>>> BIG TECH HAS BEEN SHRINKING ITS PRESENCE BY CAUSING NEW CONSTRUCTION OR LETTING LEASES EXPIRE, GOOGLE PAID $1.8 BILLION IN EXIT CHARGES ON LEASES LAST YEAR TO OPTIMIZE ITS GLOBAL OFFICE FOOTPRINT JOINING US NOW TO WALK US THROUGH THE COMMERCIAL REAL ESTATE MARKET IS DON PEEBLES, THE PEEBLES CORPORATION CEO AND CHAIRMAN GOOD TO HAVE YOU THIS MORNING. >> GOOD TO BE HERE >> WE'RE FOUR YEARS OUT FROM THE LOCKDOWN MOMENT AND WE HAVE BEEN WAITING FOR COMMERCIAL REAL ESTATE TO EITHER RATIONALIZE OR WHETHER IT IS GOING TO GET WORSE OR WE'RE GOING TO GET THROUGH THE PROBLEMS AND WORK IT OUT ON THE FINANCING SIDE WHAT ARE THE TRENDS TODAY IN TERMS OF COMPANIES RETHINKING HOW MUCH SPACE THEY NEED >> WELL, ALL COMPANIES -- MOST PRUDENT COMPANIES AND LARGER ONES HAVE RECONSIDERED HOW THEY DO BUSINESS AND HOW THUEIR EMPLOYEES WORK AND THAT WAS HAPPENING BEFORE COVID. LAW FIRMS WERE DOING HOTELING WHERE NO ONE GOT AN ASSIGNED OFFICE ANYMORE AND THEY -- YOU HAD LARGER CORPORATIONS DOING THAT. AND THEN COVID JUST ACCELERATED IT AND ALSO WHAT IS HAPPENING, ALSO, IN THE TECH SECTOR, THEIR BUSINESS IS BEING MORE EFFICIENT, ALL ABOUT BEING MORE EFFICIENT. YOU CAN EXPECT THEM, HISTORICALLY, COMPANIES GROW AND THEN THEY KIND OF LEVEL OFF AND DOWNSIZE A BIT, BECAUSE THEY CAN BE MORE EFFICIENT. WHAT IS HURTING THE REAL ESTATE INDUSTRY ALSO IS THAT WITH THESE LOSSES, IN TERMS OF OCCUPANCY, IS THE INTEREST RATES HAVE MORE THAN DOUBLED AND THAT'S MADE THESE BUILDINGS ESSENTIALLY ALMOST ALL OF THEM IN MAJOR CITIES INSOLVENT. >> WHICH IS EXACTLY, I THINK, PART OF THE POINT HERE OF WHY THAT SECTOR IN PARTICULAR REALLY FEELS THAT FED RATE CUTS WOULD BE INSTRUMENTAL TO EASING THE PRESSURE A BIT IS IT A QUESTION OF WE CAN KIND OF, YOU KNOW, THE BANKS SEEM TO BE AT A POINT WHERE WHATEVER LOSSES THEY MIGHT HAVE TO TAKE ARE NOT NECESSARILY CRIPPLING, BUT IT DOESN'T MEAN THAT THIS IS -- THESE ARE ATTRACTIVE NEW INVESTMENT OPPORTUNITIES, STILL AN OVERHANG OF SPACE AS A INVESTOR, DEVELOPER, HOW ARE YOU THINKING ABOUT WHAT IT IS GOING TO TAKE NOW TO UNLOCK THESE MARGINS. >> ONE THING I DO THINK THAT THE RISK IS FAR GREATER THAN PEOPLE ARE LOOKING AT IF WE GO BACK, WE HAVE NEVER SEEN ANYTHING LIKE THIS SINCE THE EARLY 1990s. AT THAT POINT IN TIME, ONE-THIRD OF THE 3,000 SAVING BANKS AROUND THE COUNTRY WERE CLOSED. WITHIN THREE YEARS, 370 BANKS WERE CLOSED. WHAT IS HAPPENING HERE IS 80 PLUS PERCENT OF THESE COMMERCIAL REAL ESTATE LOANS ARE HELD BY LOCAL AND REGIONAL BANKS THEY'RE THE LIFE BLOOD TO SMALL ENTREPRENEURS EMERGING BUSINESSES AND STARTUPS. AND WITHOUT ACCESS TO THAT CAP CAPITAL, NONE OF THEM CAN MAKE LOANS. THEY'RE BANKS WHO ARE DOMINATING REAL ESTATE MARKETS ON A REGIONAL BASIS MAKING NO LOANS AND THE REALITY IS, THEY'RE DEFERRING JUDGMENT DAY THESE PROPERTIES ARE BEING GIVEN BACK NOW, PRIVATE EQUITY FUNDS ARE WRITING DOWN THEIR INVESTMENTS IN OFFICE BUILDINGS TO ZERO. AND THEY ARE MOVING ON BECAUSE THE INTELLECTUAL BRAIN DRAIN TO TRY TO SOLVE AN INSOLLVABLE PROBLEM, THEY WOULD RANGER TAKE T THE LOSSES AND MOVE ON IF THE FED DOESN'T DROP RATES, THESE BUILDINGS, THERE WILL BE A CATASTROPHIC, I BELIEVE, EVENTS GOING BACK TO THESE LOCAL REGIONAL BANKS. >> WE'RE GOING TO HAVE JOHN GRAY ON IN A LITTLE BIT FROM BLACKSTONE I DON'T KNOW IF YOU FOLLOW BREIT. THEY HAVE NOT DROPPED THEIR EVALUATIONS TO THE SAME LEVEL AS MOST REIT PRODUCTS THOSE FUNDS FOR THE MOST PART ARE DOING ALMOST LIKE -- LIQUIDATION PRICES HOW DO YOU THINK ABOUT THE DISTINCTION BETWEEN SOME OF THESE FUNDS NOW, THESE PUBLIC FUNDS THAT ARE OUT THERE AT MUCH HIGHER VALUATIONS THAN MAYBE WHERE THINGS WOULD BE TODAY IF YOU ACTUALLY HAD TO SELL SOME OF THESE PROPERTYS? >> WELL, JON IS ONE OF THE SMARTEST PEOPLE IN PROPERTIES. AND BLACKSTONE INVESTS DIFFERENTLY THAN MOST REAL ESTATE INVESTMENT FUNDS. THEY DO IT TO A VERY LARGE SCALE. THEY'RE MORE LIKELY BUYING COMPANIES OR LARGE POOLS OF ASSETS AS OPPOSED TO ONE OFF SO THAT GIVES THEM THE ABILITY TO BE MUCH MORE FLEXIBLE, THEY'RE BUYING AT BETTER PRICE POINTS THEIR LOSSES WON'T BE AS GREAT I THINK -- ALSO THEY HAVE THE CAPACITY TO WORK THEIR WAY THROUGH IT, SPIN OFF THE ASSETS LIKE THEY DID WITH BIOMED AND OTHER THINGS, AND SO I THINK THERE IS A WAY OUT FOR THEM. LOOK, THEY SAID THIS, I'VE BEEN SAYING THIS FOR A WHILE, YOU DON'T KNOW WHEN THE BOTTOM OF COMMERCIAL REAL ESTATE IS COMING, AND SO YOU GOT TO START LOOKING AT WHEN THERE IS STRATEGIC BUYING OPPORTUNITIES THAT'S ONE THING WE'RE LOOKING AT I THINK THAT THEY DO NEED TO MAKE SOME ADJUSTMENTS TO SOME OF THEIR ASSET VALUES, BUT NOT TO THE SAME DEGREE THAT THESE FUNDS, WHO ARE CLOSED IN FUNDS, AND THAT THEY NOW ARE GOING TO BE COMPELLED TO SELL I THINK THAT'S ANOTHER ELEMENT HERE I THINK THE VALUES TODAY ARE DOWN, BUT I THINK IF YOU CAN WORK THROUGH -- >> YOU THINK THEY SHOULD LOWER -- WE'LL TALK TO JON ABOUT THIS YOU THINK THEY SHOULD BE LOWERING THEIR VALUES? >> I DO. >> WE KEEP HEARING ABOUT PRIVATE CREDIT BEING THE ESCAPE HATCH HERE, ALL THIS DRY POWDER OUT THERE, THE BANKS DON'T WANT TO STEP IN, YOU'RE INVOLVED TO SOME DEGREE, IS THAT REALLY GOING TO ALLOW US TO BRIDGE TO THE OTHER SIDE HERE? >> YEAH, I THINK SO. LOOK, WE STARTED A COMPANY CALLED WILLOW BROOK PARTNERS BECAUSE WE THINK IT MAKES A LOT OF SENSE FOR US TO DEPLOY CAPITAL TO ENTREPRENEURS AS AN ENTREPRENEURIAL DEVELOPMENT FIRM, ONE OF OUR BIGGEST CHALLENGES HAS ALWAYS BEEN TO CAPITALIZE OUR PROJECTS EFFICIENTLY, ESPECIALLY DEVELOPING NEW BUILDINGS AND EVEN BEFORE COVID, BEFORE THE RUN-UP IN RATES, THE PRIVATE CREDIT FIRMS, LIKE MAC, LIKE RELATED EVEN HAD ONE AND CHILDREN'S INVESTMENT FUND, THEY WERE STEPPING INTO THE MARKET AND FILLING THE VOID THAT THE MAJOR BANKS WHO ARE SUBJECT TO BAZELL THREE WERE PENALIZED TO MAKE THESE LOANS NOW WITH RATES AS THEY ARE AND THE INABILITY OF MANY OF THESE BANKS BECAUSE OF CAPITAL CONSTRAINTS TO MAKE THESE TYPES OF LOANS, PRIVATE CREDIT WILL BE THE DOMINANT PLAYER IN COMMERCIAL REAL ESTATE IN TERMS OF GROWTH GOING FORWARD. MIKE MILKEN WAS AT ONE OF THE CONFERENCES TWO YEARS AGO AND LAST YEAR HERE IN NEW YORK, IN ONE OF OUR MEETINGS, HE WAS TALKING ABOUT HOW THAT IS THE FUTURE AND I DON'T THINK JUST COMMERCIAL REAL ESTATE I THINK THAT IN TERMS OF OTHER INDUSTRIES
