Office of the CIO

Flash Call with CrowdStreet Advisors' Chief Investment Officer

Insights from CrowdStreet Advisors' Chief Investment Officer on the state of the market and what that may mean for investors
by CrowdStreet Advisors
September 01, 2023 · 0 min read

Gain insights that may help you refine your CRE Investment strategies in a replay of our June Flash Call. Join CrowdStreet Advisors' CIO, Ian Formigle, and his team as they review their Mid-Year 2023 Commercial Real Estate Outlook & Opportunities report.

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Thank you. Yeah,
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hi and welcome to the Crowd Street,
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June 2023 flash call.
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My name is Ryan Strub. I'm the senior
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managing director on the Crowd Street Investments
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Team. I wanna thank you for joining us here
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today. Very excited to be joined
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by three members of Crowds Street Advisors
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Office of the Chief Investment Officer.
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We're gonna be giving you a presentation today
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giving you update on the market based
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on what we're seeing through our research and our conversations
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with industry professionals. We are
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going to keep this conversation market driven.
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We're not going to be diving into specific deals,
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uh individual deals on the crowd street marketplace,
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but rather the market as a whole, which is
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a good segue
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into some disclaimers that we want to get out of the way before
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we start the presentation.
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Crowd Street Inc offers investment
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opportunities and financial services on
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its platform. The Crowd Street marketplace broker
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dealer services are provided through
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crowds, street capital advisory services
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through crowds street advisors. This
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presentation is brought to you by crowds street advisors.
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It should not be construed as an investment recommendation
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or advice nor a solicitation
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to offer to buy investment
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securities. This is an informational presentation
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and we want to share uh what we've seen
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in the marketplace over the first half of the year
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as we enter Q 3 2023.
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So with that, I want to take you to our agenda.
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We're gonna be giving you a brief state of the market.
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This is gonna be from our chief investment officer.
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Um Again, sharing his insights into
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what he's seeing through his research and through
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communications that we've had with industry professionals.
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We're also gonna be giving you an outlook
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into five main asset types that you'll
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see on the Crowd Street marketplace, hospitality,
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industrial, multifamily office,
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and retail. Most importantly, we'll be sharing
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the opportunities that we see within
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each of these asset types.
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We're gonna be giving you some closing remarks
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and also open it up for questions at
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the end of the presentation. Please use
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the chat function to ask any questions that you
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do have. We will interject the presentation
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if we have a question that is relevant to a topic
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that we're talking about. Otherwise, we'll save
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those questions to the end.
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So with that, I want to introduce the speakers today,
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we are going to have Ian
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Fly, our chief Investment Officer with Crowds Street Advisors,
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Anna Marie Allander Lieb, our investments
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director, someone who I have the pleasure of working
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closely with on a day to day basis along
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with our investment analyst.
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Not many people read as much research on the
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commercial real estate industry as Omna. So very excited
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to have her join as well.
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And with that, we're gonna be passing it to Ian.
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Fly to give a state of the market Ian
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to thanks
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Ryan and thanks everyone for joining us for
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the June installment of our flash
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call series.
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Uh We're gonna kick things off with just
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a, an overview of everything that we're
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seeing at a, at a macro level in the
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market. And then from there, we're gonna dive
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into that asset class by asset class
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as you know, on a basis in terms of what we're
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seeing out there and really point
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in more to the outlook.
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So from the top level, I think the
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first thing that we want to discuss is we frame
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where the overall market sits today
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is just to kick things off with transaction
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volume. Um because, you know, as
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we see it, there's really four fundamental
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factors right now that are driving the market.
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And when we look at those, we would say that those
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are one expensive debt,
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two tightening lending standards.
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We're gonna talk about that more in a minute.
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Three, you know what that's then in inducing
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is downward pressure on pricing. We'll go over
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that. Um And then four also
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re reasonably, you know, solid
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underlying fundamentals. And so
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when you put all those together, what, what
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that really means is that transaction
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volume is down, it, it's hard to get
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deals done. It's hard to get debt.
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Uh There is a big ask spread between
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what sellers in some instances are willing
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to accept versus what buyers are willing to pay.
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That has to do with those underlying, you know, reasonably
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intact fundamentals. If you have a deal that
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doesn't have to sell, uh you're not inclined
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to sell in the current market. So really
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when you put that all together, we're, we're seeing that
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translate into lower transaction volume.
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So at a top level, that's 56%
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you know, down year over year in,
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in Q one of 2023.
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And then if you accelerate and you actually look into the month
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of May,
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you're seeing total volume now down 70%
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year over year. Uh and this is a phenomenon
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that we expect to continue throughout most
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of the remainder of the year. You know, at this
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point, I think there's a lot of the market
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is sitting around and we would say kind of like waiting
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with bated breath. Um There was a recent
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statistic, I think that was interesting where
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when you're talking to, you know, groups out there
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like Walker and dunlop and so forth, they're
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seeing that while not a lot is coming
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to market right now, there's a lot of
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uh broker opinion of value activity going
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on out there. So, in essence, there's a lot of
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groups that are potentially looking to transact.
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Um but they're also trying to think
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about, when would that, you know, more
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optimal window of opportunity start
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to open? Um in essence,
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right now, they're basically, the market is looking
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at the current environment saying, hey, if you don't have to sell,
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you're probably not a seller right now. Uh
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And so for, so what that market really then
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translates to is, you know, potential opportunities
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on the buy side to the extent that things
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do have to trade. Um So we kick
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things off with transaction volume, you
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know, and for so from here, we're gonna
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then move into what that means from a pricing
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perspective. And for that, I'm gonna turn
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it over to Omna.
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Thank you Ian and hello everyone.
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My name is,
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excuse me, my name is Amna
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and I'm an analyst in the office of the CIO
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I'll start off by talking about prices
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briefly.
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So what you can see on the screen is
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Green Street's commercial property price
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index or the CPP I index.
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And this index essentially captures prices
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at which cr A transactions are being negotiated
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and contracted at a particular time.
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And Green Street updates this data monthly
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according to their latest CPP I index.
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Cr A prices are down by about 15%
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from their peak pricing as of June
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2023 data
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and that peak was in March of 2022.
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And if you remember that was around the same time
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that the fed had started raising interest rates
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and that immediately impacted
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transaction volume. And of course,
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because commercial real estate relies heavily
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on debt for deals to transact this
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higher cost to borrow debt also
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started affecting deal pricing as buyers
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stepped to the sidelines
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in that first half of 2022
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prices had first started falling almost
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as steeply as they had climbed up in 2020
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2021.
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But that speed of descent slowed down
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around October of last year
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in 2023 we've only seen
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about 2.4% price decline
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year to date.
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But the industrial sector is one of the sectors
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that actually experienced a price increase this
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year by about 6% year to date.
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And that's also according to green street data,
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but industrial couldn't pull the overall
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CPP I average up because office
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actually pulled it down declining about
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12% this year.
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And then multifamily retail
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and hospitality prices showed little
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to no movement this year.
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So that's gonna be all for pricing.
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We'll have more for you on asset classes later.
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But now I'm gonna pass this back to Ian, who's
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gonna talk to us about market fundamentals.
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All right, thanks.
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So I think when we look at market fundamentals,
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I mean, really what we're discussing what
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we've discussed in, you know, on multiple
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flash calls, we've talked about this in,
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you know, memo at the beginning of the year even last
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year was that if you from
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a top line level, the market continues
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on its path to what we call normalization.
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You know, in essence, after we saw this period,
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pandemic driven, you know, anomalous
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activity,
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you know, spiking rent growth,
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you know, driving massive household
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creation coming out of the depths of the pandemic
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to then now settling back down. It's
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been a roller coaster ride. There's no doubt for
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the last, you know, couple of years. Um
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But at this point, everything that we're
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seeing so far this year and everything that
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we continue to see on a go forward basis
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and groups like co-star project is
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that things are going back to long term trends.
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You know, I mean, you have to set aside office as
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a sector, it's going through its own cyclical
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bear market. But if you remove office
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from the equation, what you start to see
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is rent growth that looks
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like long term trends 2 to 3%
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and kind of like the expectation of that going
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forward occupancies that are ranging
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from low nineties to mid to high nineties
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depending upon the asset class. So
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in essence, kind of getting back toward towards normalization.
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And as I talked about a minute ago, really what that means
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is that. So from from the street level,
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you know, most asset classes and particularly
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if you look at industrial and even in still
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in multifamily,
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there's, there's still people who want to show up, they
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want to lease real estate, they want to occupy
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it, they wanna use it and you know,
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and what really from the stress that
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we're seeing continues to be really induced
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from the capital market's perspective, right?
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Debt being exceedingly expensive and
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difficult to obtain, you know, creating
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those big ass spreads that we talk about. So,
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you know, so again, looking forward,
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what we would say is that, you know, we, we
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continue to see more or less the same
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kind of like moderate rates of rent
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growth, everything that we
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like, we bake into the deals
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on a day to day aspect and kind of when we put together,
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you know, and assemble business plans and what we see is feasible.
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It all takes this into consideration.
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Um But this is really what we see. And I think
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one thing also to call out here is
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that, you know, on the retail sector, you're gonna
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see that that the costar data is showing
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a, you know, a relatively flat
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to like negative, you know, marginal rent
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growth in the outline
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years.
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Um Sorry, I think, I think, I think we just
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had a technical hiccup in my, in my studio.
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So anyways, but what I wanna call out here is that for
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retail uh malls are included
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in costar's data. So to the extent you're actually
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seeing kind of that zero rent growth in that chart
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in 2024 2025.
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It's kind of pulled down by malls, you
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know, at Crowd Street, we're really more focused
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on strip and grocery anchored
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centers. And what we're seeing in within those
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subsets of the asset class is a continued
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kind of 3% rent growth occupancies
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remaining steady.
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Uh So for now, I think that's gonna wrap up
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for market fundamentals. So let's move
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on and talk about lending standards and what
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we're seeing from that aspect. And for that, I'm gonna
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pass it over to Anna Marie.
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Thanks. I um
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so the chart you see here is
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the senior loan officer opinion
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survey um on bank
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lending practices and it shows
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kind of the net percentage of banks tightening
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lending standards for commercial real estate. So essentially,
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it's the number of banks tightening standards,
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less those that are using standards.
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Um And what you'll notice is that through 2021
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if you look at that kind of period of time down there, we
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were really in a period of easing lending
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standards, um which is notable
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with the standards ranging between negative 10%
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to negative 20% in Q 4 21
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and that really coincided with a record
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setting quarter in terms of transaction volume,
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where we saw 350 billion um
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worth of deals getting done.
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Now, you contrast this to, to where we find ourselves
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today and lending standards have tightened
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significantly um with that net
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percentage ranging now between 65
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to 74% depending on asset class
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as of April 23.
[00:27:10.529]
Um And as Ian noted previously, you know,
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along with that, we've seen that dramatic decrease
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in transaction volume, which came in at about
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75 billion um in Q 1 23.
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Um also notable from the April survey
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that came along with, with this info.
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Um was that the most frequently reported
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change in terms of CRE lending standards
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by banks um was wider
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spreads on loan rates over
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the bank's cost to fund as
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well as lower loan to value ratio. So
[00:27:39.309]
this really means we're seeing a decrease
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in proceeds and more expensive
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cost to, to get those proceeds for
[00:27:47.118]
um commercial real estate um
[00:27:49.140]
lending.
[00:27:50.400]
Um The survey also noted that banks
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are expecting lending standards to continue
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to tighten throughout 2023.
[00:27:57.410]
Um So really what this means is that
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we're going to see an increased stress on borrowers
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um as we already have seen um
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here in the last past couple of quarters
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and we expect kind of debt funds
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and other opportunistic lenders to kind of step
[00:28:10.809]
in and fill some of those gaps in terms of proceeds
[00:28:12.989]
on deals and getting deals done. But again, the cost
[00:28:15.328]
of financing is going up and that's making
[00:28:17.559]
it more difficult to, to get deals done.
[00:28:19.880]
Um So with that, I'll, I'll pass it back to you, Ian to, to talk
[00:28:22.259]
about inflation.
[00:28:24.078]
Thanks Mary, you know, and one of the things just to call
[00:28:26.269]
out in terms of those lending standards that we're seeing
[00:28:28.328]
is that obviously in the wake of,
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you know, the the mini banking crisis that we had earlier
[00:28:32.848]
this year in the way in the form of SBB
[00:28:35.019]
and First Republic is that, you know, banks
[00:28:37.309]
are looking to maintain liquidity.
[00:28:39.358]
Um That's
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sorry about that. We're having some technical difficulties
[00:29:21.670]
on audio. We should be back with you here shortly
[00:29:24.400]
uh with Ian
[00:29:25.368]
talking about inflation.
[00:29:46.098]
All right, sorry for that pause while,
[00:29:48.140]
while we have the technical difficulties, but it sounds like
[00:29:50.209]
we're back on track.
[00:29:51.479]
Uh So really what I want to call it is in terms of
[00:29:53.519]
those, those lending standards that this is,
[00:29:55.709]
you know, for, for the short term,
[00:29:57.939]
you know, leading through the rest of the year, we
[00:29:59.959]
continue to foresee that the ability to
[00:30:01.989]
get debt will be difficult. Um
[00:30:04.189]
It has interesting counter effects, right?
[00:30:06.279]
I mean, it's gonna slow transaction volume down.
[00:30:08.430]
Um But on the flip side, it's going to place
[00:30:10.769]
a higher level of scrutiny on deal flow. And
[00:30:12.890]
really what we're seeing is that it's raising the bar,
[00:30:14.900]
so to speak, for all deals, so deals,
[00:30:17.160]
you know, the the lower half kind of the 50 percentile
[00:30:19.779]
and below type deals that might have gotten done
[00:30:21.930]
in the past, they don't get done now. Um And
[00:30:24.098]
so I think that creates some interesting opportunities
[00:30:26.279]
um down the road that we'll talk about, you know, in
[00:30:28.328]
a few more minutes, but let's talk about inflation
[00:30:30.509]
for a minute because as we all know,
[00:30:32.880]
in the inflation has been the story of,
[00:30:35.229]
you know, the greater macro market for the last
[00:30:37.239]
year and a half. It's what's driving
[00:30:39.680]
the commercial real estate market on a monthly
[00:30:41.750]
basis.
[00:30:42.729]
In essence, everybody the entire market
[00:30:45.009]
is watching and waiting, hoping
[00:30:47.059]
that we might be reaching peak rates wondering
[00:30:49.719]
when the first downtick in interest rates
[00:30:51.779]
will come. Um And as I talk about,
[00:30:53.959]
we're gonna talk at the end of the, the presentation
[00:30:56.500]
about a memo that I'm getting ready to publish later
[00:30:58.559]
this week. Um But what we discuss
[00:31:00.640]
in this is that, you know, in our opinion,
[00:31:02.959]
in terms of getting some greater demand behind
[00:31:05.140]
the market and what we see kind of coming out of the
[00:31:07.219]
trough is going to be probably
[00:31:09.430]
some, you know, there'll be a lot of factors that play into this.
[00:31:11.578]
But I think interest rates is gonna be one
[00:31:13.719]
in essence, we think that the first time
[00:31:15.799]
that we see, you know, that 1st 25 basis
[00:31:18.108]
point reduction kind of might wave like
[00:31:20.160]
an all clear signal. And we expect at that
[00:31:22.199]
point, the potential for more capital
[00:31:24.259]
to start coming into the market, driving
[00:31:26.358]
prices maybe then translating
[00:31:28.769]
into the first bit of cap rate compression
[00:31:31.239]
after we've seen some cap rate expansion.
[00:31:33.459]
So here, what we want to call out is that, you know, from,
[00:31:35.739]
you know, the good news from our perspective
[00:31:38.000]
is, you know, inflation is roughly half
[00:31:40.420]
of what it was just eight months ago,
[00:31:42.939]
it's continuing to go down, you know, on
[00:31:45.170]
a month, over month basis, we saw that 4%
[00:31:47.368]
CP I print last month. And
[00:31:49.489]
what I wanna call out here that I think is interesting.
[00:31:51.640]
And again, what I touch upon on my memo is
[00:31:53.868]
that for the first time since we've
[00:31:55.959]
been raising interest rates and got into the high inflation
[00:31:58.368]
environment, we have now flipped
[00:32:00.469]
and what we have flipped is the fed
[00:32:02.549]
funds rate at 5 to 5 and a quarter percent
[00:32:05.229]
is now greater than CP
[00:32:07.578]
I at 4%. And that's significant
[00:32:10.059]
for the I think for the following reason is that if
[00:32:12.130]
we go back to that economic concept
[00:32:14.189]
that Paul Volcker employed in the early 19
[00:32:16.539]
eighties, it was, if you want
[00:32:18.818]
to get inflation under control, you
[00:32:20.969]
must raise the fed funds rate
[00:32:23.250]
to above the inflation rate.
[00:32:25.269]
And if you do that will change
[00:32:27.400]
consumer behavior, it will, it will
[00:32:29.568]
induce savings, it will curb
[00:32:31.858]
spending and it will in essence, make
[00:32:33.969]
the cost of capital expensive enough
[00:32:36.568]
that you'll then see disinflation.
[00:32:39.059]
And, and the numbers we saw in the early eighties, right in 1980
[00:32:42.009]
you know, we saw inflation hit 14%.
[00:32:45.000]
We saw Volcker raise the fed funds rate
[00:32:47.118]
all the way to 19%. And
[00:32:49.209]
then we saw inflation come down pretty significantly
[00:32:51.910]
thereafter in that period. So
[00:32:54.180]
this is an interesting inflection point because
[00:32:56.650]
we were just sitting here in October or September
[00:32:58.920]
last year talking about how when
[00:33:00.979]
inflation was still eight plus percent
[00:33:03.519]
fed funds rate was sub 4%.
[00:33:06.140]
It was the same economists that were actually pointing
[00:33:08.390]
to this phenomenon. And calling out caution
[00:33:10.568]
saying we're not doing enough right now
[00:33:13.118]
to get inflation under control because
[00:33:15.670]
inflation is more than double the
[00:33:17.739]
fed funds rate. Now we've flipped. So
[00:33:19.939]
in my opinion, I think this is starts to create
[00:33:22.019]
more disinflation
[00:33:23.568]
in, you know, in the months ahead, gives
[00:33:25.660]
us kind of more, you know, confidence
[00:33:27.828]
that we are really on this downward trend.
[00:33:29.969]
And as we can see in the chart, like we're dis inflating
[00:33:32.318]
at a pretty, pretty good clip. And so I think
[00:33:34.529]
there's, you know, there's real optimism out there
[00:33:36.670]
to say that might continue in the months ahead.
[00:33:39.170]
Yes. Now that we're 4% it might
[00:33:41.219]
slow down a bit, but it still feels like we're
[00:33:43.239]
tracking lower.
[00:33:44.489]
And the other thing I want now I want to talk about
[00:33:46.549]
is where, you know, a, a key component
[00:33:48.868]
of both CP I and core CP
[00:33:50.969]
I, because one thing that like
[00:33:53.098]
when we're seeing inflation coming down and we're seeing
[00:33:55.199]
these CP I prints lower. If
[00:33:57.380]
you're also seeing some other economists
[00:33:59.459]
point out be like, yes, but core CP
[00:34:01.818]
I is a bit stickier and
[00:34:03.900]
it's been true, it's coming down, it hasn't
[00:34:06.019]
come down at the rate of CP I. But
[00:34:08.340]
what's interesting in our opinion is that when we
[00:34:10.418]
look at housing, right. This is the industry that we live
[00:34:12.539]
in every day. So housing costs and
[00:34:14.619]
shelter. Well, it's about one third
[00:34:17.019]
of CP I, it's about 40%
[00:34:19.389]
of core CP I.
[00:34:20.989]
And we also know that there's a lag
[00:34:23.128]
between the time that we're actually seeing
[00:34:25.148]
rental growth growth rates on the street.
[00:34:27.559]
And when those rental growth rates translate
[00:34:29.679]
into CP I data. And so,
[00:34:31.929]
you know, there's different debating theories out there
[00:34:33.949]
in terms of what that lag time is.
[00:34:36.289]
And Jay Parsons who is an economist
[00:34:38.648]
at real page is one, I think he's a brilliant
[00:34:40.668]
mind. I think he's great for the industry. And he points
[00:34:42.898]
out that his opinion is it's about
[00:34:45.030]
12 months.
[00:34:45.927]
And in a recent post he made on linkedin,
[00:34:47.938]
he actually quantified and show this in this following
[00:34:50.117]
graph. He's saying, hey, look, look how
[00:34:52.528]
in March of 2022
[00:34:55.197]
we hit peak rental rate
[00:34:57.329]
growth in the market,
[00:34:59.068]
but then we didn't see rental rate growth
[00:35:01.438]
in CP I until March of 2023.
[00:35:04.298]
And now this is, you know, may data
[00:35:07.248]
now in may data on the street, you're all
[00:35:09.427]
the way back down to 2.3%
[00:35:11.668]
growth right on
[00:35:13.978]
the street. So now the logical
[00:35:16.208]
conclusion is going forward, we
[00:35:18.409]
would expect to see this data continuing
[00:35:20.978]
to flow into CP I and core CP I
[00:35:23.300]
creating more disinflation in the months
[00:35:25.539]
ahead. So when you roll it all up. And what is the key
[00:35:27.659]
takeaway? I think the key takeaway here is
[00:35:30.264]
watch, inflation continue to taper down
[00:35:32.543]
throughout the remainder of the year. I think where
[00:35:34.655]
we sit right now is very interesting. I do
[00:35:36.804]
think that where, where we watched this pause
[00:35:39.244]
from the fed this last month is interesting
[00:35:41.264]
because in my opinion, if they're pausing,
[00:35:43.985]
it is a wait and see. Yes.
[00:35:46.175]
The rhetoric is saying, look two more,
[00:35:50.878]
you know, in incremental increases.
[00:35:53.760]
But at the same time, if we continue to see,
[00:35:55.938]
actually CP I continue to drop,
[00:35:58.208]
then I think there's incentive for their,
[00:36:00.228]
for them to continue to hold. And
[00:36:02.269]
so therefore, it's a little bit more in my personal opinion
[00:36:04.590]
that I would say watch for rates
[00:36:06.728]
to hold, not necessarily rise
[00:36:08.829]
and not necessarily go down quickly,
[00:36:11.159]
but more or less. We might be at peak rates
[00:36:13.449]
right now and we then might see
[00:36:15.829]
the logical conclusion being that, that first
[00:36:18.250]
interest rate reduction maybe early
[00:36:20.269]
2024. And that would then give us
[00:36:22.570]
a little bit more tailwind behind the market
[00:36:24.750]
on a go forward basis.
[00:36:26.628]
Um So from here, we are going
[00:36:28.688]
to move on
[00:36:31.378]
and we are now, I think
[00:36:33.519]
from this point, we're gonna get into asset
[00:36:35.599]
class by asset class if I if I'm not mistaken.
[00:36:39.820]

And

[00:36:48.070]
hello again, everyone. Thank you, Ian.
[00:36:50.228]
So let's talk about hospitality
[00:36:52.500]
first, I'll give you a brief overview
[00:36:54.590]
on the outlook. Then I'll jump into the opportunity
[00:36:56.728]
section before I pass it back to Ian for industrial
[00:36:59.168]
sector.
[00:37:00.139]
So to track hospitality performance,
[00:37:02.340]
we look at revenue per available room
[00:37:04.590]
or rev par.
[00:37:05.840]
So two years before the pandemic rev
[00:37:08.179]
for hotels across the US was in the 67
[00:37:10.889]
to $99 range.
[00:37:12.800]
But we all know how the sector was obliterated
[00:37:14.918]
during the pandemic due to COVID-19 restrictions
[00:37:18.019]
during that time, revenue tanked
[00:37:20.090]
to its lowest ever numbers down to about
[00:37:22.239]
$17 per room which you can see
[00:37:24.250]
that dip on the chart on the screen,
[00:37:26.739]
this of course affected transaction activity
[00:37:29.478]
as investors shied away from the sector because
[00:37:31.878]
it was at a standstill.
[00:37:34.059]
The good news today is that the market is showing
[00:37:36.280]
signs of entering its next phase of
[00:37:38.340]
growth
[00:37:39.449]
revenue recovered fully in 2022
[00:37:42.159]
and has now surpassed pre pandemic levels.
[00:37:44.958]
But the caveat there is that uh the recovery
[00:37:47.458]
is on a nominal basis which means
[00:37:49.659]
that the sector has recovered if you do not account
[00:37:51.918]
for inflation.
[00:37:53.489]
So when can we expect to recover on a real
[00:37:55.530]
basis?
[00:37:56.789]
On the right hand side of the screen, I've pasted
[00:37:58.949]
what's called the 2019 real rev par
[00:38:01.179]
index.
[00:38:02.489]
A leading hospitality data source called
[00:38:04.648]
STR tracks this metric. And
[00:38:06.719]
what this is showing you is that when you compare
[00:38:08.829]
to 2019 levels of rev par real
[00:38:11.489]
recovery and revenue will be achieved sometime
[00:38:13.800]
in 2025.
[00:38:16.039]
Now I'm gonna move on to the opportunity
[00:38:18.159]
section.
[00:38:19.679]
OK. For opportunities,
[00:38:22.340]
um prices seem to be stuck at pre
[00:38:24.469]
pandemic levels after falling
[00:38:26.728]
during the pandemic. Hotel prices
[00:38:28.780]
have creeped back up to exactly where they were
[00:38:30.829]
before the pandemic according to green street
[00:38:33.070]

data.

[00:38:34.530]
So from our perspective, there are opportunities
[00:38:37.208]
to buy or recapitalize hotels
[00:38:39.260]
today at 2020 prices and
[00:38:41.559]
many of these properties would have likely appreciated
[00:38:43.909]
if the pandemic hadn't massively
[00:38:46.070]
disrupted its um its trend line.
[00:38:49.030]
So our strategy is leaning into
[00:38:51.458]
opportunities where these price disparities
[00:38:53.789]
continue to exist
[00:38:55.860]
also where such deals exist.
[00:38:58.458]
One strategy that we think is viable is
[00:39:00.539]
to lean into core plus deals
[00:39:02.619]
as opposed to um overthinking
[00:39:04.789]
the risk profile, especially
[00:39:06.800]
if it's possible to invest in a property
[00:39:08.820]
that's already cash flowing where
[00:39:11.010]
you can reasonably believe in its growth over
[00:39:13.059]
the holding period.
[00:39:14.769]
And this can be a viable strategy right now for
[00:39:16.860]
hospitality, especially because
[00:39:19.228]
right now it's one of the assets that's
[00:39:21.668]
um has the potential to offer what's called
[00:39:23.750]
positive leverage.
[00:39:25.510]
Um And briefly, what that means is that the
[00:39:27.559]
high cost of debt is not diluting
[00:39:29.860]
analyzed investor returns in a way
[00:39:31.929]
that um it would in in
[00:39:34.260]
in in the case of negative leverage.
[00:39:37.329]
So now when we think of opportunities by the
[00:39:39.378]
type of hospitality property data
[00:39:41.789]
from CBRES Hotel state of the Union
[00:39:44.010]
report shows that resort style
[00:39:46.530]
or leisure hotels are outperforming
[00:39:48.728]
in their recovery as compared to urban
[00:39:50.829]
hotels.
[00:39:52.250]
And part of the reason may be that leisure
[00:39:54.309]
travel has recovered more than business
[00:39:56.329]
travel so far. So there are currently
[00:39:58.668]
more opportunities to tap into
[00:40:00.750]
leisure hotels, especially extended
[00:40:03.389]
stay hotels in drivable destinations
[00:40:05.809]
or vacation markets with a high travel demand.
[00:40:09.398]
Lastly, let me touch on a few things we're monitoring
[00:40:11.780]
for this sector.
[00:40:13.168]
So the consumer savings rate has decreased
[00:40:15.559]
quite significantly from its pandemic
[00:40:17.688]
high of 33%
[00:40:19.898]
down to now about 4%.
[00:40:22.208]
So, and that's actually below its
[00:40:24.329]
average trend line.
[00:40:25.909]
Um We're gonna be monitoring this as this
[00:40:28.199]
could put a wrench in travel recovery
[00:40:31.309]
and we're also monitoring urban recovery.
[00:40:34.188]
It's important to understand that CRE works
[00:40:36.429]
in an ecosystem. So markets
[00:40:38.438]
where offices are struggling or business
[00:40:40.789]
travel is lagging that can impact
[00:40:43.079]
hotel occupancy as well.
[00:40:45.360]
An example of this showed up a few days ago
[00:40:47.679]
when it was announced that the investment company
[00:40:49.840]
park hotels and resorts defaulted
[00:40:52.099]
on a loan on two of its hotels in
[00:40:54.188]
San Francisco because of struggles
[00:40:56.199]
in the market's urban core.
[00:40:58.128]
And the company's CEO is planning to give
[00:41:00.148]
up these properties and he blamed
[00:41:02.168]
um in, in a news report that insider released,
[00:41:05.070]
uh they quote that he blamed remote
[00:41:07.148]
work and street conditions as the main culprit.
[00:41:10.188]
So we're definitely gonna be monitoring conditions
[00:41:12.309]
in the urban sector and in the next few
[00:41:14.458]
months that that's gonna matter.
[00:41:16.280]
Um
[00:41:17.139]
Now I'm gonna pass this back to Ian who's gonna
[00:41:19.280]
talk to us about the industrial industrial
[00:41:21.329]
sector. Thank you.
[00:41:23.409]
Great, thanks.
[00:41:24.860]
All right, when we turn to the industrial sector, we
[00:41:27.269]
see a market that continues to, to
[00:41:29.398]
still continue to operate with very sound fundamentals
[00:41:31.849]
in our opinion. Um As you can see,
[00:41:33.958]
you know, occupancies remain high.
[00:41:36.110]
Uh The expectation is for rent growth
[00:41:38.449]
to continue to kind of average in the,
[00:41:40.510]
you know, mid single digit range over
[00:41:42.849]
the next few years. You know, we're definitely
[00:41:44.878]
seeing rent growth come down off
[00:41:46.929]
the peak. Um But at the same
[00:41:48.978]
time, we, you know, this is, this is what this
[00:41:51.188]
is fully expected in our terms. And because
[00:41:53.469]
we were like simply unable to continue
[00:41:55.679]
in our minds to con to continue to grow
[00:41:57.760]
rents at double digits uh indefinitely.
[00:42:00.079]
So we saw that huge run into the market.
[00:42:02.239]
We saw now we saw rent growth pair back,
[00:42:04.760]
we've seen, you know, a cap rate expansion
[00:42:06.878]
of call it 80 points or so.
[00:42:09.688]
Uh in this year, we've seen cap rates
[00:42:11.849]
more or less flatten out uh with rent growth
[00:42:13.949]
continuing to increase. And so also
[00:42:16.119]
when we look at the a lot of the markets out there,
[00:42:18.269]
we're seeing positive absorption. So we see the opportunity
[00:42:20.929]
to continue to add supply.
[00:42:22.989]
So let's actually talk about, you know, in terms of now this
[00:42:25.135]
the opportunities. So again, like I said, we'll continue
[00:42:27.474]
to look into, you know, key
[00:42:29.715]
primary and secondary markets where we
[00:42:31.813]
see positive absorption continuing to occur,
[00:42:34.074]
occupancies remaining tight. We think those
[00:42:36.184]
markets can uh handle more supply
[00:42:38.563]
uh because they're, they're filling it up.
[00:42:40.824]
We also are looking around,
[00:42:42.914]
you know, when we think about where geographically
[00:42:44.925]
we're focused a little bit on the center of the country
[00:42:47.135]
right now, from this friend shoring perspective.
[00:42:49.974]
Um in essence, you've now seen that
[00:42:52.628]
with the wage growth in China over the last decade
[00:42:54.849]
or so, wages are now higher in China
[00:42:57.208]
on average than they are in Mexico. And so
[00:42:59.610]
you combine that wage scenario
[00:43:01.878]
with, you know, some geopolitical
[00:43:04.030]
tensions at the top line level. And
[00:43:06.168]
you know, and now we're seeing a greater propensity
[00:43:08.820]
and in like a renewed increasing
[00:43:11.079]
interest in bringing manufacturing
[00:43:13.478]
back onto our continent, some coming
[00:43:15.603]
inside the borders of the US. But then also
[00:43:17.764]
we're seeing an increase in manufacturing
[00:43:19.934]
occurring in Mexico. We continue
[00:43:21.954]
to see that trend continue on throughout
[00:43:24.155]
the rest of the decade. So to the extent
[00:43:26.224]
that we can see tight markets that are
[00:43:28.313]
catering towards goods coming over
[00:43:30.644]
the, the southern border. Uh and
[00:43:32.744]
then distributing from there, we think those are markets that
[00:43:34.804]
we that have good runway in our opinion.
[00:43:37.188]
Uh The other thing that we're seeing for the first time in
[00:43:39.349]
a year or I'd say probably two years
[00:43:41.739]
is the ability even to get into some acquisitions.
[00:43:44.688]
Uh you know, coming into last year, cap rates,
[00:43:46.969]
you know, at a national level going below 4%
[00:43:49.978]
just simply wasn't making sense in our minds
[00:43:52.389]
to acquire anything because the spread
[00:43:54.769]
between building it and then selling it was
[00:43:56.849]
just too great. We said we would just build it.
[00:43:58.958]
We couldn't seem, you know, make sense of
[00:44:01.300]
acquiring it, operating it. Now
[00:44:03.458]
with cap rates expanded, there's, there's
[00:44:05.478]
a little bit more of a normal market phenomenon
[00:44:07.559]
going on out there. So now we see the ability
[00:44:10.090]
to step into some types of acquisitions.
[00:44:12.280]
Uh You've seen us do this a little bit, you know, so
[00:44:14.340]
far this year in terms of, you know, maybe coming
[00:44:16.539]
in to a lease up play
[00:44:19.188]
one thing that we want to call out that was I think
[00:44:21.289]
notable that just this week is
[00:44:23.418]
that Pro Lodges and Blackstone announced
[00:44:25.898]
a major deal. Uh This is a, a logistics
[00:44:28.648]
portfolio that Blackstone is selling to
[00:44:30.739]
Pro Lodges.
[00:44:31.688]
It's 14 million square feet.
[00:44:33.809]
It comprises 70 properties, it's all
[00:44:35.898]
over the country and it's transacting it
[00:44:38.159]
at $3.1 billion which is
[00:44:40.179]
about $220 per square foot.
[00:44:42.610]
One other thing in particular that stood out
[00:44:44.659]
to us is the valuation of
[00:44:46.878]
that deal in terms of what was the underlying income.
[00:44:49.418]
The deal was predicated on an in
[00:44:51.429]
place cap rate of about 4%.
[00:44:53.789]
So 4% of the yield in terms of
[00:44:55.849]
that $3.1 billion. But
[00:44:58.079]
on a mark to market basis, it was 5.75%
[00:45:01.688]
on a fully adjusted market rent
[00:45:03.878]
basis. So when you back into those numbers,
[00:45:06.418]
that would suggest that on average, that
[00:45:08.429]
portfolio is about 43%
[00:45:11.099]
below current market rates.
[00:45:13.309]
And so, you know, and and to us,
[00:45:15.489]
this is a good indicator, right, Blackstone
[00:45:17.809]
being a top tier operator of industrial
[00:45:20.449]
in the United States. If their portfolio
[00:45:22.648]
is essentially failing, you know, struggling to
[00:45:24.699]
catch up to mark to market rents, we
[00:45:26.739]
think there's definitely still some upside. We've seen
[00:45:29.010]
deal flow come into our pipeline that
[00:45:31.168]
has similar characteristics. So there's
[00:45:33.329]
some, this is another thing that we're monitoring and to the extent
[00:45:35.639]
that we see the opportunity to
[00:45:37.659]
acquire properties where there is a good mark
[00:45:39.820]
to market play. Some of these situations
[00:45:42.128]
stand out. And as we just saw, you know,
[00:45:44.168]
that Blackstone prolog
[00:45:45.750]
deal, I think is indicative of that. So
[00:45:47.909]
from here, let's move on to multifamily
[00:45:50.050]
and for that, I'm gonna pass it to Anne Marie.
[00:45:53.429]
Thanks Ian.
[00:45:54.708]
Um So overall our outlook
[00:45:56.728]
for multifamily is that it's a fairly stable
[00:45:59.010]
asset class. Um at the end
[00:46:01.039]
of the day, you know, demand for multifamily really is
[00:46:03.239]
nondiscretionary. Um This asset
[00:46:05.418]
class definitely has slowed,
[00:46:07.449]
but it's important to remember um
[00:46:09.579]
that we're coming from a period in 2021
[00:46:11.708]
where we really experience double digit
[00:46:13.820]
rent growth as you can see on the chart here. Um
[00:46:16.530]
And also that was coupled with exceptionally
[00:46:18.949]
high transaction volume.
[00:46:20.478]
Um We did see this cool in 2022
[00:46:22.719]
and interest rates increased um and
[00:46:24.800]
expect this cooling to continue uh with
[00:46:26.878]
rent growth hovering in the 1.5 to 3%
[00:46:28.969]
range for the next few years. But this
[00:46:31.050]
is really just bringing it down in line
[00:46:33.070]
with the trends um that we've seen between
[00:46:35.079]
2015 and 2019 when rent
[00:46:37.250]
growth really averaged about 3%.
[00:46:39.679]
Um You'll also notice that vacancy is forecasted
[00:46:42.139]
to drop um to a little
[00:46:44.309]
below around 2% 92%
[00:46:46.550]
per co-star.
[00:46:47.619]
Um One main factor for this pullback
[00:46:49.789]
can be attributed to new supply that's
[00:46:52.059]
incoming um per co star.
[00:46:54.438]
We had about 627,000
[00:46:57.099]
units start construction in 2022.
[00:46:59.989]
Um And this is the highest rate we've seen in
[00:47:02.039]
the last 26 years in terms of the
[00:47:04.059]
volume.
[00:47:05.059]
Um However, given the constraints
[00:47:07.208]
that we talked about earlier in the debt markets
[00:47:09.360]
um and softening conditions,
[00:47:11.579]
um overall uh new
[00:47:13.840]
construction starts are beginning to pull
[00:47:16.000]
back. Um And for 2023 they're forecasted
[00:47:18.860]
to end at about 350,000
[00:47:21.599]
units.
[00:47:22.519]
Um And this is the level below anything we've seen
[00:47:25.079]
from data dating back to about 2017
[00:47:29.949]
in terms of opportunities. Um We
[00:47:32.289]
really are leaning into this higher cap rate environment
[00:47:34.760]
that we're finding ourselves in.
[00:47:36.398]
Um We're really believe we're coming
[00:47:38.619]
into an environment for multifamily where pricing
[00:47:40.840]
is gonna start benefiting buyers
[00:47:42.969]
um and opportunities may exist to
[00:47:45.070]
purchase really well located class a
[00:47:47.179]
properties at a discounted price
[00:47:49.500]
point to what we've seen previously.
[00:47:51.539]
Um If we look into cap rates, we've,
[00:47:53.699]
we've seen that they've really been compressing over the last
[00:47:55.938]
15 months. Um If you
[00:47:57.969]
look at March 2022
[00:48:00.199]
per Green Street, at that point in time,
[00:48:02.369]
cap rates for the multifamily sector
[00:48:04.409]
nationally were averaging about 3.8%
[00:48:07.478]
fast forward to today. And you see
[00:48:09.719]
that now at about 5.2% nationally.
[00:48:12.320]
Um So that's about 100 and 40 basis
[00:48:14.449]
point expansion.
[00:48:16.188]
Um Again, the last time we saw
[00:48:18.489]
multifamily cap rates in this range of
[00:48:20.590]
5.2% you'd have to go back all the way
[00:48:22.699]
to 2014. So, so we really do
[00:48:24.809]
feel like there is value in those
[00:48:26.849]
well located debt assets.
[00:48:28.699]
Um The other opportunity that, that we
[00:48:30.849]
believe exists in is
[00:48:33.188]
that of distress deal flow in the multifamily
[00:48:35.329]
sector. Again, there was a lot um
[00:48:38.030]
of operators and owners who purchased
[00:48:40.090]
assets with floating rate debt.
[00:48:42.219]
Um And with the increase in interest rates,
[00:48:44.659]
um we do believe that they may be
[00:48:46.800]
finding it difficult to service those loans
[00:48:48.849]
moving forward, which could um
[00:48:51.000]
create opportunities for some of those
[00:48:53.280]
um opportunistic purchases.
[00:48:56.289]
Um
[00:48:58.340]
Lastly, um in terms
[00:49:00.539]
of development, um our outlook here
[00:49:02.708]
is that you really have to be selective.
[00:49:05.739]
Um As I mentioned earlier, there has
[00:49:07.938]
been a lot of new supply coming online.
[00:49:09.958]
Um however, not mark all markets
[00:49:12.300]
are created equal. Um So it's really
[00:49:14.469]
important to dive into the specific markets
[00:49:16.579]
to, to understand what, what the supply
[00:49:19.039]
is.
[00:49:20.010]
Um you know, searching for those markets
[00:49:22.019]
that might have more stringent entitlement
[00:49:24.050]
policies um limiting that supply
[00:49:26.429]
is gonna be beneficial. Um Further,
[00:49:29.489]
I think it's important to, to go into those
[00:49:31.510]
deals um with tempered rent growth
[00:49:33.750]
and, and cap rate um assumptions
[00:49:36.349]
um in their underwriting and make sure that you're partnering
[00:49:38.570]
with the right developer um
[00:49:40.860]
to really make sure that they're delivering
[00:49:42.918]
quality projects in these markets
[00:49:44.949]
with, with less um incoming supply
[00:49:48.369]
in terms of things we're monitoring. Um Again,
[00:49:50.469]
I think the most notable one is that that supply
[00:49:52.550]
pipeline.
[00:49:53.519]
Um as I've mentioned, overall
[00:49:55.728]
fundamentals in multi family are holding
[00:49:57.929]
um but there has been some softening in
[00:49:59.989]
occupancy within the sector.
[00:50:02.429]
Um Again, we believe that this can be
[00:50:04.929]
um attributed to that robust construction pipeline
[00:50:07.429]
um per coar right now, there are about 1.1
[00:50:09.949]
million total units under construction currently.
[00:50:13.039]
Um However, it is important to note
[00:50:15.184]
that this supply is really concentrated
[00:50:17.753]
across 15 markets.
[00:50:19.655]
Um So you need to understand
[00:50:21.735]
individual markets um when
[00:50:23.954]
you're going into to developments or
[00:50:26.023]
looking at multifamily in particular, um
[00:50:28.563]
An example I'm gonna pull out is Austin
[00:50:30.603]
again, per Moody's um it has
[00:50:32.753]
quite robust job growth of about
[00:50:34.864]
1.7% which should
[00:50:37.110]
um attribute to about demand
[00:50:39.208]
of an additional 7000 units for the market.
[00:50:41.648]
However, if you, if you dive a little deeper into
[00:50:43.688]
Austin, um it's currently expected
[00:50:45.898]
that about 31,000 units
[00:50:48.378]
um will be delivered in 2023. So that's
[00:50:50.449]
gonna leave a shortfall um of
[00:50:52.679]
demand for about 24,000 units
[00:50:54.708]
of demand. So definitely things for
[00:50:56.750]
monitoring in multifamily.
[00:50:58.889]
Um With that, I'm gonna pass it to Ian uh to
[00:51:01.329]
discuss office,
[00:51:03.648]
right? Thanks Anna Marie.
[00:51:05.179]
So when we come to the office sector, I mean,
[00:51:07.239]
this is obviously the outlier asset class.
[00:51:09.590]
Um as I mentioned earlier, it's sitting, you know, deep
[00:51:11.909]
in its own kind of secular, you know, bear
[00:51:13.949]
market
[00:51:14.789]
and really from our perspective, this is
[00:51:16.958]
the year that office is starting
[00:51:19.128]
to experience it at the next wave
[00:51:21.369]
of price discovery, you know, huge
[00:51:23.909]
markdowns in, you know, in kind of
[00:51:26.050]
pre pandemic pricing,
[00:51:27.590]
you know, a couple of data points on that just to illustrate,
[00:51:30.250]
you know, first um Denver
[00:51:32.648]
in the Wells Fargo Center there, it's a 53 story
[00:51:34.918]
tower, it's 1.2 million square feet, it's
[00:51:37.219]
got AC M BS loan on it and that goes through
[00:51:39.329]
a valuation process regularly. Um
[00:51:41.590]
Trepp just recently reported that
[00:51:44.019]
that loan or that I should say that asset
[00:51:46.269]
really has been revalued. Um It
[00:51:48.378]
was valued at $475
[00:51:50.610]
million in 2019. It was just
[00:51:52.679]
valued at $287
[00:51:54.958]
million it's a 40% decrease
[00:51:57.300]
in price uh within the last four
[00:51:59.458]
years. So again, you know, and that, that puts
[00:52:01.760]
that asset just above valuation
[00:52:04.039]
of its loan balance. And so, you know, I think
[00:52:06.309]
that right now is very indicative of what's
[00:52:08.469]
going on across the country. And a lot of
[00:52:10.519]
these key, you know, particularly like downtown
[00:52:13.369]
CBD Trophy located assets,
[00:52:16.072]
um you know, the markdowns are coming,
[00:52:18.182]
the price discovery is coming.
[00:52:20.262]
So in essence, I think what that translates
[00:52:22.512]
to is that, you know, we're, you know, there may
[00:52:24.672]
be some opportunities and we'll talk about this in a second
[00:52:26.811]
coming up right now. What this outlet
[00:52:28.893]
looks like is in the, in the short term,
[00:52:31.481]
you know, decreasing occupancy. You
[00:52:33.592]
know, I think the Castle systems just
[00:52:35.722]
kind of at least celebrated that at
[00:52:37.766]
a nation nationwide level. We just got to
[00:52:39.894]
50% utilization on the buildings
[00:52:42.186]
that they track. It's great to see that that's an uptick,
[00:52:44.534]
but 50% utilization is still far
[00:52:46.824]
off of, you know, the 90 plus percent utilization
[00:52:49.465]
that we saw, you know, pre pandemic. So
[00:52:51.605]
the the office market does have
[00:52:53.875]
a tremendous, you know, way to go. Other
[00:52:56.166]
deal that stands out is that Clare and Partners
[00:52:58.889]
is getting ready to sell 60 Spear Street
[00:53:01.139]
in San Francisco. Uh The estimated
[00:53:03.260]
valuation of that asset when it comes to market
[00:53:05.500]
is roughly $200 per square foot. That
[00:53:07.599]
is an asset that last traded in 2014
[00:53:10.699]
at $700 per square foot. So again, these
[00:53:13.030]
markdowns, they're starting to come, they're starting
[00:53:15.099]
to show up. And in our opinion, that's the beginning
[00:53:17.550]
of the, of the basis reset that the market really
[00:53:19.628]
needs. So let's talk a little bit about
[00:53:21.668]
where, what that might translate to in terms of opportunities.
[00:53:25.059]
So, from that perspective,
[00:53:30.739]
I'll make sure I don't, there we go.
[00:53:32.530]
So we're seeing a few things start to pop up
[00:53:34.579]
that that are starting to look interesting. The
[00:53:36.619]
first is what we're calling this flight to quality.
[00:53:38.829]
Uh you know, given that the entire
[00:53:41.199]
office sector is on a strong downward trend
[00:53:43.639]
in terms of pricing.
[00:53:44.878]
Um while that de definitely
[00:53:47.030]
affects and is, you know, feeling the
[00:53:49.099]
brunt of that in certain assets that are suffering
[00:53:51.340]
that, you know, that vacancy, there's other assets
[00:53:53.728]
that are currently occupied, well occupied,
[00:53:55.860]
in fact, and they might have strong
[00:53:58.079]
weighted average lease term five plus years.
[00:54:00.688]
Um They might have strong tenants in place, right?
[00:54:03.059]
Tenants that are doing very well that are actually utilizing
[00:54:05.425]
that office right now. And it more
[00:54:07.684]
looks like a pre pandemic scenario for
[00:54:09.824]
certain buildings now because
[00:54:11.945]
of the market dynamics, those
[00:54:14.023]
cap rates on all office have expanded
[00:54:16.583]
dramatically. So we're starting to see
[00:54:18.824]
some of these deals be presented at cap
[00:54:20.925]
rates that are looking like 10% even
[00:54:23.103]
higher.
[00:54:23.909]
And if we can find a scenario where
[00:54:25.958]
we have conviction in a tenant in
[00:54:27.978]
a tenant base in the location
[00:54:30.030]
of an asset, a sponsor. And
[00:54:32.050]
now we have the ability to maybe ride through
[00:54:34.429]
this next two or three years of what we
[00:54:36.668]
think is continued price discovery while
[00:54:39.139]
getting into a deal at north of a 10 cap.
[00:54:41.668]
That's what we consider flights of quality. That's what
[00:54:43.688]
we will consider
[00:54:45.139]
from there. It goes into that straight distressed
[00:54:47.719]
assets at some point, this
[00:54:50.010]
market is gonna go on to on such
[00:54:52.289]
a level of sale that there may be
[00:54:54.369]
certain opportunities that stand out. Those
[00:54:56.869]
might be trait like that might turn into
[00:54:59.168]
the the loans. In fact, uh there's
[00:55:01.340]
one office owner that we track.
[00:55:03.610]
Uh and in his quarterly report, the CEO
[00:55:05.750]
quoted, you know, we believe that these opportunities
[00:55:08.070]
will be more likely to come in the form
[00:55:10.128]
of loan sales and not in foreclosures.
[00:55:12.760]
So I think that's a segment that we're tracking,
[00:55:14.889]
we're monitoring that possibility as well.
[00:55:17.208]
Uh Once we get to a point where we think we've got
[00:55:19.449]
very, very compelling basis kind of rock
[00:55:21.570]
bottom pricing um that might stand out
[00:55:23.628]
to us in terms of distress. Um And
[00:55:25.728]
then other, uh you know, and then other than that, it's gonna
[00:55:27.820]
be kind of this what we call these creative structures,
[00:55:30.309]
these rescue capital scenarios, maybe
[00:55:32.628]
you can get in to something that is
[00:55:34.648]
in the middle of the stack or even below
[00:55:36.719]
like a lower stack, almost even senior position.
[00:55:39.329]
That's that loan sale scenario. I think
[00:55:41.478]
there's gonna be some interesting things that
[00:55:43.539]
will ultimately occur, I think
[00:55:45.619]
right now from our perspective is, is just more
[00:55:47.659]
of the when. So we're gonna, we're, we're cautious,
[00:55:49.820]
we're just watching, we're waiting. Um, but
[00:55:52.030]
we're paying attention and when those opportunities
[00:55:54.378]
pop up, um, we're gonna, we're gonna evaluate
[00:55:56.708]
them and potentially jump on some.
[00:55:58.500]
Uh, so with that, uh, I think
[00:56:00.539]
we're gonna pass it. So it's gonna, we're gonna go on to retail
[00:56:02.780]
to wrap up our asset classes and for that, I'm
[00:56:04.820]
gonna pass it back to Anne.
[00:56:07.929]
Thanks Ian. Um All right, I'm gonna keep this quick
[00:56:10.219]
because I know we are bumping up on time and we
[00:56:12.320]
do want to leave some time for questions
[00:56:14.619]
from, from everyone who's tuning in.
[00:56:16.500]
Um So in terms of retail, I think comparatively
[00:56:18.820]
retail actually has been performing quite well.
[00:56:21.168]
Um In fact, CBRE reported that in
[00:56:23.179]
2022
[00:56:25.219]
that was one of retail's best years uh with
[00:56:27.550]
strong performance from neighborhood centers,
[00:56:30.079]
community and strip centers. Um This
[00:56:32.179]
really was in large part due to low availability
[00:56:35.309]
um and a very limited development pipeline
[00:56:37.500]
with only about a half percent
[00:56:39.590]
of total inventory under construction per
[00:56:41.688]
co-star.
[00:56:42.909]
Um Looking forward to see that demand may
[00:56:45.179]
outstrip supply and is seen on the
[00:56:47.228]
graph. Um Occupants see
[00:56:49.309]
it's expected to stay elevated at around 95%.
[00:56:52.780]
Um However, there may be some
[00:56:54.809]
softening in rent growth. Um This
[00:56:56.889]
could be a potential result from a slowdown
[00:56:58.949]
in consumer spending. Um Again,
[00:57:01.619]
we're thinking rent growth may start dipping
[00:57:03.668]
below um 3% moving
[00:57:05.780]
forward. Um As you can see in the chart as well
[00:57:11.148]
in terms of opportunities um that we
[00:57:13.208]
are seeing in retail, we believe it's gonna be um
[00:57:15.239]
really worthwhile to pay attention to those
[00:57:17.320]
grocery anchored stores um and well
[00:57:19.349]
located um neighborhood or community centers.
[00:57:22.269]
Um Gross re anchored retail again
[00:57:24.438]
has been performing well and we expect this
[00:57:26.510]
trend to continue really due to its nondiscretionary
[00:57:28.889]
nature
[00:57:29.769]
um and its ability to provide fairly
[00:57:32.168]
stabilized tenancy. Um
[00:57:35.510]
We believe in retail due to the potential ability
[00:57:37.688]
to enter into a deal with positive leverage
[00:57:39.929]
again, like Amna um described
[00:57:42.188]
in hospitality um given where cap
[00:57:44.208]
rates are, um this,
[00:57:46.329]
this really is possible. We're seeing cap rates
[00:57:48.489]
currently in the 5 to 7.5 range
[00:57:50.809]
um per Green Street.
[00:57:52.539]
Um And as an example, um real
[00:57:54.800]
estate Lurk that was published yesterday, just um
[00:57:57.090]
noted that Stockbridge Capital is
[00:57:59.188]
actually marketing a grocery and drugstore
[00:58:01.260]
anchored um component of a
[00:58:03.280]
San Diego shopping center that is fully
[00:58:05.570]
leased going in at a 5.2%
[00:58:08.530]
rate. Um And Stockbridge is actually
[00:58:10.570]
offering seller financing um of
[00:58:12.590]
54 million on this deal um
[00:58:14.860]
at an interest only rate of 3.5%
[00:58:18.800]
for the sale. So, again, that, that's a great example
[00:58:21.398]
of that, that positive leverage there.
[00:58:26.438]
Um in terms of what we're monitoring, um
[00:58:29.510]
you know, really this comes down to the US consumer
[00:58:31.869]
health. Um that really is top of mind,
[00:58:34.010]
you know, they are the the drivers behind retail
[00:58:36.289]
um and have played a large part in the recent
[00:58:38.510]
success of the sector um
[00:58:40.769]
due to the strength of consumer spending. Um
[00:58:42.809]
recall again that post pandemic,
[00:58:45.110]
the consumer savings rate set sat at
[00:58:47.179]
about 30%
[00:58:48.909]
um but fast forward to today
[00:58:51.208]
and that's dropped to 4.1%. So we'll
[00:58:53.250]
really be watching consumer spending habits
[00:58:55.668]
um to monitor um the slowdown
[00:58:57.938]
in spending and it's uh affects some retail.
[00:59:00.648]
Um We're also going to be paying attention to
[00:59:02.949]
new construction starts again, as I mentioned
[00:59:04.978]
previously, currently, there, there's really
[00:59:07.199]
a limited incoming supply pipeline
[00:59:09.329]
in the retail sector. Um but should
[00:59:11.619]
that, you know, change and in that pipeline
[00:59:13.949]
increase, um you know, it, it may have
[00:59:16.128]
an effect on vacancy moving forward.
[00:59:18.148]
Um and that window may begin to close
[00:59:20.269]
on retail's kind of current upward
[00:59:22.309]
run. Um And with that, I'll,
[00:59:24.429]
I'll pass it over to Ian for some closing remarks.
[00:59:31.769]
All right. Well, thanks Anna Marie and thanks Omna
[00:59:33.909]
for insights on on those asset
[00:59:36.148]
classes. So, I mean, overall, you
[00:59:38.250]
know, we're happy and pleased to get the market
[00:59:40.619]
outlook on the street. Uh You
[00:59:42.628]
know, hopefully that some of the comments that we gave today
[00:59:44.849]
brought some color to it brought some, some of those
[00:59:46.949]
aspects to life. Um, you know, this
[00:59:49.070]
is in essence how we see the market
[00:59:51.378]
right now. And these are the things that we are
[00:59:53.478]
looking for and looking for signs
[00:59:55.728]
uh in the months ahead. And, you know, I, I do
[00:59:58.019]
think, you know, and, and then again, we're gonna touch
[01:00:00.409]
upon when, you know, we have a memo coming
[01:00:02.458]
out. But, you know, overall the,
[01:00:04.469]
the it points to the possibility that
[01:00:06.500]
this is an interesting time in the market, you
[01:00:08.708]
know, in essence, what we're seeing is that everything,
[01:00:11.119]
all the bad news, there's, there's, there's been so
[01:00:13.289]
much of it so quickly and it's affected
[01:00:15.530]
the market, you know, as we've seen over the last year,
[01:00:18.070]
what we're starting to see honestly is kind of the
[01:00:20.148]
peter out of the bad news and the beginning
[01:00:22.289]
of the prospect and the possibility of
[01:00:24.398]
some good news.
[01:00:25.530]
Uh And you know, what we've seen from a pricing
[01:00:27.550]
perspective is Omna pointed out earlier in the presentation
[01:00:30.039]
is that pricing in the main asset classes
[01:00:32.289]
of industrial and multifamily, it's been flat
[01:00:34.519]
like they're not, prices aren't going down
[01:00:36.849]
anymore. Cap rates have more or less flattened
[01:00:39.260]
out. So to us, it's just, it's just
[01:00:41.340]
an interesting point in time. Could there be
[01:00:43.619]
future cap rate expansion? Of course, could
[01:00:45.769]
there be, you know, another downward
[01:00:47.789]
leg of pricing? Sure, that's always possible.
[01:00:50.280]
Um But the longer that we sit
[01:00:52.481]
here in this current kind of like sideways trending
[01:00:54.782]
market, the more that we start to gain more
[01:00:57.202]
conviction that maybe if we're not at
[01:00:59.311]
the bottom, we're somewhere near it and
[01:01:01.541]
the backside of the trough might actually be
[01:01:03.612]
somewhere in the short term in the months ahead.
[01:01:06.041]
So these are the signs that we're gonna be looking for.
[01:01:08.163]
We know ultimately that when
[01:01:10.311]
we know that we're through the trough, well, we'll be three
[01:01:12.492]
or four months beyond it. Uh That's how
[01:01:14.643]
we're gonna know that we've gotten through it. Uh, so
[01:01:16.695]
on a day to day basis, we're just looking for these more,
[01:01:18.925]
these day to day signs, our, our assets
[01:01:21.574]
continuing to transact relatively in line
[01:01:23.976]
or at better prices than, than they did
[01:01:26.034]
a month ago is our occupancy
[01:01:28.375]
rates holding is rent growth holding as
[01:01:30.405]
we have discussed, the more that we see that
[01:01:32.436]
the more that we gain confidence that, you know, we're
[01:01:34.655]
kind of somewhere near the bottom of this, uh, it's
[01:01:37.025]
gonna be difficult to get good deals done because
[01:01:39.166]
of the way the capital markets continue to function
[01:01:41.739]
and we expect that for months ahead. Um, but
[01:01:44.059]
to the extent that we can find good deals, you
[01:01:46.119]
know, to the extent that we see we're gonna, we're leaning in
[01:01:48.409]
to those deals that, that are well priced,
[01:01:51.000]
have the right types of capital associated
[01:01:53.228]
with them are constructed. Well, and I think the
[01:01:55.269]
key thing in our mind right now is that
[01:01:57.478]
deals that stand out to us are ones that
[01:01:59.489]
don't require a tremendous amount
[01:02:01.760]
of short term, you know,
[01:02:03.769]
good news, uh in order to
[01:02:05.829]
affect business plans, in essence, if we can get
[01:02:07.860]
into deals right now and kind of continue
[01:02:10.159]
to kind of slog through the short term
[01:02:12.378]
and, and then have greater confidence that there's
[01:02:14.579]
maybe some tailwinds in 24
[01:02:16.739]
25. Uh but we're priced right,
[01:02:19.090]
and we're capitalized right in the short term.
[01:02:21.119]
I think that to us is, is what looks like a winning
[01:02:23.449]
business plan. Um So with that, I think
[01:02:25.780]
uh we're gonna invite Ryan back back in
[01:02:27.958]
because we gotta get into Q and A, we got about 12 minutes
[01:02:30.110]
or so. Uh So Ryan come
[01:02:32.260]
up and join us
[01:02:33.519]
before that. Um ok. Yeah, sorry. Uh
[01:02:35.530]
So, yeah, so on that. Yeah, so before we
[01:02:37.610]
do Q and A I guess I was thinking we were gonna do that at the
[01:02:39.648]
end. Uh But let's jump into some of the updates.
[01:02:43.530]
Um
[01:02:44.599]
I'm just gonna keep this quick. So a quick
[01:02:46.938]
update, we recently released our commercial
[01:02:49.260]
real estate outlook and opportunities mid-year report,
[01:02:52.179]
which you should have received in your email.
[01:02:54.219]
It essentially covers what we talked about today,
[01:02:56.378]
but in greater detail, you can also
[01:02:58.610]
find a niche asset class section
[01:03:00.659]
there. We also touch on student housing, self
[01:03:02.918]
storage and life sciences.
[01:03:04.780]
Also a quick coming soon announcement
[01:03:06.809]
that Ian wrote his third memo and we
[01:03:08.949]
will be releasing it tomorrow. It's titled
[01:03:11.239]
Are We Out of the Woods? Yet, Ian shares
[01:03:13.619]
his thoughts on where we are in the current market
[01:03:15.719]
cycle when Powell might begin to
[01:03:17.739]
lower interest rates and what, where we may
[01:03:19.829]
be headed, um, in the next
[01:03:21.958]
phase of the cycle.
[01:03:23.530]
Um And I hope that's informative for you.
[01:03:25.639]
Final note that uh after the Q and
[01:03:27.750]
A you'll receive a survey that'll pop pop
[01:03:30.188]
up. Uh Please take that to give us your
[01:03:32.208]
feedback on these calls and I'm gonna pass
[01:03:34.409]
it back to Ryan. Let's jump into Q and A.
[01:03:37.889]
All right. Thank you. A great presentation.
[01:03:40.349]
This is my favorite part, which is the Q and A
[01:03:42.619]
um some interaction here with the uh viewers
[01:03:45.090]
of the audience. Um At the end of the day, we want
[01:03:47.219]
to provide you information on what you want to hear.
[01:03:49.510]
So I do encourage you still use the chat
[01:03:51.809]
feature at the bottom of your screen. If you do have a question
[01:03:54.728]
um that you want answered, please type that in
[01:03:56.769]
and we can get, get to you. I will say again,
[01:03:59.050]
this presentation is going to be on the market
[01:04:01.309]
as, as a whole. So if you do have a question on
[01:04:03.530]
a specific asset or an investment that you see on
[01:04:05.590]
the Crowds Street marketplace, go to crowds street
[01:04:07.760]
dot com. Sign up. If you don't have an account,
[01:04:09.820]
we do have the resources available to answer those.
[01:04:12.070]
But this is not the forum for that.
[01:04:13.849]
Um In the, I'm looking at the questions
[01:04:15.978]
that are coming in here. I do see some themes
[01:04:18.260]
um and they do kind of tailor to the presentation
[01:04:20.409]
that was just given a lot of questions about
[01:04:22.648]
debt. Uh And I'm gonna start Anna Marie
[01:04:25.090]
on the multifamily side here
[01:04:27.159]
because we do look at a lot of multifamily deals together.
[01:04:29.780]
A question that came in from John
[01:04:31.869]
here um are loans
[01:04:33.989]
more available to multifamily
[01:04:36.250]
refinances compared to
[01:04:38.269]
multifamily acquisitions.
[01:04:40.409]
Um And maybe you can provide some color on the
[01:04:42.449]
availability um and
[01:04:44.489]
details of uh of multifamily loans.
[01:04:47.039]
Um You know, I think instead of thinking
[01:04:49.139]
about it probably as refinances versus
[01:04:51.474]
acquisitions, I think it kind of more.
[01:04:53.514]
So um is looking
[01:04:55.684]
at the the kind of status of the asset in terms
[01:04:58.103]
of is the asset stabilized. Um
[01:05:00.353]
If you have a stabilized asset, it's definitely
[01:05:02.385]
gonna be easier to refinance. You know, you have
[01:05:04.603]
the agency financing through Fannie Mae
[01:05:07.219]
um and in Freddie Mac that um
[01:05:09.289]
is available for those. So if you have a stabilized
[01:05:11.610]
asset, it's able to, to cover debt service
[01:05:14.510]
um typically, right, those would be underwriting
[01:05:17.099]
to a 1.25 coverage ratios
[01:05:19.340]
is what you'd be looking for. Um debt
[01:05:21.708]
is available. Um They granted
[01:05:24.519]
again, some of the proceeds may be a bit lower. So
[01:05:26.619]
on refinances, it also is gonna,
[01:05:28.869]
you're gonna have to consider how much debt is currently
[01:05:30.969]
on the property. Are you gonna be able to
[01:05:33.070]
cover that with the new proceeds? And if not,
[01:05:35.168]
you may have what is known as um
[01:05:37.570]
an equity in refinance where
[01:05:39.610]
you know, the owners will have to put in equity alongside
[01:05:42.329]
the debt um to, to get the,
[01:05:44.688]
the original loan that you're trying to refinance
[01:05:47.429]
um covered.
[01:05:48.648]
Yeah. And you know, the other thing I've seen Anna Marie is
[01:05:51.039]
the availability is there a lot of times it comes
[01:05:53.159]
down to proceeds and rates,
[01:05:55.398]
we are see proceeds coming down, we are
[01:05:57.539]
seeing rates and spreads increase.
[01:05:59.898]
Um So the financing is there, it's just different
[01:06:02.030]
than it was, you know, a year ago.
[01:06:05.340]
Um Another question on
[01:06:07.699]
um debt as well here. So
[01:06:10.168]
uh a lot of noise about
[01:06:12.260]
maturities. We, we touched on this a little bit
[01:06:14.320]
but we do see a lot of debt maturities coming
[01:06:16.329]
up. There was a recent report from Politico
[01:06:19.260]
uh that was called CRE debt
[01:06:21.289]
maturities, a potential time bomb.
[01:06:23.869]
Um What are your thoughts on this narrative?
[01:06:26.570]
And, and especially what we're hearing in the news in terms
[01:06:28.599]
of debt maturities both for CM BS
[01:06:30.820]
um but also for agency. Um
[01:06:32.889]
I and maybe you can take a first step at that one and then would
[01:06:34.949]
love to hear some other thoughts as well.
[01:06:36.599]
Yeah, sure. And we did, we, we put out just a little
[01:06:38.800]
brief piece on this uh just this week touching
[01:06:41.119]
on that and what we're seeing is.
[01:06:43.280]
So first, I think you have to look at where
[01:06:45.300]
debt maturity is coming from. Uh multifamily
[01:06:47.469]
is about half of all outstanding debt,
[01:06:49.639]
roughly four trillion of outstanding
[01:06:51.659]
debt. So multifamily being about
[01:06:53.679]
two trillion of that and then, and then also
[01:06:55.820]
looking at the potential for like so then with that
[01:06:57.918]
two of the two trillion of commercial, so by and
[01:06:59.969]
large, a lot of the multifamily debt as we just
[01:07:02.039]
touched upon as it's coming due.
[01:07:04.159]
Uh There isn't like major distress in, in
[01:07:06.250]
much of that, there's gonna be pockets of distress.
[01:07:08.878]
Um but it's
[01:07:10.429]
gonna be limited to, did you buy,
[01:07:12.449]
you know, at the, at the, you know, at the peak pricing,
[01:07:14.688]
did you, did you over lever that asset?
[01:07:17.039]
Um but assets that were acquired, you know, 34
[01:07:19.079]
or five years ago, they've seen enough rent growth,
[01:07:21.309]
they've seen enough asset appreciation. Um
[01:07:23.389]
They've given some of that back this year, but more
[01:07:25.489]
or less those, those loans are still relatively
[01:07:28.119]
intact. It's really gonna be on the office
[01:07:30.269]
side, ok. Look, but there's about 100 and
[01:07:32.289]
my recollection about 100 and $30 billion
[01:07:34.590]
of maturities of, of office
[01:07:36.708]
coming due. And that's over the
[01:07:38.719]
next two years and even within the office
[01:07:40.918]
sector and what we touch upon in this,
[01:07:43.019]
in that brief blog post that we put out is
[01:07:45.458]
that, you know, and, and we had this slide,
[01:07:47.500]
you know, uh in one of our slides we talked about, you
[01:07:49.599]
know, the extend and pretend
[01:07:51.309]
and that's a phenomenon when you
[01:07:53.418]
have maturities coming due, when you
[01:07:55.478]
have a macro driven event that's
[01:07:57.648]
happening right now for the office sector,
[01:07:59.719]
it's not necessarily to say like the lenders don't
[01:08:01.860]
really want the those assets right now. If,
[01:08:04.079]
if you have a bad, if you have a, an asset that's
[01:08:06.219]
underwater and you believe it's operator driven,
[01:08:08.699]
ok? You're gonna take that asset back, you have to
[01:08:10.719]
cure that problem. You think that problem is
[01:08:13.090]
the current borrower and you're gonna look to
[01:08:15.239]
liquidate the asset or you know, potentially
[01:08:17.270]
install a new operator when it's macro driven
[01:08:19.319]
like it is right now, you, you, you view
[01:08:21.369]
that borrower more as kind of a your partner. You're like, hey, we
[01:08:23.475]
got to get through this all together. Um That
[01:08:25.765]
is going to create scenarios
[01:08:28.015]
where the lender wants the borrower to
[01:08:30.204]
put in some money, put it, you know, both in the
[01:08:32.293]
forms of an equity contribution that Anna just touched
[01:08:34.454]
upon put in additional reserves
[01:08:36.645]
more or less, help them kick the can and
[01:08:39.003]
hope that in the, in two or three years out from
[01:08:41.173]
now that they're in a better environment, asset
[01:08:43.293]
values have popped up a little bit. Maybe that that asset
[01:08:45.640]
is back to being in a better loan to value position.
[01:08:48.140]
So we're already seeing that happen. So
[01:08:50.310]
our, you know, the way that we summed it up was, do
[01:08:52.369]
we, do we think that CRE maturities are
[01:08:54.588]
a time bomb? A giant time bomb? No,
[01:08:56.829]
I'd say that it's a series of these small
[01:08:59.079]
incendiary devices. A couple of them are going
[01:09:01.100]
to blow up and then others are going to get diffused through
[01:09:03.350]
that, that those workouts in terms
[01:09:05.378]
of the extent of pretend. So we'll continue
[01:09:07.539]
to monitor that on an ongoing basis, but that's
[01:09:09.663]
what we see in the market right now. And I'll just add
[01:09:11.813]
there that the uh amount of loans that are
[01:09:13.962]
expiring within the next two years. Office
[01:09:16.434]
makes up about 20% and multifamily
[01:09:18.443]
is actually making up about 30%. And
[01:09:20.873]
most of those multifamily loans are not expected
[01:09:23.033]
to be distressed. So I think looking at percentage
[01:09:25.313]
really matters, like break it down and then
[01:09:27.394]
see exactly that it's not that big
[01:09:29.453]
time bomb, but that it's a little bit
[01:09:31.563]
more nuanced than that.
[01:09:33.009]
Yeah, exactly. You know, the underlying information
[01:09:35.159]
behind those loans is really important and that
[01:09:37.199]
is a good segue. We do have some questions coming
[01:09:39.259]
in on the office market as a whole. Um
[01:09:41.789]
One question here, concern in the office market
[01:09:44.039]
is that it seems like there's a push from
[01:09:46.250]
organizations to bring their workers
[01:09:48.458]
back into the office. So we all went remote
[01:09:50.514]
2020 now you're starting to see a push to bring
[01:09:52.693]
workers back into the office. Um
[01:09:55.002]
What do we think some clear signs will
[01:09:57.193]
be? Um, that we're now kind of at
[01:09:59.243]
that inflection point where you start to see
[01:10:01.292]
office utilization um
[01:10:03.413]
increasing versus, versus decreasing.
[01:10:07.009]
Sure, I guess I'll jump in on that one. There's a couple of things
[01:10:09.079]
to think about in terms of office utilization.
[01:10:11.239]
Uh So as I mentioned earlier, you know, nationwide,
[01:10:13.619]
we're about 50% utilization rate right now.
[01:10:16.298]
Um we are continuing to see more,
[01:10:18.708]
more companies announce, you know, the
[01:10:20.779]
return to the hybrid office. And I think
[01:10:22.918]
that is the operative term, right? I think that as
[01:10:25.079]
we get back to what is the new normal for office?
[01:10:27.689]
Uh as you know, it's been anecdotally,
[01:10:29.979]
you know, pointed out Friday is dead
[01:10:32.289]
as an office day probably forever.
[01:10:34.470]
Monday is kind of like up in the
[01:10:36.509]
air, do people come in or not? But
[01:10:38.649]
growing consensus around that, you know, office
[01:10:41.029]
at stabilization will look like,
[01:10:43.189]
you know, a lot of people returning to an office
[01:10:45.199]
wherever they live and work uh from a Tuesday
[01:10:47.579]
to Thursday kind of basis, there are gonna
[01:10:49.680]
be some companies that continue to live
[01:10:52.208]
in a, you know, in a remote, you know, world.
[01:10:54.859]
Um but that, that's gonna be, you know, it's
[01:10:57.239]
gonna be anecdotal in the, in the overall picture,
[01:10:59.298]
right? I do think that we get back to
[01:11:01.479]
better utilization. I think the the
[01:11:03.699]
statistic that in my mind sticks out is
[01:11:05.798]
making sense is that Doctor Peter Letterman talks
[01:11:08.270]
about this kind of like two thirds back.
[01:11:10.539]
So when we see daily utilization
[01:11:12.720]
get back into the two thirds range. That means
[01:11:14.918]
that like it's a 2 to 1 in the office versus
[01:11:17.109]
kind of out of the office. And he thinks that
[01:11:19.319]
is the point where that's the tipping point
[01:11:21.444]
where everyone's gonna look around and say, well, if I'm
[01:11:23.524]
not in the office, I'm, I'm actually in the,
[01:11:25.654]
in the, in the minority here. I should probably be
[01:11:27.704]
in the office if I care about my advancing
[01:11:30.104]
my career because those decision makers,
[01:11:32.324]
well, they're back in the office now. And
[01:11:34.423]
as, and as we've learned, as, you know, as a lot
[01:11:36.774]
of data out there suggests, you know, being
[01:11:38.824]
in the office, being in front of decision makers is
[01:11:40.875]
a good way to advance your career. So I think that
[01:11:43.114]
will be an interesting point. Um But
[01:11:45.225]
overall, you know, and I think there's one interesting
[01:11:47.463]
trade, if we want to talk about more
[01:11:49.489]
like the upside and what's the potential
[01:11:51.579]
bull case for, why office might look better
[01:11:53.859]
in the next few years? Just look at what
[01:11:56.020]
happened in New York. Just this week. Sl
[01:11:58.208]
Green announced that they sold a 49.9%
[01:12:01.539]
stake in their 2 45 Park
[01:12:03.838]
Avenue Office Tower to Mari Trusts,
[01:12:06.088]
Japanese Group and a gross
[01:12:08.128]
asset valuation of $2 billion.
[01:12:10.609]
That's $1100 per square foot.
[01:12:12.930]
Now, it's fair to point out that that deal
[01:12:15.088]
did benefit from fixed rate
[01:12:17.119]
debt of 4.2% that's in place
[01:12:19.390]
through 2027. So that definitely affected
[01:12:21.520]
valuation there. But at the same time,
[01:12:23.918]
that's a real trade. That's a big asset.
[01:12:26.229]
It is, it is a, it's a fantastic
[01:12:28.649]
asset and it's,
[01:12:30.100]
you know, in a core location, Park Avenue
[01:12:32.270]
is not going anywhere in New York. And
[01:12:34.369]
if there's a, a major group that's willing to come
[01:12:36.409]
in today with all things known in the market
[01:12:38.939]
and post an $1100 per square
[01:12:41.239]
foot valuation, it tells you that
[01:12:43.270]
that office market is not dead,
[01:12:45.439]
that there are groups out there that are fully bullish
[01:12:47.470]
on what it might look like in the future.
[01:12:49.739]
Yeah, I think it's really interesting. I mean, if you take
[01:12:51.890]
a step back and we all went remote, right? We didn't
[01:12:53.939]
have a playbook for how to operate in this
[01:12:56.180]
environment. And I think we've figured out a lot of things, but
[01:12:58.279]
one of the pieces that I think has been very difficult
[01:13:01.069]
is that employee growth, especially for
[01:13:03.079]
the younger employees, right? Who don't
[01:13:05.128]
have the ability to sit in the conference room, like
[01:13:07.149]
hear those conversations with the senior leadership
[01:13:09.199]
team members. Um I think that's something that
[01:13:11.338]
is missing and, you know, we haven't
[01:13:13.449]
found a way to cure that in a remote environment,
[01:13:15.628]
bringing people back to the office. Definitely,
[01:13:17.850]
Ian to your point helps out it's important to be in the room
[01:13:20.020]
with the decision makers, you know, hear the conversations
[01:13:22.520]
that they're having. And so I think that is going to draw
[01:13:24.729]
more people back into the office that
[01:13:26.878]
two thirds, one third is an interesting inflection point to
[01:13:28.949]
pay attention to as well.
[01:13:31.588]
Um Another question here in the office
[01:13:33.689]
uh space really quickly and IAN
[01:13:35.739]
this kind of got me thinking the the deal that you
[01:13:37.798]
had mentioned
[01:13:38.909]
where we went from 400 million plus
[01:13:40.949]
down to 287 to 40% decrease
[01:13:43.609]
in value.
[01:13:44.759]
So, you know, when are we going to start to see
[01:13:46.979]
the office space shrink, right? Like
[01:13:49.100]
the repurposing of some of these buildings,
[01:13:51.310]
especially in the major metros, like if
[01:13:53.489]
you go from 400 plus million down to
[01:13:55.539]
2 87 not only is that, you
[01:13:57.659]
know, just kind of not the best use for that building
[01:13:59.789]
but also the the tax base, right? That tax
[01:14:02.125]
revenue from, from that building to the municipality,
[01:14:04.914]
that's a huge issue if you see that across the board.
[01:14:07.234]
So, you know, are we starting to see some
[01:14:09.875]
uh office space convert to either multifamily
[01:14:12.914]
or other uses or, or where do you kind of see
[01:14:14.994]
some of those obsolete buildings moving to
[01:14:17.595]
uh moving forward?
[01:14:19.369]
Yeah, so there's there's a few things going on there a lot to
[01:14:21.449]
unpack, but let's just kind of dive in and talk about it.
[01:14:23.529]
So first, um you know, do we think
[01:14:25.720]
that there are office buildings out there that can
[01:14:27.739]
convert into other uses such as multifamily.
[01:14:30.470]
Uh The answer is yes, we actually, we talked about
[01:14:32.668]
this, there's an article that we, we put out on it.
[01:14:34.829]
Um But, but in the, as,
[01:14:36.869]
as a percentage of the overall stock,
[01:14:39.020]
it's actually pretty low. Um, New York Times
[01:14:41.326]
did a really cool article on this earlier this year
[01:14:43.386]
that talked about all the things that you need
[01:14:45.786]
in order to convert an office into
[01:14:47.984]
multifamily, you need proximity
[01:14:50.015]
to windows. Uh My recollection is you
[01:14:52.036]
want to be about 18 ft from a window in
[01:14:54.185]
a, in a residential building. You know, you've got
[01:14:56.425]
deep floor, you know, 19 fifties,
[01:14:58.444]
sixties constructed office buildings in places
[01:15:00.795]
like New York, that you might be 60 ft from a window.
[01:15:03.332]
That means that you have to then punch light walls
[01:15:05.421]
down through the middle of these things. That may
[01:15:07.501]
be exactly where you put all
[01:15:09.520]
the core operating, you know, mechanics of
[01:15:11.582]
the building in an office building such as your, your
[01:15:13.730]
power, your plumbing, your
[01:15:15.872]
elevators and so forth. So long
[01:15:18.101]
story short, there's a lot that goes into, can
[01:15:20.431]
you convert a building,
[01:15:21.918]
some of the older ones, the smaller floor plate
[01:15:24.279]
kind of that turn of the century building. And those
[01:15:26.649]
also have some of those kind of like interesting characteristics
[01:15:29.140]
to them that kind of set up for, you know, potential
[01:15:31.189]
office conversions. We've seen some of those
[01:15:33.220]
we will, I think we still see some of those going forward,
[01:15:35.378]
but that's not a big percentage of the stock. So I think
[01:15:37.759]
there's still a lot that sits there. You
[01:15:39.838]
know, my personal opinion is that I think when
[01:15:41.918]
we think about, you know, going through
[01:15:43.939]
this, ok, there's another Cushman and Wakefield
[01:15:46.798]
also talked about this kind of stratification
[01:15:49.000]
of office. You've got your best office
[01:15:51.418]
top 15%. That's the stuff
[01:15:53.520]
that's always gonna be fine. It's gonna be well occupied
[01:15:55.619]
and it's gonna be well occupied. Going forward. There's
[01:15:57.668]
that next kind of 15 to 20%.
[01:16:00.020]
And then, you know, and then they go to the next layer and the bottom,
[01:16:02.520]
the bottom is this, this what they continued like that,
[01:16:05.015]
that bottom third or so is really
[01:16:07.333]
the stuff that I think languishes, it's what we
[01:16:09.454]
call commoditized. It's older,
[01:16:11.914]
it's maybe seventies and eighties vintage. It has
[01:16:13.944]
low ceiling heights, there's really nothing
[01:16:16.694]
compelling about it and there's no reason
[01:16:18.854]
you really want to be in it. It used to be
[01:16:20.914]
occupied for the basis of cheap rent.
[01:16:23.439]
And there may be some demand for that
[01:16:25.509]
on a on a go forward basis. But increasingly
[01:16:27.750]
what we're seeing is that return to office
[01:16:29.958]
is give me a, a compelling reason to
[01:16:31.979]
be in that space and I'll come there. Hence
[01:16:34.430]
the 2 45 Park Avenue scenario, that's
[01:16:36.449]
a compelling office building to go be
[01:16:38.619]
in, go visit it and you'll experience why.
[01:16:40.939]
Um So from my perspective, I think
[01:16:43.039]
that there could be years where you have this
[01:16:45.109]
commoditized class B class
[01:16:47.180]
C office space, just sit there and languish
[01:16:49.810]
um You, it probably sits there at 50%
[01:16:52.208]
occupied. It gets down to a basis
[01:16:54.220]
where it's, you could kind of continue
[01:16:56.600]
to limp it along. Um Ultimately,
[01:16:58.930]
these things get down to, they really
[01:17:01.100]
have to get below land value because you, you
[01:17:03.164]
have to pay to demolish it
[01:17:04.664]
once you hit that, those levels. That's
[01:17:06.904]
when you see those buildings start to go away, get
[01:17:09.043]
repurposed from a new ground up construction.
[01:17:11.534]
Be it a new shopping center, a new multifamily
[01:17:13.543]
deal or whatever. Um But that's
[01:17:15.595]
a multiyear thing that needs
[01:17:17.845]
to kind of unfold. And so which is
[01:17:19.904]
why I said in the meantime, I think this is another
[01:17:22.384]
1 to 2 years of continual price
[01:17:24.435]
discovery.
[01:17:25.418]
I think the stuff that bounces back, that's what
[01:17:27.439]
you, you pick up at cheap prices and
[01:17:29.628]
you kind of watch the other stuff, language
[01:17:31.649]
and you know, sorry uh language and then slowly
[01:17:34.439]
and gradually get repurposed as
[01:17:36.579]
those assets get down to land value.
[01:17:38.890]
Yeah, definitely a plate to quality and it's,
[01:17:40.970]
you know, coming from a construction background, I started my
[01:17:43.069]
career in commercial construction. It's not
[01:17:45.159]
as easy as just repurposing something
[01:17:47.329]
that was designed to be an office building into
[01:17:49.619]
multifamily or self storage. There's a lot of
[01:17:51.668]
work that goes in there. And I, and to your point
[01:17:54.020]
too, you really have to get these at a basis
[01:17:56.088]
that is so attractive that you're, you
[01:17:58.244]
know, below the land value here because you
[01:18:00.305]
do have to peel the walls back. And once you
[01:18:02.384]
do that, you have no idea what you're gonna find in some
[01:18:04.454]
of these projects as well that were built, you know, 30
[01:18:06.744]
40 years ago. So those more obsolete
[01:18:09.064]
buildings are gonna be the ones that are more expensive
[01:18:11.194]
to convert. Um And it really just doesn't
[01:18:13.293]
set up well, just based on how the building was constructed
[01:18:15.765]
originally.
[01:18:16.805]
Um I'm gonna do one more question here because I know we're
[01:18:18.833]
already a couple of minutes over. Uh, and then we can
[01:18:20.963]
wrap up here, but this is an important one especially
[01:18:23.395]
that's something that we're seeing in real time.
[01:18:25.458]
Um, and it's relating to insurance.
[01:18:27.489]
So insurance is one of the most confounding elements
[01:18:29.500]
of a multifamily deal. I am hearing
[01:18:31.759]
many um, insurance
[01:18:33.878]
quotes costs that are doubling or tripling
[01:18:36.239]
year over year. Can you provide any
[01:18:38.298]
color on where you see the insurance
[01:18:40.600]
market heading? Um And when it might
[01:18:42.720]
stabilize where we might start to see some
[01:18:45.329]
um realistic expectations of where
[01:18:47.458]
those costs are gonna be coming in because it has
[01:18:49.680]
been difficult over the past couple of months.
[01:18:53.060]
Yeah, I guess I'll, I'll start with that, Anne Marie. If you've got
[01:18:55.189]
any additional thoughts, feel free to jump in.
[01:18:57.239]
But, you know, I think the, the one thing of course, so
[01:18:59.659]
to begin with our insurance rates going up.
[01:19:01.770]
Yes, they're going up, you know, going up at a, at a national
[01:19:04.329]
level. Uh, they're, they're concentrated
[01:19:06.548]
in areas, uh, that have, you know, kind
[01:19:08.699]
of extreme weather attached to them such as like
[01:19:10.708]
Florida. Um, Houston comes to mind.
[01:19:12.930]
We've seen, you know, a good spike in insurance
[01:19:15.239]
costs there. Uh, you know, I think the one
[01:19:17.270]
thing to point out, ok. So other than just
[01:19:19.378]
we, we look at it day to day on every
[01:19:21.699]
day, every deal, every asset, I think the
[01:19:23.729]
one thing to call out here in terms of like
[01:19:25.899]
how do you get to, you know, better
[01:19:28.369]
visibility on insurance costs. This,
[01:19:30.659]
this is a sponsor thing more even
[01:19:32.789]
sometimes than it is just a, you know, a market
[01:19:34.939]
thing because when, when you look at one
[01:19:37.095]
sponsor, for example, has I'll just use a number
[01:19:39.475]
a million square foot portfolio, few
[01:19:41.543]
different assets, couple locations,
[01:19:44.104]
they're gonna go buy another property or build another property,
[01:19:46.963]
they're gonna get an insurance quote that is gonna
[01:19:49.034]
be reflective of their overall exposure.
[01:19:51.673]
One thing that's very common in the commercial industry
[01:19:53.994]
we see is that you do,
[01:19:56.095]
you basically span you basically cross
[01:19:58.154]
collateralized most so to speak, your insurance
[01:20:00.414]
ex exposure across the whole portfolio,
[01:20:02.720]
the uh the the insurance companies want
[01:20:04.859]
that portfolio coverage as well, right? Because that mitigates
[01:20:07.279]
that one off, you know, isolated risk
[01:20:09.539]
to a particular building.
[01:20:10.970]
So if you only have a million square foot portfolio.
[01:20:13.270]
You can only aggregate and ex and spread your
[01:20:15.289]
insurance costs across a million square feet.
[01:20:17.359]
Now, if you have a 10,000,020 million square
[01:20:19.409]
foot portfolio, now you're, now you're
[01:20:21.470]
getting economies of scale. That's turn,
[01:20:23.588]
that turns into tremendous pricing
[01:20:25.729]
power and, and gives you the ability
[01:20:28.060]
to, to take that, take that
[01:20:30.229]
I, that, you know, that Florida risk
[01:20:32.270]
and now you're diversifying it across the rest of
[01:20:34.298]
the country so that insurance company
[01:20:36.350]
isn't necessarily, yes, they're quoting you on the
[01:20:38.378]
next building,
[01:20:39.529]
but they're quoting you on the next building in Florida
[01:20:41.628]
based upon what your overall portfolio
[01:20:43.680]
looks like. And when you put one Florida
[01:20:45.750]
building into a greater portfolio of assets
[01:20:48.088]
spread across the country, well, now you've
[01:20:50.128]
spread and diversified that single asset
[01:20:52.229]
risk into a broader portfolio. So
[01:20:54.310]
to me, the name of the game right now is really look
[01:20:56.329]
for those groups who are able to manage
[01:20:58.350]
their insurance costs by aggregating
[01:21:00.708]
and, and operating larger portfolios.
[01:21:03.338]
Thanks, I am.
[01:21:04.369]
All right, we are out of time here. I do want
[01:21:06.619]
to remind you, we had the commercial real
[01:21:08.739]
estate outlook and opportunities. Mid-year
[01:21:10.798]
2023 report released on June
[01:21:12.838]
15th.
[01:21:13.909]
Uh And coming soon, we have the memo from
[01:21:15.958]
the office of the Cio the third edition.
[01:21:18.359]
Are we out of the woods yet that'll be released later
[01:21:20.579]
this week? Uh Again, really appreciate
[01:21:22.729]
everyone taking the time to jump on listen
[01:21:24.890]
to the presentation again. Go to crowds
[01:21:27.009]
street dot com. If you do have questions
[01:21:29.060]
on the marketplace, we have a lot of resources available
[01:21:31.159]
to you there. We also have ac re
[01:21:33.189]
education center there that goes from CRE
[01:21:35.359]
101 all the way up to more advanced
[01:21:37.378]
topics. So definitely a place to check out in
[01:21:40.119]
Anna Marie. Ana. Thank you for joining us
[01:21:42.449]
again. Appreciate you tuning in. We'll see
[01:21:44.500]
you soon.
[01:21:46.079]
Thank you. Bye.