidence that you have for that.
Speaker 9: We're just looking at the data and statistics and watching
Speaker 9: aggregate industry decisions. As an example, law firms have very
Speaker 9: broadly said we're working out of the office, and they've
Speaker 9: been expanding their footprint for a ear taking more space,
Speaker 9: and the data is very clear that it says that,
Speaker 9: and you see office leasing volumes increasing on a quarter
Speaker 9: over quarter basis. There's also anecdotal data. If I walk
Speaker 9: down the hall here where I sit with the real
Speaker 9: estate brokers, they're positive when they're in a better mood.
Speaker 9: It means volumes are good and they are in a
Speaker 9: better mood, and they will tell you they're busy. They'll
Speaker 9: tell you they're chasing more opportunities and people are making
Speaker 9: decisions at a greater pace, which is also cycle times
Speaker 9: is something we always measure and pay attention to here,
Speaker 9: and they're shrinking, which means people are making decisions.
Speaker 8: So all good news.
Speaker 3: And it adds out, John, good to see you. Thanks
Speaker 3: for joining us, John Day.
Speaker 8: Thanks you for having me. Great to see you.
Speaker 2: Whenever the jail folks join us, they're always joining us
Speaker 2: from the office, which I.
Speaker 3: Guess makes sense.
Speaker 2: Nobody's ever working, nobody's ever working from home. I can
Speaker 2: tell you that John Gaates, CEO of the Leasing Advisory
Speaker 2: America's services over at JLL. They offer real estate and
Speaker 2: investment management services all over the world.
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Speaker 3: This is the drive to the clothes plunks.
Speaker 1: Your thing well up on Bloomberg Radio.
Speaker 2: TikTok, everybody. Just about eighteen minutes to the close. We've
Speaker 2: got a special guest for our drive that close. Today
Speaker 2: we're talking regional banks. We've got Herman Chan with a
Speaker 2: senior analyst for US regional Banks at Bloomberg Intelligence. Herman
Speaker 2: joins us here in the Bloomberg Interactive Brokers studio. I
Speaker 2: just want everybody to remain calm. Okay, despite the fact
Speaker 2: that Herman is in our studio. Nothing is collapsing, Nothing
Speaker 2: is collapsed. The reason I say that is because we
Speaker 2: got to know you so well a couple of years
Speaker 2: ago during the regional banking crisis.
Speaker 3: It's my claim to fame each and every day. We
Speaker 3: spent so much time together.
Speaker 2: So it's nice to see you on a day when
Speaker 2: we don't have to talk about the FDIC.
Speaker 3: That's right.
Speaker 10: Actually, banks have been pretty good this far in the
Speaker 10: earning season. Actually it's been pretty interesting because banks universally
Speaker 10: have have been estimates. But the bar's a bit higher
Speaker 10: because just because of the run up over the past.
Speaker 3: Okay, so let's take a little step back.
Speaker 2: Because we've gotten earnings from I think it's fair to
Speaker 2: say the majority of them, M and T Bank, First Horizon,
Speaker 2: P and C Financial, Citizens Financial Group, fifth third in
Speaker 2: US Bank Corp. We're going to get tomorrow, truest Co
Speaker 2: America and Huntington Bank shares. Right, you would say if
Speaker 2: there is a through line to sort of tie all
Speaker 2: these companies together, at least the ones that we've heard from.
Speaker 3: Things are good.
Speaker 10: Yeah, things are good universally. The banks have beaten on credit,
Speaker 10: So the fears of tariff uncertainty and potentially worsening credit
Speaker 10: quality and higher loan losses, that really hasn't been apparent
Speaker 10: so far, and banks have been able to deliver some growth,
Speaker 10: which is interesting because you've seen some corporate clients and
Speaker 10: business clients front run some tariffs and build inventory ahead
Speaker 10: of higher costs, so that's actually been helpful for regional banks.
Speaker 6: How are we thinking about this earning season more Brolby?
Speaker 6: Who are the out performers here?
Speaker 3: Yeah?
Speaker 10: So P and C has done probably the best so far.
Speaker 10: They've been able to deliver loan growth and also improve
Speaker 10: their nand margins, which is they're spread between lending and deposits.
Speaker 10: That's the one that has been the belt weather, and
Speaker 10: you've seen that performance from yesterday. Some of the other
Speaker 10: ones have been a bit more mixed because they've either
Speaker 10: haven't grown their loan portfolio or their not just margins
Speaker 10: wasn't as robust.
Speaker 6: Are you How do we think about just leverage right now?
Speaker 6: When we look across the industry what are you seeing?
Speaker 6: What are the main takeaways?
Speaker 10: The main takeaways really is I was trying to preference earlier.
Speaker 10: There's a higher bar for performance given the thirty percent
Speaker 10: run up in stocks over the past three months.
Speaker 3: And on the back of that, the largest.
Speaker 10: Banks like JP Morgan and Bank of America, we're showing
Speaker 10: strong deposit and loan growth, so there's a higher bar
Speaker 10: for performance. And where things really stack up is can
Speaker 10: the banks really drive top line revenues in the form
Speaker 10: of an interesting come work fees.
Speaker 2: When we talk about the six big banks, we often
Speaker 2: talk about Bank of America being a good bell weather
Speaker 2: of the consumer because they have so much consumer access.
Speaker 2: We talk about JP Morgan in a similar way. A
Speaker 2: lot of the focus of our coverage is about the
Speaker 2: trading revenues, and they were certainly good during volatility. The
Speaker 2: regionals serve somewhat of a different group of folks. We
Speaker 2: speak to Bruce Vansn a lot over at Citizens Financial
Speaker 2: and he reminds us that construction small business, they're the
Speaker 2: ones who are powering their loan books. Is that every
Speaker 2: regional bank.
Speaker 10: The regional banks that I cover, which are the tier
Speaker 10: below the Bank of Americas and the JP Morgan's we're
Speaker 10: talking about P and c US bank truists all the
Speaker 10: way down to OZ King.
Speaker 2: And when you say tier below you just mean an
Speaker 2: assets in assets, right.
Speaker 10: These banks really tend to cater towards the middle market
Speaker 10: commercial customer and small businesses. Those are the bread and
Speaker 10: butter customers.
Speaker 2: For what was the commentary that they offered around those customers.
Speaker 10: Yeah, so it's a bit more mixed if you talk
Speaker 10: about the small the mid market commercial. They're saying that
Speaker 10: they're still transacting, but on the other hand, there's not
Speaker 10: a lot of you know, key capital spending that drives
Speaker 10: a lot of loan growth for the regional So depending
Speaker 10: on what we're seeing. Some banks are talking about higher
Speaker 10: commercial line usage, which means they're just tapping their existing
Speaker 10: commercial lines for gross purposes like a good sign. So
Speaker 10: that's a good sign, but it could also mean that
Speaker 10: once the terraff costs really start to pull through in
Speaker 10: the economy, those line usage will be paid back.
Speaker 6: Were there any concerns that stood out to you at
Speaker 6: all through these prints.
Speaker 10: Yeah, there's hasn't been a lot of real concerns. It's
Speaker 10: really about if we get further loan growth or if
Speaker 10: that can be persistent in the back half of the year. Right, So,
Speaker 10: if you take a step back last year, there was
Speaker 10: not a lot of loan activity for the regionals. A
Speaker 10: lot of it was due to the uncertainty with rates
Speaker 10: with the election, et cetera. And then perversely with tariffs.
Speaker 10: You've actually seen more loan growth and if that continues,
Speaker 10: that would be great for the regionals.
Speaker 3: But that's still a question I'm.
Speaker 2: Wondering about exposure to commercial real estate. One of our
Speaker 2: viewers listeners getting in touch about Historically people have been
Speaker 2: petrified of commercial real estate exposure, right when it comes
Speaker 2: to at least that was in twenty twenty four.
Speaker 3: Is that still happening.
Speaker 10: Yeah, So the commercial really state exposure that is been
Speaker 10: in the spotlight has been office commercial real estate exposure
Speaker 10: in particular, and for these larger regional banks, it's the
Speaker 10: smaller and exposure. We're talking about on average, about two
Speaker 10: percent of their entire loan book is off a CRE
Speaker 10: and they've had a lot of time to really build
Speaker 10: their bad debt reserves on these loans. So it's a
Speaker 10: known risk that they've been managing, and you've see charge
Speaker 10: offs come quarter after quarter, but because of the smaller exposures,
Speaker 10: it doesn't really move the needle that much. And they've
Speaker 10: been really conservative with building their reserves. In fact, you
Speaker 10: mentioned citizens they actually reduce their reserves, which means that
Speaker 10: they're just letting the reserves flow down as they incur
Speaker 10: more charge off. So that's just a sign of strong
Speaker 10: confidence that the portfolio can perform going forward.
Speaker 6: So we know that US lenders really came into this
Speaker 6: earning season trading at or near record highs and looking
Speaker 6: at the KBDS Bank Index that's ticker BKX up twelve
Speaker 6: percent year to date. So essentially we're hearing some people
Speaker 6: saying that high valuations among the big banks really is
Speaker 6: what tempered some of the enthusiasm surrounding the results. But
Speaker 6: how are you thinking about next steps? Where do we
Speaker 6: go from here?
Speaker 10: The next steps really is there going to be a
Speaker 10: catchup trade? So for the KBW index, the largest banks
Speaker 10: are really driving the boat here, with JP Morgan and
Speaker 10: Bank of Mary City Group showing out performance for the year.
Speaker 3: Whereas the regional banks have lagged a little bit.
Speaker 10: Right, So because the regionals don't have the markets and
Speaker 10: trading exposure that you mentioned earlier, are they going to
Speaker 10: be able to catch up, and is the catchup trade
Speaker 10: going to happen. That's what we're waiting to see, and
Speaker 10: really that's really dependent, as I mentioned before, on growing
Speaker 10: the balance sheet and improving the manager's margins.
Speaker 2: Herman, always good to see you, especially on a day
Speaker 2: where we're not talking about a regional bank collapse. So yeah,
Speaker 2: thanks so much for hanging out with us.
Speaker 10: You.
Speaker 2: Herman janis senior analysts for US regional banks at Bloomberg Intelligence.
Speaker 2: Check out his research and the research from the entire
Speaker 2: team on the Bloomberg Terminal.
Speaker 3: He's here in the interactive Brokers studio.
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