Global Real Estate | Global Conference 2024

please welcome the panel on global real estate moderated by editorial director of Bloomberg new economy Eric shatzer [Music] good afternoon everyone it's good to see you welcome to the milin Institute Global conference 2024 panel on global real estate I'm Eric shatzer I'm going to quickly introduce my guests to my left is Kathleen McCarthy of Blackstone the Behemoth in real estate with almost $350 billion in assets El Rael the CEO of can Anders sitting to sitting to her left David Steinbach of Hines a company you may not know that well Global real estate manager with $100 billion in assets and he's going to kill me for saying this but on the far last is one of the Elder Statesmen of real [Laughter] estate the wrong foot who would that be um collectively we've got about $600 billion in real estate assets on stage well at least Equity invested in real estate of course levered up there's a whole lot more in real estate here um Global real estate makes this a bit of a tough assignment um cuz as the saying goes real estate is local uh so this panel in addition to touching on overarching factors that affect all properties everywhere we'll try to take you on a bit of a global tour of local markets of asset classes and funding sources and I hope you will all leave enriched by the perspectives of our panelists um I would love to see some questions from the audience everybody I have an iPad here I'm going to try and weave them into the conversation so that they're contextual please don't submit the questions toward the end waiting for a 10-minute Q&A period there won't be one so without further Ado Shall We Begin uh real estate has been a painful place as you probably know uh you know the industry is dealing with a vexing mix of everything from interest rates to post-pandemic vacancies to geopolitics uh there's been a lot of extend and pretend keeping transaction activity down not to mention plenty of uncertainty over the trajectory of fed policy so it's hard to know whether all the bad news has been priced in or not uh the question I'd like to begin with to our panel is have we hit bottom at the very least and say us commercial real estate retail or will this be a bumpy ride further down with lots of balance sheet restructuring ahead and a hard Landing to come Kathleen why don't you start us off thanks Eric from our perspective we are bottoming I would say it's hard to ever know if you've actually hit the bottom until you're past it but what we look at is that it feels to us that you know there's there's bad news coming but it's mostly kind of the aftermath of the Shipwreck that already happened and when you see some of the the building blocks of recovery coming into place it feels like we're probably you know at the bottom now we might not be heading straight up to your question but again to us it feels like uh when you have cost of capital coming down which you despite the fact that interest rates say high are still high thanks to spreads coming back in cost of capital's coming down you've also seen in this cycle a very quick reaction function in terms of new Supply so new Supply down sharply even in even in strong sectors like Logistics or rental housing um I think rental housing you know this year we see starts 45 % down versus you know the peak a couple of years ago and so to us that kind of leads you to you know brighter days ahead but I think there's still going to be a lot of opportunity as you know to your point you have to work through over levered Capital structures business plans that haven't worked um and and you know that's where you're going to see the transaction activity coming as this kind of volatility settles out who wants to go next I mean I agree with I agree with the bottoming Dynamic a person I think that the FED is in a situation is between a rock and a hard place and that the FED will be easing um I've been in the hard Landing camp for a long time I still think we're going to have a hard Landing but I think the opportunity set is now because I think the the bad news as Kathleen said the bad news is in and the reason that I think the FED has to ease is because bank balance sheets are in a very precarious position and when people talk about inflation it's usually focused on price versus asset but you've had Masset massive asset deflation due to the fact that you had quickly Rising interest rates and that has put bank balance sheets in a very tough spot and I think Jerome Powell and I know Barry will have some very nice things to say about Jerome um as the session continues but I I think that he understands that the greater risk between price inflation and asset deflation is asset deflation so what does that mean that means right now we're in the bottoming phase we've had a lot of bad news and I think we're looking at a more constructive interest rate environment going forward and you're also looking at Force selling in many places because of structural leverage which means you know a very big opportunity and I would say that much like the pandemic created winners and losers you I mean you mentioned Eric you know real estate there's been a lot of pain and that's true but there have been winners and losers and and we've focused on demographics as Destiny for a long period of time and the the focus is really on inelastic demand so that that's so when you're in sectors that that um that have that inelastic demand you don't get hit the same way that you do when you're in what I'll just say sort of a more macroeconomic driven sector obviously the poster child for that is office space Al could I just ask you to elaborate very briefly on what a hard Landing looks like what a hard Landing looks like well we've had um eight inverted yield curves this is the ninth since 1962 in seven of those eight times um an inverted yield curve has led to a recession uh The Only Exception was 1967 so this is the second longest inverted yield curve that we've ever had in the last 50 plus years so you know what do it look like I mean I think we're looking at I I think there are a lot of deflationary Dynamics in the economy and do I think we're headed to stagflation no I think we've got a strong economy but I think you're going to see easing wage growth which by the way I think is another reason that now is the time to buy and I would I would classify now as sort of today for the next 24 months plus or minus because the Confluence of events demand drivers uh or demand you know demand Tailwinds um if you're in the right sectors Supply Tailwinds because you have massively reduced Supply combined with a buying opportunity that's that's sort of the trifecta and that Confluence of events is not going to stick around for the next seven years for everybody to feel comfortable David I think there's a there's both a a strategic lens to look at the market today and a tactical one I think on the Tactical side I think that I I fully agree that you know things are enough is coming together to feel that um you know we are getting a sense of dollar cost averaging into the market is a very good play and I think both credit and Equity are both important plays right now I think credit is a great play I think my only concern on that is duration right I mean you're going to get the money back after Equity has has has recovered and so I think you need to play both um in the right balance and right now it's a bit more credit and and easing into Equity um so certainly I think I think that that's that is comforting and I think this year there's going to be some transactions particularly in office in large cities I think that will help give the market a lot more confidence once that occurs I mean the minute the minute of trophy building a New York trades the whole system will calibrate around that pricing and and think about risk reward from that from that data point so we need to see more of that and I think that'll happen this year I think the deeper thing well some have traded at debt value well yeah well true true trophy assets I mean I mean just what I'm what I'm seeing right now is there's a bit ass spread of the best buildings and they're not trading right now they're not trading and and those owners are have a good Capital stack sure they would they would like to recycle Capital but they're going to be patient and they're going to wait and and I think we're going to be surprised at the pricing once that emerges um in terms of how Keen the cap rates in those cases are and that's very different than all the other stuff but then on the tact on the Strategic side I think that that's also a very interesting lens to look at right now I think that um we are in a moment of regime change in terms of interest rate monetary policy and and thinking about how how that future lens looks is going to be different and I think the last 40 years 40 years has been downhill schi in terms of declining interest rates declining cap rates and now we're in Cross Country scheme and it might be cross country for the rest of my career and I think that these two sports are different right they require a different way to play the game and I think that smart investors right now are going to be thinking how do I play this game differently in this new environment and I think that um it's it's a winnable game it's just a different way to play it and so for us that is all about execution that that's a shift from beta to Alpha that's all about the hard work of creating cash flow creating value and I think investors in the real estate space in a world of probably a bit higher than longer real assets are something you want to own um and you want to own a lot of them and I think we're going to see a real wave of of capital coming into the space from places like private wealth um which certainly hearing a lot about that here at this milon so Barry the Elder Statesman I've never been an elder Statesman I'm usually uh well um yeah so we're real estate was the collateral damage of Powell's rate move we weren't his Target he was trying to bring inflation down we weren't really causing inflation I guess the rent component of CPI we had something to do with but it wasn't like we created the pandemic and and made people run to uh pay more for rent um and I you know I my criticism of Powell are I think are proven to be 100% accurate right we had inflation because we had too much money multiple stimulus packages pacing chasing too few goods which was going to be a temporary phenomenon and now the supply chain is fixed and the global stimulus package are supposedly in the US spent right now and you're seeing weakness in the lower end of the economy we see in Budget Hotels lower end property Starbucks McDonald's um some of the some of the credit card delinquency debt doesn't look good so what he created was a balance sheet crisis not an asset crisis real estate really wasn't overbuilt the pandemic made office feel like it's over overstocked there's too much office and too much obsolete office people have gotten pretty choosy about what they take but this is really a balance sheet crisis and I agree with Al I mean the FED is very aware that he has a teetering Regional Bank uh Regional banking system that loaded up on $700 billion dollar of real estate loans basically in a low interest rate environment and they won't the small borrowers are going to have a hard time refinancing on the other side of their their books are securities that they were told they never have to mark to Market and are way below market today and if you mark to Market those books they're insolvent before you get to the real estate and it's in it's inconceivable that the loan book isn't down 10% these banks are leverage 9 to1 8 to1 so their Equity is gone they exist by the grace of God and as long as um that situation is there and the government is very aware of it now and I'm sure Kathleen has gotten calls we've gotten calls how how can you how quickly can you take over bank's assets they're trying to arrange U Recaps before they fail so there's a huge distress cycle in front of us and the length and depth of that will depend on what Powell does from here I think it's fairly inconceivable that he raises rates I I don't think he doesn't want to and if he does it's stagflation I I don't agree that it's not stagflation inflation is coming from Services it's coming from Health Care Health Care and education and government jobs are 50 million jobs out of 160 they've been adding jobs every month last week in the employment report 175,000 jobs 100,000 were in healthcare they are not interest rate sensitive jobs he can't stop it in 0708 we added 354,000 jobs in those Industries in the worst financial crisis pretty much any of us have ever seen so he's using a tool on the other shot portions of the economy that if he overdoes it he will create the hard Landing that means he has to get hotels to have stop having conferences businesses have to stop traveling we have to stop shopping shopping you have to be layoffs in retail he can't get layoffs in construction workers because we're all building the Aman next door here I mean like there's a lot of data centers being built chip plants roads Bridges and tunnels and he's getting no layoffs in the construction industry we lost a million jobs in 0708 crisis he's gotten zero and hospitality is now full we've actually replaced all the workers we didn't have in the pandemic and and actually thankful for the migrants actually that have helped ease some of the inflation pressure because you couldn't get anyone to work at McDonald's and you couldn't get anyone to clean a bed in a hotel and now they've come back many of them are I don't know if they're undocumented but they're definitely uh lower workers from the Lower Side that have taking jobs that traditional Americans have not wanted don't want anymore so I think um we're definitely bottoming uh but like any cycle you're you're at the point of the cycle where the bid ass spread at least in the United States is very wide Kathleen and us and plenty of you have plenty of ammo and nobody wants to sell because they think it'll be brighter when rates come down and I I believe the rates will come down and so if you can stay alive and survive to 25 you um you hold your assets and you don't sell and there's probably a 100 basis point spread between asks and bids and this is the TR this is what happens in every cycle like this and the banks which normally would get rid of stuff I mean they're working with us and I'm sure everyone else on the stage and says well we don't really want that building back so he'll give you you a little pay down and and you work it for us and then we'll take it from you in 3 years if the world's still bad so you haven't seen that much you're seeing some short sales Banks coming up and saying just sell it for me I don't want it ever to hit my book um and it's spreading multif family now is is is in the crosshairs if properties can't were bought for different rate environment it's not people say this silly comment that oh we real estate was fine with 5% interest rates and it was but they were 5% for a long time or 6% or 7% I started they were 8 or 9% it was the pace of the increase straight up um and it was the fact that he told everyone in December of 21 real estate Lower longer and he he he enforced his van uh what his what he said by continuing to buy corporate bonds through May of 22 and then he reversed bigly and and increased rates 500 basis points super fast and that balance sheet crisis had a lot of impact not on what he wanted which is the job Market we Miami has a 1 and a half% unemployment rate like he's like it's not working in the meantime he's sort of taking he's killing asset prices and not just real estate and fixed income uh infrastructure if you bought you know roads you bought with a different you may have long-term debt but some people had floating debt or have caps but he's definitely changed the playing field and uh it is a giant asset class it will recover but there's no reason the world should grow super fast right now I think that's starting to reverse yeah now I think if you if you look at the fed and the conference call or you know the the FED minutes that was a pretty big easing actually I mean he didn't lower rates but what he did what he did was probably the equivalent of a 40 basis point decrease you're talking about lowering s selling off theet more slow on the balance sheet D side so and I would say I'm in the rates are coming down in Europe so they cuts and you heard it here first June first cut so June June I'm going June I mean September got the champagne looks incredibly September looks incredibly political which maybe maybe he's not worried about that but I'm going June can I can we can we go back to something Barry said just about kind of the transaction environment right and and you know how where where we are at really in terms of you know bit ass spreads and and also trying to globalize the conversation helpful so you know I I will say in our business we uh we have $600 billion of real estate America Europe and Asia where we're we are active last year really for the first time ever more than 50% of our investment activity was in Europe and that was because I think the pain from sharply higher rates was more pronounced there and and it was because that differential while the speed was kind of similar the differential was bigger five times greater cost versus two 2 and a halfish or two 2.2 here and so you know in sectors we liked we were transacting with over levered companies who were doing all the things you expect to do sell good assets to delever uh public companies that weren't happy with where they're trading private funds who were under pressure to create liquidity and that of course though has been slower to play out here in the US you know for all the reasons we've talked about in terms of people able to hang on Capital structures not necessarily maturing and I'd say you know even places where there's some over leverage um you you have had cash flow growth in places like warehouses and Rental housing and things like that because you're marking leases to Market even as you're getting slower Market rent growth this year though I would say at least speaking for our business has felt quite different I mean we we in the past couple of months have had four major transactions one very can reference the idea of buying a portfolio of loans that were really the the dam the collateral damage literally of a failed Bank we partnered with the FDIC buying 20% stake on our side in a portfolio of7 billion of commercial loans um all pretty much all performing real estate but you're able to set up at a discount because you you know those are primarily fixed rate loans set in a different environment and to reflect the cost of capital today you get a signature bank deal talking deal and then you we've had um two major take privates both in the residential housing space $10 billion transaction were under contracted by air communities Trion Canadian listed we have our Canadian here um I actually dual listed US Canada rental housing company and then also partnering with public companies remember you know public companies need the capital markets open in order to access the money they need to grow um and you know even in great sectors we had a public company digital realy have data centers ready to go in Europe and the US and unable to access the capital we've been able to commit to a joint venture with them and so this is just again like I think signs that there there's a bit ass spread but it's like you're starting to get to the point of either kind of frustration or capitulation and it's just playing out differently at different speeds in different and and since we're Global real estate let's back up I mean I think we've done what blackstone's done the last $3 billion of equity has been International and things are moving quite quickly through the garbage can in Europe like the banks want to sell the stuff and as you pointed out you know they're they actually in their financing markets are not as difficult as they are here it's very different than 08 the banks are open and Japan there's no distress at all it's a freefor it's a it's an amazingly po this positive leverage they've let the currency go to the toilet it's um incredibly cheap um and uh Japan is going to have a competitive Advantage because their current their companies will be very very uh competitive on a global basis with the currency where it is and in the inverse or Converse of that is the us if he does keep rates here and Europe does lower the Euro will continue to be under pressure American exports will be under pressure it should slow the US economy and and we'll make uh all the Imports we do I do feel like more expensive given given the 500 basis point increase we've had the last two years it just it feels to me like we're more fine to I mean honestly in an underwriting 25 basis points is not going to drastically change your worldview or what you're doing it just it feels more like we're in the stages of of fine-tuning around the edges versus again 500 basis points is quite dramatic um yeah but directionally it matters it took us 220 years to have our first 11 trillion doll of debt it's taken us the last three years these are next three years is another 11 trillion and it's a trillion three of debt service coverage per there are a lot of reasons to lower rates all of which I think is very aware and I and I would I would just push back it's not really pushed back but I would say listen if you're Blackstone or starward you're talking about large strategic Acquisitions and there is a bit as spread there I think part of the benefit of being smaller I said you know our platform is one of blackstone's funds but there you know we've been buying at 7% cap rates because the structural leverage doesn't work for a lot of what are you buying at seven caps how uh medical office senior's housing student medical office you can buy it yeah so I'm just saying you're not you're not dealing with large you know it's like if you if you lend a billion dollars you're a partner no in industrial at the granular level and apartments at the granular level there's a bit as spread and it it's pretty material I mean it's somewhere between five and six kind of and and and Industrial you occasionally see people wandering the really good news is we all know there's a lot of dry powder there's a lot of money that wants to get put to work um and uh and it will favor certain asset classes over others particularly it won't favor office but like I think you said David I mean the highet worths are stepping into the market they're buying stuff they could never and they're looking at it you say when I was younger last week um somebody said like I I was speaking to one of the Chinese one of our Chinese investors and I said why did you buy that office building at a four yield in Manhattan they said we have enough of your treasuries and well yeah no well further further let me just finish and then ago they then and then they said so today if you're a highet worth and you can buy the Montage which um tman fertita did down in lagon neuel at a 63 or 6'4 cap he's got enough treasuries I'm going to own this really amazing asset I'll probably keep it really lightly levered and in 20 years it'll be worth more and he's absolutely right it'll be worth more and he'll get inflation in the rents it'll you know the rates and so individuals High it wors particularly which are becoming a material part of the real estate market they're wandering and say I'll buy that beautiful office building and I'll buy that great apartment and they'll keep it relatively un levered and if rates come down they'll lever it later right so we have this Reverse lbo Impact and they're they're they're important players in the market the institutions always get scared at times like this these are always the best vintage funds we ever have when there's a crisis and um the attachment points that where we're buying stuff will be very attractive on replacement cost and the fact that supply has gone down but we're you're shopping it's and you we shop a global world we look for any asset class in any market and and um up and down the capital stack and try to be dexterous the the audience would like to know what precipitates this Force selling we're talking about what forces the deleveraging what if I mean yeah I'd say a couple things one is you can have a maturity event right many of these Capital structures are put in place not with 20 year 30-y year durations like a home mortgage and so you can hit a maturity event and even if you have an asset that's fully leased you can't replace that debt at the same level or certainly not at the same cost and so you need to basically bring down the leverage to you know what's available or what your cash flow will cover I think the other thing that precipitates it in advance of an actual maturity is the need for real Capital to go into the asset so if you have a 60% leased office building and you have an opportunity to lease up the rest of that space that's going to cost you a lot in terms of tenant Improvement allowance and leasing commissions by the way you could also have a situ where you have to pay a big tax bill and if you're the equity owner and you don't think you're going to get a return on that Capital you're never going to recover it you're going to call your lender and say hey we have to find a way to make this work or you know you're going to have to take control of it so I think that and and that you know again is starting to happen so you know someone referenced the tray of the weaker assets yeah there's one more category too which I would say there's a lot of investors that do need liquidity and they're going to look to some of their best assets to find it and you know moments like these they they're able to find it and sure they're going to take a discount but they they need liquidity back into their overall system the the other want point I also want to make to on the high net worth I just think it's so important for everybody to understand is just the magnitude of what opportunity this is this is a multi-trillion dollar space and most high- net worth investors on average are you know 4% allocated to to real estate meanwhile most institutions are you know 10 to 12% allocated to real estate so only a few percentage points in a in a multi- trillion dollar space is a lot of capital that I think is going to be coming into the system at a time that a lot of Institutions are potentially going to be maybe a bit bit more on the sidelines I think that might be a blind spot that a lot of investors have today not not realizing that these other pools of money are being formed very quickly and a lot of people are going after them including most of us on the stage so back to your question Eric it comes down to liquidity you know what really triggers it and what we were talking about earlier the regional Banks 1.6 trillion of real estate debt coming due by year end 2026 more than half of that's with regional Banks more than 20% % of that's office you know not all of that's bad but not all of that's good I mean you talked about loan portfolio that you I mean we've bought loan portfolios at discounts and it's the best performing stuff so banks are selling their best performing assets to create liquidity where they're worst performing assets and the reality is when you you know so how much you know private private Equity is filling the Gap but they're not filling the gap for you know they're not stepping in and filling a complete void for where the banking we haven't seen selling their best assets I mean we see them selling their crap first and and like they they put out a portfolio of Office Buildings 1.2 billion this is in the marketplace right now 1.2 billion face and you think it might be worth 30 cents well they want to Suburban generic Office Buildings in Indianapolis and Cleveland like there's just sorry if you're Indianapolis or Cleveland but AR we're seeing some we're seeing good stuff now because it's it's the same thing as any as a as the equity markets you may want to sell your crap but there's not a bid for any of that so it's like now you have to you have to create liquidity and so now you're selling some of and I think those investors are going to be patient and and there is a bit ass spread there but they will there will be a a coming together eventually and these are quiet conversations too they're not they're not necessarily going to a broker to have those transactions if A bank's selling 60% LTV loans with 9 and a half% debt yields at 10% discounts to nav how many new loans are they looking to make like none they're not so when you have a maturity the cash in refinance you know new term it's like okay fundamentally like the European markets are in large part much better than our markets there's not an office Market in Europe that has a 10% vacancy rate not one you can't find one here there isn't one below 18 there's submarkets that might be below 18 Park Avenue might be 6 and a half% but you know there's no City that's running less than a 15 18% vacancy rate with sublet space I think Austin Texas will get to 30% vacancies I mean 30% that's like even high in my older years having done this um and and Europe I mean Munich 2% vacancy rate in class A office with a 15% rent growth last year Berlin 5 6% growth in Berlin four or 5% vacancy rate new buildings the vacancy rates are overstated if you actually look at the numbers London is having a field day right now in office it is leasing like at higher levels and faster Pace than pre- pandemic so this uh return to work thing that the federal government and some of the state governments and to some extent the tech companies have adopted is a US phenomenon it is really not uh what you see around the world sold office less than 4% vacancy rate Tokyo 3% and there was a lot of space they absorbed so we we come at this with the US lens and our us experience um and as Kathleen pointed out the you're setting the stage for a fairly significant recovery and housing in the United States and also in in in industrial I think given the crash and starts so and that's replicating itself Blackstone has an enormous platform in industrial in Europe we have done a very large Logistics deal in Australia it's a 1% vacancy rate in Logistics in Melbourne and Sydney so you it's the benefit of having the ability to go across the globe and pick the right asset class in the right location and use the headlines that you read here about at things like this to find the deals that nobody's looking for CU everyone's running away and and I think you know all of us have been pretty good at that so and hopefully we'll continue to be good at it um member of the audience astutely points out that uh Cleveland gets no respect we have a hotel or two you can have from us in Cleveland for if you give us a dollar over the debt we're good people here in elsewhere have been hearing for some time that um we don't data centers are hot that energy storage is uh is a hot Market uh for Real Estate Investors a one question you know how long a tail is there to that trade as it were and and then secondly and I think of more interest to people perhaps uh where else what else looks like like it's a there's a growth opportunity there or at the very very least a great opportunity to generate Alpha well I'll I'll start on data centers um I think we're really just at the very beginning actually super early super early and and I'd say um this is a an opportunity in terms of of both the activation of all of this compute power and then all of the needs for power and power Innovation and and grid development and Redevelopment I mean there there are going to be so many ways to express this opportunity but as it relates to real estate data data centers are the you know the physical assets that are benefiting from this explosion in information and digitization um and and you we we B we took private a company uh in 2021 called qts it was the fifth largest Data Center business at the time uh it's now I think the largest in the US and the fastest growing globally and what you can you realize in this business is that one it is a voracious user of capital and that actually is quite hard to to be and do in the public markets as I said before so it kind of more naturally I think lends itself to private Capital owners who can bring that and then you know the other thing and and we could get into a broader conversation about every real estate sector being this but this is a a customer partnership business you have to have the the knoow the knowledge the team and the relationships to be that partner of choice because the real estate you know is so important to the largest technology businesses in the world to the federal government um and really meet them where they're at in terms of generating all of the the capacity that they need to continue growing and meeting their opportunities and I think you know to the point of this is a global phenomenon I think also um you know some of the rules and regulations and and things that will come in that will require um you know home domicil and data we see this for example in India where we're building a company really focused on Indian data centers um because you know it's the largest population in the world uh fastest growing as well um most digital payments anywhere and those are going to have to likely happen all kind of onshore and India um and so this feels like just the very beginning um and there you know again the amount of capital required um is is Meaningful and that's that's to some degree is creating kind of a more a barrier to entry that doesn't exist in like warehouses for example yeah so so fully agree on the opportunity set and using the Gartner you know hype cycle I mean you know there certainly will be a hype cycle it feels like we're still really early what I think is also interesting to think about as investors is what are the what are the unknown pinch points that are going to come right so energy is clearly one of those and and you know you're already seeing it today where places like Ireland you can't just build a Data Center and plug it in and I think this era era of building stuff and plugging it in is going to end um and you know whenever whenever you think about the you know the US last 25 years has doubled its size of economy and our energy with the same amount of energy usage and so there isn't even a muscle memory of of how to scale our our energy grid and energy you know Distribution Systems and so it feels like like the world is coming unprepared for this AI Revolution that that's coming and the data centers that will need to support all that and I think when I think about the built environment and I think about how this energy problem is going to be solved it feels like it's going to be much more of a localized solution which is a distributed uh solution which I do think the built environment is going to have a general interesting answer to that is yet to be written um but certainly as as I think about the impact of AI and data centers energy and what it's going to do to the broader economy and the broader elements of of our business I think we also need to keep our eye on U because one area gets squeezed another's going to feel it as well so that's that's how I would put the overall I'll I'll pick up on AI front I would just well sorry I just say um the two key themes to this whole conference AI data and demographics and so to your question Eric you know where are other opportunities I mean we've been investing in healthc care infrastructure for the last 15 years and educational infrastructure slre estate so if you look at 65 and older Americans 40 million to 81 million 2010 to 2040 80 and over Americans 13 million today by 2040 28 million I mean massive massive increase in the in the population age and those who need healthc care needs because three times more doctor visit 65 and older versus the 64 and underage group so just a mass massive increase in demand that what's that being met with right now a massive decrease in Supply so you're at an inflection point where you have massively escalating demand and because of interest rates and IL liquidity you have massive decreases in Supply you're not just going to flip a switch and say oh guess what we don't have enough housing for seniors we don't have enough medical office we don't have enough XYZ so the demographics as Destiny Dynamic and and what exists today because you don't need lower interest interest rates for what we're buying to work because you're in double digigit rent growth markets we'll we'll go back to data centers for a second well let me just finished because you're in you're finished you're in 9 to 10% rent growth markets so you know Barry being the Elder Statesman he recognizes that this isn't a high interest rate environment it's just it's just the rate of increase as you said earlier Barry that I mean 1962 to 2008 we didn't have a single year until 20 8 where the average 10-year treasury was below 4% it's it's not the level of rates so going back to Data Centers um you know it there's no question I think Stanley dren Miller said it on TV today that we probably short term it's a bit of a frenzy but longterm we're probably underestimating the need um and he was really reflecting on the prices of Nvidia and some of the public stock super micro computers that the we're fairly active I think we're the fourth largest in the world in data centers we have people doing this now in Europe and here um it is I think the 800 lb gorilla is not the demand it's there we'll figure out the energy grid whether it's Renewables we're ingenious we'll figure it out um it will be Renewables in many markets Europe doesn't have gas and and and doesn't have excess oil um the exits this is an overgrown industrial building it's a l more expensive it's got a great lease in place 15-year lease it has steps but they're billion dooll assets and how will we exit these things is kind of the 800 pound gorilla question we ask like it's a where are we going to get out of these uh and will we take them public will we sell them individually they'll be buyers because it's yielding credit and it's the best credits in the world I mean you have Amazon Google and meta on these credits and they're corporately guaranteed so I think that will be interesting because all of us are it is an enormous use of capital and people are raising dedicated um data center funds and then you have the crossover of infrastructure funds and real estate funds and infrastructure fund will do a deal to a 13 and we want to do deals to 20s so it's kind of a lot of money that's coming to this sector and there'll be mistakes and the other thing that sort of makes me scratch what's left of my head is um is the tenant base like there are six or seven giant tenants and two of them are wild aggressive and you you they could turn it off and people might get hung like they could decide to take a break um and people are are positioning and trying to get power to feed these Giants so I do wonder if they've told every single person on this stage if you get power will go to you and then if the first one who shows up and they're good with that one and the three of us are left with you know so it'll be interesting it'll be a bit it's a bit of an arms race and um the demand is virtually infinite the rents are are are rising both here and in Europe and um it's it's so far it is definitely the bright spot in the real estate World um and and I don't think I've ever seen anything like it not with seven tenants right driving everything we we won't digress this way but we are going to have to get serious about the energy conversation because Renewables will provide more energy but the world's going to need one and a half to two times more energy over the next 25 years and it's not you know so you could massively escalate the amount of Renewables that we have and fossil fuels are going to be here for a long period of time and have to be further further further we are have to be part of the yeah further we are electrifying everything we're we're not a lot of Industries are getting starved of capital that were traditional bases and further the grid is how energy is distributed you only put so many electrons to a wire and you just can't keep putting up wires because of nimbyism which is which has only gotten harder and more difficult so I agree with you I think it's a harder there's a deeper topic there that I think because there's going to be Economic Opportunity there's going to be opportunity in it there's a math Dynamic and we're blessed that we have a country with massive natural resources so reality is going to crash into the Fig soon figure out right we will figure it out it's just that there is an economic opportunity in better than that though too the audience is curious about where to invest in real estate we've already heard from this panel about what's going on the opportunity that's in Europe for example Barry you spoke about Japan perhaps somebody El on the panel would like to weigh in about Japan because what's going on there is so interesting um but specifically where people are asking what about Dubai what about torado what about Singapore what about London um so maybe we could spend a bit of time talking about specific locations that you like perhaps some specific locations that you think uh don't Merit your interest um who wants to start well I would just say you know obviously have some others touting other places in the globe the dollar is the reserve currency that's not changing anytime soon we have rule of law it's a single country so far we're not socialist so I would say that the US is the place that you want to be longer term and of course opportunities you know opportunity sets EB and flow so not estwing the fact that there are opportunities in other parts of the world but I think when you're looking you know as an investor and you want both upside optionality and downside risk protection you look at the US first you look at it second and you look at it third that's you know that's just my perspective now um we wouldn't agree we won't agree with that yeah yeah we won't agree we don't agree I mean rates will stay higher longer here than in Europe and you'll have positive Arbitrage to both yields and the cost of debt in Japan and Europe Europe has less Supply uh it's a dormant economy so it's like you know but there's huge holes in what they have and you can find them I mean I I think obviously the office markets are not even close to the health of the US office markets they're multiple times better uh and rents are rising across the world and they're not Rising anywhere in the United States and they're falling and will fall significantly in the office markets going forward as as assets change hands buildings in San Francisco that were bought for $800 that have debt of $400 a foot and traded $250 a foot and I own that building at 250 a foot I'm going to charge $30 rents not $80 rents and these markets will ratchet down as the Assets in these markets trade hands to new basis you will destabilize these markets it'll be worse in the office markets it'll be better in other asset classes because you don't have that kind of situation but that is radically different in the US I love our rule of law it's hard to tell we have a rule of law these days and um you know and but West I'm not talking about going to bafra or or the Congo I'm talking about out you know we've been very active in Italy very active in in in Great Britain in Finland Sweden um Spain and Japan and Australia and that's about it Singapore is a great Market just talk on one of Market that's been benefiting from China situation 100 more than 100 families have moved their net worth there every office building is completely full every single building being built is full we met with an insurance company there we had to meet in Starbucks they did not have this is one the largest insurance companies in Singapore they have no conference space in their offices everything has been taken up by offices so if we could buy one you'd be buying it at a four yield or you know and you'd ride higher rents it's a totally different thing and for opportunity funds we haven't taken that kind of like trophy bets and ride rents but they're definitely and Hong Kong is sort of China now so a lot of companies that want or expats that would go to Hong Kong are going to Singapore so Singapore is terrific the West End of London is incredible I mean we bought took a incredibly expensive lease on our office space in central London and it's probably 30% below market today and we bought it like two years ago two three years ago you cannot find space in in Mayfair if you want to find space and small we built a building in in Miami and we started the first lease was $54 a foot the last lease was 115 in the pandemic 100% full you build the right thing as you talked about you add value understand the markets and you actually can make a lot of money in real estate it's very hard to talk about real estate State at this big level you know we have to work about worry about Capital flows and interest rates but real estate is block by Block it's not on the computer so um coming back to the question I think you know I I would Echo you know us conviction Market Western Europe i' note you know the UK for all of its self inflicted wounds and there have been many um that has been a very you know productive and successful market for us in part because sentiment has been so negative that you know when you have those moments where value basically dislocates from kind of underlying fundamentals that creates opportunity so we continue to invest actively there U one market that hasn't been mentioned but is a high conviction economy for us as a firm not just in real estate as India so we started investing in India after the global financial crisis when a lot of global Capital left and we started in the office sector buying office parks that we had the capacity to continue growing as tenants grew and those tenants are some of the you know best tenants in the whole world it's our most blue Chi rent roster because what you see happening is that around the world businesses are going to India for highly trained technical Talent English-speaking uh talent and you know the the call center is is not what it is this is very sophisticated work uh technology Jobs banking jobs and we have been able to kind of ride that theme in and out of Capital Market dislocation in India and then extend what we're doing into retail it's one of the only places in the world you know similar to office where we really like the retail business and that's because you see this growth in the middle class fueling greater consumption that's works for e-commerce as well as brick and mortar Commerce I mentioned our data center business um and we think there's also a great opportunity we haven't tapped into yet but for Hospitality as well I mean this is the biggest population in the world and uh it has a teeny tiny fraction on the number of rooms the United States has and so I think this again is a theme and and some people have said you know demographics is Destiny but I would say also you know there the the conditions on the ground are pretty unparalleled in the world when you see the rate of economic growth overall I mentioned the population growth the growth in the middle class and the fact that there's been political stability there's been interest rate stability overall inflation stability again all bit higher than here in the US but you a very interesting Market and the only caution I would say is that um you have to be aligned with the best businesses and the best Partners I mean you cannot go sort of dabble in in India and expect it's going to work out and that you're going to be able to exit on the other side I I also want to amplify the India point we all we've been in India as well for a long time and it's unbelievable what's happening there just to amplify that it really is and just the Western companies that are coming and it's just not at all what you think in terms of of the setup and and how um Western companies are using using India for higher skilled labor than ever and the the build and and they will come I mean it is it is it is unbelievable what's going on so do anybody in the panel want to dump on something other than commercial us pardon me well we talked about how unattractive uh us commercial real estate is and offices we like the resi sector in the US almost everything in it and um you know we think is attractive lodging um you can always find interesting things to do in the hotel markets globally it's a growth industry um you know Europe again Europe's recovered further than the US rates are higher versus 2019 in Europe than they are here like 113% of 2019 130% of 2019 in Europe Europe Hotels because there aren't a lot of them um and the Chinese haven't started to travel yet and when they get back to London and some of the other European capitals these rates will go even further through the roof so lodging is interesting uh it's just you're a little reluctant if you have a hard Landing scenario in your pocketbook to buy hotels right now is in the US in particular where actually I think what's Happening Here is fascinating the transient demand is slowing but the group demand is staying strong business's profit margins are great and people want to get out and and do meetings and if so it's been amazing how how it was not only did it come back after Co it stayed strong right and when you look at Hilton and you read their reports in Marriott the group booking is fascinating ating and look how well attended this conference is you know it's um and there's half a hotel here so it's that's you who knew you could tear down a hotel and book a conference it's a whole new thing that's where you get it correlation between the macroeconomy and the underlying asset class one of my saying is find the demand and let it run you over so you know in terms of multif family I would say there really two markets I mean there's a Class A and A Class B you know you you could parse it farther but let's just say class A and Class B and of 2 and A5 million units built over the last 10 years 2.1 million of those are class A 400,000 Class B 90% of the Class B housing stock in the US was built in the year 2000 or earlier so you have a 25y old housing stock for 90% of the Class B multif family units in this country and estimates range from 4 to8 million pick a number in terms of the under Supply over the next 10 years in class B so it is a massively undersupplied sector with a growing renter base because you've got inflation outpacing wage gains in in many markets and even if that switches you have a massive unders Supply so love the workforce housing also known as Class B are attainable I think very different than Class A where there are Pockets obviously of you know there there are markets that are successful like Phoenix as an you know as an easy example massively over yeah the one thing I also like about multi family and and by the way living I think as a global concept there is there is a lot of under Supply around the world in terms of what's needed and so it's the US is 3 million hous is short Canada is short Australia I mean you just go down the list of countries around the world there's a tremendous amount of opportunity in that but the other Dynamic especially for uh rental apart apartments and and uh BTR is is that the leases are annual and so you mark to Market um much more quickly than office or Industrial in some Market in some markets in some markets right but but in general they it is the asset class that's going to get hit soonest but it's also quickest out because it's able to get out of um out of a down trro faster and I think you know to build to build on that um you know it again we're operating under the assumption that there will be easing of rates but they will likely be higher than what we've experienced in more recent history and so to come back to a theme somebody brought up earlier this just means you need to be able to propel the value creation you need to be able to continue moving your cash flows up and so you want a portfolio in sectors and I think we've all said this in different ways and geographies as well that are the beneficiaries of Tailwinds that are kind of propelled from outside of real estate I mean we'll always look back at the you know specific fundamentals or attributes of an asset or a market but it's like what what kind of Tide are you jumping into and then are your lease durations short enough to be able to catch that and then move the cash flows up and I mean that has been you know even predating the the environment we're in or or covid one of the challenges for office assets is that you have at best maybe a zero coupon bond in a lot of situations and often times it's not zero because you're investing so much capital and that just doesn't work if you're not getting the benefits of multiple expansion can we spend a few minutes before we run out of time talking about sources of capital for the real estate industry um you know I I I wonder I think Others May Wonder as well where's the money going to come from you know the Koreans have taken it in the teeth you know and some us commercial real State Investments the Chinese Capital that was prevalent for a good period of time in the 2010s is probably not coming back uh you know credit from uh Regional Banks isn't going to be there the way it was um where is the money coming from is there where do you see it coming from is it going to are the Chinese money and Korean money going to be replaced by Middle Eastern money um or you know we talked about high can family offices fill the Gap here well I I think um I you know I'd say a couple things one one is there are certainly speed bumps happening for institutional Capital globally and you know some of that is just you know portfolio construction or challenges with you know what has happened on the more liquid side of their books and that's making everyone feel a little Capital constrained today but when you look at kind of medium to long term the growth in capital for these you know young and growing countries whether you know it's Korea or some of the the Middle Eastern countries or more of the Asian countries or you look at places like Australia which has forced savings at a higher and higher rate I mean this is an enormous amount of capital that is coming into the global real estate economy and either intends that long term they'll be staying at the levels they're at or or I think growing and participating more so I think that um you again I I look at it as like there's temporary constraints but there is going to continue to be a lot of appetite I think also um and it's been said a few times but um you know really when you consider it individual investors and whether you're ultra high net worth or you're a middle- income sa they've really not had access to real estate in any kind of formalized way I mean p you can always trade a public company but that's a you know the US reats are something like 8% of our entire Market it's not really accessing the whole Market it's highly volatile and you know in a world that we used to have where everybody was benefiting from the pension plan they were in investing in real estate and private markets on their behalf um that Capital was getting to our sector and now the people are going to just want to access that more directly and that's why you see you know Vehicles being built to serve that client so in general Capital flows are definitely down the recovery of the equity markets has helped the US plans because they they might have thought they were 133% in real estate because equities are down equities are back up and now they're 10% again so there is interest around and I think investors like they do in every cycle in every location in the world are are they're they're being picky they're being picky by asset class by manager they're they're scraping their books um trying to decipher the differences between managers you I I said this at our LP conference and it's worth saying different managers have different marks today like we all may have different views of what is the exit recovery from an office building or even an industrial building or a multi that we own so some guy might be exiting a five in his model another guy a 4 and A2 another guy 5 and a/2 the disparity of marks among managers would probably is always the greatest at times like this and um you know people will be surprised in the last downturn I was a on the board of brown and I was on the investment committee and they asked me to look at their real estate managers first I'd never heard of almost any of them so they had adverse selection they picked a bunch of guys who charged them nothing to lose all their money um and I looked at the marks and even at that time the marks like the exit cap rates were threes or something and the market the market was a 5 and a half and I said get rid of everything you have and they sold every single position they had um but there's you know I think I think I think people are smarter in our investors are much more sophisticated they have better staffs they' they've seen The Good the Bad and the Ugly and I I think it's really important for younger people in the audience to treat your investors like it's like really convince them it's it's their money it's your money like you are aligned and and you're honest transparent and you tell them what's going on um because everybody knows you'll everyone makes mistakes um you you it's a cliche that Babe Ruth struck out more times than he hit home runs but hopefully you don't do that in investing that often doesn't work um but it everyone's if if if you've done something you have an issue somewhere and um you know we just try to the hardest part of success is to keep your keep your intellectual humility and I think um I think we're all humbled by what happened with Powell I think he probably was surprised inflation didn't turn out to be quite as transient as he thought um and so it's you know but it's great learning and there today it's great opportunities so going forward is going to be pretty exciting I think in institutions know that I think you mentioned it earlier David 4% of ultra high net worth I think democratizing access to Alternative Investments is going to be a is going is is something that's started but we're in the very early Innings and that's going to continue and it's been a tough lesson though for some of the retail investors you know Blackstone has a retail vehicle Starwood has retail vehicle um they are at the very least have generated some differences of opinion perhaps some controversy including this morning um you know is is is it I guess is it is it really uh is it for everybody you know it's there's the when when when the retail investor wants liquidity the liquidity is not there well I I think you're hitting on the most important point that these are vehicles these are real estate investment vehicles they have liquidity up to a limit and I think I can speak only for our vehicle uh our non-traded re B it's working as intended which is that we provide liquidity up to 2% a month 5% a quarter we've been able to do that we now have had a series of months where we haven't had to prade at all but the idea is really to protect the performance of the vast majority of investors 90 plus per of investors who want to stay in and that's what institutional investors have lived with you know essentially forever and that's what at least we set set out to do was to bring an Institutional quality product to individual investors now if you are a customer who wants daily liquidity you're right this is not for you um but if you want the benefits of thoughtful portfolio construction and that institutional quality management um these are interesting products for you but I think you're right you know um maybe I don't know I don't think our investors misunderstood but I think some people in the market Maybe a structural issue where that's a that that is inherently a long-term asset matched with with if if you're looking at it as a short-term duration vehicle or you're saying oh you know it's not what it is it's not what it is you're you know it's like the SNL crisis in you know in the 80s it's just it's a complete mismatch because real estate is it's not it's not immediately liquid it doesn't work that way so providing some element of liquidity can work but when there's going to be evolution of product too I I think without question I I mean we also have a have a have a have a non-traded re we're proud of but I I think beyond that there's going to be other Evolution and product rappers and I think uh there's no question this demand pool is here no question investors want access you know getting access to public markets I mean that that world is not getting massively bigger and so where where you going to go for to find good returns and so it's just it is the Natural Evolution of of this space but it it it's going to take some time too so Barry I just on the non-traded reads for a second the Press doesn't really understand two things one there is a difference we actually H have to by Gap Mark the gains and losses we have in the debt monthly and it creates in volatility in our marks so when the curve goes up and down we have 100 million $200 million gains and losses and it looks more volatile than it actually is we're just doing that Gap accounting it's actually publs don't do that the other thing that we do is we're pulled to par we're at par whatever you think our Market is that's the mark public stocks trade to wretched excess and wretched discounts and it's a different vehicle it's different than being in the in the public market so it's it's a there's a place in in people's capital structure it's not a daily liquidity thing and as Kathleen says we have to protect most of our our investors you know we have to provide adequate liquidity but we also have to protect the loyal investors we have that we're looking at this as not as a day trading thing so and don't forget our taxes our Dividends are very tax advantage so they're not comparable necessar to credit credit which is all taxable as ordinary income ladies and gentlemen thank you for your attention thank you for your questions please join me in thanking our panelists [Applause] [Music]

Channel: Milken Institute

Views: 5,172

Keywords: Milken, Institute, Sternlicht

Id: tFb6E4-bu4s

Length: 61min 45sec (3705 seconds)

Published: Mon Jun 24 2024