Moody's Talks - Inside Economics - Careening Markets and CRE Mash-Up

Episode Date: September 23, 2022

Janice Stanton, Executive Managing Director at Cushman and Wakefield and Victor Calanog, head of CRE at Moody's Analytics join the podcast to share their views in Commercial Real Estate and how it impacts the U.S. economy. Mark, Cris, and Ryan discuss recent developments in financial markets and the latest decision by the Fed. Full episode transcriptMore Info on Janice Stanton:Ms. Stanton is an Executive Managing Director in the Capital Markets group at C&W. She is responsible for advising global investors on the real estate investment markets. Ms. Stanton has more than 25 years of industry experience in real estate investment research and analytics, finance, and pension fund management.More info on Victor Calanog:Dr. Calanog is the Head of Commercial Real Estate Economics at Moody’s Analytics. He and his team of economists and analysts are responsible for the firm’s commercial real estate market forecasting, valuation, and portfolio analytics services. For more on the long-term impacts to the built environment if remote and hybrid work models continue, check out the Future of Work research hub.Follow Mark Zandi @MarkZandi, Ryan Sweet @RealTime_Econ and Cris deRitis @MiddleWayEcon for additional insight. Questions or Comments, please email us at [e-mail]. We would love to hear from you.  To stay informed and follow the insights of Moody's Analytics economists, visit Economic View. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Inside Economics. I'm Mark Sandy, the chief economist of Moody's Analytics, and I am joined by a number of folks. So let's just introduce the lineup. We got the regulars, my two co-host, Ryan Sweet and Chris Duretis. Hi, guys. Mark. Hey, Mark. I'm proud of Chris. He's getting used to this casual look now. Oh, I've got a black t-shirt for in honor of a Black Friday. here. There you go. Oh, you're talking about the stock market. Well, markets in general, right? Yeah, markets in general. We've got to come back to that for sure.

But yeah, he does look a little casual. But no matter what Chris wears, he looks good. Have you noticed that, Ryan? Yeah, he dresses and tries to be, he wants to be the first economist on the cover of GQ. Is that a possibility? I doubt it, but, you know, there's always a possible. Is GQ still a magazine?

Have you been on there? already. Oh, actually, I got a great story. I got a great story. I got a great story. Let me introduce the other two guests, okay, before I tell you the story. Because you want you absolutely will not believe it if you're watching this on YouTube and you see my hairline, but I'm going to tell you anyway. We got Janice, Janice Stanton. Janice is with Cushman-Wafield. Good to have you, Janice. Good to be your mark. And Janice and I, I think we go back. I'm not going to even say how many years. I think we were one of your first client. And we take full credit for recognizing the brilliance early on, right?

You know, it was, that was a great, I can't remember what the project was, but I just remember it, it was a great project. I don't have this warm, fuzzy feeling about this project I did with you. Was it a good project? I can't remember. Yeah, it was risk-adjusted cap rates with Susan Walker and, you know, like professors and real estate. Yeah, with Susan Walker, of course, who's a well-known real estate professor at Wharton, University of Pennsylvania. and a good friend, too. I don't think we've gotten her on the podcast,

but we definitely should get her on the podcast. Yeah, absolutely. And, oh, that was my first, cross, the first time I crossed paths with Susan, too, I think, in that project. That was interesting. Yeah.

Yeah. Mark, was your reaction, what? How do you guys measure cap rates? Really? Yeah, right. Something to that effect, I think. It was like, why is the data so bad?

Yeah, what's going on there? And, of course, you heard the voice of Victor. Calanag, Victor, how are you? Good, Mark. Thanks for having me today. And actually, I'll have to say, Victor, you look better than Chris. I don't know what you guys think. But, man, he is, he looks really sharp. I was going to go for the cover of muscle and fitness, that that would mean less clothes, I think, than we would allow.

Okay, let's not go there. Let's not go there. Let's not go there. Oh, I should, the obvious, Janice and Victor are experts in the commercial real estate world. And we're going to obviously do a deep dive here into the CRA world. A lot going on there and a lot to contemplate, both in terms of what it means for the CRE market, but what it means for the broader macro economy. But before we do that, we do need to talk about what's going on in markets. Oh, I wanted to tell you the story, though, because actually I'm somewhat.

proud of this. Do you still have it framed? Do you have it framed? Because I know what story you're going to tell. Probably in that office I don't really use. It may be there. So I was in Fortune magazine as one of the sexiest economists in the world. I'm not kidding.

And, you know, this is like 30 years ago. That is a pretty low bar. Yes. That's what I said. That is so true. That is so true. That's what I said. go, really? And I remember there's, I can't remember who, who they had like a three or four or five

economists. So that, that's when I had, that's when I had some muscle mass, Victor. You should be proud of that. Two words that don't ever go together. Sex and an economist. So that's so funny. That is so funny. Anyway, that's my claim to fame. Let's talk about the markets. And Chris, you want to give us a sense of things? I mean, what, what markets are doing, why and what, what potentially the implications are? I believe the term you used earlier was markets are losing their mind. And I think that's pretty apt. Hair on fire.

Hair of fire, right? So all over the place, it seems as though investors are selling assets, right? So the stock market is down. S&P 500, Dow Jones, take your pick. They're all down. Bond yields are up, right? So people are selling off their bond assets as well, requiring a higher yield. So there's a general risk-off approach here, fear all around of recession.

The most obvious trigger, of course, is the Fed statement earlier this week. Fed action of 75 basis points. A hike was well-known, well-communicated. So I don't think that was the reason why folks are taking on this attitude. It's more the statements and the dot plots that Ryan will certainly get into, indicating that the Fed certainly has a more pessimistic outlook here, suggesting that rates will be higher for longer, making that very concrete. I think if you've been paying attention, you've noticed that Powell has been very hawkish,

but now he's really trying to send that message over the banister to everyone in the marketplace. And I think finally folks are taking the message to heart. You also have geopolitical risk, of course, with Russia-Ukraine, still percolating perhaps as well with the call-up of Russian reserves. So lots of things to be fearful of all the way around. So I think that's what's going on in the marketplace today. Yeah, Janice, what is your official title at CW? Executive Managing Director, Capital Markets. Capital Markets.

And so you're looking at the CRA market, the commercial real estate market, through the prism of capital markets. You know, debt and equity capital that drives investment in CRA all over the world. In fact, we've been trying to get you on this podcast for a long time. but every time we think we've got you nailed down, you're in some other part of the world, which we'll come back to. But is the capital markets, CRE capital markets as in turmoil

as every other market appears to be? You know, it's not great. I felt a lot better, frankly, before Chris went through that litany of things going on today. But, you know, I think what we're seeing in the commercial real estate markets is the fundamentals are actually pretty decent.

But because of what's going on in interest rates, and if you're a borrower and most people who buy commercial real estate are levering, you know, not only your LTVs are down, but, you know, based on everything else, Chris is talking about, you know, your borrowing costs are up a couple hundred bips. And as a result, you know, people have kind of pushed to the sidelines. I mean, August trades are down 40% year over year. And that's after a great first half of the year because people are just trying to absorb what's going on and then figure out. what they want to do right now. So there's definitely been, you know, kind of a dislocation of the market. But what's happening, unlike where you always get trades in the stock market or in the bond market, you're getting a bid ask spread. You're getting a 10 to 20 percent bid ask spread where some of the sellers are going, you know what? I'm going to wait it out and see what happens.

So more than anything, there's a lack of transparency, which is funny because when you read the reports, someone will say, oh, cap rates are down and you're like, what? Because it's just the transactions haven't necessarily cleared the market in that specific property type or location. But everyone is feeling the pinch of higher borrowing costs. So let me just translate that a little bit to the listener. So my translation of some of what you said, is the market is the capital flowing into the commercial real estate market has gone to the sidelines. The investors have gone on the sidelines because of this broader turmoil in markets, the Fed tightening, the run-up in interest rates, both short and long-term interest rates.

And you're not actually seeing that yet in terms of prices paid for real estate because in a real state market, you might not get a transaction. You know, the seller still thinking, oh, well, the price is what it was a few months ago before this mess started. The buyer says, no way, you know, it's a lower price. So you have this big, what you called bid-ask spread is just, there's no meeting of the minds here. So no one's signing on the dotted line. So until that happens, we don't, we don't get real clarity with regard to where prices are in the commercial realist market, very different than a stock market or a bond market where, you know, it's transacting all the time.

It's a very liquid market and you get price discovery very quickly. You don't see that in the CRA market. Did I get that roughly right? Yeah, I'd like to take you to investor meetings. Oh, there you go. Okay. I got a job. I got a real English.

Yeah. That makes a lot of sense. So let's, it all, Ryan goes back to, it feels like the Fed. And, you know, maybe you can give us a sense of your interpretation of the Fed meeting that happened this past week and what it, what they're saying to us, what the Fed's saying to us. And then I, then I want to go next to long-term interest rates because there, that's been pretty dramatic in the last few days. And I want to talk about that a little bit.

And that obviously matters a lot for pricing all assets, including, you know, office buildings and other commercial estate. So, what's your take on the Fed meeting? So all the turmoil and financial markets started after the. the Fed meeting. And the takeaway from the September meeting, you know, as Chris alluded to, like the increase in the target Fed fund rate by 75 basis points wasn't surprising. They barely tweaked the statements of nothing surprising there. It was the summary of economic projections where the Fed submits, you know, each participant submits their forecast for GDP, unemployment,

inflation, and policy rate. So the so-called dot plot. And that was a significant increase between the last thing they updated, which I think was in June. So they're now signaling the terminal Fed funds rate, where it's going to peak this cycle, where they're going to most likely stop tightening, is 4.6%. That's much higher than what the market was anticipating. They were thinking 4%. It's almost more than a full percentage point higher than what's in our September baseline. So the Fed is just basically the takeaway, and if reading between the lines and the tea leaves,

is they'll stomach a recession if it brings inflation down. And that's the general takeaway. If you look at their forecasts, the unemployment rate increases by 60 basis points between this year and next year. And as Chris has pointed out, that's always coincided with a recession. So basically, the Fed is signaling they were likely going to go into a recession, and that's really affecting market sentiment. Yeah.

So that all makes sense. I mean, likely, or I mean, it feels like it's like right on the line. Yeah, we're on the, yeah, we're going to flirt with one. We're going to flirt with it. It can be uncomfortable. And that's what the Fed, that's what Palestine is saying. He's like, this is going to cause pain. Right.

They're going to, if inflation doesn't come down, there's going to be, they're going to reflect more pain. They are laser focused on bringing inflation down at any cost. Right. And so what's happening now is that stock investors are digesting that recession now or really, a really tough economy is much more likely. The Fed's going to live with that and to get inflation in. And therefore, we're seeing all this red on our screens right now.

Basically what the market is saying is that there's still a path to a soft landing. And a soft landing is when the Fed brings inflation back down to target. We avoid a recession. So that's kind of like the best case scenario. That path is narrow and getting narrow or narrow after each FMC meeting. Yeah. Okay. I will point out that with even right now, I'm looking at the decline in the market.

I think we're down a couple percentage points from where we were yesterday. We're still only down 20 only, but we're down 22% from the all-time high that was hit back at the beginning of the year. And that's kind of also sort of consistent with recession, but not quite, right? It's kind of like right on the line because if it were a recession, we'd probably be down closer to 30%. Is that fair to say? Yeah, I think that's fair. Your favorite indicator, the yoker, the difference between the 10-year and the two-year is among the most inverted since Volker.

So that's, and it's been inverted for a long time. So if you're a yoke-curve believer, you know, that's pretty much sending us very strong signal that the bond market. That's why I've been more focused, as you know, Ryan. Your shift on the goal post here. On the other yield curve, the 10-year versus the Fed Funds rate, the policy yield curve, which has not inverted. It has not.

And this gets to my next question to you. And it goes back to cap rates and, you know, pricing in the real estate market. The 10-year yield, have you noticed what's been going on there in the last couple of days? The 10-year, it's going straight up. I mean, I'm looking at now. It's at 3.7 percent, right? So if you decompose it into the three components, which is inflation expectations, long-run inflation expectations, they haven't budged.

It's the expected path of the real federal. funds rate, that adjustment occurred after the FMC meeting when they signaled, you know, basically the bond market's taking the Fed at its word and saying that the terminal rate's going to be 4.6, if not higher, because there's five or six Fed officials that we're saying that their dots are even higher than 4.6. So, you know, some have been arguing we might have to get up to five. So it's really, I think the market's trying to assess where's the ceiling on the Fed Funds rate this cycle. You know, one other thing I'll throw in the mix. I was just talking to a really good bond trader, he pointed out that the Japanese, you know, they're intervening in markets,

right? You saw that, right? They're trying to defend the yen because the value of the yen is falling through the floor here, which I find a little bit perplexing why they feel that's a big deal, you know, given they've been trying to get inflation up anyway, but regardless. And that means that the Japanese are, you know, selling treasury buying yen in that effort. And that's one of the reasons why we're saying what we're doing. what we're seeing in the long term bond market.

I thought that was interesting. Yeah, I mean, that's most likely going to show up in the term premium. Yeah, that would be the component of the tenure. Yeah. I mean, this week, there's a lot of central banks made decisions. The Bank of England, a number of central banks in Asia. Everyone's being pretty aggressive, but interest rate differentials or real interest rate differentials are strongly in favor of the U.S., and that's why the dollar,

it's not just against the yen, it's against almost everything. just appreciating very, very quickly. Right. Hey, Victor, you must watch the bond market here pretty carefully because going back to cap rates and valuation pricing in the CRE market. Do you have a take on what's driving this? I mean, obviously, the Fed's on the warpath, and that's contributing, but it feels like long-term rates are rising faster than you would have expected, even given that.

But is that your interpretation? Do you have some view on what's going on there? I mean, I agree with everything that's been said so far about the underlying drivers. but if we bring it back to how that might map out with our cap rates and our cap rate projections for commercial real estate is that I do think that, Janice, keep me honest here, January and February, we're still kind of hopeful that though we were anticipating interest rate increases from the part of the Fed, that cap rates would at least absorb it from a spread point of view as long as 10-year treasuries did not rise as quickly as they ended up doing.

So there was, I know there are some property types and some geographic markets where cap rates have trended very, very low, just pretty much correlated with interest rates we're going. But there was still a little bit of a spread. Now, as it turns out, if we're using the 10-year treasury as your risk-free rate for a lot of 10-year hold periods for assets like multifamily in office, where you're looking at very, very little spread and got a lot of asset classes that have been trading at 4, 5% caps or below, where there's nothing. And now that upward pressure and cap rates will really likely result in an interesting situation between buyers and sellers. Or they go, yep, Janice, what do you think? Yeah, but I mean, but you hit the down on the head there. The issue really is, you know, with all this volatility, the people who aren't trading this bed-ass spread, it's not that all of them are in denial, right? Like a lot of them are thinking, hey, the Fed's going to get inflation under control

and then things are going to restabilize, you know, the curve's inverted. So, you know, maybe like long-term rates will be lower. So they're just saying I will either buy cash and finance it later, right? Or I will hold on because I don't want to mark to market, you know, at a very high borrowing cost. So maybe I'll wait a year. Maybe I'll wait two years, you know, you kind of. So that bid-ask spread isn't necessarily like, no, I can't hear you. I know rates are higher.

I refuse to acknowledge it. It's, you know, what's the way? the best thing for my portfolio, and maybe it's just, you know, buckle up and wait a bit. And I think that is part of what complicates this particular asset class, right? It's an income generating asset class. And as Janus noted, you know, for multifamily warehouse distribution, sure, office kind of on the ropes along with retail, but for multifamily and warehouse distribution, they haven't gotten the memo that there's all this volatility. You've got a good amount of rent growth, decent occupancy. I do know that there are some kind of headwinds in the horizon.

Amazon's out there basically saying they're going to sell release a bunch of their warehouse. I'm not saying everything's peachy, but by and large, at least through the second quarter, and we're processing third quarter data soon. Rents and vacancies are holding steady. We'll come back to that. And just one other sidebar to get the listener to catch up if they aren't following along. We're throwing around the word cap rate, you know, capitalization. rate, that's short for capitalization rate. And that's simply a discount rate. So just think about the price of the real estate. That's equal to the stream of rents that are produced by that real estate. That's what Victor is calling the income stream. And then you just divide by the discount

rate. So, you know, if cap rates are low and falling, although it's being equal, you know, with that rent stream, that means prices are going higher, you know, that kind of thing. So lower cap rates, synonymous with higher prices relative to rent growth. There's a couple other things I wanted to explore before we move on more in depth into the CRE market. And I'll turn back to you, Chris, is around mortgage rates. And, you know, we've been having this discussion around mortgage rates. Now I'm talking about not commercial mortgage rates, residential mortgage rates,

for a single-family home. And last I looked, and I didn't look today, I'm kind of scared to tell you the truth. I'll look it up for you. Oh, please don't. I think it was 6.4 percent, or I think that's what I saw yesterday. Low, of course, was the low point, the record low back a little over a year ago was 2.6, 2.65, so they've come up a lot. But the mortgage rate, that 6.4, has risen even more than the long-term treasury yields. The 10 years up a lot, we just talked about that, but even mortgage up more than even more than that,

which obviously is doing a lot of damage to the single-family market, I guess to some degree to the benefit of the multifamily market. But, Chris, do you want to explain what's going on there? Why is that mortgage rates going up so much more than at least historical norms compared to like a 10-year treasury yield than has been the case historically? Yeah, I just looked it up here. Google says 7%. So you're looking at the wrong one, man.

I look at mortgage news. Is it mortgage news? I think we should look. I'll look it up while you can tell me what's going on. It's going north here. It's rising. And I think it's endemic of the other several components here. One is just the volatility in the market today.

Right. So rates themselves, if you look at MBS or mortgage back securities, right? At the end of the day, the price is set by supply and demand factor. So if the rates going up, it means that you have. more limited demand out there relative to a certain level of supply, right? So I think that's a fundamental reason. But then why is that the case? Well, you have issues around the prepayment option that mortgage borrowers have when they borrow money. And at these higher levels, perhaps there's a higher chance of prepayment in the future. So the MBS invests,

has to account for that. You have that volatility I mentioned, right? So clearly in these times of extreme movements, the investors also have to account for that in bidding up the spread. So I think those are the main components that we have here. And it's just a weird time in terms of the yield curve inversion. A lot of the models are going to produce results that require or suggest that we need higher yield in order to make the math work here.

So I attribute this excess spread that we're seeing between the MBS or between the mortgage rate that borrowers are paying and the 10-year Treasury do these really allow these movements in the markets themselves, these dislocations in the markets. Yes, I look. Where I go, my go-to for mortgage rates, real-time mortgage rates is mortgage news. daily. It's a website. And they, I think everything has a blemish to it. But I mean, I think this is a pretty good place to go. 6.62 as of today, right, as of a minute ago, 6.62%. It's head to towards seven. Yeah, headed towards seven, right? And of course, hard to argue with

Google. The one thing that makes me a little nervous about the mortgage rate and this argument that it's based on volatility in interest rates, which I think you did a pretty good job of explaining. It would no reason to go down that path again because I'm not going to explain it any better. It's very complicated, but in a bond market world, it doesn't feel like that's going to go away, that volatility and that those high mortgage rates until the Fed's no longer on the war path here. As long as the Fed's on the war path, and there's a lot of uncertainty with where, with regard to where that ends, you know, how high are they going to push short-term interest rates and how long are they going to keep them there, that volatility is going to remain in the market, as long as that

volatility remains in the market, mortgage rates are going to remain very high. Would you agree with that? I would. And then if you throw in the mix, the cloud state of tightening, right, with the Fed not purchasing mortgage-back securities anymore, right? That's at least one source of demand that's no longer there, right? Even if they're not selling actively, it's, they're not supporting that market either. So there are a number of things like probably we'd see the spreads whiting me out, even without this latest bout of volatility. This is just an accelerator.

Yeah. Well, hopefully with the increase, the Fed doesn't opt to sell MBS. No, they were. No, I can't imagine that. Yeah. They were talking about it. No, but that was pretty explicit.

I thought it was pretty explicit at the, in the press conference after the meeting. Oh, yeah. Yeah. Yeah. I think now it's less likely. Yeah. Yeah, okay. That's great for the multifamily market.

I mean, even before the rate hike, when we look at, we cover 50 markets. And then we do a comparison between is it cheaper to rent or is it cheaper to own? And before the rate increases started, it was cheaper to rent in, you know, 20% of the markets. And then when rates started to go up, it became cheaper to rent in 66% of the markets, right? And with this, you're just pushing that number up, which is, you know, kind of actually very good for the fundamentals of the multifamily investment market. Which is saying a lot, given how strong rent growth has been, right? Yeah. Yeah.

I mean, geez, Louise. We're going to lose Ryan in not too long from now. So before we lose him, two things. One, a question to you, and then I want to play the statistics game, and then we're going to dive into CRA in more detail. financial conditions. So the link between what the Federal Reserve is doing with regard to interest rates and the impact on the economy runs through financial markets and the financial system more broadly. We talked about stock prices. We talked about long-term interest rates. I think we alluded to the value of the dollar. It's very strong. Credit spreads in the bond market. Given the sell-off in

markets, which represents a tightening in financial conditions, meaning that it's going to weigh on the economy more significantly. Do you think markets are now where they need to be to slow the economy sufficiently to bring inflation in, or is there more to go here in terms of the tightening that needs to occur? I mean, there's a little bit more to go. Not too much, just a little bit. And it affects the economy with a lag. So the tightening that we're experiencing today may not necessarily affect the economy until

sometime next year. But past tightening, I mean, there's been a lot of tightening financial market conditions. It's going to weigh on the economy in the first half of next year. And that's what the Fed wants. They want the economy to be growing below its potential, roughly 2%, 2.5%. Say, when GDP growth persistently below that threshold to cool off the labor market, take some heat off wage pressures, and then by extension, that should help bring down some of the inflation that we're experiencing. Okay. All right. Let's play the game. The statistics game, we each provide a statistic. The rest of the group tries to figure that out through questions and clues, deductive reasoning. The best statistic is one where it's not so easy. We get it, you know, slam dunk, not too hard that we never get it, although that's pretty tough to do. If you can thread that needle, you're really good at this game. And if it's relevant to the topic at hand, that's even better. Or relevant to a, goes to a relevant statistic, you know, something out there in the recent environment. I'm going to go easy on the guess at first.

I'll turn to you and see if you want to play, but just so you see how the game is done, I'll go to Ryan first. Ryan, you want to go first? All right. I got two for you. And they're related. 35,000 annualized and 555%. 355,000.

I want to say job growth for the month of August, but it was 315,000, so it's not job growth. This is job related? It is not job related. Some construction number. We were getting closer. Permits are getting warmer. $35,000. Besides permits, what else is there?

Compliance. There starts. There starts. Okay, $35,000. But you guys are getting close. That's not seasonal. Well, you said annualized, 355,000. Was that permits for multifamily?

No. It's not permits. No. Starts for multifamily. Is that right? It was that, oh, okay. I got to go deeper. I go a little deeper.

This is the highest since 1985. Oh, this is a four plus or five plus units or something. Like 20 plus. Mm-mm. No? Mark, what's our bread and butter? Bread and butter. Regional.

Oh, regional. Oh, right. Here you go. Yeah, yeah, okay. Okay. The west? South, north south. Northeast to Midwest.

Only four, so we'll get there. It's multifamily starts in the south. It's the most since 1985, and they count for 55% of all multifamily starts, which is roughly, they're usually between 50 and 60%, but that's a lot of starts, multifamily starts in Sal. Yeah. Your point being, we're getting a lot of multifamily construction. Yes.

Yeah. So overall housing starts unexpectedly increased in August, and it was mostly because of it's multi-family and multifamily, but it was all multifamily. Yeah. And the rent growth, right? It was 12% rent growth last year. Yeah. I mean, even with all that construction, we still haven't,

like pretty close to record low vacancy, right? Yeah. And as you point out, rent growth is double digit. So you could argue we need even more multifamily. Yeah, the chain of causality may well be strong rent growth, low vacancies, developers responding, just like that Kevin Costor movie, right? If you build it, they're going to come because low vacancies and high rent growth. Yeah, that one of that movie.

You all smart on that one. He has no idea. No, no, no, that's one of my favorite movies. The natural. No? No, that's... Field of dreams. Ryan's right. Yeah. I'm just not part of the pop culture.

But I like that movie. I like the natural better than I like The Old of Dreams. Isn't it? That's a good movie. Except when he starts bleeding at the end. You know, remember, showed through his suit. But he hits the home run. Yeah, I know, but it made no sense that the internal bleeding would be. Anyway. we're getting off track.

But that was a good statistic. That was a really good one, even though no cowbells with that one. Oh, and I should say, guys, if you show yourself admirably here and get the, if you get the statistic, you get a cowbell. Well, we've got cowbells. Yep, absolutely. They're pretty cool. All right. Victor, you want to play?

Sure, absolutely. Okay. You fire away. I have a number for you. 102.3 percent. The first time this name. crossed 100% since the COVID pandemic began. TSA Traffic Labor Day.

That's exactly right. September 3. I deserve a cowbell. That is definitely a cowbell. That's awesome. That is huge. Oh, my gosh. There was no hesitation.

There was not even. None. It was big, right? I mean, Janice, we were all agog about this. And, yeah. Illusion. I feel collusion. Yeah, that's close to.

That's an investigation. I was just going through all of the, you know, kind of the habits that we've returned to post-pandemic. Right. Versus kind of like what's happening in the office market. And that was one of the metrics I was looking at. So cool. That is one. So we're back above people who go through TSA.

The number of people go through TSA pre-check is now higher, a bit higher than it was at this point in the year. Well, that was the number for September 3. Yeah, it was Labor Day. It oscillates. And we're still at around 98, 97% after that, which, you know what, I'll take it, right? It's been going up and down because of all the variants. But it was the first time we crossed 100%. That is really cool.

And it's consistent with, you know, kind of, you know, kind of also restaurant activity. And everything, all of these things are now above pre-pandemic. my clothes. Yeah. Yeah, we're back. Yeah. We're back. We're back. We've got to talk about remote work, which will definitely come back to because I don't think we're quite back there yet, but you're saying, what about business travel? Is that back? Is that one, is that means? The TSA doesn't really disaggregate that. Your sense is, is that mostly tourism is stronger than it was. It's mostly leisure travel. Janus, you tell me, I know, we were getting less conferences canceled now as opposed to last January. I remember one of my guys went the KREFSI conference in Miami in January,

and I told him it was a small miracle that only three of them got COVID. Back then, like conferences were still being canceled. Now, not so much, right? Everybody's pushing through with it. There are protocols. Yeah, now there is more business travel. I mean, I'm on the board of Bayfire Association of Foreign Investors in Real State, and we had our largest conference since pre-COVID. But I think it's really individual. Like I called people I work with, investors, brokers. In August, I got international ringtones

like every time I called someone in August. So I think there's revenge travel. It's lots of people vacationing. The euro looks great. Yeah. Yeah, it makes sense. So the Moody's Back to Normal Index, though, is not back to one.

I think it's in 91. Yeah. Brian, you have a sense of why, is it the mobility piece? I think he's not back to the office. Okay. We construct this index called the Back to Normal Index is a compilation of a lot of different statistics,

some of which you TSA pre-check, restaurant bookings, box office, that kind of thing. In economic statistics, and it's still sitting 90, 95% of normal. 91, right? I think it's three things, Chris. One, we have our own business survey, business confidence survey. That has been weak. Yes. Stabilized recently, but it's weak.

Second thing is we use Ryan's GDP tracker. So what is our estimate of GDP growth in the current quarter? And GDP has been weak. It fell in the first half of the year. So that's also contributing it. So third reason. Oh, mobility. The mobility.

Yeah. The mobility. That's weird. It really, that's the Google mobility. They track people's moves based on cell phone movements. and they break that down into that related to office or retail or transit stations, all kinds of different breakouts. And some of the mobility has recovered, but a lot of it hasn't.

It's still well below pre-bendent. So it's really odd. Yeah, I think public transit is still way down. Yeah, public transit's way down. Office is down, still way down. Certainly. Right. You want to take, Janice, did you want to go?

Sure. Yeah, fire away. What the heck. Okay, so 120% of pre-COVID levels. Okay. Is it open table? No, but that's, it's a little north of 100, but it's not open table. It's more specifically real estate, more specifically real estate.

Oh, okay. Interesting. We'll tell ADRs. No, that's interesting. It's higher. Through Times Square. It has to do with investors. Oh, investors.

And it's a positive thing that it's 120%. It's a positive thing. Is it investors, global investors and commercial real estate? Yes. Yes. Okay. Is it could be something like the amount of

I hesitate to say it because it doesn't feel like it's right, but something like the dollar amount invested in U.S. commercial real estate. So you're getting close. So it is about the dollar amount and investing in commercial real estate, but it's not, has been invested. That has been invested? It's not had been. I'm sorry. It's been traded or it's in a full? Dry powder.

Oh, dry powder. Oh, let's see. So even though we said that transactions were kind of down 40% in August, the dry powder number is 120% of pre-COVID levels. Got it. Which shows an incredible amount of capital on the sidelines, kind of waiting for this to sort itself out. Okay, that makes perfect sense. Yeah, perfect sense. So you're saying as soon as things look like,

the fed's over, the coast is clear, we're on the other side of whatever it is, we're in the middle of, there's a lot of money on the sidelines that could come in pretty quickly here. Yeah. Another reason why sellers don't want to sell, probably. Exactly. Yeah, right. They're saying, I'm just going to wait for that pot of money to come in at some point. Yeah. Okay. All right, let's do one more. Chris, you're up? Yep. 873,000. That's completion. No, that's the, that's number of homes in the pipeline, right, to go into completion. What kind of homes? Multi-family homes. Not started. There you go. Good job. That's multi. Yep. Very good.

Under $70,000 are under construction. Right. Yeah. And that's up. With a single family, I think, homes in the pipeline going to completion is actually starting to come off here pretty quickly, I think. That's right. But $873,000 is a lot. Is a record high since 1973. Right. Yeah. Yeah. That's a lot that could come online and help fulfill some of this. this deficit that Victor mentioned. Yeah, I guess one benefit of people losing their jobs in single-family construction sites is they can walk across the street and go work for a multifamily developer and get some of those homes completed.

All of the permits are down, right? True. Yeah. All right, well, that was good. You don't have one on, right? You want mine? I mean, of course we want yours. Really?

Yeah. You really want mine? Okay, hold on one second. I got to check. I got to check what it is right now. Copper prices. Yeah, I was about to say it. No, it's not copper prices.

$435. $1.09. 1.09. I give you a big hint. Oh, you gave you a dollar. It's a dollar against the euro. You got it. You got the pound.

It's the pound. The pound, okay. Yeah. There's one pound, British pound, buys $1 in, actually, at this point, 8.8 cents, 1.088. That's, is anyone living in time when the pound dollars has been close to parity? I can't remember. In the, like, 82, 82. Did you get that when the pound crashed? It was just about pound parity. Right. You know, that's when Soros made all those money, I think, on that crash, you know, in the pound.

That just, you know, and that obviously goes to the fact that, why. While the U.S., our economy is struggling, the European economy and specifically the U.K. economies and is really, really struggling. I mean, the recession seems very likely there at some point. And, of course, they just got a new prime minister who passed a piece of legislation, or is in the process, I guess, of passing the legislation to cap the energy costs for households because they've been going skyward because Europe relies very high. heavily on Russian energy, and that's been cut off to a large degree and cost prices go north.

So very understandable, right, because low-income households are just getting completely hammered. But the complication of that is it's kind of fueling the inflation fire, right? And potentially exacerbating the inflation, making it more entrenched and raising the odds that they're going to get, the British are going to get in some kind of stagflation scenario with high, precisely high inflation and ultimately, you know, a very weak. economy. So that's why investors, I think, in the foreign exchange markets are really having a lot of difficulty with this anyway. But the dollar's up against all the currencies. I mentioned the yen. It's actually beyond parity against the euro. It's 0.969 against the euro. So

the dollar is now stronger than the euro. And against all currencies, it's up quite strong. Against Canadian dollar, you all see dollars, it's about 70 cents. So very, very significant. Okay, let's turn to more specifically to the commercial real estate market. And Ryan just signed off, I think he has some child responsibilities. And let's talk, maybe you can talk about the multifamily market first, because I think, and I guess to some degree the industrial market, those are the markets where I guess the fundamentals are better and I guess investors are still engaged. Would that be fair to say, Is that reasonable statement? Yeah. I mean, so the basic issue with the multifamily market, unlike with industrial or office, is you get to reset your rents every year, right? So to the extent that people are worried about inflation, you know, and even if cap rates

are going up, if you can reset your income and if your income is in some sense indexed to inflation, it protects you against what's happening with borrowing rates, et cetera. I would say that that is in general, and it's kind of really favored the multifamily market. But it also, you know, it doesn't really reflect, I think, what's happening socially. And what we had during COVID is, you know, a big social backlash against, you know, kind of the discrepancy between rich and poor and all of these kind of social issues. So we have started to see rent control, you know, kind of support across a number of markets. and we don't know how it's all going to work out. So while you do have kind of today the ability to index your income up as inflation goes up,

there are emerging, you know, kind of pressures, you know, to kind of cap in some sense. We said average rent growth was 12%, you know, last year. And that's on average, you know, it's 20% in some market. So there is, you know, emerging pressure to say, enough's enough. let's, you know, kind of put a cap on individual rent growth in markets. Now, to be fair, just for historical context, before COVID came along, the big news in 2019 was the four states were enacting some form of rent regulation. I remember a candidate in New York State running off of a platform saying the rent's just

too dang high, right? So it's always been affordability, I think, has always been and will continue to be an issue. I think from an income point of view for multifamily investors. It's been a great year. Janice, we have effective rent growth of 12.7% in 2021, a record quarter in the third quarter. Very impressive. But to your point, these are the headwinds where there are backlash, just where we go. You know what?

This year, we're maybe at a 5.5% year-to-date, middle half for probably forecasting between 6 and 1% and 7%, suggesting that the latter half will encounter a bit more bumps in the road. You said we're going from double-digit rent growth to about half that. 12.7% or around 7-plus percent. Those are our numbers. And with that said, I'm not trying a river for more than a moly landlords. And they can eke out to 7-plus percent rent growth for 2022, given how this year has progressed. Yeah.

And I also think kind of the double-digit rent growth in 2021 kind of doesn't reflect the fact that in 2020 it was frozen, right? So, you know, it really wasn't, you know, kind of 12% on top of 6%. It was like 12% on top of effectively zero. Yeah, in 2020, we've recorded some record drops in effective rents for places like San Francisco, Washington, D.C. had a record drop for the 40 years or so we've been tracking this data. So, yeah, it's coming off of a bit of a low. But to your point, Janice, about the pushback here and the prospects of rent control.

I was at a national multi-family housing council, I believe. A couple weeks ago, right, Mark? Yep. Yeah. And were you there, Victor? I might have missed you. I couldn't make it. But Kim Beppincourt from Fannie Mae says hi.

She missed dinner with you because she was a little bit under the weather. I missed her. But anyway, it was the first thing I noticed was how packed it was. I mean, the ballroom was overflowing, so business is good. second thing is they had a group of protesters outside, very vocal complaining, because these are landlords, right, big landlords, institutional investors, and they're angry. You know, as you can imagine, they can't pay their rent, especially if they have to pay a rent increase of 12.7 percent.

For most people, that's just like out of bounds. And I'd love to like make them concrete, right? We talk about changes, but Janice, you mentioned that in some markets and this. neighborhoods, that's 20 plus percent. I had our researcher sharpened their pencils when we were about to publish the Brooklyn submarket was going to pull the 25 percent rent growth in 2021. And how it translated to one of my staff members, she's left Moody since then. I'm not sure if it's causal, but her $3,000 one bedroom was going to get a rent increase of $700. Right? That's 23.3% in Brooklyn. It was real.

Yeah, and you know what? I think, Victor, I don't know that I even introduced you guys appropriately. Did I, Chris? I think I just kept on going because I just feel so like we know each other so well. I never really introduced you. So we've been talking all this time. People might be saying, well, who are these guys? And, you know, although in the real estate world, they're very well known. But Victor is part of Moody's analytics in our commercial real estate group. And, uh, Janice is at, did I mention Cushman-Wafield, one of the biggest, well, how would you describe Cushman-Wakefield? Just massive real estate company. You're into everything. Yeah, everything. Yeah, not the real estate services firm. So we do everything, you know, office, multifamily, industrial rent, sell. If it has something to do with real estate, we'll do it.

Yeah. You got your fingers and all the pies and all over the world, as I mentioned earlier. You're all over the world. So I apologize for that. I just took it for granted because we're buddies, so I didn't even think about it. I do that to Chris all the time. I never did I even, I didn't, I'm sure I didn't even say you were the deputy chief economist. I don't even know she's in my name.

Yeah. At this point. Okay. So can we go back to the rent a little bit? Because for a macroeconomist, this is really important because rents drive the cost of housing, particularly as measured in the consumer price index, you know, the measure of inflation that we all look at. it's a third of that index and it all goes back to rent. So if rents are rising very rapidly and 12.7% is like out of bounds rapid, that adds

to housing costs adds to the inflation picture. So it's really important to getting inflation down and stopping the Fed from and ending the Fed's rate hikes that we get rent growth rolling over starting to slow here. So Janice, do you have a similar, do you have a view on rent growth in the multifamily market? I mean, are we, have we passed the peak in rent growth and starting to moderate? Yeah, I mean, so we definitely think, you know, we're not getting another 12.5, you know, 12.7% year. I mean, there are a lot of starts. But, you know, structurally, we've undersupplied the sector for like more than 20 years.

So, you know, kind of the pressures that we have are because you get to markets with 3%, you know, kind of vacancy rates and we've undersupplied them. So we think with the amount of starts and we focused a lot on starts that we have, coming online, it's going to take some of the pressure off and that rent growth will kind of moderate and taper, which I think is a good thing. Yeah. And Victor, you said 6%. Did you give a date? I mean, you're probably like those good forecasters that I know.

You give a forecast without a date. I think. Yes. I don't think he gave me a date. Kristen, did he give me a date? I didn't hear it. I don't hear a date. So 6% by when?

Is that like by this time next year? We're looking at 6% to 7% expected for all of calendar year 2022. Yep. The 2022? Oh, this year. Oh, okay. Okay. Can I ask then, roughly speaking, what does 20203 look like next year in terms of rank?

Around. We're looking at half that. Okay. Okay. That's very encouraging. There's that moderation, but I will let you know that given the data that we've tracked and how some clients have used it to predict shelter inflation, there is about a two to three quarter lag.

And so what we're seeing hit the CPI numbers was Janus is probably the 12% that we recorded in 2021, right about now. And so hopefully relief is on the horizon, hopefully starting next quarter, but we'll see. We'll see. Okay. Okay. So you're saying calendar year 2022, we're going to be at 6, 7%, which means we're ending

the year on a pretty soft note. compared to the start of the year. We came roaring into the year, double-digit rank growth. We're leaving the year feels like low, kind of low single-digit growth to get to 6.67% for the calendar year. The second half in particular, we are expecting a bit of a slowdown, and it could be reduced to the three factors, less of that in migration, the former Zoom towns that characterized pretty strong demand at that point. And then slower household formation and just the affordability issue that we've discussed. which creates demand destruction. Households can't form.

Right. They can't afford to buy a single family home. They can't afford to buy a single family home. Yeah, and it's somewhat disingenuous to just go and say, I'm always optimistic because someone needs a place to live, but it also means you could go back to your parents' basement, which they preserved for you exactly when you were eight years old, right? Yeah. Hey, Janice, in terms of capital flows, is it still, you said that investors have gone to the sidelines.

Does that also apply to the multifamily market? There's much more demand for multifamily. Multi-family and actually debt today because rates are higher. There's a very kind of strong bid for that. It's seen, you know, kind of at this point in the cycle, you know, it's a little bit of a cushion against what might happen with recession, especially kind of mid-market assets, you know, workforce housing. But definitely, multifamily in general has bucked the trend. You know, and there is, it's probably, we used to call it beds and sheds, you know, anything with a bed in multifamily, anything with shed industrial. Now sheds are somewhat

less in demand, but multifamily beds are still like the number one choice for investors. Got it, got it. Okay. So it feels when you look at the spectrum of commercial real estate, multifamily feels like it's kind of the at the top of the heap in terms of the fundamental conditions, vacancy, rank growth, prices, capital flows, all those kind of things. Would it be fair to say kind of at the bottom of the list is kind of office, the office market, particularly kind of the big office towers sitting in big urban centers, like where you are right now? Yeah. You're in New York, aren't you right? I'm in New York. You're right.

in New York, yeah. You know, and I think you pegged that accurately. The issue with office today is not only kind of the national vacancy rate, which is, you know, 17 plus percent. It's also this reluctance of employees to go back full time to the office. So, you know, some employers are basically saying, you know, we know we want these guys back. There are two job openings for every person looking for a job. So to, you know, kind of push people back to the office doesn't seem, you know, you don't want to be too tough because you don't want to, you know, get a lot of rollover.

You don't want the great resignation at your company, right? Yeah. So the office sector, I think people, you know, are thinking, wow, it looks like it might be a value investment, but we just, you know, we're not quite sure yet what's happening with workforce flexibility and work. from home. So it has not been, you know, the trades have been, you know, at a kind of a relatively low level. No one's buying, no one's selling nothing. They're just, that bid ask spread is very wide. Yeah. The bit as far is wide. Unless you have something like you have, you're a hundred per year, 95% occupied or 100% occupied long term credit tenants, you know, sure, you know, that looks pretty bulletproof as long as you can get through the next couple of years. That looks pretty good. But

anything with a large amount of vacancy or role, you know, people are just taking a little bit more of a wait and see attitude. I mean, I personally feel like, you know, there's some value investing to be had here, but it's quite a countercyclical. When you say value investing, you mean prices are going to get to a place where there's real value. Even at significantly below replacement cost, right? Right. You know, but you have to, you know, you have to buck the trend for the next year and a half because vacancy rates, even if everything, even if everyone comes back to the office, vacancy rates are still structurally quite high now. They are not out of line with what happened after the GFC or the dot com, right, in terms of, you know, eight to nine

quarters of negative absorption is completely consistent with what has happened. It just doesn't feel good when you're in it, right? So, you know, that's what's going on in office. And also, I think the Janus's point about the uncertainty in the tight labor markets, it is true that in the near term, office is that asset class that has a cross-hair target painted on its back, right? If we encounter some kind of recession, I'm just going to bet there are going to be a bunch of CFOs, offering a refrain like, to manage our margins, we're going to let go of underutilized office space and reinvest, the retain and reward our people. So let's see. It's an easy target. See, that's very interesting because you're saying, you know, kind of like that a recession is kind of bad

for office. I think in a weird way, a recession gives employers more leverage to bring people back to the office. Interesting. And the reason I say that is because the productivity numbers early in COVID were sky high, right? I mean, people, you know, had to shelter in place. You couldn't go out. You couldn't hang with your friends. You couldn't go to restaurants. You couldn't go shopping. So productivity numbers were really high. But if you look at starting in 2022, the productivity numbers went below trend. And employers started to say, you know what, people in all these polls, Christian Wayfield does like a cagillion of these polls about are you engaged, you know, are you motivated? There's a 15% gap between if you're in the office three or more days a week.

You are 15% more likely to be motivated and engaged. So even though you want the flexibility to work from home, if you take the temperature of how you feel, people who are, in the office three plus days a week are more motivated and engaged. So I think employers would like to draw people back to the office. It's just that individuals want the flexibility to work from home. And given the balance of power between employee and employer, they're giving flexibility right now. I mean, that's in the near term. I do think there is a centrifugal, centripetal. I always confuse this, right? There is likely, I would claim that in the intermediate term, three to five years out,

there will likely be a showdown when it comes to, well, you know what? We probably have proximity bias. And if you show up in the office more often than your peer, I wonder if you're going to get promoted faster. And is that going to pull people back to the office? Or is that going to be an HR issue? because, you know, you want to play like you're the enlightened employer. You're saying it's going to be the same for hybrid and in office. And yet this person in office is advancing faster.

Let's see. I actually think that conversation is starting to happen more in an ad hoc basis, meaning that in the beginning, you know, employers tried to lure people back to the office. They said, we're going to get you the best space. I mean, actually brand new, classic. office space, is it a 30% premium to the rest of the market today? And it was 20% pre-COVID. So people are placing more value on the best space. So they're saying, come on in. Let's lure you in. We're going to have really awesome space. It's going to be really collaborative.

They were doing, you know, kind of food and fun. You know, we're going to have ice cream. Ice cream so cool. Like Tuesday after you. Right. Tuesday tacos. Come on in, you know, 15-minute massages at your desk. But now. Is that right? Are you making? that up? No, no, no, this is true. Okay. Not every company.

Some companies did that, Victor for us. Did they ever, no, I didn't. I'm thinking that'll run afoul of harassed training and prevention. But, you know, funny. But now I think it's moved to the point where everyone's looking at what's going to happen with the recession, conversations are starting to be had, you know, in a kind of mentorship way, saying, you know, people are looking at contingency plans, maybe contingency cuts. it might be good for you to be more visible.

So this is exactly what you're talking about, Victor. You know, it's better for you kind of conceptually, right, because people still have a little bit of an old mindset. I don't know that we've 100% accepted, you know, from an employer perspective, the flex work, the work from home. If there are cuts, I think that if you're less visible, you know, you're a little bit more vulnerable. And I think those conversations are happening.

I just want to point out there's this growing, we talked about this last week on the podcast because we had Nick Bunker from Indeed. Indeed. It's indeed. Indeed. For job posting, and he's a great economist, and, you know, he follows this remote work dynamic pretty carefully. And he made the point, I think he's right. There's this gap between what economists think about remote work, that it's productivity enhancing and what CEOs and business people think is productivity destroying.

somebody is wrong. And so we'll figure that out going forward. One thing, Janice, you did say in the chatter we had before the podcast that you travel a lot all over the world, that attitudes towards remote work are very different across the club. Do you want to describe that? I found that fascinating. Yeah.

So it's interesting in a lot of countries, they can't understand why the U.S. isn't kind of 100% back. So, you know, I just got back from literally, you know, Singapore. Seoul, Tokyo, Sao, Sao Paulo, Brazil, Santiago, Chile, and London, right? And I would say that the U.S. is far behind all of those markets in terms of the return to office. And maybe Austin isn't as far behind because, you know, Austin is one of the markets where, you know, it's on a Wednesday, maybe up towards 70%.

But if you go to these markets, I mean, South America is 100% back. You know, it's like nothing ever happened. The UK may be a little softer, but it's mostly back. You know, you look around a floor and, you know, most people would be there. Friday might be light. But, you know, in the U.S., our numbers are really hovering at half, you know, a little bit higher, a little bit lower, depending where you are. And they're better after Labor Day. New York was up 9% after Labor Day, which shows a post-Labor Day push.

But still all in, you know, and it shows in office occupancy, it shows. shows in if you look at, you know, kind of mass transit, you know, subway ridership, bus ridership, kind of around 60%. We have been much slower to get back in the office and the question among a lot of the international community is if it's gone on for this long, right? The longer it goes on, the harder it is to revert to mean, right? But none of these other markets, I mean, in Tokyo, you'll have a meeting. Everyone will be wearing a mask three feet from you.

and there'll be a plexiglass screen, but they're in the office. Interesting. And I'm headed that way. I'll be in Tokyo in two weeks. I didn't realize I better take my mask with me. Lots of COVID tests. Lots of PCR tests. Apparently the government just dropped the visa requirement for visits.

Oh, good. Yeah. Makes it a little easier. Well, at this point, we're running out of time. And I thought we could end the conversation. in this way, because we are economists and we are, obviously, recession is top of mind. From your prism, your perch, looking at the commercial real estate world as you do, does it feel like a recession is coming?

First of all, that a recession is there, and that secondly, a recession is coming. Maybe I'll throw in one other question while I'm at it. Is there something you would be looking at or that you are looking at to gauge whether it feels like we're going into recession or not from a CRA perspective? I'll go to you first, Victor. You've got a perspective on that. I do think that from the income driver point of view, commercial real estate always lags the overall economy. It'll follow if and when employers start shedding jobs, in which case there will probably be pretty clear markers of recession, of a recession incoming. But with that said, I think the general hope is that even if there's probable volatility on the pricing side, that if it is a relatively shallow recession, fingers crossed, that a lot of these income generating property types of stuff we talked about today will weather it just fine. But we will see.

And so those are the things we kind of look for. Again, we are. I'd love to see the Q3 numbers for income drivers. I'll leave the rest to Janus when it comes to the capital markets and transaction volume and cap rate stuff. We're not seeing it just yet, Mark. But again, it's a lagging variable. Just to make it clear, when you say income drivers, you mean like the rents and vacancies. Yeah.

Yeah. Yeah. You're not seeing any sign yet of stress. Well, aside from the idiosyncratic stuff where, yeah, sure, there are headwinds in industrial because we're buying less goods as we transition the economy to spending more in services. That's why you've got like earnings, warnings from Target, Amazon and Walmart, but you've got airlines posting record earnings. And so there is that.

And so Amazon's leasing a bunch of their warehouses, they're stopping construction. But there's that. But with it said, is it localized? Is it across asset classes and asset types? We haven't seen it just yet. What about development? Have you noticed any projects that were kind of early stage and have just gone dormant or projects that are underway that are being slow walk?

Do you sensing any of that happening? We're seeing more of the difficulty in the construction financing side, I think, just because you've got a lot of lenders also saying, look, do we want to pull back and re-evaluate our LTV and our income assumptions? But with that said, we just cited that 873,000 multifamily properties are coming down the pike. I do think that if and when there's a downburn it comes, that's when causality comes where supply growth slows down, right? That's when we know. Once you've got your shovels in the ground, sorry, that apartment building is going to open its doors, even if we run into a recession with least of velocity slowing. And then we, like, pull back on future deliveries.

What about you, Janice, from your perch, do you sense any weakening in kind of the environment, both from a real perspective, you know, vacancy, absorption, and from a capital markets perspective? Yeah, so I agree with Victor that the fundamentals, you know, kind of in multifamily and industrial, are kind of so strong. that even when you get some headwinds, you know, with the kind of a relatively brief recession, you know, they're just headwinds. It's nothing catastrophic, right? I do think, though, that and actually Kevin Thorpe that, Cushman Wakefield, just put out a paper on price adjustment, I think that the fundamentals are different from price adjustment, because I think that your

return on equity, you know, given the spike in debt rates, mean that we're going to see upward cap rate movement, even with the fundamentals being pretty decent, right? Because it just, if most people lever, you know, 65 or 75% of acquisitions, and now LTVs are down to 60, 65%, and your cost of borrowing is up north of 200 basis points, you just can't afford to pay as much for the assets, even if the fundamentals are pretty darn good. So, yeah, I I mean, I think we're looking for, you know, kind of 100, you know, in office. I mean, you know, there's a paper that Cushman just published and it breaks it out by property type. But, you know, it's as much as 100 basis points, cap rate increase.

Yeah. And then what's interesting about that, Janice, right? Mark, you alluded to this earlier. Because cap rates have gotten so low over time, that same 100 basis point increase will result in greater value destruction. If you're going up from four to five, as opposed to if you were starting up from seven to eight, right? It's that denominator effect. And so it is concerning if and when it plays out. Yeah. And the analyze are moving too, right? You know, because with inflation and everything, so you get a little bit of offset, but it, but it is an issue. You know, values will be lower

with the cost of debt where it is today. Yeah. Okay. So, but, you know, if you're sitting trying to scan the horizon here for recession, you say, you know, there's reasons to be nervous and worried given what's going on with interest rates and what it means for the cost of capital and what means ultimately for the price of commercial real estate. From a kind of a fundamental perspective, you know, demand, vacancy supply, not yet. You're not seeing anything, really. No, I mean, office is softer than the other property classes for everything that we talked about or returned to the office. But, you know, the fundamentals are actually quite good. If you look at kind of press recessions and where we started with the fundamentals, they're pretty darn good today.

So, you know, we can withstand some of these headwinds, not a problem. Good. Hey, Chris, I want to just turn it back to you for any last words. I mean, you've been listening to this conversation, anything strike you with regard to the conversation? No, I generally agree with everything that's been said here. I think just turning back to the multifamily construction numbers, right, I think consistent with what was described as, yeah, we do see this increase in number of properties that are under construction, but we've also seen a decline in actual completions recently, right? So that does suggest kind of

that slow walking, yeah, we're building out, but maybe not as speedily as we otherwise could. And then you also do see the pullback on permits, right? So that's also suggesting, hey, some caution there, not really starting new projects at a very rapid, pace in this environment. Right. Okay. So your sense is there actually there are some signs that builders, developers are starting to grow more cautious here and maybe kind of reining it in a

little bit. Yeah. I mean, still, I think still quite aggressive relative to history. If you go back a couple years, right? Yeah. So there's still demand. They still sense the demand out there. Yeah.

Yeah. The other question I have, I haven't really studied closely is the mix, if we're thinking about multifamily in terms of the luxury versus or higher end of the market versus lower than the market. It looks like it's still targeting kind of the higher end. Yeah, I'd say Janice, right, 95% of the numbers just don't work because of the high construction costs. Exactly.

You don't bring in a class A property, right? Exactly. What you do for mid-market is you renovate the older stuff because it's just too hard to build, right? Without other kind of concessions or support or government support. it's too hard to build with the current cost of construction, you know, to mid-market. On stat for the mix, class B-C vacancies are 3%. And as of the second quarter, rent growth for Class B-C apartment properties actually outpaced

those of Class A. Let's talk about that in terms of the context of affordability and just overall tightness. Right. Okay, well, we've covered a lot of ground. and I think we need to call it a podcast. We could do this all day long. And maybe we'll have you guys back if you're interested in three, six, nine months. You can see if there's any more warning signs out there from your perspective on what's going on in CRE and what's going on what it means for the broader economy.

We might all be back in the office. Yeah, yeah. Will you be? I'm a trawby. Yeah, you're there. I'm here. Yeah. I'm not sure.

You can see my not elsewhere classified room back here. So I just missed a laundry hip hugger. Yeah, that's right. I try to clean up a little bit for you, Victor. Yeah. Thank you. But I want to thank you guys for taking the time for a very informative conversation.

And with that, we are going to call this a podcast. Take care, everyone.