Why the CRE Urban Doom Loop May Still Be Coming

SPEAKER_1 (0:03)

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Joe Weisenthal (0:20)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:25)

And I'm Tracy Alloway.

Joe Weisenthal (0:26)

Tracy, so we had that conversation the other day with Rich Hill, Conan Steers, and you sort of put a maybe not too gloomy gloss on the commercial.

Tracy Alloway (0:37)

Not too gloomy gloss.

Joe Weisenthal (0:38)

Right, I mean, like-

Tracy Alloway (0:39)

Say that five times fast.

Joe Weisenthal (0:40)

Not too gloomy gloss, right, not too, that's a good one. Not great, but maybe not terrible, that price discovery is happening, it's not great, but it's salvageable. There's still room for extending and pretending, it's not the end of the world, like, you know, not great, but not terrible.

Tracy Alloway (0:57)

Yeah, and I think to some extent, we've seen that play out in markets in recent months, right? So there were all these stories about the looming maturity wall. A lot of those loans, a lot of those bonds have been refinanced, a lot of companies are surviving, a lot of building owners or real estate developers seem to be surviving under the new conditions. But I guess the wild card in a lot of this is still what happens with interest rates.

Joe Weisenthal (1:24)

Here's what I don't get, though. Like, at least when we're talking about office and when we're talking about office real estate in big cities, the vacancy rates keep going up. And I sort of thought that would stop because especially in the middle of last year, you saw a number of pushes where companies like, no, we're serious, it's return to the office time, guys. And so I was like, oh, okay, like that was it. This was the turning point.

And yet I think by like at least top line metrics, if you just sort of look at offices and the empty ones, things continue to deteriorate.

Tracy Alloway (1:54)

Office buildings are still empty in places like New York and San Francisco. This is very true. But I think real estate, like people still want to live here, residential real estate. I mean, I think those vacancies are pretty low. So there is this tension where people still want to come to the city, it feels like, or at least move here, but they don't want to go into the office, which fair enough, I sympathize.

Joe Weisenthal (2:17)

So just a full disclosure, or my own stake in this story, which is that last year, I bought an apartment in Manhattan.

So I am really invested in the idea that Manhattan continues to be a thriving, going concern with people on the streets, looking around, moving about. I feel like that's, you know, it feels good for safety, things like that. I really need this whole thing to hang together.

Tracy Alloway (2:43)

And I'm on the opposite side of this trade, I think, where I have no Manhattan ownership.

I rent, I would like the rent to go down, actually, and I have a house out in the country. So yeah, we'll debate.

Joe Weisenthal (2:55)

Between the two of us, Tracy, we're perfectly hedged.

We're perfectly hedged. Well, anyway, so we had that conversation with Rich Hill last week, and he mentioned, he said, oh, there's this NYU professor who was once super gloomy about the urban doom loop real estate apocalypse.

And even he's changed his tone. And then when he said that, I thought two things. It's like, A, I know that guy. Yeah, he's even been to some Odd Lots trivia nights. And B, I didn't realize he had changed his tone. I didn't even know if that's true. Got stated on air. I hope it's true, because I want things to be factual on the podcast. So I was like, yeah, we should actually, we should talk to that NYU professor.

Tracy Alloway (3:35)

I like that our fact checks have become sources of content now. It's just another episode to see if what someone already said is actually correct.

Joe Weisenthal (3:42)

We could have just done a fact check or we just put it out there. And then if it's wrong, then we get it debunked on a future episode.

Tracy Alloway (3:49)

All right, let's find out if it's wrong or not.

Joe Weisenthal (3:51)

Well, I'm very excited. We're going to be speaking with Arpit Gupta. He is an associate professor of finance at NYU Stern.

And back in 2022, he was the co-author of a paper, Work From Home and the Office Real Estate Apocalypse. Of course, there's all this fear of doom loops. People don't go into the office, and the local businesses that depended on that foot traffic, like delis and salad bars and restaurants go out of business. And then people don't like being in the city even more. And then they move out to the middle of nowhere like you. And then suddenly the whole thing falls apart.