Moody's Talks - Inside Economics - Rockey on Real Estate

Episode Date: April 19, 2024

Deputy Chief Economist at Cushman Wakefield, Rebecca Rockey, joins the Inside Economics crew to talk about the outlook for commercial real estate and the economy in general. After unpacking the week��s economic events and a quick primer on outrigger canoe paddling, Rebecca walks the IE team through the different segments of CRE and how they’re faring. Mark goes through a “what’s bugging me about CRE” list but Marisa can only see the bright side. Finally, Rebecca and Cris discuss their views on the possibility of a CRE doom loop.  For more on Rebecca Rockey: 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 Sandy, the chief economist of Moody's Analytics, and I'm joined by my two co-hosts, Chris D.Reedies and Mercia D. Natali. Hi, guys. Hey, Mark. Hi, Mark. We had a busy week. Yeah, we saw each other in person for the first time.

That was kind of cool. Yeah. That's kind of cool. Yeah. Did you see? It was the All Hands Day, or we had actually two days where everyone came together in Westchester. Pennsylvania, our kind of previous HQ. There's no HQ now, right?

We're remote, but it was good to have everyone in person. Did you see anybody that you go, oh, you're taller than I expected or you're shorter? Absolutely. Yeah, that happened a lot. It happened to me a lot. Yeah. Yeah. All right.

Do you want to name names? No. You don't want to go there. No. That's right. Right. Yeah. But it was a good two days.

We got, you know, it's really. I think remote is, this is Mark Zandi's view. I think remote's working well, but you got to have these events where you get together and see each other. It just doesn't work otherwise. You guys agree with that? Yeah. Absolutely.

Yeah, very much. Probably more than once a year or two. That would be nice. That would be nice. In a nice spot, it doesn't have to be in Westchester, Pennsylvania, does it? No, does not. Yeah. Right.

We could go visit Marissa next time. Yeah, I'd be all for that. Yeah. I don't know if we had the budget for that, but yeah. Yeah, that would be nice. She's in this hoity-toity, where are you, Laguna Beach or something? I don't know. With the movie stars?

Yeah, I'm in Dana Point. Oh, Dana Point. Oh, yeah. See, Laguna Beach isn't Hoity-Toy enough, or she has to say Dana Point. I think Laguna Beach is a little more hoity-to-to-y. Are you a surfer? I mean, I think anyone who lives on Dana Point has to be a surfer. Isn't it like a Rich Carlton on Dana Point or something?

Yeah. And you look down into the ocean and there's surfers all the time. Yeah, that's a big surf beach right below it. Right. Yeah. You see the seals and the sharks and all that kind of stuff. No? I don't know about that, Mark.

Okay. Sharks. I thought there were sharks. Anyway. There are. Versus a paddler. Yeah, I'm a paddler. Oh, is that right?

Interesting. Outrigger, canoe, paddler. What does that mean exactly? Outrigger canoe. It's a canoe? It is. It's a Hawaiian sport. And I'm on the Dana Point team.

Oh. So it's a racing team. So six months out of the year, I do this like three days a week, three or four days a week. And we race other teams up and down the Southern California coast. Some people go to Hawaii to do race. It's a big, it's a big part of my life mark outside of worrying about economics. That is cool. Is it an Olympic sport?

No, it's not an Olympic sport yet. But my coaches certainly treated as if it's an Olympic sport. Oh, you have coaches too. Oh, yeah. It's a big. It's a real thing. It's a real thing. It's a big deal here.

Yeah. Oh, wow. Yeah. This is the largest and oldest outrigger, the Dana Outrubrub. Dana Outrigger team is the largest and oldest outrigger team in the United States. And the women's team in particular is the best in the world, I would say. Maybe like Tahiti's better, but our top crews are, yeah. Is it like, I know, crew where you, you know, you race in a straight line.

Is that kind of sort of what you do here? You're racing? No, no. So these are longer races. So our first couple months are 10. to 12 mile races. Then the last part of the season are these nine-man races where there are 30-mile races and you switch paddlers out in the water.

People jump in the water. The canoe comes. The people in the canoe jump out one side and the other, the people getting in the canoe getting in the other side. So you can, it's like a relay. That is so cool. And you have one paddle, right? Cruise oars, you're rowing.

This isn't rowing. You're paddling. So you do like several. several strokes on one side and then everybody switches over to the other side. So every other person is paddling on a different side of the canoe. Oh, man. My whole worldview of you just changed like completely. I thought you were this maven statistics game player, but you're a maven statistic

game player. I'm both. And in and out, what did you call it? Outrigger canoeer? Yeah. Cool. Very, very interesting. Chris is much more boring than you.

Oh, yeah. Chris is pretty interesting. We're going to have to dive into that. I know he likes Bocciball. I know that. He's big in the crypto markets. I know that. You got me pegged, Mark.

I got you pegged, man. I got you pegged. And I know you like going to Italy in the summertime. And for three, four, it feels like six, eight weeks. He's sitting in some wine cellar somewhere, sipping something while he's chatting with us. we can dream right we could I called you out man yeah anyway well we have a guest Rebecca Rebecca Rocky good to see you yes thank you for having me more did you know that about

mercer Rebecca did you have any idea I did not and my worldview just changed us as well actually so we're in the same boat so unattended no one attended yeah right And Rebecca, you're the, what's your official title? I know Deputy Chief Economist at Cushman Wakefield. You are? Yeah. Yeah. And maybe you can tell us a little bit about you, how you landed at Cushman, Wakefield, and became deputy chief economist.

And maybe a little bit about Cushman as well, because we're going to talk about commercial real estate. And obviously, Cushman's a force in CRE. And maybe you can tell us a little bit about that as well. Sure. So I ended up in CRA kind of by accident, but from what I hear, that's, that is sort of normal for the industry. Oh, and Rebecca, can I ask, can ask why you're telling us the bio? Can you fill in like, are you like an outriggering canoe kind of person or something similar? Do you have any of those things going on? I'd be very curious, just so I get the right worldview of you. Yeah. So on the side for 15 years, I did teach fitness classes. And I spent a great deal of time doing indoor cycling. I taught for flywheel before the pandemic for five of the final years.

I did that. I had a small business that ran boot camps and talk kickboxing and all kinds of range of things. So you're in great shape. You and you and Mercia were hanging out. Probably not ready to compete with Tahiti's outrigger canoe team. But yeah, no, definitely enjoy being. active. I have a 20-month-old, so, you know, things have changed a lot, but that's really fun as well. Absolutely. Yeah. So I had that sort of, yeah, that was my, you know, that was my, I would moonlight at night as a

fitness instructor at 6 a.m. But, yeah, I ended up in Siri sort of by accident. I, I moved to D.C. originally and was thinking I was going to go into international development. I was really fascinated. by microfinance, and I just thought this is where I'm going to go. And it turns out, you know, some of the more quantitative work in that field, it was a bit nascent at the time. And that was something that intrigued me was doing more quantitative work. And I actually don't remember applying to the Congressional Budget Office, but evidently I did. And I was hired in the financial analysis division and did a lot of work. Yeah. And actually my first manager was, is Deborah Lucas, who's now at MIT.

I was there under Doug Elmendorf, and Damien Moore was my manager when she left. I didn't know that. That is so interesting. Damien told me that when I saw him the other day. Yeah. For folks out there, Damien is with us at Moody's and manages our financial economics unit. So that's really cool. I didn't know that.

That's really interesting. Yeah. I was there in that research. research assistant role that's very typical of CBO and the Fed, worked on a lot of federal credit, sort of FCRA related work. The group I was in did a lot on the GSEs, but I was sort of working on the first fair value, comprehensive fair value estimate of the federal credit programs, which at the time was about, I think, a $3 trillion in outstanding exposure. And so definitely did not arrive with that expertise. So it was a great experience. I have very fun memories of CBO and, of course,

keep in touch with many people, including Damien from those days. I left there. I briefly went into consulting. Fannie Mae was my primary account that I was working on doing modeling of lost reserves and things like that. It was not quite the best fit. And it wasn't that it was being a Fannie. It was just something was not quite a fit. And one of... Were you at Fannie? Did you go to Fannie? Well, I was consulting for them. So I was specifically there. Because first was a Fannie, a Fannie alum. Yeah. Yeah. And I got a call randomly from a guy I was friends with at CBO and he said my wife is a land broker at Cassidy Turley. They're looking for an economist who's going to sort of be the right hand for the chief

economist, I think you'd be a good fit. Do you want to kind of explore this? And I thought, you know, I really don't even know what Cassidy Turley is or commercial real estate. But I thought, you know, why not? I'm not loving what I'm doing. And so I went and I explored this option. I got an offer and decided to go into commercial real estate. I just had my tenure anniversary in January. But the firm has gone through a lot of evolution. So, I joined in January 2014, Cassidy Turley was a sort of large player in the U.S. market, but it was not a global firm. We merged with DTZ pretty much within that first year. I think it was January of 2015 or so, and we became global in that merger. Then nine months later, we merged with Cushman,

and we were already global at that point, but we became now the third largest commercial real estate firm in the world. And since then, it's been, you know, it's been a journey. The companies evolved a lot. We went public. We went through a pandemic. And the market has changed tremendously over that 10-year period. So I think what I love about CRA is it touches everything from policy to demographics to, you know, technology to the economy. Every property type interacts with the world we live in in different ways.

So it's just really interesting. And that's what I fell in love with. Our firm is, as I mentioned, the third largest in the world last year, revenues of about $9.5 billion. We have about 50,000 employees around the world, around 400 offices or so. So we're pretty large. We're full service.

So what that means is we don't just do brokerage, although we do obviously have a tremendous brokerage business. And for those of your listeners that aren't familiar with CRA or full service brokerage firm, brokerage is really just for representing buyers and sellers in the capital markets. And we're representing landlords and tenants in the leasing markets. But we also offer, you know, things like valuation and advisory. We have property management, asset management. We have a global occupier services business to really bring together all of our functions

to serve the largest occupiers of real estate in the world. And in many cases, they own and rent assets across different kinds of property types for their business. And we offer a slew of other services, but that kind of gives you a flavor for the kinds of things that we do and really having more tentacles out there than just transactions. And you're around the world at this point. So you're global. Yeah.

Yeah. That's such a cool history. know that. Can I ask who's one and two? When you say your number, Cushman's number three, who's one and two? CBRE and JLL. JLL. Okay. Okay. Interesting. Very interesting. Well, we're going to have to have you back to talk about fair value. Oh, yeah. I know that's a Debbie Lucas thing. Yeah. I've got my own pet theory about fair. We probably shouldn't go down that rabbit hole, but no. About the discount rate. Yeah. Yeah, exactly. Yeah. Yeah. Yeah. It was a contentious thing.

You know, like OMB was very stick with FICRA. CBO is just saying we should have this second estimate that's more fair value, more representative of the credit risk. Right. Embedded in that discount rate. Yeah. Yeah, it's a whole thing. Probably shouldn't go there because you've got to explain. You've got to explain FICRA.

You got to, yeah. So, but it's very important because big part of what the federal. government does is provide a backstop to all parts of the financial system and provides credit, you know, backstops the availability, everything from small business lending to mortgage lending and everything in between. And the question is, how do you assess the impact of that, all that on the government's budget? And that's a complicated issue. And actually has enormous implications, you know, how you do the accounting has enormous implications for, you know, what you can do here or not do. But anyway, but we're not going to, we'll have you back if you're

willing to go into that can of worms. But I thought, get Damien for that one. Oh, yeah. Yeah. Actually, I haven't talked to him. I guess I've talked to him. Do you know, Damien, he's one of these guys you talked to him and you're not sure where he stands after you talk to them. Like, if you talk to me, I tell you exactly what I think. Damien, I guess it's a little bit more academic, right? I mean, he thinks about it from all sides and second order, third order conditions, that kind of thing. Before we dive into the commercial real estate market, let's talk a little bit about the economy because that's obviously key to what's going on in CRE. Maybe the way we can do this, and I'll turn it back to Chris at this point, just to talk about,

we've got a plethora of, how about that for a big word, plethora, plethora, is that a big word? Yeah, I think it is. It's good word. Medium word. Medium word. Medium word. A plethora of data this week. And maybe the question is to Chris, you know, after seeing all this data this week, how are you thinking about the economy?

What do you think? Stronger, weaker, better, worse? Yeah. I'd say the word comes to mind as resilient, incredibly resilient, right? It seems like months or weeks ago, but the past weekend we had the Iranian attack on Israel, right? So Monday morning, the mood was things are going to fall apart here in terms of oil prices, spiking. But, you know, despite that, we've seen things kind of hold together. And then we had a slew of reports this week on the U.S. economy that indicate that consumers remain relatively strong.

I look at the retail sales report. Shows consumers are still spending, right? Still willing to spend. So I think there's a lot of strength here. There are certainly some, as usual. We can always point to some causes for concern. But overall, it still seems like a very robust, resilient, strong economy. Yeah, I mean, the events in the Middle East played out at least, well, it's still a script being written here.

Yes. It's going to be written for a long time to come. But at least the script that's written over the last few days, probably couldn't have been any better, given what happened last weekend when Iran attacked Israel. I mean, it feels like, you know, of course, the Iranians didn't, it feels like they didn't really want to do a lot of damage. They just wanted to send a message. And the Israeli response, we're here, whereas this Friday, the 19th, the Israelis responded by doing an attack in Esfahan in Iran, but they didn't want to do much. damage either. Just wanted to send a signal that, hey, we can bomb in Iran as well. So it feels like couldn't ask for kind of a better outcome given where we were a week ago. Agreed?

Well, you can always ask from, right? So it's still a very tense. I guess. You know, it's a- But oil prices are down. They're not up. So- Correct. Right. Yeah. Yeah. So, but I think you need to emphasize your point about this script is still being written. This is just the first round. And so, Some way, you know, we've want to get fearful. We've kind of opened the Pandora's box here now, right? It's no longer off limits to attack these, for these countries to attack each other directly. So, you know, still need to be cautious here. But at least for now, this seems like it was a more measured response.

Hey, Rebecca, do you watch the economic data as just as closely as, you know, obviously we do? I think you do, don't you? You're like all over the data. I do. I pick and choose the ones I pay more. attention to than less. But I absolutely watch the data and the markets every single morning. And what's your sense of things at this point in the economy? I would echo what Chris said. Well, one is resilience. Two, I've been sort of surprised to the

upside about how oil markets have responded to what's going on. I would have guessed, if you had asked me last week, if this happened, probably oil would be closer to 90 than to 80. But that's obviously not the case. And generally, I think we can agree that's good for U.S. consumers in the U.S. economy that oil prices didn't spike in any way. But, you know, looking at some of the data that came out this week that, you know, are relevant for CRA. We saw retail sales. Again, Chris mentioned that, pretty robust report. on the back of some weaker reports, but we generally tend to see weaker reports at the beginning at the year. So that was moving in the right direction. I also look, you know, manufacturing. We got some early indications last month from the ISM. Things could be stabilizing there. We saw

some more diffuse activity in the manufacturing output. Capacity utilization still low, but kind of at least moving up a little bit. So those were the two that I looked at a little bit more closely. I don't want to talk about the other one because I might use it for this statistic. So, you know. Glad you're going to play. I'm sure I have a feeling you're going to be really good at it. So the retail sales, obviously, for the retail part of CRE,

and we'll definitely come back to that in a minute or two. And then industrial manufacturing activity. You mentioned the ISM, the Institute for Supply Management. I think that's what it's called, right? The purchasing managers, which gives you a read on manufacturing activity. And that feels like it's starting to perk up here a little bit. And that's a good thing for the industrial market. Yeah, and for freight markets, which a lot of the freight activity is generated from the U.S.

manufacturing sectors. And that has been really experiencing some tough conditions. I wouldn't expect those to turn quite one-on-one with manufacturing parking up, but if it's sustained, that's a really good indicator for where the freight markets could have. Hey, Marissa, anything on your radar screen? Yeah, I was just after yesterday's events with Israel attacking Iran, I was scared to look at the oil market, but I was surprised that prices were actually down. jobless claims still not going anywhere we got median weekly earnings too they're they're falling on a

year ago basis they're three and a half percent year over year that's BLS data so that's good from an inflation standpoint which is good to get some positive inflation data I guess home sales were not good right home sales fell quite a bit but as Becky He said the manufacturing data was good. We got industrial production data that was positive as well. So, yeah, it's remarkably resilient so far. Yeah, I was looking at those UI unemployment insurance claims because they're a window into layoffs. And it's like someone is drawing a line.

Yeah, they went from like 211 to 212. I mean, they've been in this 210 range, right, forever, it seems. And the 40-me-a-average, I think I'm making this up, but it's like 215 or 2-10. It's been that way for a long time. Yeah. I've never seen anything like it, actually. Right. It's pretty bizarre.

But that, and 210 is low. That's a low level of claims. Yeah. So, so Rebecca, you know, obviously for CRE, interest rates matter a lot for lots of different reasons. Yes. What's your sense, given the resilience of the data, and of course, we last week we would have been talking, we were talking about inflation. We got all that inflation data, which was on the hot side. CPI came in hot. And interest rates have pushed up here a little bit. And expectations for the Fed first Fed rate cut have been pushed out. What's your view on interest rates, both in terms of the Fed in terms of long-term rates? I think, well, start with the Fed. We have been in the June camp for the first rate cut up until the CPI report. And I think coming into that report, I knew as well as our team knew, you know, we need to see some really

almost, you know, perfect reports for the next few, given how, you know, many jobs the economy is creating and so on. And for CPI specifically, you can go back to last summer and see on the three month annualized rate basis it started to pick up. And this was just a continuation of that. And so we knew we needed to see that pattern start to reverse. And when we didn't, when it came in hot yet again, and the Fed's been very clear, you know, you've got to have multiple reports that tell us this is moving in the right direction. Although it's not their preferred measure, you know, they look at everything. and it really was the nail in the coffin.

We think of the June, the June cut. Markets obviously generally agree. We did push our first cut out to September as well, and we had a September and a December cut. So we were thinking three, 25 bibs each. Now we pushed it out to September. Really, you know, my view on that is for September to happen, we do need to start to see those improvements and consistently.

and we're really hanging our hat on housing inflation starting to unstick a bit. So if you look at housing inflation, PC or CPI, right, it's been kind of leveling off on a six-month annualized rate basis. So that should come down with a lag. That lag is just taking longer than we thought, and I think really than anyone thought, but assuming that that historical relationship reasserts itself, and given the importance of housing in either index, even though it's lower than PCE than CPI,

we would think that the Fed would also want to get ahead of, you know, any further slowing in the economy, given how monetary policy does operate with long and variable lags. So we're still holding onto the September call. We acknowledge the risks of fewer rate cuts has gone up than even that, right? That more no landing scenario. I think Apollo's chief economist has said no rate cuts this year. He's been there for some time.

I think the likelihood of that has gone up. That's not our base case. Put it that way. On the long end, there's no doubt about it seeing a four, five. Maybe on the Fed just very quickly. Oh, yeah. Because our forecast is the same. We have a set, we, we had a June with a cut in a quarter point, then one in September,

one in December. And with the CPI report, that dashed the prospect for a June cut. So we now have a September cut in a December cut and then a quarter point each quarter after that in 25 or into 26. But I'm beginning to wonder, you know, if I were sitting at the Fed, and, you know, we're talking now September right before the election. And clearly this election is going to be very contentious. It's going to be close and very contentious.

And very easy to see the Fed getting politicized. And whatever decision they make, they could get politicized if they don't cut rates, if they cut rates. But it feels like they have a much greater chance of getting politicized if they cut rates in September. Because that's like right in the teeth of the – you know, back and forth politically. I'm beginning to think if I were sitting there, you know, if I'm going to wait to September, I might as well wait until November. November would be just right after the election, you know, to cut interest rates. What do you think of that kind of thought process?

It makes sense. I mean, I don't disagree. The whole political cycle is just starting to ratchet up. And, you know, it's going to be intense this year. my hope and I think, you know, what they iterate is data dependence, being independent, and having that as part of their reputation and credibility, I think, is still a way that we think about the Fed. But I don't disagree. It's a possibility that they just want to abstain from having any kind of influence on outcomes and weight.

It is a possibility. I think on the margin, you know, two months. until you cut 25 bibs. I mean, I don't think it makes or breaks the economy in that way, but I do think we're still, we haven't moved our base case to that for, you know, because of the election or something like that.

Yeah, I think Chris wants to move it to November, don't you, Chris, the first rate cut. Yeah, I'm leaning that direction. I think the threshold for September for our first cut is really high. You really need that perfect set of reports that Rebecca mentioned. And I'm just not clear we'll get it.

And by the way, this is all about it, then why not wait, right? Yeah. Yeah. This is all about what are they going to do, not what they should do. I'm still, they should be cutting interest rates in my view. But anyway, that's a whole different kind of discussion. So, Rebecca, long-term interest rate. So the 10-year treasury yield, I didn't look today, but we've been hovering now at 4.5% kind of on the high side of the range.

it's been in over the past year, we've been kind of sort of close to four, up to four and a half. Actually, we got as high as five for a brief period of time, but back in. So where do you think the 10-year yield's going to be over the course of the next year or two? As we look at a year or two, we think it will settle down into that 4% range. you know, obviously there's a lot of movement in that in any given period. And I have to say, I mean, obviously this resilient data has been feeding into shift in expectations for Fed Funds policy. Fortunately, we've continued to see, as you guys probably know, throughout the pandemic, expectations have remained very anchored. but the growth outlook is continuing to be revised up, you know, across consensus forecasts, including our own.

And so I think, you know, that may create some of that upward pressure in the near term. But ultimately we think kind of like what happened last year when we had that rally to five, it ultimately came back down into the 4% range. I mean, the Fed will ultimately with through forward guidance, whether it's later this year or some other time, start to get guidance on the pivot and we would expect as they start to normalize monetary policy, we should see the tenure come down and roughly, you know, if you believe two and a half percent our star, which I know that's a moving target that's unknown, you know, we would expect something like 4% over the medium term. That's where our forecast is at, kind of range bound 3, 8 to 4-2 over time. Yeah, we're kind of in the same place, you know, same ballpark.

for similar reasons. And I think the kind of the stake in the ground for us is nominal potential GDP growth, which is about four to four and a half. You know, that's 2%. Actually, real growth feels a little stronger right now for labor force growth, productivity growth. So maybe we're two and a quarter, something like that. And then you throw in 2% inflation.

That's 4.5. In the long run, abstracting from the vagaries of the people, business cycle, those two things should be roughly equal to each other. And they are, you know, if you look historically. So it feels like we should be somewhere in the low fours, you know, something like that at this point at time. But that makes, of course, we're all going to be wrong about this for sure. Yeah. Yeah. You know, one thing I would say is what we saw in CRE at least with coming off of the 5%, and then being stable at 4, we were seeing the market respond well to that. you know, CRA can operate in 4%. Treasury, 4.2% 10-year treasury. It's that volatility that really

creates issues in the market. So I'm sure we'll dig more into that, but that's been a little bit of, I think, cold water and sentiment that had been persisting in the first three months of the year where we were really seeing some unlocking in the markets. And, you know, we'll just have to watch how temporary this, this rally to 4-6, 4-7 is. Well, maybe it's a good point to dive in to go right into commercial estate. So I know you're play-by-play in the CRA market, but most of us aren't quite as, you know, play-by-play. So what you were saying is, you know, if we go back, if you rewind to like the end of last year six months ago, the sentiment was pretty dark. You know, rates had gotten up 5%.

It did prices, CRE prices were starting to come in. You know, there was a lot of discussion is a so-called commercial real estate CRE doom loop. And we can talk a little bit about that. But you're saying at the beginning of this year when rates started, when rates came back in, when we got back down to a 4% 10-year treasury yield, and it felt like the economy was going to avoid a recession, and now we're talking about how resilient it is, lots of jobs and retailing and so forth and so on, the sentiment has improved. But then now you're saying with the backup and yields, things feel a little less.

Yeah, sort of just skittish, like what's going on? I think it just tends to create a momentary pause, right? Because if you really think, oh, we'll get it down to four really soon, you know, then that can have a real impact. 50 basis points can have a real impact. And that quick and swift movement, the volatility is, you know, we call it kind of the enemy of transactions, and we'll just have to see how long that lasts. I think another part of the sentiment coming into this year was not only, you know, getting

away from the 5% range, which probably scared us all to a certain degree for different reasons, but, you know, the shift in forward guidance from the Fed, right, seeing that the terminal rate is likely the one that we're at. Now, we could debate that. Some people are, but we tend to think it is. And they've sort of reiterated that in their recent communications. And that forward guidance really, I think, sparked belief and conviction in the notion that CRE is nearing bottom, right? Especially on the capital market side. The pricing is in private markets, likely bottoming the first half of that year, this year that was sort of what we were calling for. And so with that combined with Fed saying, hey, we think we'll probably be cutting rates next year and the 10 years coming down,

all of those things, I think, created some sentiment and tailwinds for CRE capital markets. I still think they're there. I just, you know, this one week of data, I'm not going to extrapolate for even, you know, the whole month or quarter. but the kind of thing we saw this week is is really just introducing that in that uncertainty, the uncertainty of interest rates that really creates more hesitance, right, in transactions. And once we see stability, that's when we start to see people move forward with decisions. So your thought or your thinking is that commercial real estate prices broadly are near a bottom. Is that what you're thinking?

Broadly, yes. Really? Okay. Depends on the asset class, of course, as I'm sure what we'll talk a bit about. But we do think sort of in private markets, middle of this year, will be the trough. And, you know, the second half of the year, we're not going to see crazy, you know, double-digit price growth or anything like that. But we'll see probably some stabilization at that trough. And then we think we'll start to see some value growth next year.

And when you say prices, what do you use? Do you use our price, you should be using our price index? Rebecca, I'm just saying. Well, we certainly do have that in our toolbox. We look at it. What do you use when you say prices are going to bottom? What is it that you're measuring? Well, we look at a lot of different measures.

So there are different price indices and some are repeat transaction based like yours. Right. And we look at those. Some are appraisal based. And we look at those. Those tend to lag a little bit if they are truly based on appraisals. Green Street has a more novel method with sort of real-time appraisals in not necessarily using appraisal methodology that appraisers use to determine what they think is happening to values. And they tend to lead private markets.

So they do give us a good indication, you know, with a bit of a lead to other indices. But of course, we also think about things like cap rates. we construct our own price index using some NACRIF and RCAA data. And we look at all of them and try to think about broadly what's happening. And then, of course, we also have intelligence on the ground, what we're seeing in spot cap rates and bids that were fielding on behalf of buyers and sellers. So all of that points to, for most property types, absent the tenure really remaining anchored, where it is, but if it were to kind of hang out where all of us think it's going to go,

that we're likely near that trough. And we're seeing that with, you know, institutional investors starting to make actions based on that. You know, you've seen some major transactions happening with, you know, debt funds, equity funds, the first part of this year under the premise of we want to get in before that value growth starts. We want to get it in the window at, at proff pricing. Yeah, it's interesting, you know, for folks that don't follow the CRE market, and I follow it and then I don't follow it because I'm following something else when I come back.

Whenever there's a problem in CRA, I'm following it. And of course, after 35 years of being an economist, I followed it a number of, a fair number of times. I'm always amazed at all the acronyms and different ways of measuring things and, you know, and you can get some very different perspectives, particularly in terms of price. You know, you think, you say, how hard can it be to measure a price? Well, it's really hard. It's really hard.

It's very hard. Yeah, really hard to do. So, Chris, let me ask you, and everything you just said is in your kind of your baseline worldview, meaning no recession, resilient economy, interest rates kind of hanging around the fours, low fours, that kind of thing. That's, you're saying prices are broadly speaking, yes, it varies across property type and, you know, region, so forth and so on. But broadly speaking, we're near a bottom.

Chris, is that our, because Chris spends a lot of time on CRE too, and he manages the construction of our repeat sales indices. What we do is we get all the transactions that occur and know what the price is, and then we look at prices for properties the last time they transacted, and based on that, we can construct an index. In theory, it controls for mixed issues and that kind of thing. Chris, we're not saying there's a bottom, are we? We've got more to go here, don't we?

in our forecast? Our view are based on our index, certainly yes, that there is more to go, particularly in this, maybe this can start to pivot into some of the property types. Yeah. It's office, right? For us, office is just still at the beginning of its real correction. That's the one exception to the rule of what you just said. Yeah, but you're right. If you look at multifamily, it's already come down a lot. We don't expect there to be much more of a correction here is just may take some time for it to grow at a very robust rate and just plateau here for a while as things adjust. But then other property types, industrial certainly looks great. It's actually continuing to grow retail. It's pretty solid. Hotel even looks pretty good. So I don't know that we're

too far apart, right? Maybe a bottom is a little further out for us because of maybe the weight on office. but yeah, I think I think the story kind of holds here. Hey, so, so I wanted, I can't, I'm looking at the clock here. I think we've been like at this for like 45 minutes already. I don't know where the time went, but this is what I want to do. I want to talk a little bit about the individual property types. And I've got each one of them that I want to focus on, I've got something that's bugging me.

So I'm going to ask you, you know, to help unbug me, you know, with regard to you. Then we're going to play the game, the stats game. And I got a great statistic that no one's ever going to get, but it's a great statistic, but I'm just saying. And then we'll come back and then we'll end on the, you know, reassessing this idea that there's a commercial real estate doom loop, you know, very quickly. You won't dwell on that, but just a little bit on that. So that sound like a good game plan? So everyone okay with that?

Okay. So on what's bugging me, let's obviously office is kind of, the, office market is kind of front and center for people's concerns because, you know, remote work, you know, vacancy rates have risen quite considerably. Rents have actually held up pretty well, I guess, so far, you know, at least because leasing takes while to really filter through. But, you know, when I look at office, I have a hard time constructing a scenario where that ever comes back. Remote work is here to stay. You can see it in the swipes data. There's swipe cards where you can see the number of people going into the office and they're not coming back.

He's kind of leveled off in most markets across the country, well below pre-pandemic. And then we've got this demographic thing going on where, you know, the number of, we've gotten a little bit of a bail out here because of all the immigration. But once we get past that, you know, everyone's retiring and leaving and the number of people in the labor force isn't going to grow nearly as quickly, therefore we're going to have fewer jobs, so less demand for space. And it's hard to convert a lot of these office properties, I think. So isn't office going to be a problem for like ever, Rebecca, or am I overstating the case? If it is a problem forever, I think, fortunately in the long run, we're all dead. But,

I think it has a transformation to go through. There's no doubt about it. And it's just a matter of which office we really dig into. So it's absolutely true that, you know, vacancy rates have been rising in most markets around the country and some, in some not as much. But there are, I think, important underlying themes there. So one would be the smaller the market, the greater the return to office has been the less significant, the supply wave. And actually the increase in vacancy has been very marginal, maybe 250, 300 basis points. What would be a good example of that when you say smaller market? What would that be?

You could put like a Boise, a Palm Beach, a Fredericksburg, Virginia, you know, Omaha, Nebraska, anything that's, we consider them sort of tertiary markets would be how we describe them. And I point that out because, you know, that's where a lot of smaller banks are lending. So when you worry about office exposure, the smaller the bank, the more likely their exposure is to these more resilient markets on the fundamental side. As you move into secondary markets, we've seen a more significant increase in vacancy. You've seen more influence from the supply side, which will thin out and is thinning out very, very rapidly. So examples of that would be Charlotte, Nashville, Salt Lake City, Rowley, Durham. They've had a huge supply wave that has contributed to a large degree to that increase in vacancy. So on net, for example, you know, Nashville has had positive occupancy gains in terms of the level of occupied stock has gone up. There has not been what we call negative demand or negative absorption. Their vacancy has gone up because they're building a lot. And they're experiencing tremendous office job growth as migration patterns benefit some of these lower costs, Sunbelt markets. Of course, we do have an issue in some of the more larger cities,

including our gateway cities, in those markets, vacancy has gone up about 12 percentage points. And there's no doubt that there is obsolete office product out there, that the impacts of remote work will be lasting, and that they will structurally impact. demand. The way that we think about that is, one is we have a transition to get through, and then on the other side, for every new office job that you get, you get marginally less demand. So you want to think about that from a longer term basis, but you also have to account for the adjustment of all the existing office leases that occupying, that, you know, house the 33, 34 million office workers that we had before the pandemic. And figure out.

out how they're going to adjust. Now, our weighted average lease term across the 5.4 billion square feet that we track is eight and a half years. In larger cities, it's about 10, but in the aggregate, it's about eight and a half. If companies that had space before the pandemic were just downsizing by 20% because of hybrid work, our vacancy rate would be roughly 40%. But it's not. It's 20% because not all companies are downsizing. Not all companies, if they are, are downsizing by 20%. Some companies are expanding. And we have this offset that we account for

in how we model that a disproportionate share of new jobs, even as demographics drive job growth lower over time, are created in knowledge sectors that use office space. And all of those things point to, after this adjustment and transition period, which we're still in, that we will, on the margin, start to see incrementally positive absorption. And we think it'll probably be late next year, more likely 2026 onward,

and that we'll start to see these gains reacrue. But you're going to have this overhang, right, of vacant space. And so right now we've just hit, for the first time ever in our data, 20%, 20.2% vacancy. It's the first time we went over that threshold. we've estimated that roughly 30% of that is just obsolete. You know, it needs to go. And so I think part of the transformation is we're going to be removing stock over time, and it's the weakest stock.

I didn't think this was a fair stat for the stats game because it's obviously a Cushman stats. You wouldn't know it. All's fair in that game. So Class A is, in fact, about half of the office market. And people say, oh, B and C are really where it's hurting the most. And that is true, but there's a lot of Class A that is struggling as well. More commodity, older Class A, especially suburban office parks and so on. So when we look at the overall Class A vacancy rate right now, it is 22.8%. And just remember, you know,

all new construction hits Class A. So there is a supply impact in that vacancy rate as well. about 12% of office buildings in the country, they're not disproportionately large. They're about 12% of inventory, right? So 12% have a 50% or higher vacancy rate. And if you took those buildings out, you said, well, I'm just going to get rid of that 10%, 12%, instead of the vacancy rate being near 23%, it's actually 15.5%. I see. And so you'll hear about flight to quality and you hear about obsolescence, but

I think quantifying just the true concentration of weakness is really eye-opening. There really is a bottom 10, 15% in most markets that are weighing on these headline market stats. And most other product is performing okay or even pretty well. In Class A, about 35% of buildings are fully leased. And another 10, 12% have a 10% or lower. or vacancy rate. And that's four years into the pandemic as companies have been adjusting and recording this record-setting negative demand in the sector. So I think there are a lot of signs that companies really need this space, that it's not just this outright downsizing, or the counterfactual

would be 40% vacancy. And that's just not what we've seen. But there is this, I would call it even more than a trifurcation, but I don't know what the actual word is to just, you know, to what's beyond trifurcation where it's, I like that word. Yeah, top tier is doing great. We know that the bottom, the obsolete stuff is really, really bad, huge impact on vacancy, 730 basis point delta in the rates I just gave you. And then there's this middle, which is just going to reinvent itself. And that's going to take time. And it doesn't mean that that's easy or, or fun, especially for the owners of that, but we do believe that that space will ultimately serve a function in the office sector moving forward. That's a really cool frame. I hadn't thought of it in that term. So that's

very interesting. Just really quick, because I want to move on to a couple of what bugs me. AI, artificial intelligence, any concerns about that? Because it feels like that would be focused on kind of office using occupations and employment. Any concern there? Or is that still not on the radar screen? I think, well, one, it's too soon to tell. We know there's obviously going to be displacement of some jobs. Any technology does that. We know there are going to be many jobs that are augmented.

That's, in fact, in real time in the CRA industry, where we see deployment of AI is to help workers do their job or to help an asset manager or facilities manager manage that asset more efficiently, not replace the job of that facilities manager, right, to get smarter and more efficient with how we use buildings. So I think in that way, the jury's still out over the longer run. You know, when you look back at literature on technology disruptions, I followed some of the work of Darren Ace McGlew. And, you know, he's looked at, you know, when in the 90s and the early 2000s, you have these technologies coming in.

And roughly half of all the new jobs that were created in that time period were jobs that never existed before. And I tend to have a glass half full view of creative destruction and the ingenuity of the American economy and the American, you know, sort of spirit in that way. And frankly, to your point earlier about demographics, there couldn't really be a better time to get a technology to supplement labor, you know, and make us more effective when we have despite recent immigration, this longer-term demographic deceleration on the horizon, right? To be able to augment the skills of labor to continue to produce two to and a half percent GDP moving

forward seems like great timing, but, you know, I think we'll just have to watch and see how it plays out. That's just my tilt is glass, have full on, we'll find a way to create new jobs. Yeah, makes sense. Hey, okay, so let's, the offices seems to be the problem child. The one property type that kind of is surprised to the upside, you definitely correct me if I'm wrong, but this is just me from my, my perch. And really confusing to me is retail. It's like retail is this darling property type and just and that's despite continued increase in the share retailing that's going to online i mean if you believe the data and that that was supposed to be the kind of the stake in in the heart of retail forever that maybe this is a is a an important

thing to think about when you think about office in the current context right but but what about retail. What the heck? What's going on there? Well, we weren't surprised by this shift. In fact, we put out a series last year on the resilience of retail. And you can kind of think of it as like a one, two, three punch. You go through the GFC. E-commerce really started to accelerate in the property market impacts in the 2010s. So yes, it was happening before that, but it really wasn't until 2012, 13, 14, we started to see big players, one, juice the industrial market, right, going in and getting warehouses and selling online, these one million square foot facilities and bigger. And so you had that penetration happening. You also then had the pandemic, which, you know,

that's kind of the final stake in the heart of any retailer that didn't. Yeah, she's using my terminology, I'm influencing the way she speaks. Do you say? I'm sure she never said steak in the heart until she heard me say it. It was not part of my regular vocabulary. There you go. It's true. But, you know, if you survived all of that, you were generally in a pretty good position. And then you have an economy that's performing pretty well. Obviously, there's disparity among different kinds of income groups and that translates into the kinds of retail categories that are in more aggressive expansion mode versus those that are in consolidation mode. But on net, the last few years, we've been recording positive absorption. We have a 40-year low in the vacancy rate. And it was,

I think, some of the fears that you articulated in how people thought about retail that led to an underdevelopment cycle. So we were overbuilt on retail now, right? Now we have something like 12 million square feet under construction, just to put that in perspective. That's across 83 cities and 4.3 billion square feet of shopping store stock. So you literally only have 12 million square feet that's that's underway. And we have a 5.3, 5.4% vacancy rate. If you're a retailer, you have very few options. And when store closures happen, in many cases, there's a line of,

tenants waiting for that space provided it's well-located and meets their actual requirement needs. But we've really been excited about it. I would also say just in the context of the interest rate movements, it was the least overpriced. I mean, it went through a pricing correction for a period of time. And so it had a lot of spread over the tenure that as that went up, we really didn't have to see cap rate expansion. nearly to the degree that we have in other sectors. So that's something I can tell you is an investment theme heading forward as consumers rotate back to services. As we see certain kinds of shopping centers really perform well, I always say, you know,

1% of retail stock are buildings, the number of buildings are malls. It's 8% of the stock, 1% of the buildings. And so most retail are not malls and even many malls are performing quite well, because they're not all class B.C. You know, struggling in areas that have deindustrialized over the last few decades. So it's an exciting time, I think, for those in the sector who watch it, we weren't surprised. But I think because the media says retail apocalypse and, you know, those kinds of things, it can be surprising. Yeah.

I've got one more what bugs me. But maybe, Marissa, do you have a what bugs me in the, in the, in the, in the, in the, in the, in the, in the, in the, in the, in the. market that you want to ask because I've been monopolizing the conversation. If not, no worry, or Chris, it's got to be a good what bugs me. I don't have a what bugs me. I actually, the opposite. Oh, what's the opposite of what bugs me? Well, I'm curious about sort of like the warehousing and the data centers and that segment of commercial real estate, which is, as far as I understand, right, doing very well for obvious reasons. And I was just curious. And I was just curious to hear Becky's take on that. It's a really great point because Siri is so diverse. And

industrial is truly a darling. And I say that very genuinely. So we came off of a period where things were building out from an e-commerce penetration perspective before the pandemic. And so we knew what healthy run rate rates were for demand, given the e-commerce taking up more and more a share of core retail sales. Then the pandemic hits, it was, I say this all the time, it was bananas. I mean, the levels of demand were wild. We estimate that half of the excess demand beyond normal was e-commerce providers essentially pulling forward future demand because they had to meet the needs during COVID. So there was this pull forward influence that occurred during COVID and really juice demand. And supply was trying to respond, but vacancies got below 3%. And just for context in our

data nationally, the best of the best during the housing boom, during the 90s expansion, we would maybe get to 6.5.7% vacancy at the low point. And we got to under 3%. And so that just through rents through the roof. They grew 22% year-on-year-on-year in 2021. Or sorry, 2022. That was the fastest growth year. We saw supply start to respond. What's happening now is a bit of a normalization in the market. So people will see vacancies are going up. We're now kind of in the mid-five range from 2.8. But again, that's historically better than the thing we've ever seen before. And demand is slowing. And we actually made an unpopular forecast that not only last year would demand slow, but this year, because of that pull forward effect, right? And that sort of right sizing with respect

to the e-commerce trajectory, which we think we'll work its way through by the middle of next year, and then we'll start to see an acceleration in what we call net absorption again. So this recalibration in industrial from the fundamental side is really, okay, well, we're going to get probably a peak vacancy rate middle of next year around 6.8, maybe 7%. That's like on par with the lowest we had ever seen before in prior cycles. And so this like window of opportunity that tenants have to actually get some space and have some pressure off the rent growth is finite. And that's been really probably the biggest challenge is companies that occupy this space absorbing the cost increases. And they've been most acute in places you'd expect, Southern California, New Jersey, where markets and land,

you know, markets are very, very tight. But from an investor perspective, right, remember that the weighted average lease term is still about 6.7, 6.8 years. So even as rent growth slows down, we see some upward movement in vacancy, although it's still very low, we still have many leases that, with their escalations are underpriced to market. And so when an investor has that in their portfolio and that lease rolls, they're able to market to market. And that income growth is going to fuel NOI returns, which in this environment with interest rates is a very important dynamic. And that is why it remains so favored. You still see pricing going up. You don't see cap rate expansion because you know, you know that if you come in and buy a building, you're still going to be able to push

the NOI and your effective cap rate would even be different in one year from now. So that asset class just remains absolutely favored. There's structural demand for it. It's going through normalization right now, which we think is healthy and good for the market. Data centers, we track separately, and this is, again, an area where it's structural demand. We're tracking right now the pipeline of future data centers and the amount of, we track them not by square footage, but by energy, right? And so the amount that's underway will increase what we have by two and a half times what we currently have at the moment. So it's a 250% growth rate over the next few years. The number one constraint that really dictates how that can come online is power availability.

And that's really where, you know, the rubber hits the road in terms of, okay, how do we get this? The number of requests coming into utilities is insane. And they haven't had to expand their bandwidth, you know, for two decades. So this is very new to them. They're not used to building 250 percent, you know, ability to generate power in just five years. So that's going to be probably the constraint. It's making that market where there is a rental market for that space. Vacancies are at 1%, 0%.

Rents are going up 10, 20%, depending on the market. We're seeing some shifts into secondary markets. It depends on every mega player has their own strategy in this way. We're seeing huge swathes of land being taken down. for the purpose of building huge data centers and or also co-locating next to microgrids. So they don't need to rely on utilities building out power. So we're literally seeing anywhere from 200 to 500 acres, 1,000 acres being purchased. We've had some that are much more significant than that.

I would say where we're watching power come online, the greatest is happening in the southwest. and then up into the Pacific Northwest, Texas has a tremendous amount, particularly in that Dallas-Huston corridor, right around Long Island in the northeast, you see wind energy, significant amount of wind underway. And that's important just because a lot of companies that are building data centers or providing data center services to other tech companies or other companies, there are sustainability goals that need to be met.

So we're very focused on what is the kind of power also that's fueling the ability of these data centers to come online. But absolutely a growth area and you see capital following it on an institutional basis. Well, I like the rubber hits the road, bananas. Those are things I wouldn't say. But so those are Rebecca Rocky's aphorisms. But those are good ones. Let's play the game real quick. The game is the stats game.

We each pick a statistic. The rest of the group tries to figure it out with the accused deductive reasoning and clues. And the best stat is one that's not so easy that we get immediately, one that's not so hard we never get it. And if it's apropos to the topic at hand, all the better. And we always begin with Marissa. Marissa, you're up. Okay. First, let me say this is not a – I'm not going to say anything.

Never run. Sorry. What? What the heck was that? That's not fair. I was going to help you out before I gave you the stop, but I'm not going to help you. 27.4%. It's not CRE related.

It is indirectly. He always does this. You see how she does this. It is, but it isn't. It's not a vacancy rate. That's what I mean. Okay. It's not directly CRE related, but it is very relevant to the conversation we just had about CRE.

Percent remote work? Yes. After all that, after all that, I guess you didn't need help. Yeah, that's from the latest Census Bureau's Pulse survey. The results of the March to April came out yesterday. And that is the number of people that are doing any remote work, whether it's one day a week or it's five days a week. So it's 27.4%.

Guess what it was a year ago? 30%. 27%. Oh. Oh, is that right? Like even. So it's to your point, right? We talked about this with the office.

It's kind of seems like it's at this level and it's not changing, right? Because Pulse has only been around since the survey's only been around since the pandemic. And those are the only two data points for this. So they didn't ask about specifically about. remote work in this way prior to 2023. Well, the broader statistics, that feels consistent with the broader. I think there's other similar. Yeah, there are other measures, right?

And it's kind of in that like. I think it got up to like 35, 40% and it's come, you know, came back in. It's kind of stabilized around 24. Yeah, you mentioned the badge swipe data. Bad swipe data. Yeah. And it's right. Somewhere.

It's it's kind of in that ballpark. But the point is to the conversation that it seems to have settled into this sort of average, yeah. Way to go, Chris. That was good. I guess it wasn't hard. Oh, well, Chris is, no, see, Chris, did you see that? That was a dig.

No, it wasn't meant to be a deal. I'm used to it. I'm used to. I'm used to. Rebecca, would you like to go next? Sure. I'm not sure how easy this will be for such experts as yourself. Were you mortals down there, non-C-R-E mortals?

This is like way above you guys. See, those are fighting words, man. Oh, no, no, I think you might get it. That's what I mean. 44.3 percent. 44.3 percent. CRE related? Yes.

She's like Marissa. The way she does this is head fake. She's saying yes, but she's shaking her head, no. Is it office market related? It's not. office market. It's so it's tangentially related to CRA. Yes, and some would include it in their definition of CRA.

Others would say non-farm, non-residential and residential. That sounds like that's a big hint somehow. That sounds like a big hint. Yeah. Is it related to the multifamily market? Yes. Okay. I thought so.

What's 44.3% in the multifamily market? Is that the share of multifamily debt that is the banking system has 44.3% of the multifamily mortgage debt outstanding? That's not what it is. That seems high because of the agencies to me. Oh, that's probably true. Yes, yeah, but it's not debt-related. But I'm, yeah, I was just- It's not debt-related. It's not that related. It's not-finance-related credit.

It came out this week. Oh, and the housing starts data, the multifamily housing starts. So, permit, what would be, what, Chris, you would know that data really well. What would be- I can't think of- Is that right, Rebecca? It was in the housing starts data that came out. Yeah, okay. Because multifamily was low. It came in like 300-K or.

something like that. That was the total number of starts. And, oh, is it, and single family is about a million. It wasn't 44% of all starts were multifamily.

Or 44% of, no, no. Damn, what could it be? It's the share. It's not a percent change. No,

it's a percent change. Oh, oh, oh, uh, permits of multifamily. Is it, is it,

uh, it didn't have a negative sign. It had, a positive sign. It is a decline. Oh, that's a decline in the number of starts. Yes, that's the year over year. The March multifamily starts, which the census data has been a little funky.

You know, we track the square footage and that goes into the pipeline and starts. It's off by 52, 53%. on a quarterly basis. We don't track it monthly. Their data's bouncing all around. So it's finally kind of lining up a bit more. But that's, you know, I chose it because we really see the construction pipelines thinning out. And it's true for all sectors, but for multifamily, obviously the supply wave has been the big phenomena driving the market.

And then there's this air pocket behind the supply wave. and, you know, so the softness in that market will not persist indefinitely. That's over what time period? March last, March. A month to month. A year ago. Okay. Month was 20% down there or something, right?

Yeah, yeah. It was a big decline. Yeah. So, Rebecca, so I just understand, you're saying the census data on the number of multifamily units that have been started had been relatively elevated. But the data you track has been showing. much weaker construction activity. Is that what you're saying?

Yeah. It's been consistently coming down. Yeah. And even at the end of last year, it was off by 50% year on year. Yeah. So we were waiting, you know, sometimes when the census report comes out, can be just a little volatile. So you sometimes get head scratching months.

And this was one where things made a bit more sense to us. So 300K, 300,000 units. That's annualized. It's more consistent with your. data, not the four to 500,000 per month we'd been getting previously. Okay, interesting, which I guess is, it was just a matter of time given we have rising vacancy, we've got weakening rents, we've got lenders that are tightening down underwriting, we've got price declines, just feels like it was going to show up here at some point in terms of less construction,

and that's what we're saying. Yeah. Yeah. Okay. All right, let's do one more, Chris, and then we'll move on. Chris, we're going to do yours? Okay, I'll give you the easy one because we're running out of time. Oh, okay. Right. 940,000. That's not the number of units under construction, is it?

Yes, it is. Oh, geez. Told you. He always goes to this. You know, every single time he goes to the same well. Well, he's not a housing guy. He's a thousand. He's a good stat mark.

maybe you can. Yeah. Give us yours. Yeah, what's yours? Because you said we would never get it. Right. You'll never get it. I'll never get it.

Try us. Actually, I got, I got a lot of great stats. I'll give you the easier stat, 17%. CRE. That is related. I'll give you a hint. It's CRE related. It's retail related.

Is it? Is it from the release this week? It is, yes, it's, yes, it is. It's from a release this week from, yes, it is. I won't say which release. Is the percent change in e-commerce sales? No, no, but you're in this, you're in the ballpark. It's the share of total retail sales that are non-store that are, you know, basically online.

And that's, that's up five percentage points from pre-pandemic. The peak was 19%. Guess which month? we hit 19 percent. April 2020. There you go, April 2020. Yeah. Actually, I've got another great statistic, but I'm going to wait for next week to give it to you because it's a really good one on multifamily rents, a really good one.

But we've got to move on. We're getting long in the tooth. I want to come back, you know, after this is a bunch, you know, Rebecca, a lot of happy talk in this conversation. And actually, Marissa led you down the Primrose Prath here. Tell me about data centers, you know? Yeah. And you're going, oh, it's bananas. It's been in a 1% vacancy.

No problem. No problem. Okay. That's a great impression. Yeah, that sounded just like me. Perfect. I wouldn't take any down the dark path, a dark path, the multifamily path, but a darker path. Because, you know, everyone was hair on fire, you know, six months ago.

Doom loop. We're going to see rates are up, vacancy is up, prices are down. We're going to see more defaults on mortgages, CRE mortgages. That results in more property being thrown onto the market at distress price. Prices come in and you get into this kind of self-reinforcing cycle down. And adding to the concern is the banking system is exposed. The financial system broadly exposed because they make, you know, loans into these, into the properties. And we're going to see some bank failure, and that's just going to add to the, you know, overall problems out there. And then on top of that, you know, a lot of the, most of the, not all the problems are in

large downtown urban areas. And, you know, those areas are going to be much diminished by, you know, what's going on here. San Francisco is the poster job for that. But that feels like that's kind of the hair on fire has been put out. People are much more relaxed about that. And should they be? I mean, and maybe I should ask it this way, because I'm sure you're going to say, yeah, they should be more relaxed about it.

What is the scenario where things don't play out, you know, well? You know, what could cause that? I mean, I don't know if that's a fair question, but I'll just pose it. just to see if you have a perspective on that. Yeah, I think, you know, the unsexy part of the credit cycle going on in CRE is just that it takes time, you know, and so there's, there's, we're in the early stages. We think we're in probably, you know, just 18 months into a seven-year cycle. So kind of think about that and it's just going to take time to materialize.

And usually it's in years two, three, four, where you start to see the preponderance of distress start to pick up. And so, you know, it isn't to diminish and say everything is fine. In the world, absolutely these large urban centers, especially in gateway markets with elevated vacancy, they have distress coming. You're seeing that in sort of one-off headlines around the owners walking away, the kinds of price declines that are. that are out there. And there is absolutely more to come. And you can see it in real-time delinquency rates on CMBS, where, you know, you basically have sub-1% delinquency in most property types. Commercial mortgage-backed security. CMBS, so securitized mortgage loans. Yeah. Right. Multifamily actually jumped up this month to about one and a half-ish percent from about a half a percent.

and that was due to one property of student housing property in San Francisco. So, you know, that's not a nationwide issue. That's that one property. Office has gone up from around a low of one and a half during the aftermath of the pandemic and forbearance and all the things to seven and a half. And it's still climbing. So I think that's indicative of just how it stands alone in this particular cycle. From my point of view, it's manageable, right? So any given owner, whether it's a bank or otherwise, generally has limited exposure to office.

And I think this particularly becomes of interest in the banking sector because, of course, banks have lots of tentacles into the economy when they're struggling with putting reserves aside and managing their portals. their portfolios and their tightening standards on lending, just really sort of crimps activity and growth. And that's what we're seeing in the commercial real estate markets now, more broadly. But they're finding ways to work through. We've seen actually in this quarter with some of the bank earnings calls, you know, some positive news, actually, with respect to how CRE is holding up, some write-offs, right, that maybe led to some charge. jobs, but manageable in the context of their broader portfolio. Keep in mind, CBD office is something like 5% of the big bank's CRA portfolio. So yes, it's there,

but it's part of this $2.9 trillion exposure that they have. That exposure is diverse across markets, property types, and CBD office is really just one of those, let alone CBD office in the harder hit urban markets. You also have, of course, extensions going on, modifications. We're seeing actually cash-in refis, which is something that's unusual. We usually see cash-out refinances in commercial real estate. You're seeing banks get a little bit of an upper hand, actually, and require deposits or some other form of recourse that they wouldn't typically be able to demand as they work with borrowers. Of course, with office, you know, they have an incentive to do that in the sense they also don't want.

the property, but at the same time, you can't inevitably, you know, forstall what, what is going to happen, which is more defaults, more credit pressure on the office sector in particular, and that being more acute in these gateway and larger urban centers. So I think that's just going to play out. You know, Chris and I have spoken a bit about the doom loop in the past, and does that move the macroeconomic needle? Does that cause some kind of recession? probably not. It's just a slow burn. And that ultimately then starts to materialize in things like state and local governments and cities and their budgets and so on. And that just also takes time. And it's not inevitable, especially if you're able to do successfully what some cities have done in the

past, which is reinvent that downtown area, which I think we're in the very early stages of. And in that way I think about it as, you know, there are going to be losses, but there are going to be tremendous gains as you put that real estate to its highest and best use in this post-pandemic world. And so there is a sort of value gain, right? Perhaps even on net, we can add value to the commercial real estate stock if we're removing low quality office and adding something higher value there. And how that plays out from a doom loop perspective, I think is just it's not inevitable. And it's it's difficult to distinguish between a cycle in commercial real estate, whether that's in the fundamentals or even the credit market versus actually a

doom loop taping place. I do think some cities face a real risk of that if they do not make a concerted effort to think about policy, public-private partnerships, getting the downtown to a adapt from a place where maybe there was an over-dependence on office workers and office worker production and to make themselves more of a consumption destination. And that's something that we're in the early stages of. I mean, there are signs all around the country that that's happening. To your question about a darker scenario, you know, I think anything that triggers bank stress beyond, you know, an economy that's expanding, a tenure that's at four-ish,

and we just have this slow burn of a credit cycle for all lender types, including banks. I think something that really puts acute stress on the banks or a rapid run-up in interest rates that sustained beyond what markets are pricing in at this point, that I think could create outcomes that are much darker than the ones I just described. So I don't think anybody's base case, but there are Black Swan events all the time. So we remain aware that that's always a possibility at the tail end. But that would be sort of how to bring that up. Yeah, I mean, I joke.

I agree with you. I think the most likely scenario is that you said slow burn. I think that's the kind of a way to think about it. Like a corrosive, a bit of a corrosive, but there's no cliff event here. At least doesn't feel that way unless something, you can need something else to go off the rails that are, that, cause the economy to pull back and interest rates a spike, that kind of thing. Chris, Marissa, do you want to push back on what Rebecca said, anything there that you would push back on? No, but what is the cash in refying?

So typically when investors have refinanced in the past, it's been in this environment where interest rates were structurally declining, so you can refinance and actually take cash out, right, of the property. Now, in order to meet the lending criteria of LTV debt coverage service ratio and so on, we're seeing refinances where borrowers actually have to bring equity into the deal. But, you know, they believe in it. And believe it or not, there are actually a lot of office refinancings going on and just at the right price with the right kind of loan condition. We're putting equity in.

They need more equity. The bank's saying, hey, you've got to put more equity into the deal, which is a good sign that they're willing to put the equity in. Right. They think the values there. Okay. Chris, anything you want to push back on? Not really push back.

Just I think emphasize maybe some of that extend and pretend that's going on there, that the banks are accommodating and extending loans. But we're also kind of gambling on better days, right? that things will improve in the future, interest rates will come down so that we can, you know, we consolidate and go forward here. So I don't think that the macro doom loop is a real risk, but I do think that there is some risk there, certainly. If that scenario doesn't play out, you combine this with some more negative outcome at the end of the term, right, then we certainly could see more stress. Well, Rebecca, it was a great conversation.

Sorry, we kept you longer than I anticipated, but I appreciate, you know, you're taking the time with us. But thank you. Thank you for doing that. Oh, my pleasure. Thank you for having me. Anytime. And we've got to have you back on fair value, although only three people in the world are going to listen to that podcast if we do it. But yeah.

It's pretty out there. Yeah, it's pretty out. But really important, actually, shockingly important. But anyway, well, with that, dear listener, we, I think are going to call. Yes, we are. we're going to call this a podcast take care everyone