Global Real Estate Outlook: A More Attractive Asset?

thanks everyone thanks for coming this afternoon I am very certain like I'm going to be the moderator here which is going to be fun we're going to make this lively as they usually do Sam and I have done this together many times I'm going to start out just really quickly we're going to try to spread our conversation evenly cover a lot of topics and we have time we'll do a Q&A at the end as you know this has been a really good time for real estate so I'm going to just talk about the background I want to talk about where we're headed from here does this work first slide there we go well that's sort of interesting it almost worth there it is so this is slide of interest rates and the red dots are real interest rates and the blue bars are nominal rates and you can see that on this slide probably 80% of the sovereign wealth that in the United in the world is negative that has negative rates um so the question for investors for us and what we do we're about a fifty six billion dollar asset manager today is is this what does this mean and what is going to happen and as we have a new fiscal policy in the United States potentially with a lot of stimulants coming presumably some will make it through and then what happens in Europe and the rest of the world also it's interesting that Brazil is you'll see has the highest interest real interest rates in the world and many inflation is falling rapidly and as they do that they've been able to lower interest rates and the currency has held because of these high interest rates is still an attractive currency so that's an outlier salmon same we'll talk about Brazil a little bit when we get there and what this has led to is we are there prettiest girl at the dance we are the best performing asset class in of all the major asset classes so over three years five years and twenty years the dark blue line is the the Navy index the blue line is the S&P and the Green Line is I can't read it actually I can't see it from here is the Barclays hedge fund index which I like because we've crushed it and now I have a lot of my friends in the room probably or hedge fund managers it's been a really tough time for them and I think structurally their business has changed and we are yield alternative you know today real estate produces yield some of us buy it and fix it up we have many colleagues on the on the panel here who develop it Rick Caruso he starts from nothing and develops yield product Eric and I for the most part buy it we build it to Sam buys it only when it's dirt cheap and rosboroughs everything built it bought it and it's on peoples also as a developer so there's many ways but this question is will its asset class continue to perform like this going forward it's had a good run and the one thing that I knows well it's in front of you but it's not up there we get the next slide up please slide 3 so this is the US budget and this slide was put together before Donald's tax cut last week and it was just the lack of reform for entitlements that would have driven your having some technical issues here now the deficit to nearly a trillion dollars again because no candidate Donald Hillary nobody was willing to talk about entitlement reform and if we don't fix it we're gonna have trillion-dollar deficits again an amazing float I don't know what the annual cost of Donald's proposal is but it's not positive short-term even he says that so you have two trillion deficits who's going to buy all the debt and what does that mean to liquidity in the world and then you throw over overlay on that political discussions like China is a currency manipulator or trade war or selected trade wars and maybe if you don't buy our debt so for me and real estate today and we'll talk about the panel a second why do rates rise it rates rise because the economy's moving ahead quickly that's okay rents will move we'll talk about why rental rents will move in almost every asset class because the baseline for real estate today is probably the best of my life been doing this 30 years there's basically no excess supply was a couple outlier cities New York and hotels and some other places resi in New York the most part this country is pretty balanced formula state and we are not an issue anywhere the banks haven't been lending too much money it looks good but if that deficit explodes and it's supposed to get bigger and this is again before the tax cut if you believe the economy's going to race ahead maybe you can fill the bucket they're gonna have a debate about it in Washington but if rates rise because it's just too would supply because we're running a two trillion dollar deficit that means maybe we don't have economic growth and that's probably bad right for real estate there's no rental pressures no wage growth and the rates rise because as a buyer strike because the Saudis and the Chinese are angry at us because we've done some political maneuvering that wouldn't be good for property either so why is it's been such a good period for us this is if you're looking where those the red line and all those other colors converge that's Oh 708 we're really good assets traded below the cost of debt that's actually the 10-year Treasury the red line and those are the yields on all the different asset classes but what's interesting about this slide is that actually you have to add the spread to the Treasury so you had negative leverage your cost of debt was higher than your yield on your property back in Oh 708 that was a different time this is United States only you had to use to go to Japan to see these kinds of spreads between property yields and the cost of debt and today the ten years lower than it was in January 1st of 2016 so that's before Trump ever raised his head and that's amazing to me and not sure what's going on other than large short squeezes but you would expect some of what's going to come in five different statistical stimulus is to move rates that means it's still okay to invest today but you have to have a view on interest rates and this is a diagram of that it's we're around the long-term average so nothing's really changed this is a really positive thing for real estate because if we get the base case scenario of inflation coming back because the economy is picking up replacement cost goes up and rents will have to rise further and they'll be economic growth and wage growth in order to justify new supply so I still like our asset class you know I used to say when I've been here a couple years ago I don't have it here last year this is the best time in my career in this sector in our returns show it and that's the Y so that's real estate supply that's all assets and those are forecasts which you can see that we're not building that much and for whatever reason we have not really built that much so the markets are in relatively clearly room so I'm going to sit down and we're going to have two panels a bunch of questions and see what they agree or disagree on everything I just said and I'll pry my notes okay let's start with Erik so I didn't reduce everybody I should have done that Erik is with PGI em they own forty billion dollars of assets United States the domestic arm of Prudential Insurance that's been renamed which confused me and there are asset player all over the world so and everybody should should have get each other questions omec this is informal as possible but talk about capital flows and what you're seeing in the business today and where you see the opportunities yes sir well I'd start by saying the capital flows in when you really think about cross-border capital flows they've been higher than they've ever been ever since the global financial crisis with what you just described in terms of the interest rate environment real estate got very attractive for a lot of investors and you had the usual suspects that were international investors pre-crisis come back in pretty quickly and a lot of what we call hot money that looked to play counter cyclical markets but a lot of players we'd never seen before fixed income shops some of the private equity shops that we hadn't seen prior to the crisis came in even had cash boxes getting listed in places like Spain but I think the real game-changer was the Asian institutional money they are not hot money but they think like opportunistic investors so their ability to react to different changes and opportunities around the world was much quicker than we anticipated and what it's done is made this money move much more quickly than we were used to prior to the crisis and you've seen this you could find an arbitrage opportunity in the country and it could last a good year or two sometimes three before all the money came in it's really these arbitrage opportunities started getting closed within a matter of months and so it became a very attractive asset class but very much a momentum game and that all changed last year with the volatility in the Chinese markets beginning in 2016 with where prices have gotten that had really frozen the flows in the US and on the back of that yet brexit so a lot of the foreign money going into Europe generally slowed down it was they didn't know if that was more a UK phenomenon or a European phenomenon so they stopped their investing in Europe generally and on the heels of that we had the u.s. election and again that gave a lot of foreign investors and pause for thought paradoxically for relative value players that's a that was a better environment because local is not going to be as correlated as global flows and so we were starting to see differences in pricing in markets and I think that money is coming back so the real question is how strongly it'll come I've never seen as much of the discrepancy between investing intentions and actual transactions but if if the transactions start matching the intentions again I think we're going to be off to the races so are you a net buyer net seller today we're that's it's schizophrenic we're both so there are a couple of Martha that's so I think transaction volume in Europe is down like 40% the others quarter because everybody is when you see the French elections and this chart is the first quarter capital flows and you can see from China despite the capital regulations they were able to get some money to head off shore almost five billion dollars of capital it's a single most important market in the United States so the second orange dot on the top there and you can also see the relative lack of importance of some of the other countries Australia very big into the US - and the funds are you seeing pricing flatter back flat or what what do you thing in yields it's flat it's flat because again there was such a there's still money coming in but not as much as there was before the beginning of last year and so prices are seem to be flattening out supply demand as you said is very attractive so people are betting on on rents their ability to and what do you think the foreign bid is versus the domestic bid this is a 100 basis points wide or is it fifty of a swords are right on top of it is there a second are they outlier bid in your book today they are yeah especially Global Gateway core you have a lot of the particularly Asian money is still quite aggressive because they take the play along game is a Korea or China or Japan its I if I had to pick one of the three right now it's more China Korea's been more consistent throughout this cycle and Japan is the is the one to watch there Sam you you wanted to talk a little about capital flows what are you saying as you deal with you have these guys as clients I do see but let you talk I don't I just look at the markets and look at the supply demand equation and not I don't see the demand the demand for to fill office I don't like real estate capital real to go Alex you talk about various forms whether it's office to retailer apartments we're putting hotels we're producing a less significant more supply than there's demand and that I think we're I'm a real estate blaming you not in a particularly attractive market the US yes that I have to ask you what you like in real estate on the real estate panel Wow I mean we you know we made him in a lot of talk about oh he's got a new book coming out I have to tell you about it's called he liked his book am I being too subtle is the name of his book and it's coming out next week so if you're around a week he'll autograph your book but hopefully to me in there as much is very wrong [Laughter] nobody's ever accused of being very funny but anyway so go on but I give you why I just think that the overall real estate market is benign i I think the odds are that performance is going to be less rather than more apartments were building more multifamily than we ever have before we're building a lot of hotel rooms for building a lot of office buildings that I don't know where the demand is going to come from and that's you know we've been through up as the first chart showed a wonderful cycle I think there's a cycle I think this is a real estate cycle is coming to an end and I think that all the oversupply of capital is much more capable of turning on a dime and most people expect so do you think is that based on your forecast for interest rates also do you think what do you think the ten years to 32 today where do you think it'll be in twelve months higher ah I mean the insert is routine the answer is that you know there are so many different factors that you know inflation demand for capital you know the Fed is got like that three trillion or five trillion they're going to over the next supposedly 12 to 24 months they're going to sell that to loop Americans you know we never that's the same issue of the dollar how it's you know how strong is the dollar and you know if you didn't have all of the risks worldwide the dollar would be a great short but I think it still represents safety and that's holding it holding in place somebody up here has disagree thank you we just well I disagree and hey Danza develop a great developer means building up almost a 500 million our project right now in Tribeca and then go ahead and disagree and I and obviously look I think that in some markets the markets that were struggling and were hit the hardest there's some there's a constrained demand but in terms of global markets New York City New York City is the best real estate market in the country there is a demand in talking long term I'm talking long 9x12 and I believe also in the short term basis I think residential real New York for example is a safe haven of the global piggy bank for protecting assets by using at New York City real estate so I'm I am well kind of hoping is Miami I just moved there oh my well nice thing look if Trump gets through his tax revenue damage today Miami will be the place to be and you know and I think that Miami is another city that is catching its breath right now but there's still demand there now's the time we're a net buyer in New York City we think now that the markets getting a little gun-shy that land prices have gone down we are seeing a slower velocity in terms of residential sales in Manhattan and prices are down in rental prices are down rental rental prices are down because at a certain point rents were hovering around $100 a foot and for luxury product and that's the economics those compete with the cost of buying and so people have been pushed into buying so I think that we're seeing you know the market kind of catches balance but product is still selling in New York you can ask Howard Lorber I saw I'm here somewhere Douglas elements have in one of his best years so i think that you know in places like Washington DC real estate market on the residential side is doing well I think the challenge is going to be retail I think that's where we're going to see some good segue to I never go lay up thank you will have Rick Caruso who's Pacific Grove development here have been compared to retail Disneyland and he has three major developments that I know of under construction right and talked about and we're going to get to H cross for a junior over here because he's a he's building the warehouses for Amazon that are destroying your balls so let's uh so let me get right in here let me give you my view I can give you my view about my world I don't deal on a global basis I find it fascinating to study it and hear about it I really like that respect rest of us but I'm sort of old school and I believe that real estate is very much a local game especially when you're dealing with retail because if you're going to be in retail you need to understand who your customer is has always been the premise of it you need to understand what their expectations are and then you need to exceed it I said in the back room which shocked my fellow panel members I think Amazon ecommerce is the best thing that's happened to brick and mortar and let me tell you why we run it a hundred percent in our portfolio art portfolio last year in terms of growth grew at 8% one of the biggest back orders that we can't fill is space and the ecommerce providers are demanding too brick-and-mortar including Amazon but what I like about it and there's a path to great brick-and-mortar you're not going to save that retail I don't think you're going to save indoor malls four years ago I gave a speech and nrepp and I said the malls are going to die unless they're massively reinvented I still believe that and all the papers now reporting on that and the capital markets are reflecting that but is there a path for them to flourish yes good brick-and-mortar is going to flourish and it has our portfolio has retailers because of e-commerce are going to get smarter and it's data-driven so we spend an enormous amount of time on intercept studies who's our customer what they want what their expectations are and if I viewed myself as being in the retail business or I viewed myself being in the apartment business because we build luxury apartments and we do office and I didn't view myself as what the customer wants I'd be out of business so how have you changed in the area of the internet how have you changed your retail strategies we haven't changed our retail strategies it's always been about exceptional service it's always been about hospitality it's always been about understanding the customer and we actually spend more time deleting taking space back than we do leasing because the medical retailer starts losing their way we want that space back and we will repopulate it there are a lot of retailers have lost their way there are and they're fearful and freaking out but there's also a lot of retailers who are great at what they do and if you focus on the retailers and the restaurant tours that are great at what they do that they understand that inside their four walls they have to have a great experience connect to the customer be relevant sell a product that actually people care about and don't have a business plan that that is based on competing on price because men's compete on price hold on when you compete on price you're in a race to the bottom and the stores that are going out of business the Macy's of the world and everybody else is closing down the Sears the JCPenney it's all competing on price you have no word go retailers that provide an exceptional experience a great product that's curated that actually is a merchant not a retailer or doing exceptionally well you have department store anchors in your mouth yes there are they you can call the Nordstrom brothers they're thrilled that their stores are up on my property you can call Phillip grain stores are up on our property so we grew at an 8% clip I can't tell you why well your Acura can tell you those are California assets right pretty much those are California assets the economy has been pretty good no but you know what I see Barry with all due respect I think that's a and I don't mean this in the wrong way I think that's a lazy argument I think it's a lazy argument I if you're a good operator and an operator not a passive landlord if you're a good operator and you know how to drive sales if you view your customers your guests and you make it a happy environment a pleasant environment and you exceed expectations you drive sales are you really my yeah yeah yeah what do you think you'll sing Kumbaya oh well maybe not you know what you're saying is not is not it's not actually contrary most people feel a mall will get stronger and C and E malls will disappear and then the B and a multiple get better because the CND Mol's went away and those stores will consolidate and we're going to lose 100 million square feet of retail space United States for sure but still not going to Nogales where we have we own a little bend mall two of the five moles are closing joy so you know we're doing what he's doing would he not limit it down no it's the whole country and we own the mall Lincoln Nebraska I mean you know it's a we're the only game in town that doesn't help us too much what is your view as an investor towards retail are you are you fearful are you buying it or not yeah woman we're not we've been net sellers because of the pricing right it is a confusing time in retail and I I agree there are some forces real estate yes in fortress real estate but if you the general trend is there's too much of it out there and if the u.s. is probably the most extreme just so you know I don't have fortress real estate at the Grove we do 2200 bucks a foot I have the Beverly Center 3 orders of a mile away from me I have Century City three miles away from me and I'm surrounded by retail stores that's not so why why are we doing 2200 bucks a foot in the average malls doing 400 it's the same product I'm selling well the bottom line is judge not the waitress or not all that again that just it with all due respect what there's a people that are doing well in retail and in brick-and-mortar or luxury residential are providing an exceptional service that's what people want today but I am though isn't it I mean it's a it's a it's a what percent of your Center is entertainment focused would you say restaurants theaters everything else is it 10 or 30 or 50 is probably 10 to 15 percent so it is in line stores what I will say the one place where we're still viruses is a center city right good under city retail yeah and it's mainly because we feel good about if you price it right over the over time you can find repositioning option sorry I want I want to get to mr. throw over here so people don't know he's one of those incredible developers United States and he had he built a little airport on 18 an 18,000 acre site called Alliance and then he built all the intermodal transportation systems around it and then he created a city basically has employs 50,000 people I said 47 a half thousand out there to him and he said no it's 50,000 so the wikipedia was wrong like two and a half thousand and he's not finished but most what what he wanted to talk about was technology's impact on real estate and what he sees coming and how it'll affect everything in property and I'm going to give it to you on that and he does a lot of work Amazon built n1 millions group of distribution centers it has a ton valuations I mean we're mainly industrial developers across the United States and in Europe and as I was talking to Barry in the industrial market would be a fine business right now but with the eye fulfillment boom it really has become a very strong business we're doing we have eight names on buildings in production right now or negotiating another eight or nine and with Amazon you know you're always working deals you're always trying to find land and there's a big group of us that compete for the Amazon so the key is who has a land and then you get closer and closer your client you find out where they want to go but then the Amazon boom is stunning to watch and how they're changing you know basically retail in the United States and now Walmart going to work for Walmart cuz they want to catch up all the major retailers need an i fulfillment presence and so it's the industrial communities helping them get up to speed to compete with an Amazon and then you have UPS and FedEx and so we help both UPS and FedEx build their I fulfillment facility so it really has been a huge energizing movement for how does a little guy compete against them is on industrial I mean they're going to build and how big is your average through Amazon Center means perfect alright so if you're like I don't know some smoke eight-speed you're not going to build why don't you so we thought we did good to me it's very pretty holes yeah you know we did we do multiple needs for a like well how many fulfillment sent as long as I need well we have we've done 2-minute Alliance two million at DFW Airport and that's what we did and the other developers did a couple more because looking at 10 centers serves all serving population centers seven half-million and talk about your helicopter and so then there was announced lastly with Hoover is the newer Burrell youtuber elevate they were developing the first prototype the verdict ORS for uber in Dallas Fort Worth the second city is Dubai and uber convened all the manufacturers the F of the FAA which has amazed how far the FAA is going with drones and drone and passenger service and package service with drones in the work that NASA is doing developing the airspace and the modeling for the drone business I've been a pilot for a long time so it's hard for me to understand drones and airspace but after being with him last week it really is a viable concept and so they're developing the vehicle there will be electric powered it will be quiet and you'll have these series of vertebrates around the major cities of LinkedIn with the uber app and so we'll be pioneering that over the next three or four years in dallas-fort worth you think in five years emma's let's assume Amazon conceded isness which i think is a safe assumption um they're going to you're in order your paper towels and they're going to deliver it to it's um with a drone and the guy who gets hurt is UPS and FedEx because then I think and drive after after a little bitty kind of a over team last week with uber envisions as the drone lens on top of the uber car then the driver delivers it to the house so whoever does the last mile because it's to me to get them old that I and the pilots are me to imagine drones delivering to every home but you're going to have packages dropped in pools dogs every large and a lot of problems of that but I think I do think you know the drone on top of a new ver with the human delivery to the front door is at least a valid first step in automatically I think in Texas they'll use them in place shooting targets I think this did not come out in Reverse and so uh I think a few drove I thank you microscale shot they're going to shoot them down I know that I wish she was going to be fun truth that's crazy but I don't understand I mean for real estate logistics has been probably one of the strongest if not the strongest asset class and it's followed in my opinion interest rates right like all real estate because drop rates crashed as and if the institutions of foreigners really have focused on that as an asset class to own because it's sort of a portfolio of credit and corporate corporate bonds it is is a long-term credits but but also huge demand I mean the buildings are being built the buildings are filling up around the country people may not know the the vacancy rate in LA and industrial Ike 1% and there is no stronger market I think in the whole globe and we've been going over here for 20 years which in a normal to market you buy air force bases what we reconvert the Norton Air Force Base and that was a great program for the Air Force now at March Air Force Base redeveloping March and so we work a lot of these public/private ventures in order to find enough land to do these big logistics projects and and and it's business as usual for you in this climate we don't see anything slowing it down now we've had a great run the country set a great run so you're cautious but as long as the demand is there we'll continue to build and take care of our client base but on technology that the drones are fun to talk about the driverless that's real and then I'll have a big impact on our business for trying to feel what happens to the distribution patterns in the United States when you have the driverless truck and the driverless car what we just and the driverless car and in the driver of our driverless car we're spending a lot of time working with technology partners because we're going to get a lot of good real estate back you won't need as much parking - one of the words so you're going to get a real estate back with zero basis it's going to change the pattern of how people live how people shop how people go and dine on the driverless car which i think is one of the most exciting changes for the real estate industry that's going to come down a path and 10 or 15 yep and and Eric Schmidt I was a thing with the muslin he said see your way not ten years five years it's a year away and they can't do it in California because they won't they won't let you do it but they'll do in Arizona it's starting but it will happen - eventually eventually yeah he was funny he made it out and Alex said was analogous like everyone's driving around in horses and then a car shows up in the California without lot of cars it's going to kill all the horses so and that's what the driverless car would be and I've seen this car so and I'm fatten it and it's better than we are it drives better than we do because it can see in all directions you can't you seem human see one way if there's a lady crossing the street your eye goes there and there's a void come across on a bike you can't see them so it's and it's ever learning as you know so let's talk about here's a common person let's get away from what is your outlook because it we're all investors in one way or another just one will stick in the US right now and we're gonna go to Europe and Brazil for Sam all of Latin America but what is your outlook for the US economy and what do you think GDP growth is going to be and and I'd like to know where your take is on where interest rates you think will be and if it matters and let's take 12 months and five years or three years nobody can do five years not with Donald Trump in the presidency yeah we actually can't even do a week we think 12 months is more the same in this first quarter is indicative of that slow first quarter it's going to be it's just a pathetic first quarter not just slow with pathetic yeah but there's some there's some Reed there's some extenuating circumstance that is more that's been happening for several years some extenuating circumstances around a slow first quarter so we think we think it's pretty flattish for the next year so the economy and rates right now weights will go up but not we're I mean our view is the rates are going to go up fairly marginal and what is Donnell get and ask everyone the same question what does Donnell get through this year do you think what is sorry what does he get through this year it off structure deregulation tax cuts health care does get anything done I I really don't know if much actually gets concretely done this year I actually have a different perspective look one of the things about that we got to keep in mind about our business is that we have these cycles but they can get extended and so in Reagan propelled a rebound of our industry in 81 was tax reform he used tax policy to jumpstart the real estate industry sadly 9/11 and then the economic stimulus had followed it extended our run in the real estate industry again I believe that Donald Trump and the Republican Congress will ultimately pass reductions in tax rates I believe that is here this year I believe that and I think what will it look like I think it will be somewhere between 15 and 25 percent as a top rate for corporations and that comes with it has to come with a attacked a similar cut and similar rate for pass-through entities which will be our business which is real estate so for example we were beginning to abandon future condo developments because the New York were paying 54 percent of our profits and taxes but if we are taxed at 15% it makes the market look a whole lot different so I believe he'll get tax rate reduction I believe that we will see significant regulatory reform he's already started with executive orders I believe that there will be reform of health care a tweak of health care reform he will get some alliances that have taken place before I believe for example with some the death tax that's going to get reduced to zero the Congressional Black Caucus which is now 50 African American members of Congress voted with George W Bush and left the Democratic caucus to eliminate the estate tax because they feel that that's one of the ways African Americans can advance economically is to pass on generational wealth so I believe he's going to get those things through infrastructure is going to be another story because I don't think there's going to be the financial resources to pay for it I do believe that they will find they use health care and an elimination of some of the tax deductions for high net worth individuals to pay for this tax cut but there you've got a Republican House a Republican Senate and a Republican president and I think if he if he's smart which he have every reason to believe he's surrounded by smart people um that not to say that I don't think he's smart cuz he is smart very listening that resident if you are one of the you know I haven't we don't have a qualifier so um but I think they will be able to if they get a simple majority out of the Congress and they'll get 10 years of tax cuts if they can trade off some of these things like the big trade and the big issue is going to be the deductibility of state income taxes so California and New York and New Jersey these high tax states will be connected Connecticut who which was also just honest because it tricked a lot of people to come there make cities are you still there nope I preferred Florida but I think that when you know I think that's going to be the trade I think the trades going to be that and really giving you come back you have an opinion on this you yeah I did engagement rates are going to stay low I don't see any pressures that are going to push interest rates too far high I think Bernanke said this morning he season stabilizing around three percent and and I I have a different capital structure so I build everything on my own balance sheet we do my own equity to debt the banks have been great I invest for long-term I build I've never sold anything that I built and so from a long-term perspective I think it's down to fundamental real-estate principles if it's great real estate well located in areas that are demographically strong educationally strong etc I would be investing and infrastructure nationally I don't know what's going to happen I hope it happens the good news here in Los Angeles we overwhelmingly passed a forty billion dollar infrastructure bill for railroads and transit and everything else so no matter what else is happening in the country la is taking the lead which i think is great California passed a five billion dollar infrastructure bill so there's going to be a lot of good things happening and I'm very bullish on California for the long term do you ever sell anything oh yeah it's curious it is super here the way we leave we market done and what is your base case on this economy you think so I think I think I think there's a real driver for rates to go think three percent is normal I mean I was worried about rates as AM labor you know the biggest problem we have in Texas and really everywhere we're developing now is our none of men and women to do the work and there's a labor shortage we see labor inflation and so you know the building products will bill will be fairly simple warehouses and industrial but our complex buildings I'm not sure and Dallas Fort Worth I don't want to start a new high-rise office building right now because of our labor problems there you can't find people to serve lunch in New York and our hotels our home builder can't find workers to build the houses that they're and that's why we have we're not building enough we're gonna need an immigration bill likely to get a lot of labor back into em what do you think about this economy with Donald I think Donald has an extraordinary opportunity to create a massive amount of stimulus by deregulation on a single measure alone which I can do other just that that in other words frankly if we just stuck that and didn't get involved in all this other stuff and focused on deregulation we've just come through eight years of the most regulated government history of our country it's not accidental that the president who focuses on income redistribution sacrifices growth for that objective and I think that's what's happened I think that that's Donald's opportunity if you can do that and not get distracted by his Twitter here or other stuff that he keeps you know varying often he's got an opportunity to be a great president I agree I think he's got an opportunity to be transformative because with Obama who I was a big supporter of the challenge wasn't in the country was at his knees and so the constraints put on our free market system were paralyzing if we look at our industry you know because we're focused on real estate you look at the capital structure and the constraints placed on the financial institutions to make good business decisions they were they're very difficult and in fact that choked off demand for residential housing condos single-family homes the biggest challenge is buyers being able to qualify for mortgages or to come up with a 25 percent down payment because again the regulatory environment so it's not all that I mean kids have at one point four trillion dollars of student debt they had four or five hundred when Obama came into office so somehow we levered up the kids who were the first-time buyers and they don't have the money for it even though they can qualify for an FHA loan again 97% financing even today so the credit thing I don't buy I we've started and just left the eighth largest home build United States we started from scratch and it's the issue is labor and cost cost of labor and then the markets you know the housing market housing complex because we have a public company that rents homes and we own a ton of apartments so Sam and most of you guys I mean is the best resi complex I've ever seen in it's unbelievable and it should stay as a baseline bedrock for a growing economy going forward especially if income shows up so let's talk about International for a second Sam where are you what do you and you operate outside US to Poland and Germany okay go okay we'll start with Stan because you talk about Latin America China did you invest planet Earth we we previously invested in China until our partners stopped speaking English the answer is you know there are no nothing too subtle at the moment very there are no investment opportunities where capital is not short no high when China was short capital there were great opportunities in China China is not short capital and not consequently I think that there is limited opportunity at the same time we've been in Brazil IRA Brazil we're not going back into Brazil I think that you know it has all the characters are you an Argentine never know we've been in Argentina years ago but Argentina is a criminal enterprise for lack of I mean some me this is best performing stock market in the world two years / hotel Wow I mean you look at you look at what goes on there you know for 10 years nobody paid their electricity bills nobody paid their telephone bills you know you had coronis philosophies that have taken what in 1920 was the fifth largest economy in the world and turned it into you know Zimbabwe the speak Spanish okay what about Colombia Mexico you like oh here we have a lot of stuff in next thing you know I think Trump is doing Mexico an enormous favor I think Mexico is going to come out of this current period dramatically stronger than it has been in the past why is that I talked to my people in our partners in Mexico and I thought they were going to be very depressed instead their attitude is you know he's forcing us to figure out where our markets other than you less ought to be and they have a lot of markets to export to and a lot of work it's the import from and just in the line ill next go is the largest buyer of us milk billion six hundred million dollars a year of milk guess what there's excess milk in New Zealand they can buy it from New Zealand so I think Mexico is is in a great position and I think is going to the fact that the peso is down is an enormous opportunity what about Poland and Germany we removed to your per second demand in Poland is good Germany is ok and we're in Poland because the labor rate you can build warehouses and distribution centers in Poland and deliver into Germany and so it's the labor the availability and the poles are hungry I mean they really want to build a country and they've got great ambition and they're the kind of the kind of berry that when you invest and they love America you have very pro-american and so when you're there and you're building there's competition but it's not as near as competitive in we own Germany's receding as we own some buildings in Krakow or so and but their building is that they're adding supply in this market as they you know it's not the Paris or Berlin there's too much land and too much stuff they can tear down and rebuild what do you think about Europe in general because yeah I think our view is Europe is much stronger than we thought it should be but these are constrained supply markets you know and in the hotel space they're having the best market probably in the whole world yeah I look at when we look across our business globally that includes that am I very much agree with the comments on Mexico maybe not as certain how much they can they can exploit some of the further away markets but generally very constructive on our Mexico portfolio but in Europe continental Europe supply has been extremely constrained the economy's doing much better than people would have expected and fest and now and we've got a sanguine view on the outcome of all these populist elections coming up then Paul has gone well France we'll see cross your fingers you have to have some humility on outcomes but it does look unlikely that that lepen past passes Germany is always is very stay so either outcome is okay in the grand scheme of things so value added opportunities across continental Europe the bigger cities Germany France Perry active in all the asset classes oli asset classes yeah you know else hotels not as much too bad for your next vehicle you for the next thing and UK debt very attracted to the debt play and the UK brexit should have a big impact on central London we haven't felt it enough in the prices on the equity side so we've been net sellers of buildings but we've been doing a lot of we've been underwriting a lot of great mezzanine product because the banks are scared so a lot of good products just repelling financing there let's take some questions we have ten minutes and if you don't have questions I will keep going with the panel but we want to get an opportunity to be able to ask questions I mean we're active all over the world so is there a mic I can't help with the lights up here we can't see anything oh there's a mic there's no hands if you have any questions I want to ask is about any anything Harrison are you thinking of raising your hand any views on other countries in Asia aside from China like Japan and Southeast Asia yeah maybe all because that's the one thing we haven't talked about when I think very long term we are most constructive on Asia generally and that's when you look at Asia historically Western investors would go there because it felt more volatile but there was more structural world leader that was looting China in that comment well Joe so let's just put China side China I think China's like an on and off switch when capital controls are up very hard to buy because all the money just stays in the country when capital controls are let let up places like Shanghai and Beijing you will find opportunities we bought a building in Beijing beginning of last year when there were a lot of capital controls it's worth 35% more now so it's a tricky market but watch those capital controls you can buy at certain moments in China but otherwise the rest of Asia the volatility that everyone thought was at a premium in Asia when you look at what's going on in the West I don't think that's the case anymore so you still have area we have to exempt Korea imagine well I you know what right now one of the best if you can get it's just cast-iron stomach no question because there's an asymmetrical risk going on but I only make that risk today I mean why what would bother well so let's think about it this way if the worst happens what you're thinking about where exactly do you buy real estate what do you think is going to happen for a long time after that kind of a conflagration right it's it's a bit of a you know if you're gonna if you're really thinking that you could have wore out there I don't think you buy real estate anywhere right till you till you let that pass so you've got to keep a I just disagree with that so I would say that that that means rate to go down right and and yield is going to be super valuable again so real stable to income assets in place like the states will be a store of value I would think in a something that deflates which should be a rising economy but we'll see I mean I think London office is the greatest short in the world followed by Tokyo office you know Tokyo is massively over built in the office space because they have no your interest rates and so they're building building building in Tokyo I saw a presentation from a hedge fund if you could figure out a shorter you make a lot of money I can't figure that out yet I'm trying the and and what do you think the best place to invest today is there if I might Pixar probably Europe the debt in the UK value added opportunities in the better economies of Europe or the best place with a little bit of if ever this shakiness in Mexico could lead to some price pricing coming down in the industrials place we'd be big buyers in Mexico as well what do you think the best thing to do to they with your money and property is just invest in Texas I agree the big stake I love how about that your governor is really happy your fellow Texans are happy families what are you doing we want to do with money today besides writing a book we wouldn't invest in Europe ha but we're we think Brazil is very attractive right now leaving Mexico is very attractive right one year I'm sorry Colombia we have invested in Colombia we have some significant is there right now the problem with Colombia is that it's next door to Venezuela and I think I think Venezuela is going to explode and in Colombia will be dramatically impacted I mean they talk about you know the North Koreans you know running into China the Venezuelans are going to learn to Colombia and create massive problems okay we'll skip that one others are good with it I don't know the question right what what there's a question there go ahead sorry I'm from Detroit Michigan I've been living downtown for four years now boom and a major revival there and I'm starting to see more and more investors that are not from the Detroit area interested in the market just curious any of you guys have any thoughts and have any interest in Detroit what a great story that is why would eyes in fact on that city I've been incredible I look we actually spent five years as a kid in Detroit and I've been trying to look at Detroit to make it make economic sense and when the challenges Detroit has it's a city built for 2 million people and right now there's about 600,000 residents in Detroit and so they still have to maintain an infrastructure for a city that's got the sprawl of 2 million people and there's not much job growth there in fact you know other than what Dan Gilbert has done down there has not been enough of a broader investment attraction there so the fundamental scheme to be challenging but near University of Detroit and the Arts District that's been an appealing investment for people who reverse commute so what's happening out there but if people are reversed commuting from the suburbs into Detroit they live in they live in Detroit and they go out to the suburbs because all the entertainment is downtown so I think that's probably why you're living there but the challenge is in terms of any massive amount rents are so low it's challenging to make economics work retail core there is not doing really well either I don't know about anybody else well I just like to take a bigger leap off of that question because I think there's I don't understand investing internationally I like investing locally I like investing in the United States I like being here the most stable market in the world and I'm sure there's reasons for you and I Oliver's in and barium we're Globo financière on the ground up man but I would tell you I think there's great opportunity and developers great opportunities and a revival in the old Main streets people nowadays they want to live work congregate socialize educate their children with a sense of community the world is unsafe there's more anxiety in the world today particularly United States than ever before there's a sense of community that people are looking for so I think the Old Main streets the old towns and I've been around a lot of them in the country there's a revival coming back which is fantastic so it may be a longer term investment but I think it will pay off huge and it would be across the classes hotel residential and retail I'll go ahead say you know the subject of hotels came up Rick I drove by with curiosity at your project up there in Montecito can you talk a little bit about what you're doing sure so we're under construction on the old Miramar Hotel the Miramar was there for about a hundred years it's in Montecito right south of Santa Barbara about an hour from here up the coast very tough to get entitled a lot of barriers to entry which is good in terms of value creation it will be the only five-star hotel actually on the beach in Southern California and like Barry did years ago it was genius and what he did in terms of the hotel business we feel that we've got an opportunity to reinvent the model in terms of the levers to pull to drive revenue growth but what I like about it the most is they're not making another 18 acres on the beach in Southern California the only hotel you'll open your door and you'll step on the sand how many keys is it was that how many keys is it 161 mostly bungalows and and then beachfront and a restaurant right on the beach also so we open that in June of 2018 go ahead that's very clear company SFR Oh so SFR is a colony Starwood homes we nor the third largest player in the single family we bought the house and we rent them and it turned into a crazy good business the stocks up 50% the margins are the same as apartment 65% I'm astonished I had no idea this business would be this good I didn't know it's a business but it worked out great our yields are these are two different renter because it's usually have hired better credit than an apartment it's often a family and we've basically inhaled all the people were thrown out of their homes and they've taken to renting homes and they don't seem to have any proclivity to want to buy the home so you know same store sales growth is like 6% our apartments are almost 6% and margins are the same leverage is better you can lever the pisser out of homes if you want to although we can't in the public company we argue about that how what leverage level should we run the public company there are enormous economies of scale with 30,000 homes in the way we've aggregated them by city we can run them much better than you can you know we have and they've built amazing technology but they don't even go to the home to rent it it's all maybe pad and they send them there and they put the key they plug in a code they go look at the house themselves and they and we know exactly how much to pay for the house because we know exactly how long and what it rented for so you know the house next door so we have amazing data and I think it's you know there's there's three of us now Blackstone in public and I think it's a religion in an asset class in American can play the housing market we get two returns we get obviously rental growth and income and we get HP a home prize depreciation and told her returns levered are very competitive so it's a very good business and the stocks are traded pretty well they traded we trade a little lower than the other guys in multiples but no 17 and 20 times ffo right alongside the apartments and some money's come out of apartments as the market's gotten a little toppy the public company is on very nice real estate and that's been the toughest place to be we focus more on be apartments and that has been our our major thing I just want to close question one ask everybody because I'm confused you haven't we've talked about a lot of topics are you bearish bullish or neutral over the next most of us invest for five year cycles by the next five years I mean is anybody bearish about that on us just us real estate in general on us we're Ike our way to top we're neutral I'd say we're when I look at it look at our us were forced net sellers and here's what I mean by that is we'd like to buy but prices are high and everyone's looking at the same assets right and and prices are high so the stuff we want to sell is selling quite well so it is a one-word answer we haven't or at a time so bullish very foolish foolish oh I'm bullish I get that your developer we live in Texas I don't even ask you this state is really working music but we own stuff in Texas we never owned Texas and maybe the with a huge apartment portfolio and it's crushing it one of the great markets in the states by the way Detroit is about the part mark in the United States right now lowest vacancy rates and highest rental growth Sam neutral your new job yes - I know I know USA next columns going to rewrite the whole American fiscal policy I think I hope you enjoy this I think I think the trial sum up by saying I mean we we we think rising rates will be met by rising and we hope Donnell gets some of his fiscal stimulus system because it will create wage growth or at four-and-a-half percent unemployment we get wage growth retail sales go up apartment rents go up jobs are created and this divide in the economy gets a little less of noticeable and then we can get the business of creating jobs for America thanks for coming today thank you [Applause]

Channel: Milken Institute

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Id: KV1WA1lbtV4

Length: 56min 39sec (3399 seconds)

Published: Mon Jun 26 2017