Lots More on the Big Can Kick in Commercial Real Estate

SPEAKER_1 (0:03)

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Tracy Alloway (0:10)

You know, one of the things that kind of surprised me is there was all that concern about commercial real estate and specifically office buildings. And instead, we've seen, it feels like we've seen more stress in the multifamily space.

Joe Weisenthal (0:21)

Yeah, that's a good point. I don't know, like I'm still worried because I still see these numbers, at least an aggregate of vacancies not improving. And I sort of thought, you know, about six months ago, there was another rash of headlines about companies calling workers back to the office. But I'm not sure if there's improvement, like I'm still anxious. I'm not comfortable saying Coast is clear yet, but what do I know?

Tracy Alloway (0:44)

You're caveating yourself. I feel like that's what you're doing.

Joe Weisenthal (0:50)

I did a deadlift. One, two, three.

Tracy Alloway (0:56)

Barges.

Joe Weisenthal (0:57)

This is an after-school special, except...

Tracy Alloway (0:59)

I've decided I'm going to base my entire personality going forward on campaigning for a strategic pork reserve in the US.

Joe Weisenthal (1:05)

Where's the best squid ink pasta?

Tracy Alloway (1:07)

These are the important questions. Is it robots taking over the world?

Joe Weisenthal (1:10)

No, I think that in a couple of years, the AI will do a really good job of making the Odd Lots podcast, and people will say, I don't really need to listen to Joe and Tracy anymore. But we do have the perfect guest.

Tracy Alloway (1:25)

You're listening to Lots More, where we catch up with friends about what's going on right now.

Joe Weisenthal (1:29)

Because even when the Odd Lots is over, there's always Lots More.

Tracy Alloway (1:33)

And we really do have the perfect guest.

So Rich, we had you on basically a year ago talking about where stress is in the massive market for commercial real estate. What have we seen since then?

Richard Hill (1:46)

Yeah, well, first of all, it sort of feels like deja vu all over again for me.

There was a bunch of three bank failures this time last year, fast forward a year. We didn't have any and then suddenly we have another bank failure or another bank stress test, if you will. So look, maybe I'll start with office. I think I'm certainly tired of talking about office. I think most people understand that office valuations are down rather significantly. We think office valuations generically are down around 35% or so.

And peak to trough, they'll probably be down closer to 50%. So I think most people understand that at this point. I do think there's still a little bit of debate and a little bit of misunderstandings about, well, not all office is bad. New clean and green office even in New York City is doing exceptionally well. And then maybe some of the Sunbelt office properties where you're seeing strong demographic shifts, those are working well, working as well. But are people willing to step their toes in? Probably not. I think they share your views.

Tracy Alloway (2:39)

They share Joe's tendency towards self-caviatation. That's a word that I just came up with. We're speaking with Rich Hill.

He is the head of real estate strategy and research over at Cohen & Steers, formerly of Morgan Stanley, which is how I met you and read your research for a number of years.

One thing I wanted to get your sense on, so we have seen a rally in broad CRE since sort of November, December. How much of that is just echoing the expectation for rate cuts? And I feel like I should add a caveat here, which is that we're recording this on March 20th, the day of the Fed interest rate decision, so who knows what will happen, but the expectation is still for cuts. So how much of that is feeding into the rally?

Richard Hill (3:25)

Yeah, so maybe just a level set. The trough in listed REITs, listed real estate, was October 25th of 2023 Since that time, listed REITs are up more than 20%. November was one of the best months ever. December was pretty strong as well, top 10 month ever. So you bring up a good question. How much of this is just driven by rate cuts? So let me unpack that a little bit for you. And I think I'm going to be a little bit wonky here, but I think that's probably okay. That's what we love. First and foremost, listed REITs do really well in the aftermath of the Fed stopping hiking interest rates. Usually on the next 12 month basis, they put up double digit returns. So what we've seen happen is consistent with what we've seen happen with history. But I also think there's a few other things that are maybe not as well understood, where I would say this is not all about REIT cuts. And I'll come back to that in a second.