Flash Call with CrowdStreet Advisors' Chief Investment Officer

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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.

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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

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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

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um commercial real estate um

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lending.

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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.

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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

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in and fill some of those gaps in terms of proceeds

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on deals and getting deals done. But again, the cost

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of financing is going up and that's making

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it more difficult to, to get deals done.

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Um So with that, I'll, I'll pass it back to you, Ian to, to talk

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about inflation.

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Thanks Mary, you know, and one of the things just to call

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out in terms of those lending standards that we're seeing

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is that obviously in the wake of,

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you know, the the mini banking crisis that we had earlier

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this year in the way in the form of SBB

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and First Republic is that, you know, banks

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are looking to maintain liquidity.

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Um That's

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sorry about that. We're having some technical difficulties

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on audio. We should be back with you here shortly

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uh with Ian

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talking about inflation.

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All right, sorry for that pause while,

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while we have the technical difficulties, but it sounds like

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we're back on track.

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Uh So really what I want to call it is in terms of

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those, those lending standards that this is,

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you know, for, for the short term,

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you know, leading through the rest of the year, we

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continue to foresee that the ability to

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get debt will be difficult. Um

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It has interesting counter effects, right?

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I mean, it's gonna slow transaction volume down.

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Um But on the flip side, it's going to place

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a higher level of scrutiny on deal flow. And

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really what we're seeing is that it's raising the bar,

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so to speak, for all deals, so deals,

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you know, the the lower half kind of the 50 percentile

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and below type deals that might have gotten done

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in the past, they don't get done now. Um And

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so I think that creates some interesting opportunities

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um down the road that we'll talk about, you know, in

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a few more minutes, but let's talk about inflation

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for a minute because as we all know,

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in the inflation has been the story of,

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you know, the greater macro market for the last

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year and a half. It's what's driving

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the commercial real estate market on a monthly

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basis.

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In essence, everybody the entire market

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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.