Moody's Talks - Inside Economics - Forecasting the Fed and Falling CRE

Episode Date: June 23, 2023

Mark, Cris and Marisa weigh whether or not to change the forecast for the Fed funds rate and dig deep to play the statistics game. Later they are joined by Professor Glenn Mueller of the University of Denver to talk all things commercial real estate. Professor Mueller ranks the segments of the CRE market from worst to best performing and explains why the legalization of marijuana has disrupted the retail market. For more on Glenn Mueller, click hereFor the full transcript, click hereFollow Mark Zandi @MarkZandi, Cris deRitis @MiddleWayEcon, and Marisa DiNatale on LinkedIn 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 Zandi, the chief economist of Moody's Analytics, and I'm joined by my two co-hosts, Marissa Dinaali and Chris Duretis. Hi, guys. Hey, Mark. We had a very eventful week. Did we not? We did. I just saw you two days in a row, right? I know. In person. In person, yes, yes. Yeah. Day one was, we had our own conference in Wilmington. I thought that went well. And I, although having said that, we were talking to one of our other colleagues.

And I asked her point blank what she thought. And she goes, well, I thought Chris did a better job than you more. Ooh. Yeah. It's just an objective opinion. Of course, she was much more, she phrased that a little less directly. But, you know, that's kind of sort of what she was saying, right, Chris? But that's what you heard.

that's what I heard. That's very gracious, but that's what you're. But, you know, I view that as throwing down the gauntlet. I'm like, I'm going to be number one again. I got to, you know, I got to get back on my game. Well, I did give out prizes. It is about the prize. You were giving out prizes.

That's really not, I didn't have any money to give out. What did you give out? I gave out decks of cards, Moody's Analytics, branded cards. Which we. We bought all that those chock keys 25 years ago. Well, I guess a benefit of closing our office is that we had to. Yeah. Get rid of all this stuff.

Yeah. But people really like the cards. Yeah, I'd like some cards if you've got any extra ones. Oh, you have to, well, let's see how you're doing this. Let's see how you're on the statistics game. And then on day two, we had, because we're now remote, we went fully remote six, eight weeks ago, we had a lot of the folks come into Wilmington where we had the event and had a kind of an offsite. And that I thought went pretty well.

Very well. My brother gave a, that was a great speech. Inspirational. It was. It was really very good. Mercy, you missed it. You weren't there. I know. I was in Dallas with a client. Oh, okay. Well, fair enough. Someone's got to, you know, someone's got to go out and do it, right? Exactly. Next time. Yeah. Well, we have a guest that we're going to get to in just a minute, a guy named Glenn Mueller, a good friend of mine that I've known for, I don't know, we talk about it, I think 20, 30 years. He's been everywhere in the commercial real estate market. He had of research for Prudential. On the investment side, he's now a professor at the University of Denver. And so there's a lot of concern angst around commercial. real estate and what's going on there and what it might mean for the broader financial system and economy. And we'll come back to that. Before we go there, I thought we spent a few minutes

to talk about, you know, what's top of mind this week. We've got a lot of questions around monetary policy, Fed policy, interest rates. It was kind of a light week in terms of economic statistics, but we'll play the statistics game. But I thought we'd talk about monetary policy first. So maybe I'll turn to you, Chris, and you can kind of describe, you know, what our baseline outlook is for the Fed in monetary policy? So at present, at least in our current June forecast, we have the Fed pausing at this point being stamp hat at five and five a quarter percentage points on the Fed funds rate through the end of the year. And then in, I think, early to mid-20204, we have them starting to

cut as inflation is coming down. Actually, March. It's actually, to be precise, at the March 80 in 2024, yeah. Yeah, I think we were talking about perhaps pushing it out, which we should talk about now because I think we probably should. But anyway, now it's March of 2024. Yeah. But the theory there is that inflation is coming down and things are moderating or moving in the right direction and therefore there's no need to be much more aggressive in terms of monetary policy.

And then in 24, the inflation rate is nearing the target. but the job market is weakening at that point. They become more concerned about really pushing the economy into recession, and they start to cut. Right. That's the frame we have currently. Yeah. And what's the market say?

Do you know? The market looks like it's anticipating a hike in July. Just one, though, throughout the rest of the year, right? Obviously, there's a distribution, but it seems as though that's the mode is for 525. to five rate high. One more. Well, it felt like Jay Powell, the chair of the Fed, he testified in Congress, both the Senate banking and the House Financial Services this week, and the other speakers,

it seemed to be, and also the FOMC meeting, the policy market, yeah, meeting last week, seemed like they were intimating there might be more than one more rate hike, at least a couple more rate hikes, right? Yeah, the dot plots. The dot plots. suggested two more. Right. Two more 25 point hikes. Correct.

That's right. For precision, yeah. Right. Yeah. So what do you think? Mercia, I mean, is that, that's the baseline. That's our, you know, and that's a no recession baseline. We're not expecting recession.

Obviously, we're expecting inflation to continue to moderate, get back close to the Fed's target by this time next year. Does that sound like a reasonable forecast to you or outlook? Would you cancel any change there? I think I'd probably put another rate hike in there. You would? Okay. I think so.

I think given the strength, they're really data dependent here, right? Inflation expectations are very well anchored. That's, you know, you could use that as an argument for them not hiking and just staying where they are. But I think the job market is just really strong. Yes, it's slowing down. but I think it's reasonable to expect we get at least another couple very good job reports. And core inflation is improving at a very marginal slow pace, right?

It's pretty sticky. Most of the inflation relief we're getting is energy and food prices. So I think they probably do at least one more here coming up. I think as we get past the summer and if we really start seeing really relief on core inflation, particularly the shelter component, that's probably the point at which they stop. I don't think the forecast is unreasonable, but I also think it would be very reasonable to add one more rate hike in there. It's funny, generally, you have to make a distinction in your mind.

what should they do and what will they do? And, you know, I'd say 95% of the time, for me, those are the same thing. You know, what they should do and what they will do are one and the same. Recently, in the last few, last couple, three meetings and certainly, you know, looking forward, what they will do is now different from what they, in my mind, what they should do. I mean, what they will do, yeah, they probably will raise rates a quarter point at the July meeting because they pretty much signal that's what they're going to do. And that's already embedded in market pricing.

And if they just simply follow through, in theory, nothing should change, right? I mean, it's already out there. It's an expectation. But what they should do just feels like. to me they should just stop. They stopped and just stay stopped until there's a reason not to, the reason to move one way or the other, because it feels like to me inflation is coming in pretty gracefully. I mean, maybe not as gracefully as you'd like if you had a piece of paper you drew the line, but, you know, it's pretty close. And, you know, the outlook feels

increasingly more certain there. And then on the growth front, growth is slowing. I mean, you know, output GDP is below potential. You can feel the labor market easing up. And I increasingly, of a month of view, that the job numbers are going to get revised down. Yeah. You saw what's happened with the household employment data. That, you know, we all look at the payroll survey data, and that's been, you know, strong 300K plus per month. We look at the payroll survey, I mean, the household survey, the other survey of employment, that's measurably weaker. And then you get the data from the quarterly census of employment and wages. That's the unemployment insurance record data, full count of employment,

to which this survey data we're looking at now is ultimately revised and benchmarked to. And that's been a lot weaker. So, you know, who knows? I mean, we're going to have to wait to see what the benchmark revisions are going to be. I'd be surprised that after these revisions come in, you know, over the course of the next six, 12 months. we're not we'll come oh we're going to realize oh my gosh yeah job growth was actually meaningfully weaker than what what it is now i don't think it i don't think it's you know falling apart i don't i'm not saying that the economy is still you know creating jobs a you know a good number of job but not not 300 000 plus a month i just don't believe that's the case and then you got the issues

with the banking system the financial system you know why you know why would you know keep pressing on the breaks, you know, at this point. Do you want to take the other side of that, Chris? Surprisingly not. Okay, fair enough. I actually agree with you on the will versus should. Yeah. And I'm also concerned about the student loan repayments restarting. That's just one more thing. I don't think that's the end. They'll be all over recession. That's one more thing that is going to slow down consumption in the broader economy as well. And so I think we need to be looking ahead at least a few months here, not just reacting to what we see in front of us. But I think you're right. They probably will hype one more time. Yeah. And that student loan thing you just mentioned, it's the moratorium on

student loan payments comes to an end in September. And that's going to happen because that's in legislation. That's the debt limit legislation. And that by our calculation is about $70, $75 billion in additional payments on student loans. That's analyzed over a period of year. But, you know, that hits September, October, November on an annualized basis, that's not inconsequential. That's going to take some steam out of consumer spending in the broader economy, you know, just when the Fed is thinking about, you know, we should be raising interest. Here's a theory, though. Maybe the Fed is taught simply talking tough, right, because they need to keep inflation expectations down. Mercy you pointed out that they seem relatively well anchored.

And they don't want to give that up. They want that to continue because it makes it easier to get actual inflation back in. It gets wage growth to back something that's more consistent with their inflation target, get inflation back in. So if I were them and I, and, you know, and I had my view now that they shouldn't raise, I'd still be talking tough like they are. I'd be saying the same things they are. So maybe what we're observing here is just kind of some strategic, messaging that's going on to try to keep inflation expectations. What do you think about that theory?

Jawboning. Just jawbo, yeah, kind of a jawboating. I'm not sure how, now everyone like me thinks it's jawboning, so I'm not sure how much it works. But, you know, that's the, you know, kind of the theory behind it. Much better than if they came out and said, oh, yeah, maybe we'll stop, you know, we'll be a much more relaxed about that 2% inflation target we've been talking about. Probably doesn't make sense to do that.

I wonder. Oh, go ahead. Sorry. I was just going to say if we go back to the meeting that happened after the SVB collapse, we kind of thought they should pause then. There's turmoil and financial markets. That would have been a good time to pause and not put further upward pressure on interest rates across the economy. And they didn't.

And just like you're talking about the job boning kind of to try to anchor things, I wonder if that was a strategic. hike to say, we really aren't worried about this, right? We're really not worried about the banking system. And had they paused at that point, that could have been a signal that they're really worried, right? That there's more stress out there in financial systems than people thought. So just like, because it seems to me, if you were going to pause, that would have been the time to do it. And they didn't do it. And now they pause. So I think everything they're doing is strategic to keep markets in line and expectations in line.

Right. Okay. So, I mean, because we think they will, not because we think they should. Right. Seems like we should put another quarter point rate hike in for the month of July. Then let's look out quickly into 2024. Right now, in the baseline, we have the first rate cut in March of 2024. Feels like that might be, the one reason why you might stick with that is the election.

You know, you got this thing called the election. election next year? And do you really want to be moving rates around when you're in the middle of the election process, which kind of goes into full swing a few months later, you know, as you move into the summer? And, you know, maybe you move a little earlier. Do you do it in March? Otherwise, you might have done it a little later in the summer.

But, you know, having said that, maybe. we should push it off a little bit further because, you know, they, they'll want to make sure that inflation is actually back, you know, within spitting distance of their target before they actually cut interest rates. It, again, with the underlying assumption that we're not going into recession, that's kind of our baseline. There's no recession. What do you think about what we should do there, Chris? Yeah, given that assumption, I would think they would wait a bit longer. You think so. So what did they cut in like?

May? Oh, you think of May? So they're still not kind of in the middle of the election process. They can still say hey. Yeah, they're so kind of. Okay. All right. Well, I guess that's the primary, right?

Yeah. Oh, my God. Yeah. I just realized the primaries. Yeah. So I'm not ready. Yeah. So you think we should push it off a couple months, though?

I think so. That's my. Yeah. Again, given the other assumptions that we're not going into recession, and that inflation is still, you know, chugging along here for a while. Okay. Okay. Well, the listener is seeing how we make these assumptions.

We have these conversations. Now, of course, we're going to have to bring in the rest of the group, and they're going to disagree for sure. Somebody's going to disagree. So we're going to have some kind of discussion debate over over this. But it does feel like we'll probably add one more quarter point hike in July, and then extend out the first rate hike until we're probably May June. Is May a meeting next?

We'll have to see when the meetings are. Oh, yeah, we should check. I can't quite remember when the meetings are. But sometime in that period, the May June period. Yes, in that period. Yeah. Okay. All right, very good.

Let's play the statistics game. Just remind everyone, the game is we each put forward a statistic. The rest of the group tries to figure that out with questions, clues, deducted reasoning. The best statistic is one that's not so easy. We get it immediately, one that's not so hard that we never get it. And again, this week was pretty light on the data about as light as it get. So I'll be curious what kind of statistics people come up with. And as per tradition, we're going to start with Marissa.

Will you go first, Marissa? Okay. This is going to be very hard. And so I probably need to tell you where the data is from for you to get it. Okay. Whoa. But I'm going to, I'll set, so this is what I'll say about it. It was released by the BLS this week. Okay.

It is something they release every year. So it's not high frequency. The statistic is that I'm going to give is for the whole year of 2022. Is this the poverty statistics? No. It is germane to the topic that we're going to talk to Glenn about. Which is CRA. Commercial real estate.

and in particular sort of the office market. Is it construction employment? Okay, hold on. I haven't even given the statistic yet. Okay, so the statistic is that is 34% in 2022. Okay. That was down from 38% in 2021, but up from 23.7% in 2019.

Okay. is labor market oriented. Yes. Right. And it has something to do with the way people work. Remote work. Remote work. Yes. Yeah, you got it. Okay. So this is, and then, but then I have two other statistics. I'm going to. Did I get it or did Mark get it? Did I get it or did Mark get it? Who gets the cowbell here? Oh, the way. One of you said remote work. Oh, that was. Yeah. Oh, geez. Okay, Chris gets it. Okay, Chris gets it. By a second. Hold on. Is that 34% of what? I'm going to tell you what it is. Yeah. Yeah, go ahead. So in 2022, 34% of employed people did some or all of their work from home. Yeah. Okay. Which was down from 38% in 2021. But prior to the pandemic, it was 23.7%. And this can include people that only work from home. It can include. people that do a little bit of both. They might work in an office and then bring work home.

But yeah, 34% work from home in in 2022. Okay. Now, this is obviously interesting to the office market, right? Because this is sort of the trend that is determining the direction of what's happening with office space and take up. Let me give you these statistics. 7.9 hours. versus 5.4 hours. Commute times? No.

There's something to do with the amount of time doing times. Oh, you said hours, but it's time. Yes, yes. I'm smart, don't I? Time news. Time is something to do with time. Time spent online? Something in their work day, some of some,

some hours of their workday, they're doing this. No? Work week, I should say. No? I'm asking you, Marissa. Yeah, I know. I'm thinking about how to answer it. Yeah, it is their work day. So people that worked in the office on an average day worked 7.9 hours. People that usually worked from home only worked 5.4 hours a day. What? What? What? Oh, is that because is that just compositional, you know, different types of work that are at home versus in the office? I mean, like, you need to see the time series of that to make. Yeah. So, I mean, so the work done at home is much more, that 5.4 hours back in 2019, it was 3.3 hours if you did any work from home.

Okay. And this really varies by the type of work you do, the profession you're in, your educational attainment level. Right. Right. But generally when people work from home, they're working fewer hours than if they work in an office. Okay, but I mean, you've got to correct for the composition of work, right? Don't you? I mean... Yeah, but even when you correct... If I'm an office worker and I work in the office, am I working less if I work at home? That is the implication here, because even if you look at full-time people in the same industry, the people, the people

working at home are working fewer hours. Oh, really? Yeah. Oh. Wow, that's, that's, that's not me, Mark. I'll just. Yeah, it's not us. It's almost the opposite, right? Yeah. It is definitely the opposite. It's definitely not us. Because people actually take some of their commute time that they're not. Yeah, right. And actually work during that period. That's weird. I got it, that's interesting data, though. Yeah. Don't get a closer look at that. That's a good one, though. Very, very good. You did it nicely because you knew there's like zero probability that we would have gotten that. Yeah, but that was good. Okay, Chris, you're up. All right. I also looked a little farther afield. This is from a government source. Came out yesterday.

I'm going to give you three numbers. You won't tell us which agency or anything. It's two. The census. Okay. Okay. That's okay. It helps, right? Census. Okay. 38.30. 38.9, 44.8, 31.9. Those are ages. Yes. Oh, 38.9 is now the median age of the population. Yes, very good. Ding, ding, ding. Oh, wow.

Yep. What are the other two ages? 44.8 and 31.9. I will help you and tell you that these are state. Oh, the youngest is Utah. Very good. Excellent. That's the 31. I want to say Florida.

Florida. Pennsylvania? Nope. Michigan. No, it is in the northeast. Okay. Keep going that direction. Maine.

Maine. Maine, Maine, 48.8 median age. Yeah. That's good. That's really cool. What's the mean? It's an overall median age is what? 38.9.

Yeah, I'm in that cohort. you are contributing to that number yes yeah so definitely uh get aging as a population here right so with all sorts of implications for housing and productivity labor markets so that's very good that's very very good okay uh my statistics don't stack up to your statistics i'm afraid I've got, all right, I'm going to give you two that are unrelated. The first one, because I'm afraid the first one is not any good. So if it's not any good, I'll give you the second one. $1.4 trillion.

$1.4 trillion. And it's related to the topic that we're now going to turn to in just a minute, and that's commercial real estate. What is $1.4 trillion? And given the conversations we've been having, you may be able to figure this one out. Yeah, I think. I might even say it. It's office loans held by banks? No, that's that's a hundred billion.

Those are, that hundred billion is the amount of office mortgages that are on bank balance sheets that will mature. Oh, trillion, trillion. Yeah, that will mature by net, by the end of 2025. It sounds like excess saving. It does. You're right. I think it is excesses. I think it's not what I had in mind.

That's a good one. That's our latest estimate of excess saving. That's the extra saving done during the pandemic that's sitting in bank. By household. Yeah. Go back to CRA though. Okay. And you're on the right track. 1.4 trillion is the office market? No, you said that. Well, yeah. It's the total amount of CRE debt across all providers. of that debt, banks, REITs, CNBS, everything that is coming due that needs to be refinanced or

rolled over between now and the end of 2025. 1.4 trillion. Okay. I'm not sure how good that was. I'll give you one more. You should be able to get this. Minus 0.7.2 and 0.1. It's a statistic that came out this week.

Is it from the conference board's leading economic indicators? Yes. Ding, ding, ding, ding, ding, ding. Yeah, what's the minus point seven? That was the decline over the month in the index. In the leading indicator. Yeah, in the leading. And then one's probably...

Point two is coincidence. Coincident. Point one is lagging. Lacking. Lacking. Lacking. Very good. Very good.

You know, there's a interesting phenomena. The leading indicators have been falling now for quite. some time. The coincident indicator is not going anywhere. You know, it's still positive. So it's happened before in the past. It's not like it's never happened before, but it's unusual. You know, you see these leading indicators, you know, signaling recession,

but the actual measures of coincident economic activity, which determine whether you're going to be in a recession or not, so things that kind of the National Bureau of Economic Research looks at when trying to date recession doesn't show it. You know, it's just been, you know, very interesting. phenomenon. Anyway, okay, well, very good. I think because we do have a guest and a conversation around CRE, I think we're going to call this part of the podcast to a close and we're going to move on to the next part of the podcast. Thanks. Thanks so much. And I'd like to introduce my good friend Glenn Mueller to inside economics. Hi, Glenn. Good to see you. Hi. How are you? Good. I'm

You told me you're in White Bear Lake Minnesota today. Correct. Yeah. And I recounted this story that I, believe it or not, when I was growing up, my dad was a professor at Penn, and he had a good friend, engineer at 3M, who had a home on White Bear, and we'd go up every summer. And then we'd go from there up to Lake Superior to a little town called Two Harbors. And the thing about those trips was that for a kid that grew up in a big city on the East Coast,

that was the first time I actually really ever saw the sky, believe it or not. Yeah. Do you see the sky off in there in the White Bear? All the time, looking out at it right now and the water. And the water. Oh, and that's the thing, because Glenn is a master water skier, right? Right. And you're still doing that.

master. Yeah, I ski every morning here, ski this morning. I actually, lifetime goal is to go to nationals, which I did in 2019. Wow. And I was ranked 30th, but took ninth. Oh, wow. Congratulations. Top 10, yeah. Well, how come out not number one, Glenn? I'm just, you know. Because I don't live in Florida where you can ski all your work. That makes a lot of sleep. I grew up in Wisconsin. And the other thing about the Midwest is I I grew up racing sailboats and had a summer home in New Hampshire for 38 years and then moved here to be near my grandkids. And now I sailed. I race sailboats.

As a matter of fact, I had my trifecta week. I sailed Monday, Tuesday, and Wednesday nights. The raced all three nights this week. Wow. That sounds like fun. You are in impeccable shape. I remember, you know, how many years we go decades back, don't we? Yes, like 30 plus.

easily early 90s. Yeah. That's when we first met and we keep bumping into each other at real estate conferences around the country. And also Homer Hoyt Institute down in Florida, which is a bunch of PhDs chatting it up on real estate for the last, you know, like I said, I joined in 96. So, yeah, we're, you know, you're much broader in your exposure than I am. but it's it's been a good ride i think one each one inch deep and six miles wide is that the phrase something like that there we go yeah but i'm fortunate enough to have good friends like you know really know stuff and i can call on you and say hey what the heck is going on right you know

you're now at the university of delaware professor of real estate and you were telling me Denver is the second oldest yeah yeah university wisconsin's the oldest university Denver started their real estate program in 1938, and we're the only program in the country that has both real estate and construction management in a school of business. And we just two years ago started an executive PhD program for a me that just can't take a couple of years out of their life to go get their PhD. You could do it online mainly and come to the university for two weeks a year and and do a PhD that's applied to your whatever business you're in, you know, whatever, whatever specialty you're doing. So that's kind of cool. That is very cool. That's very cool.

And of course, we're here. We're going to talk about commercial real estate. That's top of line, you know, for anyone focused on what's going on in the broader economy, banking system, financial system. Before we do that, though, as I recall, you've been at different stops in the CRE market world on your way to becoming a professor. of the University of Denver. Yeah. You want to just give the most certain sense of that? Sure.

Actually, started out as a home builder in the late 70s. Yeah. Get back to school, got my Ph.D. in real estate at Georgia State University. Ended up back at University of Denver teaching for four years and then got hired by Prudential as a VP of research when that was a brand new thing. Charlie Wirtzbach, if you remember Charlie. I sure do. And then I moved to a company called ABKB, Alex Brown, Clements.

Howard Benson, after two years we merged with Jones Lang LaSalle, I moved on to Price Waterhouse as their National Director of Real Estate Research for a couple of years. Then, like Mason, I ran a reet group there for a decade and helped take 22 reeds public and then moved to one of our clients called Black Creek Group as their head of research. And they did non-traded reits. And actually there for 17 years until Aries Capital Management bought them two years ago. And Aries Capital Management is the largest debt lender in the world now. They're like $325 billion. I didn't know that. Yeah. So, and they're, and they had some direct real estate stuff going on before that, but they're like 50 billion of that's in direct real estate funds. Wow.

And of course, my, and at the same time, I've worked. at Johns Hopkins. I'm still a guest lecturing every year at Harvard and Wharton. And, you know, I've been at University of Denver now a total of 21 years. Well, you've seen commercial real estate housing, all of it from everything. Everything. Just so you know, Chris is a Johns Hopkins PhD, economic PhD. Okay. Yeah. You ever have Glenn? Did you remember Glenn? Chris? No. We had a master's in real estate there. I started there in 92 and left in 2005. Very good.

Very good. Well, it's obviously great to have you here and talk about CRE. Let's begin the discussion this way. It feels like hair on fire out there when it comes to commercial real estate. Everywhere I go, every conference I speak to, every policymaker I have a conversation with, you know, how worried should I be about commercial real estate? estate. I'm sure you're getting that all the time. How do you answer that question? Right. And the, and the answer is kind of funny. I say, well, yes and no. Yes, you should be really worried if it's

office. No, you should have no worry whatsoever if it's industrial and or multifamily. And retail has been just actually doing really well. And we can talk about why. And then hotels, it's the, you know, sort of the have and have nuts. The resort stuff and leisure is great. The business hotels are, you know, kind of up in the air still, although there's, you know, more coming back than now. But really, you know, as I say, office is the one big jump ball out there. And you can literally bifurcate that into, you know, brand new stuff coming out of the ground or that's just finishing off that they started four or five years ago is actually leasing up very well. well because everybody wants new, really nice, attractive space to get people into,

just came from the Neary meetings in New York and listened to Boston properties, you know, the big high and Class A. And they said, you know, a lot of Class A isn't doing well, right? He said, but we went back and looked at it and we're like, you know, 95% occupied. And there's demand and we're getting people and they're about to come out of the ground with a new building in New York right next to the Yale Club. He said, and it's because we asked, we asked our brokers at CBRE to go in and look at our stuff and find comp building. And they said, what we have is prime or a plus real estate.

And that's what everybody wants, the best location. And it's not that it's brand new and that kind of stuff like the General Motors building. We own it. It's doing great. And we've got people that just like, if you have any open space, let us know. We want you know because they, people want. that really good space. And it's not tech companies right now. It's it's the service providers. It's, you know, accountants, lawyers, and financial advisors and wealth managers that are, you know, they want

really nice, attractive space for their clients to come to. So that top, they call it like, you know, 10% of Class A is actually doing really, really well. Even in the big urban centers? Yeah. I mean, in New York, And, you know, I'm on the board of Arden Group out of Philadelphia. And our prime Class A stuff is actually doing very well. You know, suburban and B&C, really, really tough times. Really tough times. So I think we're going to see a lot more of handing the keys back on those buildings and what the banks end up doing with those is up in the air.

But I think that's the biggest risk in the real estate world right now is what do we do with all these, you know, non-prime office buildings that probably aren't going to refill and just reading somebody else's report this morning. As you know, as economists, the idea is to a forecast often. Something we're saying it's not going to, we aren't going to be back till 2040. It's going to take that long. What are the meaning vacancy rates back in by 2040? Right. Right. Right. It's going to be that long before, before, you know, the general overall office market comes back.

Yeah. I mean, by my, tell me if I got the numbers wrong. This is in my mind's eye, and I might not have it right. But there's roughly $400 billion in office mortgages that are coming due that need to be refinanced rolled over between now and the end of 2025. So 400 billion, and about 100 billion is the banks are on the hook for. Correct. Is that sound about right to you? Yep. All right. Go ahead.

There's going to be some pain. Right. Right. But about $100 billion in the grand kind of scheme of things, if you look at the commercial banking system as a whole, that's really. not much to worry about. I mean, it's really the, maybe some, some institution on the tail of the distribution is going to get caught because they had too much CRA and they caught with the wrong

CRE at the default and they might choke on that and fail. Right. Yeah. Okay. Right. Yeah. So industrial, on the other hand, is just off the charts, fantastic. Things are going well.

It's become a lot more expensive to build it. Before you go on to industrial, though, let me just, let's explore the office a little bit because that's the soft spot, right? Yeah, yeah. So do you, there's a number of kind of significant headwinds to the office market. Curious to get your take on how big a deal they are and whether they're going to continue. The first one is obviously remote work and then remote dynamic. And that clearly has had an impact on the kind of the large office towers and big urban centers in the northeast, Chicago, on the Lord.

Do you think that's a dynamic that's here to stay? We're going to continue on with that. It's going to play a role going forward. Yes. Yeah. And I mean, because everybody wants to work at home on Mondays and Fridays and be in the office three days a week.

And so you need less space per person. The historic average was 200 square feet per person. And I think it's going to, you know, and when we started doing more work at home virtual stuff. Some people were cramming down to like 120 square feet per person. And, you know, if you can figure out how to spread the peanut butter out over the bread during the week, you know, maybe it's down to half that in the long run. But older, older people like you and I, I'm happy working from home. It's no problem. I'm not worried about my next promotion. Most of my

most of my undergrad and grad students, my grad students who are master students who are working, like, you know, if I'm not in the office, I'm going to get overlooked for the next promotion or this or that, the other thing, they want to be in the office. And if they're living downtown, they don't want to be working from their 500 square foot, you know, efficiency apartment. You know, they like going to the office and the socialization and stuff like that. So it'll be really interesting to see how everything kind of, you know, filters out as we as we go through all this. But like I say, I think we're coming up with a new trend that's going to take that decade plus to just sort itself out. What about conversions? You know, there's some, some chatter about converting office into

multi-family being the most obvious. Right. And that really has any legs. Is that viable? There are some and not that many unique buildings that you can do that with. Because one of my good friends, Tom Toomey, at United Dominion Realty, that reed, they've done a couple conversion. He said, when you take a normal office building, that's got a big floor plate to it. What you end up with is little shotgun narrow, 10 or 15 foot wide by 80 to 100 foot deep units. So you get one window, right? Right. And there's only so many people that want something that's small and unique.

And the cost of conversion is so high that economically it's not viable. So we're going to see some of that, but it's not the be all and end all of it. I had a student in my development class do a project where they converted an office building and all over office building in Denver into self-storage. And it worked financially, which was amazing. The one thing was it had concrete columns supporting the floors. And with storage, the floor load went up. And they came up with the coolest solution.

This guy was an engineer. They wrapped the columns in graphite to give them the strength needed to do. So it was a really inexpensive way to do that conversion. Also, self-storage, you know, self-storage, close-in warehouse is another potential because if it's got a parking garage underneath, the trucks can come and go. You know, the Amazon trucks can come and go. They can bring stuff up and down in the elevators,

that kind of stuff. So that's another potential. Chris, can you imagine turning seven world trade? That's Moody's HQ into a big warehouse space. Actually, it's a very secure building. I mean, I'm sure you can figure out there's got it. That's an amazing thing about commercial real estate. it's always amazed me.

CRE developers, you know, they're so creative. You know, you can't. How are they going to get out of this box? And somehow they do every single time they get out of the box. They figure it out. Right. Yeah. And maybe, maybe, you know, some of the suburban office buildings can be converted to other

things like that too because they got plenty of parking and everything else. But it'll be, you know, it's, like you say, it's, yeah, we're waiting for the next creative thing to come along. Yeah, we, you know, Glenn, the economics unit within Moody. that's us. We just went remote, fully remote, what,

six, eight weeks ago, something like that. And our office building in Malvern, or excuse me, Westchester, PA is,

you know, now, now empty. Pretty empty. Right. And why not? Yeah. Life is easier.

The amount of time, you know, if we think back over our careers, the amount of time that we spent commuting. Yeah. If you had that to do something else with. Yeah.

You know. Could have written another couple books maybe. Yeah, exactly. Hey, Chris, let me ask you. I mean, what do we, we collect all the transactions and create this repeat sales, commercial real estate price indices and model them, forecast them a lot, you know, a lot of our clients use them for stress testing and all kinds of different risk management. that kind of thing. Chris, what are we, what are we expecting prices to be down peak to trough in the

office market? For office, 25%. 25. Does that sound right to you, Glenn? I know you don't do explicit forecasting. Right, right. Well, you know, in the Great Recession, we dropped prices by 40. Yeah. And then they bounced back within four years and we're up, you know, multifamily was up like 240 over the previous peak. Actually, mobile home parks was the highest, you know, up over that time frame. So I think 25 is conservative. You know, that could be the number, but I'm kind of guessing a little bit worse. That's what I've heard.

What do you think, Chris? That's what I've heard. Yeah. That's what I've heard. Although, that number has real implications, right? Right. For folks. Although, remember that, you know, after the Great Recession,

banking went from 75% loan to value loans down to 60 in most cases. So you can have a 40% value drop before you're, you know, before you're out of the money. And, you know, think of this that, in essence, anyone that has a loan on a building, they basically have a put option, right? Or a call option, if you will, that if the, price drops below the mortgage value, I walk away. I just keep collect, you know, as long as I'm collecting enough rent to pay the mortgage, I don't need to walk away, right? If I'm not collecting

enough rent or if I've calculated that in the next year or two, I've got enough leases coming due that don't pay, you know, then I also walk away. And as you probably know, the sublacing situation, we've almost tripled the amount of sub-lease space on the market. So you've got somebody like Moody's, who I assume is, you know, on the hook on a 10-year lease and maybe you only have a year or so left on it. And if you guys are not all working from home, they probably put it on the sub-lease market. Will someone take it for a year? Maybe not.

But, you know, so that's the forerunner of where vacancy rates are going is, you know, the amount of sub-lease space tells you that vacancy is about to rise. So do you see this playing out over time? Or is it a one-time shock? You've got like I say, with average five to 10-year leases over the next five to eight years, we're going to see all this stuff, you know, come do. Right. So that's office. Anything else on office you want to bring up, Marissa, Chris, that I missed? Well, I just, I imagine that 25% price drop, you know, as Glenn was saying, probably varies quite a bit, depending on the type of office space you're talking about, right?

Like you were, and I've heard this before that now Class A doesn't really mean much because it's got to be top of the line Class A. So that stuff probably does better, right, than some of the more suburban class B, class C office buildings. Right. So in Denver, we have two iconic buildings, right? The Wells Fargo building, which looks like a cash register on the top, right across street Republic Plaza, Blackstone, close 50% owner in both of those,

and they handed the keys back to the bank here a couple months ago. And just, you know, we have leases come and do it and everything else by our numbers. You know, we're not going to make any money, so it's yours. And now they're older, they're, you know, 20 to 30-year-old building. So they are the right location. Have they been, you know, remodeled and stuff like that, they could probably be Premier A's, but they're old A's, which, you know, didn't work. Also, you know, what you have to do is, you know, my market cycle work, I look at the 54 top

cities in the marketplace. There are some that are doing really well. Others where you had a lot of new space coming online, like, you know, Denver just had the new Tabor Center to come online. And the firm that bought my area's capital management, they took the three top floors and then asked any of their, any of their other people, people in New York, San Francisco, anybody want to move to Denver? And they got a whole bunch of people coming in. They started with two floors and went to three. So all of a sudden, the newest brand new, class A in Denver, the top three floors are taken kind of thing.

And the Boston properties in their presentation, they said, we have three clients who are looking for 100,000 square feet or more in New York City right now. Really? Yeah. but and there's and and that's in a premier building and it's not available yeah so uh i guess the question is sort of my thought process is that for these issues we're talking about in the office market which is kind of the poster child for the concerns because as you point out and come back to it in a second and these other property types the issues aren't nearly as serious does not that They're almost, I'm going to say, non-serious.

Non-serious, not a problem. Yeah, yeah. So, and if you want, let's go ahead and run through what's going on. But I just want to kind of do one more thing there, and that is, you know, the kind of the link back to the broader economy would be if the default, say, prices fall, you know, more Blackstone's hand back the keys to the bank, a bank than, chokes on that. The losses are overwhelmed their capital base and the regulator says, look, you're insolvent,

you're no longer viable, I'm shutting you down, or are you going to merge with somebody or are going to be fired by somebody? Then that could, if it were widespread enough, be a problem for the availability of credit more broadly and therefore the macro economy. But in this case,

it doesn't feel like that's at all possible because we're not talking about numbers that are big enough. A hundred billion over the next three years doesn't actually think that's big enough. The other way, I guess it could have an impact broadly on the economy is if a smaller bank or mid-sized bank choked, failed, and that reignited kind of the deposit runs that we saw back a few months ago. So you got folks out there, depositors, got a lot of cash in the bank, very kind of skittish, nervous. Even if a small bank that's not by itself systemically important, by itself, if it

fails no big deal, but if it kind of ignites another run, people say, oh, I'm out of, I'm pulling all my money out, I'm going into money funds or put it all my money into these big guys. You know, maybe, that's the only way I can see this thing metastasizing into a broader kind of macroeconomic issue. Right. Well, in your view? Is that how you think about it? And I guess I'm going to ask you then a question because I this is something I've never studied how much how much capital is in the large banks that are too big to fail that the federal government would obviously come in and just bail out like a Wells Fargo US bank whatever versus all these smaller banks you know is it like 50% of all the money is in small banks and 50% in big banks or is it 80 you know I don't know the

magnitude size between those that would be a good thing to look at to say hey If 20% of all this money is in these smaller banks and that's what's going away, 20% isn't so bad. Right? Yeah, I think for the big guys, then that's a big problem. Of course, I'm curious if you have a different view. But for the big guys, you know, the big guys that take the stress test every year, you know, they have to stress their balance sheet, including the CRA portfolio against that 40% decline you mentioned and Pete the truck decline, that's what's used. used generally. In fact, in this last stress test, it was more than that. Wasn't it Chris? I think it was 45 or 50% down. And that's across all CRE, right? That's not just office. That's the

whole shoot match. That's a pretty severe, you know, financial crisis-esque plus kind of declined. And they got to have enough capital to, you know, digest that. And they do. So the big guys, guys that take the stress test, I just, I don't, I don't, they're bulletproof. Smaller guys, they, you know, they don't take, If you're below, you know, before SVB, you know, it was $250 billion and below. That's going to change now because of what happened with SBB. But, you know, 250 below, you don't have the same kind of stress testing demands the big guys have. So there could be failures there. But again, you know, unless it creates a deposit run for some reason, people lose their minds irrationally.

I'm not, which could happen for sure. You know, my mother-in-law, 93-year-old. mom has K, and I probably shouldn't say that, but crazy. Some cash in bank well below the deposit insurance limit. She goes, you know, should I be worried about that? This was back in the, you know, in March, April when things were, you know, very hard-earning. I said, mom, don't worry, no problem. You're below the deposit insurance limit and she seemed okay.

A few minutes later, she came back and she said, honey, what do you do again for a living? Can you remind me? Nice. Just to see if I am standing. Chris, do I have that right? I mean, Marissa, am I missing anything? How else could this thing, the problems in the office market, kind of metastasize more broadly in the economy? No?

No, I think that's a confidence issue more than anything, right? Okay. But if there are these bank runs and then we have a repeat of what happened in the spring. Right. And remember, you know, the balancing act here, the stock market's up 17% and doing okay and people typically feel all right. Yeah. So. And the worry about a recession, actually, and you're the guy I wanted to ask this question to is when I look back since the 60s, every time we've had a quote unquote recession, both employment and GDP go negative, right? Yeah. This time, while I can see easily GDP going negative later this year, potentially, I don't see employment growth going negative because we've got so many jobs out there that are unfilled and everything else. So anybody that wants a job can certainly go get one.

And now that the COVID money is gone and everything else, people can't live on, nothing, can't live off the government. Is it really a recession if employment growth is? positive and GDP is negative? No, no. You're speaking my language, Glenn. Yeah. Yeah, exactly. I totally agree with you. I mean, I think businesses are

very, very reluctant to layoff workers because, you know, on the other side of whatever it is we're experiencing, now they know they're going to have a boatload of difficulty of hiring people and retaining people. Just given demographics, it's going to be very difficult. Right.

This is actually a statistic. We have a statistics game, we won't play the game, but I'll throw it out there and see people know the answer. So the average monthly job growth over the past decade has been 170K, you know, that go back to 2013, 10 years, pandemic, everything, 170K. Guess what it's going to be over the next 10 years, according to our forecasts and most others, you know, CBO, everyone that does this forecasting, just given demographics and what it means for the growth in the And so this is net you and me retiring with other people coming to make our place, right?

It's going to be, I'm going to say probably just slightly less than that, maybe 150. 75K, at best. Half. Well, it was 170, 170, now 175, now it's 75, now it's 75, you know, something like that. Wow, okay, yeah. It gives you a sense of magnitude. I know it was a lot less. Yeah, a lot less, a lot less.

A lot less. And by the way, these forecasts were done well before the pandemic. Like if you go back and look at our forecasts, you know, 15, 10, 15 years ago because you know, we knew the boomers, you and I are going to retire. Right. Well, you'll never retire. And these guys are going to have to kick me out. I'm not retiring.

You're not retired. But anyway, so, okay, so, all right. So we just focused on the weak link in the CRE market. Right. Post your child for all the concern office. And we came to the conclusion that, This ain't great. It's going to be an adjustment. Certainly there's going to be a lot of losers in all this, but it's not existential for the financial system or the broader economy. Correct. I mean, kind of came to that conclusion. Correct. Okay, fine. Okay. What, what, and then the rest of the CRE market, what else out there, is there anything? Because I'm all, I'm looking for things that could, you know, kind of hurt the economy, undo the economy. Is there anything else out there?

scouring, you know, because I know you scour the physical markets, you scour the capital markets, you look at the private market, you look at the public market, anything else out there that is making you nervous about the... Not only no, but absolutely no. Absolutely no. And I'll tell you why. And I can start from worst and go to best or best and go to worst you pick. Marcia, your choice.

Let's go worse to best. Let's end on a high note. So I think the worst out there is hotel. Okay. And the reason for that is bifurcate between the resort and leisure and off and business hotel. And business hotels, we closed a number of them in New York. Things are kind of bad there. The one thing that happened, the little detail that a lot of people don't understand about hotels is when, you know, I own hotel that's flagged by Marriott.

Marriott requires me every 10 years to completely remodel the place at about $100,000 a key. Right. So I am escrowing every year to be able to do my $100,000 room remodel at the end of 10 years. Marriott doesn't pay for that. And in the pandemic, they said, okay, you can use that escrow money to make your mortgage payment, to keep things going, all that kind of stuff. And now it's like, okay, now things are back. you know, by the way, your remodel is going to be due again. Anyway, and so I think from a,

we're going to see a number of owners who don't have the capital, put those properties up for sale. So we have, if you will, kind of, I've used, I've used this term now for a couple of years. We've got the COVID have and the COVID have not properties, right? They're going to do it now. Everybody's raising their rates like crazy as well. And everybody used the COVID money that. couldn't spend to go out and do leisure travel, that's starting to fall off with the high dollar value international travelers weren't coming into the U.S. either. So that, you know, kind of that, the U.S. people come in and kind of balance that out. I think now that, especially if you have a recession,

people back off here in the U.S. and the international travelers still aren't coming. So to me, hotel is the, you know, is the number one most risky of the property types after office. So the business travelers, I haven't been following, are they making their way back? Yeah, but you're no longer in your office. Someone's not coming to come, is not coming to see you. That's true. Anymore, right? And as a matter of fact, I just read a new little report about the fact that now most people

are at the office Tuesday, Wednesday, Thursday. So Tuesday, Thursday travel is picked up. But Monday, Friday is getting worse, not better. So now you've got a hotel, you know, in hotels, normally live off of the historic number used to be a 62% of what was break-even occupancy. And we've got the leisure hotels up in the 80s and the business hotels still in the pick the city, 50s, 60s type of thing. So hotel to me is the next riskiest thing. But there have been like dozens of hotel opportunity funds started and that kind of stuff. I'm actually invested with

some of the Marriott lineage and a little opportunity fund in that area to, you know, try and pick up some great deals. Well, this might be a good spot to do a little bit of the deviation. Then we'll come back to your west of worst to best. And that is in these large urban centers where, you know, people are leaving remote work as playing a role. These office towers are going empty. That's also affecting retail and in some of these like San Francisco is now the poster child for this. You got things kind of feeding on themselves. So property prices are down. That's affecting tax revenue and the ability for local government to provide public services, including safety. So crime is becoming more of an issue. Homeless.

is more of an issue and you're getting into this kind of self-reinforcing very negative dynamic. Right. What's your sense of that? You know, is that, how big a deal is that? And is there any turning that around? I think it's potentially a big deal. You know, the younger generation has loved living downtown, working downtown, doing all the things they're doing.

And as these, you know, as this crime, you know, goes up and stuff like that. and, you know, restaurants aren't open every day and all those kinds of things. They're thinking about moving out to the suburbs. One of the neighbors over here, young couple newly married, living the life downtown, both working downtown for big firms. And she walked out to her car one day and got robbed by gunpoint. She says, we're out of here. A lot of house actually bought his grandmother's house here on the lake.

and now they're living here. So, and right now, the, the biggest demand out there is for single-family home rentals out in the, out in the sub-markets. If they don't have, you know, the down payment to buy the house, you know, they're renting. So that's, that's a, yeah. And you're right. Cities have a major financial problem with the fact that the revenues and, you know, I saw a number recently like tax revenue down almost a trillion dollars in major cities without

the rental uh without the rent with without the with without the taxes and the rental income and the sales taxes from you know people going out to lunch and and shopping and everything else so yeah that's that's that's the other big risk yeah that's there yeah um okay let's go back to the west the worst to the best can i think a crack at guessing what the next one is sure warehouse? No. I would say retail. Oh, you'd say retail.

Okay. Right. And the big reason for that is, you know, retail got hurt after the Great Recession and the Amazon effect and all that kind of stuff. Yeah. We slowed down new supply substantially. And we converted a lot of retail. As a matter of fact, the best thing to have in retail was marijuana. You took all the old crap.

retail and you turned it into a marijuana dispensary, right? My first job when I graduated because I was in there was a big recession in 1974 and I couldn't find a job so I just turned around and applied to and got into grad school. I worked as a mechanic at the Ferrari dealer in Denver. That, you know, like a mile from a mile from the DU campus and it's now medical, it's now a marijuana dispensary. Oh, amazing. Amazing. So retail has been really restricted in supply. You had the COVID haves and COVID have-nots. The COVID-have-haven, if you were deemed a necessary retailer,

which was building materials, obviously grocery stores, all that kind of stuff, your sales went up. And when your sales go up, it's like, hey, I'm doing something right. I need more stores. And they are, you know, Home Depot, Lowe's, building new stores, doing that kind of stuff, hardware stores, doing well. And so last year, 80% of all new retail built was pre-leased. Fast food chains, all that kind of stuff, all doing really well.

And we also converted a lot of stuff over a decade ago from retail into some office, into now close in warehouse, other things like that. So retail isn't kind of a balance. I put that next only because if we do have a recession, their sales go down. Some of them can't afford to pay their rent kind of thing. It's going from West, worse to best, and that sounded pretty good to me. It's going from best to best to bestest. Right, right.

So next in line is industrial. Industrial. And industrial, you know, the Amazon effect created huge benefits, as you know, and every retailer, if they're going to survive, Every big realtor, if they're going to survive, needs internet presence. So they need warehouse space. Amazon was gobbling up so much of it. In 2019, Amazon leased 25% of all space leased in the United States.

And think about this. We're going along at over five years, 8 to 9 to 10 to 11 to 12% of retail sales were online, right? And then COVID hits and it goes to 18. That's a 50% increase. What did Amazon do? Wow. Demands up 50%. They went up and just started leasing everything under the sun, building stuff themselves, everything

else. And then COVID ends and it drops back to 12 and a half percent. So we're back on the old trajectory. And they go, oops, we took too much. Well, that's why I said warehouse. That's why that's what I was thinking. Right. And so they said, oops, we took too much.

And they put it up for sublease or walked away from a lease and stuff like that. But then all the retailers who weren't able to beat Amazon out got them. Got them. And by the way, every time a state legalizes marijuana, it immediately takes care of warehouse problem. I'm sensing a theme here. Yeah. Maybe they can turn those office properties into something, you know, marijuana.

Bingo, Mark. You could be the icon savior of office with that idea. I love that, right? I can marry the two. Maybe we could make, you know, take the windows out and make them greenhouse. That would be perfect. Yeah. So warehouse, so in Denver, when we legalized in Colorado legalized marijuana over a decade ago, rents for three bucks a square foot, they went to six.

The cost, break-even cost to Bill New was about 450 a square foot. We went to 100% occupancy. And we grew, grew, grew, grew, grew, everything was great. And then other states started legalized. So we were having a lot of marijuana tourism. tourism. So it started fall off. We've now had marijuana companies actually go out of business. Yeah. Right. So all of a sudden, we have a, we have a, and we were building warehouse. We're now at national average. We're at 11 bucks a square foot for warehouse space. Right. Now, costs have gone up

too. But all these retailers are needing that. One of the things we're really short on is, is a cold storage warehouse. The average cold storage warehouse for food and stuff like that, four years. in this country. And so we need a lot of new refrigerated warehouse space. So the demand there is like off the charts. Absolutely. Because Amazon's delivering and it has to come from a refrigerated warehouse. Right. So, so I think industrial does well. And then the number one, best property type over the next minimum of a decade is a movement. And it's because, and you probably I'm sorry, what? Apartments, number one.

Apartments, oh, apartments, yeah. Because we are 6.5 million housing units short in this country, according to the latest National Association of Realtors number, and that's living units, whether it's ownership or rental. Yeah. Okay, because, and I used to be a home builder back in the 70s and 80s, and we had a saying back then, Kerry kills.

If I built a spec house, and back then this is when interest rates, if remember, you know, 10-year treasury hit, hit 15% in 1980, right? 81. Yeah. If I finished a house and I didn't sell it in nine months, the interest on my construction laid up all my profit. So all of the major home builders in the Great Recession, when they were sitting on inventory that wasn't selling, they went, okay, we're not going to put 100 houses up in the Denver

market, hoping that they sell. we're going to only start at the next house once one sells. So our production went from $2 million a year to $1 million a year to half. So over a decade, we were short a million units a year, almost. We had the big growth in the millennial generation that soaked up some of that. And we built a lot of apartments downtown. When I was, my first job was at United Bank of Denver in downtown Denver, there was nobody living downtown.

you could have laid down on 16th Street, the main street, that's the mall now, at 6 o'clock at night and not got run. You know, everybody, you stopped working right at 5 o'clock. You had a drink at a bar and you were back home at 6 o'clock. That was it. Right now, they're, you know, they built thousands and thousands and thousands of apartments in downtown and it's thriving. It's, you know, 18 hour and not 24 hour. So there, whether it's apartment or ownership, it's there. really simple math, my students say, should I buy a house now? I go, because I'm going to wait for

interest rates to come back down, then I can afford more. And I go, let's do some simple math here. For a round number, you make $100,000 a year. 30% of that, you know, can go towards your mortgage. So 30 grand a year towards a mortgage. When mortgage rates for 3%, 30 grand divided by 0.03 means you can afford a million dollar mortgage. Now rates are 6%. Right? 30 grand divided by 0.06 is a 5,000. hundred thousand dollar mortgage. That's enough. And yet housing prices really haven't come down much. Why? Because we are short. And every, all the young people that my grad students who have bought homes, they're like, I'd like to move to another home, but my, if I buy a home of the same price I sell for, my mortgage payments go to double. I'm not going to move. So we've just shut down or slowed that,

you know, that transition move up or or to a different place or whatever. I think we've, we've, we've, slowed housing mobility with these higher interest rates. Yeah, but the only thing on apartments is in the near term, there's some adjusting to do, right? Because you've got about a million, we've got a data point this week from census. So there's about a million record number, million apartment units in the pipeline going to completion. They all got bottled up because of the pandemic and supply chain labor market issues. Right. Yeah. They're coming to completion. Right. In the next 12, 18 months. And you got demand that's a week because rents are so high, the surge back a year ago, that you got demand destruction, the households haven't been forming.

So I agree with you about apartments over the next 10 years, and that's how you couched it. But it feels like in the next year or two, there's some adjusting to do. Oh, I absolutely agree there. And I'll give you the fun example. So one of the young people that worked for me, she was in a 500-square-foot apartment in Denver, in the newest building with every amenity under the sun, full L.A. fitness-sized gym, swimming pools, commercial kitchen with a guest chef that came once a week for a cooking class, right? She's in 500 square feet, two grand a month. She COVID hits and she's like working on her bed every day, right? And so she and four and three other friends rent a house out in the suburbs

for a year. And then COVID's over. So she comes back, goes back to St. Billy. I want my apartment back. Great. But now the rent's $2,500. And she goes, wow, 25% increase. I can't afford that. So she doubles up with another friend and gets a two-bedroom for three grand, right? And so we just took, you know, demand for two-housand-ins and turned it into one. Right. And I think that, you know, that that big increase in the major high-growth cities, they're, you know, they had a 12 to 25 percent, you know, increase in rents. Rents are going to fall there. In the Midwest, as you probably looked at those numbers, too, they had like a five to six percent. rent increased, and they're still getting that because they didn't go crazy from that standpoint. So I agree that we've got a correction in rent growth happening, but the demands are, if the rate comes down enough, be back.

No problem. You know, my youngest son's an airline pilot. He bought a house to remodel and rehab and then sell and flip. I don't know where he got those ideas in his head. And he, you know, the, he, he, he, he knew that it was going to be worth literally a million and a half dollars when he finished. And then the whole rate increase started and everything else and going, you know what, I'm just going to try the market for the heck of it.

He puts it on the market for what he thought it would be worth at the peak a year ago, sells it in four days. Wow. Wow. in Denver because of demand. He was in the right neighborhood. He was in the right place. I don't know where you learned that either,

other than he got his undergrating real estate with me. You know, he was in the right place at the right time. And now he's out there looking and have an hard time finding something. Fortunately, he's got a duplex that he can live in while he's. Well, that was a great tour around the CRA market. And I have to say, I feel actually a lot. lot better after this conversation. Chris, what he, Chris is the lugubrious one of the bunch. Did he push back, Chris? I mean, you must be feeling better too, no?

Yeah, a little better. A little better. Okay. All right. Very good. Except for office. You know, price. Price. Price. Price is a mystical office. Right. Price corrections. Like I say, I think that outside of office, all the other property types are going to be generating enough rent that they can pay their mortgages. Although we, you know, we'll see a few, you know, unique things happening here or there where somebody bought at the highest price, right? And now their, and now their mortgage is coming due and with a price correction, you know, let's say it's 10% in apartments in industrial and maybe 15 in retail. And all of a sudden they can't, you know, they can't afford the higher, you know, the higher mortgage rate. But, you know, outside of office,

I think we're going to do fine. Okay, well, with that, I'm going to take it. That's good news. I'm going to run with it because it makes me feel better. But I want to thank you, Glenn, for taking time with us today. It was very helpful, and it's good to see you, and I hope to have you back on if we can get you back on. Yeah. That'd be great.

Yeah. Well, dear listener, with that, we're going to call this a podcast. Actually, one last, one last really quick thing. Yeah. Tell me whether you agree with this. The world is still just a wash in cash. You know, I'm dealing with, you know, if you look at the institutions, they've all got funds, you know, opportunity funds to go in and do things with.

And I've been working in the family office, wealthy family thing. They've all got cash. And they're all trying to, you know, do opportunity stuff, et cetera, that, you know, anytime there's a deal, it's going to, you know, that's going to sell. And that I think will help keep a little bit of a floor under, you know, too much. of a price drop. Yeah, the only thing I worry about there is, uh, in terms of credit, you know, the banks are tightening and they are going to be more cautious in extending out credit. But I mean, a lot of stuff is selling. It's amazing. You know, my son sold us a million and a half

cash buyer. Is that right? Cash buyer. Wow. Okay. All right. But I mean, I think that's where the, you know, there's there is cash, uh, but, uh, I think in terms of the availability of credit, you know, Is it enough for unleveraged purchases, is the question. Exactly. And that suggests some price adjustment here. I can't imagine we're not going to see some. Oh, yeah. Some price, some increase in cap rate.

But to your point, you know, I'm on board. I think your optimism is well justified. But before anyone dashes my optimism, I'm going to call this a podcast. Thanks, Glenn. We'll talk to your listener. We'll get you at the next podcast. Take care now.