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Hi, everyone, Welcome to the Bloomberg Business Week Weekend Podcast. It may have been a chilly January outside in much of the country, but you know what wasn't called US inflation. The Consumer Price Index rose by more than forecast across the board in January on a monthly and annual basis, as did the core measures, which strip out food and energy costs, and with employers also adding three hundred and
fifty thousand jobs last month, again exceeding all estimates. Well, that has led to some rethinking when the FED is going to cut rates this year. That said, we also got data that supports those thinking about the FED cutting rates sooner than later. US retail sales broadly declined in January,
the biggest drop in nearly a year. Treasury Secretary Jennet Yellen this past week showed her comments on the CPI, saying that she still sees continued progress in bringing inflation down, though she did address one of the more worrying components of the report, shelter costs. Today, on the program, we take a step back to focus on everything real estate, from apartments bought with cash in New York City to
commercial real estate, student housing, storage units, and more. So, let us begin by taking a moment to think about your life. Thinking about your daily routine and the built environment that you interact with, your office or workspace, the roads, the parks, public transit, all of the infrastructure that's around you, and equally important, what you find on the other side of the doorways that you walk through. Maybe it's just me, but these things have a huge effect on my life
and my well being. For our next guests, this is their world. Andy Cohen and Diane Hoskins are the co CEOs of the privately held global architecture design and planning firm Gensler. Gensler has more than fifty locations and six thousand employees around the world in the America's euro Up, Greater China, Asia, Pacific, and the Middle East. Gensler does more than two billion dollars a year in revenue and counts eighty percent of the top fifty Fortune five hundred
companies as clients. Terminal One at JFK, Invidios Corporate headquarters in Silicon Valley, Shanghai Tower, the tallest building in China, m and T Bank Stadium in Baltimore. These are among the thousands of Gensler projects around the world. Andy Cohen and Dian Hoskins are also the co authors of a new book. It's called Design for a Radically Changing World. They joined us in our New York City studio.
We're in a world where new cities are being created I won't say overnight, but you know, again at such a rapid pace. You know, we were just in India and you know, to see the kind of energy and excitement going on and the transformation that we're part of as a design firm in Bangalore. We were just in Mexico City hearing a lot about the near shoring and the energy that that's bringing to the economy there and
obviously opportunities in the built environment as well. So you know, again as a global firm, we're part of this transformation that is literally happening, you know, around the world. We were at COP twenty eight and in Dubai and you know, again all of what's happening in the Middle East. So, you know, the United States, there's amazing things happening that hopefully we'll talk about as our cities are you know, finding their path.
But we're very bullish, wells safe to say we have a sensitivity about cities too, and we think it's really important that if you have healthy cities, you have healthy countries and healthy policies. Like it kind of starts at that level, but I want to dig a little bit deeper, Andy, because you guys do have this incredible global perspective. Any signs that there are companies are you know, cities slowing down on projects because of uncertainty about.
What's to come again, like Diane said, it's where we have this global perspective. We worked in over one hundred countries last year. You know, we're seeing the US right now in definitely in the work sector, in the office sector definitely slowing down. You know, we're in four sectors in our firm. We have work, lifestyle, what we call cities,
and health and wellness. We're seeing our work sector definitely being hit right now with the slowdown in office although we're doing a ton of office to RESI residential conversions right now. Are you really a ton of those right like old office buildings, older office buildings. What we're seeing is because office buildings right now they're only fifty percent occupied.
We're seeing this unbelievable flight to quality that's going on right now where tenants really only want to be in highly amenditized quality buildings that are brand new or newer. And the older building stock millions upon millions of square feet what we call B and C product are B
and C buildings are a really, really problematic. So we have done we created an algorithm recently that we're able to study entire cities or whole portfolios of buildings and analyze them quickly to see which buildings can be converted from office to REZI and about twenty five percent of the building stock in the United States and around the globe can be converted.
Diana, How I mean we've heard for years since the pandemic that oh, it's just too expensive to convert on a large scale old office buildings into housing. I mean, think about it from the perspective of the plumbing, and there's some lack of windows. I mean how do you do this efficiently? Is it something that is realistic to do to offices that aren't used?
Yeah, as Andy said, we've created a tool where we can answer that question really quickly.
So some buildings, it works in some buildings.
Yeah, I mean that tool. Yeah, what is it? No, it's you know, we've put together basically.
A way of bringing all the analytics that would probably take you know, a pretty extended period of time to study into a very concise set of metrics that predict the viability of an office building becoming residential. So the window to the core, you know that dimension. Obviously, super deep apartments are not going to work. You know, the Florida floor height again, you know there are ideal Florida floor heights for residential that are different in many cases
than office. The loading dock, by the way, makes a huge difference. What's going on with you know, the column base. So all of this basically we do a scoring and literally, if it's eighty or above, it's viable. If it's below, maybe not so much.
And you said that algorithm says twenty five percent can be reworked, which makes me think that other seventy five percent do you think ultimately it's just going to have to be either torn down or done away with.
Well, we're doing a lot of adaptive reuses right now to other types of uses, but definitely be the reason why we're studying residential is such as short as a residential and so we need more residential and this is a sustainable way of doing it. Instead of ripping a building down, we can reuse the building, which is so much better for the environment. I should also add, Diana and I just went this morning. We saw a project called a Pearl House and it's here in Lower Manhattan.
It's the first unbelievable successful conversion from office to REZI and it was a building built in nineteen seventy and we were able to literally turner it inside out and turn it from a standard office building into residential and we think it's going to be a home run here in New York.
It's really cool to hear about this because again again it's like we've heard about we've been talking about this for years, and it's like it's good to finally see this happening. So, Diane, how susceptible is Gensler II blips in the economy, Because the reason I ask it's and I don't think it's an obvious answer. Is because yes, a big portion of your revenue does come from offices, but also a lot comes from municipal municipalities. You do airports,
courthouse renovations, parliament. So how much of that is dependent on you know, fluctuations within the global economy.
Yeah.
You know, over the last twenty years where we've been co CEOs, we've really focused on diversification and really looking at all of the kind of a three sixty from as Andy said, sort of this work sector which we've been talking about, that's the office buildings and then the spaces inside those buildings. But even that is like, you know, you've got tech, and you've got financial services and you know, professional services. But you know, right now one of our
fastest growing practice areas is actually aviation. And you know, you look at the stimulus, the you know, infrastructure bill that got passed not that long ago. You're starting to see amazing projects going on all over the US in terms of these you know, much needed new terminals. We all go you know, overseas and see great terminals, but we're starting to see some amazing opportunities.
Here in the US.
So you know again that diversification, whether it's another massive growth area for US is sports stadiums. And you know, again we all saw the Super Bowl, but you know it's so important in our communities to you know, entertainment in sports as well. So you know, the and let's say hospitality. I mean again since COVID, we all know, the hospitality sector has been just on a rocket and that reflects also back into the work that we're doing.
I want to go right to one called social and racial justice because I think about how we have done in general housing for decades and kind of separating lower income and then developers maybe they throw a few units like how do we do and Diane, let me start with you, how do we do this better?
Yeah, you know, it's about equity, right for so many years, you know, and in so many of our cities there are communities that just haven't had the investment. And so you know, at Gensler, we're really being mindful about seeking out opportunities to work on projects that are helping to create more livable streets, more green space, you know, helping to create schools that are exciting children to want to learn and grow, but.
For not just one member of the social strata.
Correct, yeahat for everyone, for everyone, and it's it is about equity and how do we bring that through design?
Andy, You and Diane argue that design can be a more powerful tool than policy when it comes to changing cities for the better.
Explain, well, sure, I think first let's talk about the context. For the first time in human history, more people live in cities than not. Fifty five percent of the world's population lives in cities, and by twenty fifty seventy percent of the world's populations lives in cities. So the design of cities are obviously going to be really important for the global population. And we believe and this has to
do with policies moving forward. We believe in the philosophy and through our research of a twenty minute city and the twenty minute city, and we learned this through COVID, is that everything is walkable. Everything you need in life, every amenity that you need in life is walkable. Grocery stores, restaurants, retail, healthcare, education is older than a walkable district. Now, in a small city that would be twenty minutes. In a city like New York, you might have multiple twenty minute cities.
But this philosophy of access and amenities, even having to do with racial justice, is the idea that you have these amenities that your fingertips, and about that design can make a difference in our world.
How do you make sure it's affordable amenities that are within everybody's reach, because that maybe is not always I don't know if that's within design you know capabilities, or is it like how do you work that in as well.
Again, at the end of the day, design isn't about the price tag. It's about the decisions that we make as designers. Where to put, you know, the green space, where to put you know, instead of a wall, maybe it's it's shrubbery, or maybe it's the way that you move from one space to the other instead of something that's very rigid and kind of onerous. You know, it's about experience, and you know, at the end of the day, you know, design is about a you know, a thousand
different choices we make with the design problem. And again I go back to it's what we focus on, you know, it's what we focus on. Design is for every neighborhood in a city.
But our client's all sensitive to that. I mean, I do always wonder, especially if it's a tougher economic environment, right, Tim, and I constantly here we are going through earning still and it's you know the bottom line, and you know what gets a stock moving, it's a buyback. Sometimes there a dividend or cost cuts in these you know, thank you,
Mark Zuckerberg. The year of efficiency continues for many. So Andy, come on in on this, Like when you guys are working on a pro how important is it that it's access for most How do you incorporate climate change aspects? How do you do it make it green or make it better.
For our clients?
They're looking for it all.
They want to mark they really they want to make sure that it's equitable, but they also want to make sure that it's financial financial, and so we're constantly balancing the two. And I'll talk about housing for a second. We do a lot of housing, and much of the housing today about every project ten to twenty percent is affordable housing that's being factored into the performance.
Is that more than has been in the past.
Absolutely?
Okay, most projects residential products would have zero affordable and now, based on the demographics of the community, developers are building that into their performer and make it work, and that gives us the ability to create equality and design, to make sure that designs for everyone.
Diane Andy mentioned climate change, and I'm curious how you do design in a world where extreme weather events are happening more frequently beyond just putting everything on stilts, because that's certainly one way to do it. But is that I mean, is that the is that like the only option for low lying environments or even lower Manhattan or Red Hook and Brooklyn.
Do you need develop Well, look, you put your finger on probably the most critical issue of our time, which is climate change, and this is impacting all aspects of the built environment. You know, forty percent of global emissions and CO two are from buildings. Yeah, I mean, it's a huge issue. It's both how we make the buildings,
the town and steel and all of that. So this whole idea of you know, adaptive reuse, that's that's really literally we can cut in half the amount of emissions from our buildings if we can reuse buildings, so that's a big piece. And then of course creating efficiency in our buildings, So you know, that's one piece of it. And you're bringing up resiliency and the point there is that we have to think about the climate not just this year and next year, but in the next fifty years.
And so we need to create the systems and the design, the orientation of the building that is going to allow that building to be able to be usable and valuable into the future.
I love that this idea, Andy, come on, I got me thirty seconds out here.
You know, climate change is the moral and business imperative of our lifetimes. As Diane said, forty percent most people think that autobiles are in industry are the largest. It's buildings that produce the most amount of CO two. We have put in place that by twenty thirty all of our buildings will be net zero, and that's really really important.
That's the focus for us. And I'll give you an example of one quick project, San Francisco Airport, the first net zero, net zero waste airport in the United States.
So even publicly, like.
You were mentioned, Tim, it's coming that municipality is a pushing for net zero.
It's a nice thing to hear, an upbe thing to hear, because it does feel like sometimes it's a tough climb, especially when it comes to climate change. Andy Cohen, Diane Hoskins co CEOs at Gensler their new book, Check it Out. Designed for a radically changing world, it'll definitely get you thinking when it comes to your neighborhood and just developments in general.
You're listening to the Bloomberg Business Week Podcast. Catch us live weekday afternoons from two to five pm Eastern Listen on Apple car Play and then brought auto with a Bloomberg Business app, or want us live on YouTube.
We're going to stick gears a little bit talk about the real estate market, in particular here in New York. The vacancy rate for New York City's most expensive rentals plunging to three point four percent last year. Tim that's the lowest in almost three decades.
All right, here's some more numbers for you. So we're talking about rental units costing more than twenty four hundred dollars a month. Availability fell from about thirteen percent back in twenty twenty one. That's according to the latest New York City Housing and Vacancy Survey. It reflects caroll a broader housing shortage in the Big Apple not seen going all the way back to the nineteen sixties.
Yeah, So let's get to it. Let's get to the interview at this hour on the New York City real estate market, an important one and a closely watched one with us as Lisa Littman, Licensed associate real estate broker at Brown Harris Stevens joining us on Zoom in New York City. Lisa, good to have you here with Tim and me. What are you seeing in terms of availability when it comes to the housing supply here in New
York City? What are you seeing in terms of demand for buyers who are looking for properties?
So we're seeing increased demand since about mid December. I'm seeing a lot more people coming back to the market to purchase. We definitely had a lull from last spring summer through the fall.
It was quiet, and.
In the middle of December, sort of out of the blue, things started picking up. Hart to know exactly why. Often after a period of lull we get busy again for obvious reasons. People need to move, people die, they get married, they have children, they get divorced.
So things started picking up in mid December.
I feel like this January and early February have been busier than the average early year. Usually our spring market starts more in March April, but it started earlier this year.
Lisa, how closely is your business tied to the equity market and what we see in the bond market when it comes to rates in the ten year and mortgage rates that is, you know, if we started to see markets move higher in November and December, is it fair to say that people would come off the sidelines and say, Okay, wait a second, I feel wealthier now, I'm ready to make a big purchase. And at the same time, I'm also seeing mortgage rates come down slightly from what we saw over the past few months.
Absolutely, my market is definitely tied to those factors. Having said that, we have a lot of wealthy cash buyers in New York, which has continued to fuel our market.
And the buyers.
That purchased in the fall were buy a large cash buyers at every price point, from one million all the way up to one hundred million, and even the uptake that started in mid December, that's continuing now.
We still have a.
Lot of cash buyers, although I'm starting to see people who will finance creeping back into the market.
Yeah, that's interesting, I guess, you know, when we hear something like this, I'm always curious Lisa in terms of perspective, So, like what you're seeing today in terms of the real estate cycle, how it compares to probably a lot of cycles you've seen.
Is it a.
Typical one, you know, in terms of the amount of people buying by cash? Is it makes sense maybe the amount of people you're seeing, you know, starting to maybe tap into some loans. I mean, give us some perspective because you you've been in the industry for a while, so you've seen a lot.
Yes, Yes, I've been in the industry for twenty five years, and I work through nine to eleven and post nine to eleven and the financial crisis, and then obviously you know, the latest big depression recession. The difference now is that there is a lot there are a lot more cash buyers than I've seen in the past. And you know, since I've started doing this, interest rates have come up
and gone down. But this most recent rise in interest rate was the largest percent to drop rise, and that really pulled a lot of people back, freaked a lot of people out. I've been doing this long enough to know that even now the interest rates aren't really historically that high, but in.
Relation to what they had been, it preached people out.
But what we learned about the real estate market now is that there is so much wealth in New York that has been created in the last few years with the stock market, that there's a.
Lot of cash buyer. There's a lot of cash out there, and there are a lot of cash buyers now.
The important thing about cash buyers is they don't overpay. They expect to get a good deal because they're paying cash.
Okay, So if somebody's a seller out there and they get an all cash offer that's not at their price point, what's the next step here in terms of countering in a realistic way, taking into account that this thing could close quickly and not necessarily be dragged on by the financing process.
Well, I always encourage sellers to look at reasonable offers carefully, and especially cash offers. You know, it's something's financing contingent. It's never as interesting. A cash offer is always interesting. And you know something that we learned in the last ten years when the market hasn't been as gangbusters as it might have been at different times.
You know, we had this really.
Crazy market in two thousand and five, two thousand and six, we had a mini crazy market from twenty fourteen to sixteen, but at other times when things weren't like that. Any offer you get, especially cash, should be looked at seriously and you should play ball with that person.
Hey, are all the buyers American?
Most of them are.
I'm seeing about eighty percent domestic buyers, twenty percent or foreign money, but it's not where it used to come from. We see a lot more South American money. We see some European money, and then we see some money coming from Asia, but places like Singapore, Taiwan, Korea different than.
We used to see.
So, in other words, not seeing China.
Correct.
What about Russia? Are you seeing Russia?
We see no Russian money. I haven't seen any Russian money in several years.
You know.
It's funny New York City. You know, we always talk about location, location, right when you talk about anything. In terms of the real estate market. New York City has a lot of different markets in the residential space Uptown, downtown, East, West, So walk us through, what are the properties that people are most interested in right now or where in New York City?
All right, Well, Downtown's always popular, West Village is always popular. Tribeca, especially prime Tribeca, meaning west of Church Street is always super popular, so home very popular. You know, the fifty seventh Street corridor Midtown tends to be less popular, except for the period of time where we saw lots of Chinese and Russian buyers buying there. Not to say that
people don't buy there, but less popular. And then of course we have the Upper east Side, in the upper west Side on the Park is always the most popular. And then beyond that, what's really been the most popular for several years is anything that's in really beautiful condition, move in condition. People are very wary of doing renovation. It started before COVID, but certainly during COVID and since COVID.
The cost of doing renovations.
In New York City is very very high, and to get somebody to buy something that needs a lot of work, you really have to be priced very very attractively. Otherwise people just don't buy properties that need work.
What do you have on your radar? Just in the last thirty seconds that we have of perhaps the biggest shift that you can expect in the next few months as we get into that spring real estate season, I think that.
It's going to get more competitive for buyers.
Buyers have gotten used to in the last six months being able to sort of drag their feet making offers take a long time making a deal expecting to be the only buyers. I think they will see more competition, So I think that will that'll be a change.
But what I also want to warn.
Sellers is sellers are always very slow to react to a softme market, and they're often too quick to react to a market that they see as getting better. So what will slow down our market again is if sellers start raising their prices.
That there is a danger of that.
All right, interesting take on that, Hey, Lisa, thank you so much, Lisa Littman. She is licensed associate real estate broker at Brown Harris Stevens. Joining us on zoom from New York City.
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Okay, here's a bit of good news. Commercial property deals in the US are starting to pick up. Here's the bad News. These deals are happening at deep discounts, and that's been forcing landers around the world to brace for souring loans and mounting distress. This distress can be traced to issue stemming from COVID, like reduced office demand or apartments that were overbought in the pandemic frenzy at peak values,
and is exacerbated by much higher borrowing costs. As of December, offices accounted for forty one percent of the value of distressed US properties, which stood at nearly eighty six billion dollars. That's according to MSCI. For more, we turned to one of the most read stories on the Bloomberg this past week, which was also a Bloomberg Big take. The brutal reality of plunging office values is here. The story by Bloomberg
News real estate reporters Natalie Wong and Patrick Clark. It tells us how the plunging valuations of office buildings are being felt around the world. Pat joined us in our studio.
For a long time, we've known that office values in particular were way down right. You can tell by just looking around how many people you see when you go to work. We knew that was going to have a hit that was going to play out across real estate owners and banks. We didn't know exactly how much because nobody was selling anything, and so it was very easy for everyone to kind of collectively put their head in the sales.
We didn't really kind of know how it was all going to settle, right, Yeah, a little bit.
Well, that's true.
In twenty twenty one, you know, there were still debate, you know, are people coming back to the office when while it happened, you know there's going to be a recession. You're going to want to come and look good for your boss so you don't get laid off.
You hear much less of that these days.
And I don't know if it's because you know, we haven't had the recession, or if you know, we've all sort of the defenders of the office have sort of capitulated and come to accept the fact that attendance is not going to be what it once was. The buildings are not going to, you know, command the same rents when releases roll over, and those they're not going to be worth there's much money when they have to either be sold or refinanced.
Well, when it comes to people actually going back to work and using these office buildings on a daily basis. There are big regional and geographic differences here. The US is a real laggard when it comes to where it stands in the world. How does that affect the way that buildings are valued in different parts of the world.
Yeah, well, it's you know, it's fascinating, right, I mean, it's I think the data that we have in the story is that Asia and Europe are kind of like seventy five eighty percent of you know, pre pandemic levels, and the US we're kind of stuck at fifty percent.
You know?
Is that because of the type of work we do here? Is it you know, how people sort of organize their lives. I mean, I think you could argue that it has to do with housing markets, at least from a US perspective, I would say that, you know, the lack of housing near you know, downtowns is something that makes remote working
really appealing. You know, maybe someday we'll start converting all these office buildings into apartments and that will improve inventory and affordability, and all of a sudden it will be easier to get people back to the offices that offices just won't be there.
Anymore, or maybe we won't.
Yeah, right, And this is kind of what we're facing with. I mean what's interesting is it's good to see the market finally moving, but that valuation means I think about global investors, right who've had exposure in terms of the debt side of the equation and all the loans that went out. I mean, they're kind of holding this bag that now is not worth as much as it was a few years ago. So what you know, we've talked about regionals, right, certainly in the US. I mean, what
are some of the implications. We're already starting to see some of this play out.
These were the safe assets right in the low interest rate era. This was like an alternative to buying treasuries, was buy an office building in New York or San Francisco. You know, it's it's it's absolutely not great for the owners and not great for their lenders. And you know, I think the thing that has started to happen is we're getting closer to certainty on where interest rates are
going to settle. Greater certainty, right, people people are now starting to feel like they know what their borrowing costs are going to be in the future, and so that's getting to them to the point, and it's both owners and lenders. More certainty on interest rates gets you to the point where you can start to take some of
the punishment that you need to on valuation. Now, you know, lenders are having to put aside greater reserves to deal with the fact that they're going to take back some you know, take back some keys on office buildings that they're then going to have to Really, what are they going to do it?
That was my question. So let's say you are one of these lenders who gets one of these buildings at a deep discount, or perhaps you're a buyer who's looking to buy something at a deep discount. What are we starting to see now when it comes to this commercial office space that is actually what these buildings will be used for.
The thing The place where I come out I guess is I don't see a ton of reason to think that things will go better for office than they did for shopping malls. I mean, it feels like it took us a really long time, and I don't think it's a solved problem. What do you do with off it? What do you do with shopping malls when people no longer want to go to them right. And there's there's obviously the malls that are great and people still love to.
Go right these experiential places, experiential or.
Just like high end or the right place and to properties.
We certainly have that. In the office market as well. There are offices that will draw people in for a variety of reasons. Either the jobs are really good and sought after, or you know, the and usually it goes along with that. They make the office a pleasant place to be, like the office we're in right now. But you know, many of these buildings are not going to
be very successful in pulling people in. For a decade, we were writing probably more we were writing stories about the future of them all and how do you repurpose the mall that is no longer a magnet for shoppers? And I don't know that that anyone did anyone ever solve that problem. At some point you just kind of either kind of just dies out.
It or they become like Amazon distribution center right right at some point.
But it's a lot of the times. What did that is that the value of the building, the value of the mall, the retail center, you know, became depressed and a new buyer could step into it at such a low basis that it actually was functional as real estate. You could collect enough rents to make it work. It just didn't look at all like what it did before.
What you know, And this is where the academic outlook is really so important you right, though in your story it's still too early. It's common for commercial mortgages to have five year or ten year terms at amortized out a thirty year schedule, leaving balloon payments that need to be paid off or refinance when a loan comes due. That's a fairly long runway, right, And I'm sure that if you're a lender, a commercial lender, you're going to
do it. If you're a back, you're going to do everything you can, right, especially if it's a big loan, like you don't want it to default and come undune, so you kind of have some time to play with. So is this kind of a long slow burn or how do you see it in terms of the rest of commercial office?
I mean, I hope so, right, isn't that that we hope that it's a manageable problem?
Then, yeah, do not a crisis, not a.
Crisis, a manageable problem. You space them out right, you're going to extend certain ones. You know, sometimes something will be more critical and you'll have to take back you know, you'll take back that property now. But if it doesn't happen all at once, and we do get relief on borrowing costs and it gets easier to refinance some of them, then you know, things could play out in a gradual and you know, you know, short of crisis way, and.
That's what we hope.
So the lenders are going to be okay.
Not all of them, right, I mean, nobody believes. I don't think anybody.
I don't think there's any way that everyone makes it through intact, but some I'm sure will.
It's interesting though, so much we're talking about is really us focus, right, because that's where we're seeing the biggest kind of valuation reset pat Yeah, and.
The and the global exposure is you know, through the debt. I mean it's I don't think that's investor personally. So there are you know, multi family owners in Europe who've run into trouble, for sure, but we've got banks in Germany and Japan and all over the place who you know, again they thought that financing a building an office building in Chicago was a safe way to deploy capital.
Right, we got this. It should be okay until it's not pack clock. Thank you as always really appreciate it. He's a real estate reporter at Bloomberg News, joining us here in our studio. The stories we said it is the Bloomberg Big Take. It is among the most read on the Bloomberg.
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While Treasury Secretary Janet Yellen said that while losses in commercial real estate are worried, US regulators are working to ensure that lone loss reserves and liquidity levels the financial system are adequate to cope. Essentially worried about how much is on bank's balance sheets, That's what she was addressing.
Well.
One big player in the commercial real estate industry is the Canadian asset management giant Brookfield. The company owns more than seven hundred properties around the globe, makes it one of the world's biggest owners of commercial property. Eight hundred and sixty five billion dollars under management. Brookfield is second only to Blackstone among alternative asset managers.
Yeah and tim. As office values languished and higher rates persis, Brookfield finds itself at the center of a global real estate shakeout. In fact, it's still though raising a new real estate fund even after defaulting on more than three billion of US commercial mortgages. That is top of mine. When we bring in John Gittleson.
Yeah, he's part of the team that writes about Brookfield today. He's Bloomberg News real Estate and investing reporter as well as Los Angeles bureau chief. He joins us from our Los Angeles bureau right now. So, John, let me get this straight. Brookfield defaulted on three billion, more than three billion dollars of US commercial mortgages in recent years, and now it's going back to investors saying we want to raise billions of dollars more from you to go and buy the same thing.
Well, they're saying it's not the same thing. They're saying now is a great time to invest because they will be able to buy office buildings, malls, and other kind of properties that they like at a discount compared to what they would have been a few years ago. And they also say, hey, everybody buys a whole bunch, nobody bats a thousand. So these defaults are deminimous as far as our you know, total investments, and that put your money with us because we know what we're doing.
Are they right to say that? What do folks investors in their fund say?
Well, I mean that's what's interesting, that's why you play the game.
You know, that's fair.
But their argument is they take a very value oriented approach to investing, and they say the best time to buy is when other people are overleveraged or mismanaged real estate and we can get assets that have long term value at a good price. Others in real estate take more of a growth approach to what they're investing, and they're saying there's too many office buildings, for example, out there, there's a lot of malls that are you know, zombie
malls that aren't worth money. So they're putting money into industrial real estate, into data centers, into types of real estate that are undersupplied and have a growth story to them. And so it's really interesting kind of comparing it to stocks. Brookfield is like the value investor, whereas other companies are more the growth investor, thematic investments.
Hey take us through the structure here of Brookfield, Brookfield Corp. And Brookfield Asset Management. So you know what's going on with these two separate but related companies.
Whiteboard, which we like crops go ahead.
Yeah, that would have been a good idea. I should have prepared a sort of org chart. But there's a parent company that is now called Brookfield Corporation. There was a spin off that's called Brookfield Asset Management, and essentially Brookfield Asset Management, which is seventy five percent owned by Brookfield Corporation, manages outside investors' money and all of their separate funds. Brookfield currently has a real estate fund that
they're raising, an opportunistic fund. Their target goal is fifteen billion dollars. This is like a closed end private equity type fund, and they've raised about seven billion dollars so far. Brookfield also has an insurance or multiple insurance affiliates. They do infrastructure investing, they do energy investing. It's a very diversified company, but real estate is their biggest segment, and there are all kinds of interwoven parts and affiliates of this company.
You know, we're laughing about the structure, but I mean, why is it important I'm thinking about our audiences listening or watching right now. Why is it important to kind of is it convoluted? Is it not transparent as a result of it? Like, why is it important that we're pointing this out? John?
It's important to point it out for a couple of reasons. One is it is hard to say. It's an important to say which part of Brookfield owns something. If it's part of one of these funds, which have a term typically of about ten years, their shorter term, they're more opportunistic. If the assets are owned by their real estate I'm sorry, by their insurance affiliate, or by the parent corporation, they
are more long term investors. And sometimes what they have done is transferred properties from one of their shorter term funds to their insurance affiliate or their parent corporation, and that way they can return money to investors in these funds, and they can hold onto a property over the longer term without necessarily having to sell at a time when the market is not paying the price that they think
they could get if they hold on too longer. And a lot of these are income producing properties that they figure, hey, we can keep collecting rent making money on these properties rather than being forced to sell to repay investors. Works for them, but it also is a concern of investors who may think are our interests aligned with theyers? Are they playing you know, accounting games by moving stuff from one segment of the company to another.
Hey, let's just end talking a little bit about Bruce Flatt. I was so surprised to reading your story that he became CEO of Brooksfield Asset Management in two thousand and two. And this is a guy who was in his thirties when he became CEO.
Correct, that was twenty one years ago. He's fifty eight now, so do the math. Anyway, Yeah, he was very young. I mean he's been nicknamed the Warren Buffett of Canada or Canada's Warren Buffett. He is a very you know, not a real colorful guy. His name is flat. But he also has a long track record and you know, very shrewd building this company from what was once a small I wouldn't say small, but you know, he's definitely managed to grow it. And his value investing theme is
a really strong, you know it. It's done very well by him.
Listen, and he's raising money for that new fund. And either of the BET's going to be a smart one. And I guess time will tell ultimately about this, John, This is incredible story, John Gilson. Another one from John la Bureau, Chief real Estate investing reporter at Bloomberg News, joining us from our La Bureau. Find it at Bloomberg dot com or on.
The Bloomberg terminal.
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Plenty ahead in our second hour of the weekend edition of bloom Burg BusinessWeek, including a check on your new Year's resolutions. Have you been eating better, exercising more, getting more sleep? Or maybe your resolution is trying to learn a new language. We get an update from the CEO of the language learning at Babbel Plus from Athens de Mikinos. It feels like everyone has been taking a trip to Greece recently, except for me, more Americans are going to Greece.
The Greece ad Minister of Tourism on why Greece can be a year round destination. First up this hour, more real estate and a conversation with the CEO of a firm that works in multifamily, industrial and commercial. Carol and I spoke with Michael Levy, CEO at Crow Holdings. It's a Dallas based privately owned real estate investment and development affirm. They've got thirty one billion dollars in assets under management.
I'd boil down to three things, you know. The first is the market is highly bifurcated in terms of haves and have nots, And today the have nots as office buildings, and the have nots is a lot of the downtown urban cores that are impacted by the flexible workforce and not having as many people there and the issues. There's a lot of halves in the business today, which is the industrial sector and the residential rental sector, the data
center sector. So there it's a highly bifurcated, not painting with a single brush across real estate in anyway.
But you guys have some commercial office we have very little.
We do have we we're building a fabulous mass timber building, the largest mass timber office building.
We have a fabulous office.
Campus in Dallas at the very upper end of the office sector. Buildings like this, they're very attractive to people, they meet the modern needs. They're well leased. So the top third of office is great. The bottom third is going to be dirt. It just doesn't know it.
I just want to make sure I get this right. You're actually actively building.
We're active. We have a development company.
An office, but an office building.
Correct. It's the largest Dallas.
It's in Frisco, which is effectively Dallas for metroplex.
Okay, so when did you start? When did you make the plans for that?
Versus and right after COVID, right after right after Well.
How are you designing that in this flexible work environment that you.
Just First of all, the building is not made of steel. It's made of timber using a construction technology. So from a sustainability perspective, you know, it's a much more sustainable building,
which appeals to lots of corporations and individuals today. It's also physically beautiful because the interiors would so the structure is shown and the layout is just big open collaborative spaces and amenities, and it'll be in a neighborhood with a hotel ultimately and other amenities, and people will be able to live, work, play in this area. And that's what people want.
All right.
So you are in New Yorker, you understand this market really really well. I'm assuming you play in the commercial real estate space. Would you not want to be someone here in New York who owns maybe that's second or third tier office property right now?
Like most things, it's all about what your basis, your costs. But yes, as a general rule, let's just call it the bottom third of office buildings. A lot of these buildings you see, for example on Third Avenue, for example, these.
Are really tough properties that are likely.
To wind up in the hands of people who buy them at huge discounts to their value of just a few years ago and ultimately look to repurpose them. But this is a multi decade problem. This is not going to be resolved in the next two.
Or three years.
So no crisis there. There's not a broader real estate crisis. There is distress in the office space. But if you really look at the percentage of disposure that people have to this asset class. In the totality of the real estate sector, it's relatively small. If you talk to the banks and their exposure. It's not going to take the financial system down, it's not going to take the real
estate industry down. But those lower third of office buildings across the country, they are very difficult assets and people are going to lose them.
Why do you think it's going to be such a multi decade long turnaround or at least experience.
Well, One, you can look at things that have already happened, like the mall sector, which start to get disintermediated in the early two thousands, and you can see lots of dormant malls all over America. The issue is one it needs to from a price perspective, get down down to ultimately the value of the land so someone can redevelop it and it makes sense. And secondly, the entitlement process,
you know, going from zoning and entitlements. You know, communities and neighborhoods don't necessarily want to entitle you for apartments, for example, if you were zoned for office and so this takes decades, and it's going to take decades.
Michael, your company's seventy five years years old. Obviously you haven't been there the whole time, but you guys have seen a lot of different cycles. I mean, if you had one word, two words to describe the real estate cycle right now, how would you And I know that's hard because different geographies, different types, but what would how would you describe it?
Sure, I would describe it as we are just beginning to merge because of the interest rate cycle and inflation. We are just becoming beginning to emerge, literally just beginning to e merge from a very contracted, frozen period of time twenty twenty four. It looks like in terms of the capital markets and lending, because of inflation and interest rates, the friction that's been in the business is beginning to be alleviated. So there's a capital market cycle that's been
destructive with respective valuation levels and transaction levels. But the fundamentals rental growth, occupancy, with the exception of the office sector, have been great generally across the country in most major markets.
You are obviously watching the rate cycle very carefully. Does it matter if the Fed does two rate cuts, three rate cuts, five rate cuts this year in terms of what it means for your business.
I don't think there's a very direct course. I certainly would not speculate the two is bad in five is good. I can just say in general, for our levered asset class, don't fight the FED. And the FED is relaxing rates and they're coming down. That's going to be good for our industry in terms of transaction activity, financing, valuation levels, the grease that allows the industry to move forward.
We recently spoke about a Bloomberg big take by own Sean donn and about how Americans are moving around, especially in swing states, and that could impact the presidential election outcome. You have people all over the country, You have businesses and properties all over the country. Give us some color about the demographic trends that you're seeing.
Yeah, look, there is no doubt America is moving to the southeast and southwest. Now at one level, that's a set, you know, seventy five year trend when air conditioning started, but it is accelerated, it's sustaining itself, and it's a virtual cycle. Cities that thirty years ago, as someone from New York you may not wanted to have lived in today are vibrant and with restaurants and culture and food, and so this trend is continuing.
Does that make you barish on New York?
I think be careful.
There's a lot of New Yorkers right.
I understand New York has some very significant challenges, not as difficult as some other cities such as San Francisco. But the reality is our office buildings. This was a city that forever has been first work, second play, third live. Well, people are coming into the office a lot less. And if they come into the office a lot less, that means not only the offices occupied less, the retailers have less.
It's hurting on top of people are not only people, but wealth is and business is leaving the city and the state. You can look at the data for lower costs, higher quality of life markets.
We got to run really a great perspective. Michael Levy, chief executive Officer of cro Holdings, joining us here at our New York studio. This is Bloomberg Business Week. Michael, thank you.
You're listening to the Bloomberg Business Week podcast. Catch us live weekday afternoons from two to five pm Eastern Listen on Apple car Play and and Brout Auto with a Bloomberg Business app or want US Live on YouTube well again.
Depending US existing home sales rebounded sharply in December to a five month high, suggesting the recent drop in mortgage rates is helping to stabilize the resale market. That recent drop, by the way, in mortgage rates also helping to bring sales of new homes in the US past forecasts in December. We got that data yesterday, and in general, we've been thinking a lot about real estate and talking to different voices in different sectors of the industry.
You have some sectors that we've covered in recent days have been office, hospitality, hotel, industrial, but it got us thinking more about so called alternative real estate assets. We're talking about senior housing, self storage, student housing, and more. It's top of mind at Harrison Street, a company that
focuses exclusively on so called alternative real assets. The company has fifty five billion dollars in assets under management with more than five hundred institutional investors around the world.
Christopher Merrill is CEO of the Chicago based Harrison Street. He's in town and he joins us here in our Bloomberg Interactive Broker studio. So great to have you here. We like to start big broad it's a new year. How are you looking at twenty twenty four and how it compares to coming off of the pandemic and then even pre pandemic.
Sure, well, thank you for having me. It's great to be here.
You know, we look at this year and we're absolutely excited about the alternative segments. To us, this is now sort of the second black Swan event we've been through as a firm.
We were the first move and alternative real.
Estate, starting the business in five so we saw how these alternative assets did in the global financial crisis, and then we saw how they performed the pandemic. So coming out of this environment, going to twenty twenty four, what you have as a situation where demographics are solid, they're strong, but supply has been choked off. So many asset classes
that you mentioned have a ton of headwinds. When you think about what's happening in student housing, senior housing, medical, life science, tremendous tailwines right now is demands increasing, enrollments are up at schools, aging population, and there's no supply. So we look at this as some of the greatest vintage years we're going to see for some time.
I understand that for life sciences, medical, senior housing, student housing. But self storage isn't there a glut?
You know?
It's interesting.
Self storage is a fantastic asset class, and it's really is one that you have to look market by market. It's a sort of not in my backyard asset. But the great thing about storage is people use it in good and bad times. It's life events. You'll never get rid of their They don't ever get.
Rid of it.
You've ever seen storage.
It's so unique, but it's amazing, Derek glut of it.
I mean the way we do how we invest in all terms, because there's a lot of different ways to invest in terms, we'd like to invest in asset by asset, create portfolios and then sell to the larger players. So for us, there's a huge demand in owning these assets. It's consistent cash flow month to month leases, so in
a inflationary environment you can really reprice. And so what we like to do is do the hard work, build portfolios and then sell to those groups that are really trying to get exposure to the asset class.
Is it nice that self storage also as zero employees, so their overhead is so low.
It's amazing it's the lowest default asset class. You get about the same rent per square foot as an apartment, but you really don't have a tenant. When someone leaves, you roll it up, you sweep it. So it's a it's a great business, but the challenge with it is it's an easy asset class to build, so you have to go into markets where it's hard and titlements because it's not in my backyard, so you've got to find high barrier entry markets once you own those assets.
Fantastic what happened during the pandemic to all of the assets.
So what happened it was fantastic, you know during the pandemic because at first people nervous, what's going to happen to student housing? What is online learning? What's going to happen to your off campus housing environment?
And self storage particularly?
Yeah, I mean what happened with all these asset classes just consistent, consistent people that were doing businesses online were using storage facilities. People were you know, when you thought about people moving, there was more flexibility, so people were starting to move into other markets.
Right.
You saw a lot of remote working, so people were traveling, moving and so they were using storage.
And student housing.
Same thing.
Student housing was fantastic because really the students didn't want to be in mom or dad's basement.
They wanted to stay in their off campus apartment with nieces.
My daughter wasn't in college, ye, but my nieces didn't care if she was on college. I think it was her first year. She was a freshman, and I think after having to stay home for a little bit, was like, I think, very happy to be at least on campus, had a whole dorm room to herself.
And that's what's happening that you look at the Power five universities, enrollments are up, You're seeing rent increases eight to ten percent a year.
There's just no supply.
Talk to me about the type of student housing you do, because not all student housing is created equal. I know that the student housing that I experience and student housing that I experience isn't necessarily the same student housing that other folks have experienced.
You know, it really is a different level of quality and a lot of us experience. But it's really is that what you say, Well, I mean, it's what it is.
It's come with a beer soaked couch outside outside, you know.
I think that the key the key with the business is it's it's all a bed bath parody, so it's like multifamily, but really what it is is not bed bath parody, three bedroom, three bath, but it's a real focus on gated, well lit safe safety is a big issue, so that's really a focus is creating an environment where you are providing safe environment study rooms, amenities, health clubs, et cetera.
So what are these are? These? Are these student housing? Are these student houses that are multi multi unit that are affiliated with a college or university? So or is it are you essentially building like a huge building of apartments?
So a big part of our business, we're sort of the largest owner of off campus housing, so that's not really affiliated with university. It's off campus, but the school loves it because it becomes an amenity to the school. They can say to a student when you're a sophomore, junior, senior, this is where you can live. So the schools like
working with good managers. We also have a part of our business what we call our P three business where we're doing public to private partnerships with universities where we're working with and helping them build dormitory because a lot of these big universities don't have the capital. So we're going we've probably got thirty to thirty five universities that we are actually helping them with their housing.
Hey, security deposits and student housing. Like, what's the average rate that you actually keep from those? These people just destroy their rooms?
You know what, It's fascinating that if you provide a nice, high quality product and you walk the units on a regular basis and you have the willingness to kick children out if they're not taking care of it, and you're building their parents. Actually they're taking very good care of the units. And you know, we have a higher percentage of women a lot of times.
In these units.
And so actually saying it's not the type of thing, and that's when we started the business, it was student housing is an in social asset class.
It's animal house. There's no way this is going to be insit usual.
But I think people have seen how the industry has really developed and it's really become an asset class where insurance costs are lower than multi family. We have better rent growth than multifamily, and you have really sticky strong demand.
Drivers well, and you have parents who are footing the bill.
And you have parents who are footing the bill.
So from a credit standpoint, you think of only a multi family versus only student housing. We have great credit sticky, not because you've spilled jello shots everywhere.
I have to tell you, like I go and I know you do. There's a story there. I've helped my daughter move out and I am amazed at like some of the haroommates or like you will just leave that in the fridge. I'm like, nope, You're cleaning it all out. It's going to be clean because I want the security to possibility.
Right, that's right.
I'm a tough bringing me back, Carol. What's senior housing?
So senior we're just getting older.
People are getting older. But the challenge is and there's different ways to invest in senior housing, is people getting but we're having memory.
Issues, assisted dementia.
So where we focus is on independent living, memory care, dementia rental for and private pay.
We don't focus on skilled nursing. That's more public pay issues.
But when you look at what's happening, five million people turning eighty by more turning eighty by you know twenty thirty, there is not near enough supply right now. So We're going to wake up in four and five years and wonder where are we going to house all of the folks that have memory and health issues. It's almost impossible to take care of a loved one that has Alzheimer's dementia. So it is a very important NASA class. It's hard,
it's not easy. You need great operating partners. But it's a business that we're very bullsho on and we're seeing occupancies back to pre pandemic levels right now.
How do you design for that just in the last thirty seconds that we have.
You know, I think what you do is we have folks that have been taking care of demension also repairers for decades. So it's really about what paint colors you use, you know, how do you do how do you do carpets, how do you do the right caregivers? And so really for us, it's about choosing great local partners to work with.
I've seen it firsthand. And there's safety issues, so you can't somebody can't just walk out. There's a lot of safety measures in place. Favorite favorite market right now, geography real quick, you.
Know, I think the right now we're active in the US, Canada and Europe, and so we love all those markets. So for us, if I'm near a great university or near a great hospital system, you know, that's where we want to be. And so we can be really diversified across the US and Europe. And so it's hard to pick a favorite market. We just love some of the fundamentals.
Right now, all right, I can leave it there, real fun, Thank you so much. Great trip back home to Chicago, Chris Christopher Merrill. He's the chief executive officer at Harrison Street. Joining us here in our Bloomberg Interactive Brokers studio.
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So we wondered too about the hospitality side of the business. The Bloomberg Reat Hotels indexes rally twenty six percent since late October, and we had the perfect guest with us. Kevin Davis is CEO America's Hotel and Hospitality at JL Jones Langmassol. It's the publicly held real estate and investment management consultancy. It trades under the ticker JL. Kevin's here in our studio at Bloomberg Headquarters in New York. Good to have you with us this afternoon, welcome back, Great
to be here. You know, our Bloomberg Pursuits team called it already, they said, twenty twenty four is going to be a record setting year when it comes to travel on the tourism side, on the business travel side. First up, though at JL, you're involved in office, industrial, retail, give us size and scope here when it comes to the hotel and hospitality business that you're in charge of.
Yeah, So our business relative to some of the other asset classes is relatively small, but certainly our impact on GGDP is relatively large given the number of people that work in hotels and hospitality and leisure around the country. So it's a business that has a pretty significant impact on the economy.
Yeah.
Absolutely, And you guys obviously want to get into because why and want you assume you can grow to how much of your business.
Look, we have aggressive and ambitious growth goals, and so our hope is that we continue to move the business forward and make significant strides in terms of growth.
I mean, is it going to grow faster? Is it going to grow faster than office, industrial and retail?
You know, look, it's hard to say.
Certainly, some of those sectors have been challenged and are in the midst of recovering. I will tell you one of the things that we're super optimistic about as it relates to hospitality, it has proven to be a strong inflation hedge and while inflation looks like it's in the rear view mirror.
As a result of that, it's attracted a lot.
Of institutional investors into the space. And also hospitality typically offers incremental yield relative to other asset classes, and so as a result of that, investors are coming into the space.
Kevin, you talk about investor interests, quantify that give us an idea of how it was maybe pre pandemic. I mean, tell us how long have you guys been building up this business.
I mean, we've been in the hospitality business at JLL for over twenty five years. So this is a core business for us and we are leaders in the space. So just by a order of magnitude, and I'll give you global numbers. I mean generally globally hospitality. It's typically between seventy five and one hundred billion dollars worth of
transactions that take place in a given year. Last year, globally, we had about fifty billion dollars worth of transactions, so we were down about thirty percent relative to twenty twenty two. But we expect that it will likely increase sales volume. Transaction volume will likely increase fifteen to twenty five percent this year.
So we are on the way back.
We don't expect to get all the way back this year, but we think we're on a great trajectory toward stronger transactions.
What's feeling that you talk about investor demand? Is it because we're expecting a lower rate environment? Is it because you expect the economy And I'm curious when you look at the economies, I'm assuming it's the US and elsewhere or is it the US specifically?
Yeah, it's strong growth in the US, strong growth in Europe. Globally, though relatively speaking, we actually expect more growth in Asia, which has been slow to emerge out of the pandemic.
Japan.
Japan has actually started, but more specifically China, which has recently opened up much more so we expect that you'll see strong growth in China. Also inbound travel from China to the US, which is something that certainly has not it's not close to recovering to what it was pre pandemic.
Hey, talk a little more about that, because we've talked a lot on our program about the struggles that China faces internally, the struggles that they face with their own property market, with the economy, with youth unemployment, with demographic challenges. Why are you bullish on China?
Well, I'm bullish relative to what we've seen over the past couple of years. I'm bullish in terms of Chinese travelers getting out and traveling. I mean, you ultimately have an emerging and growing middle class in China, and as the middle class grows, we expect that more people will travel and will travel specific to the US into Europe as well.
So what type of hospitality properties do you think investors are investors kind of clamoring for or asking for?
Of you guys, Absolutely, it's really the two poles, if you will.
It's luxury, which has.
Performed exceptionally well coming out of the pandemic, and it's select service and extended stay assets which have also performed well.
What's select service?
Select service, So typically you don't have extensive food and beverage. It's primarily rooms, and you typically don't have a lot of meeting space, so you wouldn't if you're going to a big conference, you're generally not the meetings are not going to be at a select service hotel. You'll typically go to a full service hotel that has meeting space
and banquets and catering, et cetera. Part of the reason why the select service space has grown though, particularly extended stay, is people have a lot more flexibility now post COVID as it relates to work, and you've seen a bit of the blended business and leisure travel, the so called bleisure travel, And so because people have a lot more flexibility to travel when they are frequently on the road,
they want a bit more homelike amenities. So extended stay, which typically have kitchens, are attractive and that's a sector where we expect to see a lot of growth.
What about regional differences here in the US. You talked about where you're seeing action globally, but what about here in the US.
Yeah, so in the US, it's interesting and it's changing. In the first couple of years out of COVID, we saw strong growth in the sun Belt and the resort markets, which we expect to continue. We saw meaningful contraction in the urban markets New York, Boston, Chicago, Los Angeles, San Francisco.
But the trend that we started to notice last year, which picked up steam and we expect will continue over the course of this year, is really improving performance in urban markets, so again the New York's, the Boston's, Chicago, etc. The reason really threefold. You've had return of leisure travelers. For many years, people were concerned to go to an urban city, to an urban market because of the pandemic, so you've had leisure comeback. You've also had group travel comeback,
so people come to the cities for meetings. And then you've also had a sector called business business transient, which are business people coming to meet with clients and colleagues, et cetera. So that segment is all coming back. The other part, the last component, though, is the global which is early days of coming back, but we expect that that will pick up in earnest and that's going to drive performance in markets like New York Boston, San Francisco.
Go move a little bit more on San Francisco because I feel like Tim, we've had some different guests who are it's fine, it's coming back.
Others others say no way, we're not touching it, and that.
They make it so hard to build or do anything in that city. So you see opportunities there.
Look, San Francisco is a gateway market, it's a top five market. It's not going anywhere. Certainly, it's having its challenges now they're political issues, social issues.
Et cetera.
But we certainly believe that longer term, San Francisco is going to be a great place to invest. And so, yes, the market is challenged today, but we think this is a short, medium term issue which over time San Francisco will recover.
You sound really optimistic. I have bottom lined. So what's the risk out there? I mean, we have spent so much of January, you know, laying out quite a long list of risks for folks out there, whether it's geopolitical politics here in the US and elsewhere. What if the FED gets it wrong? Just got about thirty seconds. What's your number one risk that could kind of upend this optimism?
Number one risk is if the FED doesn't cut rates as aggressively as the market expects, so six ' five more or look, I think it's at least three okay, Or or if the rate cuts get pushed to later in the year. I think if one or both of those things happen, that will take some, not all, some of the optimism out of the market, and we may be on a slightly different trajectory, but ultimately we feel very good about twenty twenty four.
All right, well, this was a fun check up.
Thank you so much.
Thank you, I appreciate it.
Kevin Davis, he's chief executive officer of America's Hotels and Hospitality over at Jones Lang LaSalle. Joining us here in our studio at Bloomberg Headquarters.
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Never too late to be talking about a new year's resolution.
Yeah, maybe things like eating better, getting more sleep, working out more.
Launched on our popcorn.
Yeah the hate Popcorn's okay? Maybe the new year's resolution for you, Carol, is learning another language.
Yeah, I could kind of brush up on my Spanish. You have so much spare time, yeah, exactly, we can multitask. Well. There are plenty of online platforms out there to help you do that. Among them, though, is Babel, the Berlin based company that does exactly that helps you learn a new language.
Well, we've got back with us Julie Hansen, the US CEO of Babel. It's a role that she's had since twenty seventeen. We should note Julie also the former COO and president of Business Insider. It's a role that she served in when Axel Springer bought bi back in what twenty fifteen, value the company for four hundred and fifty million. Julie joins us on Zoom from New York. Julie, good to have you with us this afternoon. How are you good.
Thanks for having me, Sam and Carol.
Yeah, well, thanks so much for coming back here. So I kind of made this joke about having so much spare time there, But at the same time, the whole point of the app based companies that help you learn another language is that you kind of do them when you do have a few minutes talk to us a little bit about how you differentiate Babel in a marketplace that has Rosetta Stone, it has duo Lingo. There's you know, so many options out there for people to learn another language.
You're right there are, and it is a great New Year's resolution. So I love that Carol is on it and trying one thing. You know, we do say that with Babel you only need like ten to fifteen minutes a day, and that's actually really important because you'll do better learning consistently versus binge learning. I think it's probably like starting for a test in college, you want to keep going with a daily habit versus one giant study session. But Babel is very much about learning efficacy, you know.
We are about getting you conversational. It's not comparable to college in that sense. We understand that our users want to learn a language to speak it and use it in their lives, not to not to pass a test necessarily, So that's the focus. We use a lot of human intelligence augmented by some artificial intelligence. But the role of teachers in creating our product has been super important over the years, and we now have teachers actually giving live
lessons in our Babbel Live product. So I think that's a quick way to think about Babel.
What about from the perspective of a business that needs its employees to brush up on a new language or learn learn a new language, Because there's a business side of this too, in terms of where the revenue comes from, at least here in the US, your US CEO, of course, what is what is personal use of versus business and enterprise use?
Absolutely the fastest growing portion of our business is the B to B business, the business use and that's very interesting in the US. It's quite different from the use case we see in Europe. So in the US we really have one main use case or two languages that together make up a main use case. So English speakers
learning Spanish, Spanish speakers learning English. You know, we have many different industries that we serve, but we're clearly seeing a trend toward those industries that have a large proportion of Spanish speaking workers in them. So that can be anything from healthcare even to like manufacturing and construction. And it's interesting and baseball, by the way, we have something like eight MLB teams working with US, and it's bilateral.
You know. We find workers learning English, managers learning Spanish. To generalize, there can be a mix of those two, of course, but that's the general trends and that definitely ties in with the trendsency in the US in consumer where Spanish is by far our biggest language.
Are you seeing this added at all as a workplace perk? Like companies that are saying, you know, come work for us because we believe in continuing education and we'll pay for you. Like for example here at Bloomberg, you know, now we have virtual physical therapy that's new this year. I think we should talk about that. I hope I don't get in trouble for dog, but I think it's a pretty cool. I think it's a pretty cool new thing. But would an HR department ever say, you know, we
want to attract and retain talent. One way we can do that is by offering babble. Do any companies do that?
Yeah? Absolutely, maybe a little more so in Europe than here, but it's a good use case of both cases. For example, we work with a major ad agency that has a large international program where they move their people around, and they bought a large license to prep people for those trips. So and that's but that's kind of a it's a it's a perk for that, So yes, that is a use case, But honestly, I'm a little more excited about the use case where I feel we can really make
a difference, which is around safety. You know, in a lot of our B to B situations, we have workers in say meatpacking or manufacturing or warehouses, and there are safety issues if they can't communicate with their teammates or their managers. So, you know, making the chance for Bibble to improve the safety of people's jobs but also their career prospects, their earning potential, that's really exciting.
Hey, do you ever worry? It's so funny. We had a conversation with our Rachel Metz, who covers all things AI and all the stuff that's going on. You are you worried though at all about chatbots kind of replacing some of what you do? And I'm like even amazed. On my phone, you know, I can type something in, it translates it right away, and it just sends it off to whomever. So I do think about that that is potentially a threat.
To what you do.
So I'm curious to keep you up at night or how are you thinking about that and how how it applies to kind of what you do or maybe how you guys adapt to that.
There's kind of fringy use cases where that can erode the need to learn a language if you're just using it for those sort of transactional interactions. Our learners, generally speaking, want to communicate. They want to learn a language to speak to someone, to take that trip because their mother in law speaks a different language, whatever it is. And you know, people already five years ago people went traveling and held up the phone, you know, to use as
a live translator. So that use case, I think is already well established and we don't worry that much about that. It's the it's you know, our purpose as a corporation is creating mutual understanding through language. So you know, mutual understanding is really much deeper than quick translation.
Well, speaking of AI, Carol brought it up. Are you using and integrating AI tools at all and the way that you develop courses, the way that teachers developed courses and then deploy that for people to learn.
We are, and which is very exciting. We've actually had a machine learning and AI and the product for a long time Now, one of the key concepts that you find in our product and in language learning in general, is this notion of space repetition, where we bring things back to you and remind you of what you've already learned. And so there's quite a bit of machine learning in
the product that does that. Just to use one example, and we see possibly we have we're in the works direct features where a consumer can interact directly with the AI and have a conversation and get training that way. So yeah, we think that AI is fantastic augmented by HI, you know, the human intelligence. Those two go together really nicely.
So how do you think that will change the way the business is run in terms of margins or in terms of you know, how you guys are able to run the business. Does it have like a does it? Does it have an effect on the bottom line?
I hope so, because otherwise, I mean, it's expensive to use AI. So if we only add costs and don't figure out how to be more efficient with it, we will have a problem. We actually have indiatives kind of across the whole organization to use AI and to come up with use cases and experiments, et cetera. So everything from marketing, copywriting to you know, deep feature development in the product. We're embracing AI, but we don't really have
any I think we will. We expect there to be cost savings that come out of this, but we're starting really more with the efficiency, productivity and like you know, use user experience as the primary goals.
All right, Julie, where we started? So I am curious New year resolutions. Do you find a jump in people on your platform at the beginning of the year because they're like, yeah, I think I want to I want to lose some weight and I want to learn a new language. Just give us an idea. We've about thirty forty seconds left.
January is the biggest month of the year every year. It's super important and people tend to subscribe in Jenuary and then they really use it. So our job is to keep them going throughout the year. But absolutely, and you think about it, January sets you up for your spring and summer travel, so it's very important.
All right, So what's the weakest I'm curious now that we went down this path.
The dead of summer, you know, especially in Europe where everyone's traveling, like they're getting the payoff for all that work they've done to learn the language.
In the summertime, I want to drink the margarite rather than learn the language.
Like I said, they go hand in hand. You've got to be on the ground in that country to actually learn the language as well. You know, that's a big part of the education.
I totally agree you immerse yourself in it. But this is a good starting place. Julie, thank you so much. Julie Hanson, us CEO of Babbel jenningsan zoom in New York. Great to check back with her.
You're listening to the Bloomberg Business Week podcast. Catch us Live weekday afternoons from two to five pm Eastern Listen on Apple car Play and then brought Auto with a Bloomberg Business act or want us Live on YouTube.
All right.
So, I don't know about you, but at certain points over the last couple of years, I know, Tim, I've thought about going to Greece. I was just talking to my daughter who's planning. She's overseas. That's on her list before she heads back home here to New York. And you open up your Instagram a lot and think about.
It, Yeah, trying it to open up my Instagram too much because you know, hashtag fomo. But it does feel like at certain points of the year, everyone in my feet is either in Greece or Italy, like I don't know what's going on. It's actually not our imagination here, Carol. More Americans are going to Greece. In November of twenty twenty three, tourists spending by US travelers increased by sixty two point four percent to more than sixty five million euros.
All right, so there's a lot of folks, and Greece wants even more Americans to come and spend time and money in Greece. And that's why Olga Kevaloyani, the country's Minister of Tourism, is here in the United States. She joins us now here in our Bloombery Interactive Brooke Studio og A pleasure to have you here. First up, why are you in New York.
Well, thank you very much for hosting me, and thank you very much for giving me the opportunity to talk about what we're trying to do in terms of tourism in Greece. Of course, American market is a very important source market for Greek tourism, and twenty twenty three was a record year for Greek tourism as a whole, both in terms of arrivals also in terms of revenue, and it was also a record year in terms of Americans arriving in Greece and spending in Greece.
Show us the Pine like how much in terms of tourists, how much are from America, how much are from elsewhere, maybe from the European contentent or so.
Well, the majority of our of our visitors are from European countries, so we believe that there's a lot of room for the increase from the American market. But you know, up to a couple of years ago, we didn't even have a direct connection, so this was actually an impediment. So nowadays we have direct connections through New York, Boston and Chicago and this year twenty twenty four will be having even more connections.
So I think direct flights are.
So there were no direct flights.
There were direct flights, but they were not year round, so they were very seasonal.
So what do you think when a person, when an American is making the choice about where to go on vacation and they're choosing like they're in you know, in that stage where they're planning that trip, what prevents them from choosing Greece, Like, what's the barrier that they need to get over?
Well, first of all, I think that connectivity is very important, so we are very happy that nowadays there is more of a direct connection through a lot of airlines. But I think that an impediment, if this is a correct, let's say word, would be that Greece is mostly associated with summer vacations. So Greece is always associated with the Greek Islands, a beach vacation, sea and sun. And there
is a lot more in Greece than just that. So what we are trying to do is extend the season and promote Greece as a year round destination for Americans throughout the States, because it's not just the East Coast, it's also the West Coast.
And all the other parts of America that well.
Remind us about the weather in Greece, because it is true, like when I'm thinking about when traveling, or I know my daughter she was looking when did some overseas traveling in December and talked about Greece, and I'm like, I think it's kind of cold there in December, But give us an idea, so as you make it year round, I mean the weather is supportive of doing what in December? Or give us an idea of how you're thinking about that year round approach.
Well, when we're talking about the year round approach, that means that, of course you can have year round beach vacation, but the weather is very moderate year round, so you would have a very nice experience in the countryside the mainland Greece, mountainous areas, and you can have some activities outdoors in the nature like trekking, rafting for anyone who's
interested in astronomy. Of course, Greece is associated with really good food, so I think that you would find like a Michelin Star restaurants in Athens, but also super super cute and super nice at awareness in all parts of Greece.
We had an executive from a real estate firm based in Texas on a few weeks ago, and he's a New Yorker but moved to Texas to become a CEO of this job, the t CEO of this company. And he told us, we're asking him what he missed about New York, and he was like, I can't get any good Greek food in Texas, like in the entire state. He's like, when I come to New York, the first thing I do is I go hit some Greek food, not of course saying it's anything close to what you find in Greece.
But yeah, but you know, like even you know, for us, when we are in a Greek island and we have the fish that is just like caught fresh.
Fish and it's just grilled fish.
You don't really need to have a lot of seasoning or you know, like very cooking in a very particular way.
You just have like very very good raw materials, and then you just have.
Like olive oil, Greek olive oil, and it's like the best meal that you can have.
I'm sold. I want to talk a little bit about balance. Though tourism is certainly important, but also maintaining historical significance, maintaining artifacts and making sure that the place doesn't overrun with tourists. How do you find that balance.
Well, it's actually the biggest challenge right now. And this is why I'm as a minister. I'm always talking about, you know, like the new era for Greek tourism, which takes local communities needs into and to you know, significance when it comes, you know, to planning, because we see that, of course tourism is a very big source of revenue for the local economy. It's also a very big generator of jobs. For Greece, Tourism represents almost twenty percent of GDP,
both in terms of direct and indirect contribution. So you see this is a very important economic activity. But at the same time we see that there's a lot of pressure to the local communities, and of course we really need to to protect and preserve our natural environment, our cultural environment.
When you're blue economy, I have to say I am obsessed. I'm a sailor and my husband I are obsessed with some of the YouTubers that sail the world and they spend a lot of time in the Mediterranean and certainly in your neighborhood and at your home. And that economy in terms of supporting fishermen, the ocean economy, the blue
economy is soport. So just to you know, kind of push a little bit more on and what Tim was asking about, like that economy, you want to make sure that doesn't come undone by a mass, you know, move of tourists into the area that maybe it can occur because I see it in areas around the world as a diver like just whether it's cruising or cruise ships or just over development that just really messes up the ocean economy and then impacts a country or anything.
I couldn't agree with you more.
This is why our strategy is focused on sustainability, and we take sustainability when it comes to the marine environment very very seriously.
This is why we just.
Founded this observatory for maritime and coastal tourism in the Mediterranean region. So we did this and collaboration with the UN World Tourism Organization. So Greece, let's say, we'll be in the forefront of preserving the coastal and the maritime environment in the Midtranian because of course it's very important for all insular nations and coastal nations to preserve the
marine environment. So in this respect, of course, we are reviewing our strategy when it comes, let's say, to cruise ships.
I know that you guys push back a little bit.
I know that it's a big interest into the American market, but you know, at the same time, we cannot be having so many cruise ships, so many large cruise ships in Greece, So we are thinking of, you know, applying some quota and having a more strict birth allocation system. So I think we should find, as you said before, the correct balance. So we need the revenue, but at the same time, we need to preserve what makes us really unique and authentic and attractive, you know, as a destination.
Thirty seconds and then we're going to do some news and we're going to come back. But what is specifically about the cruise operators do you find that you need to push back on?
You see that especially in some of the very very popular islands such as Mikonos and Santa Reni, it becomes very frustrating even for visitors who are on the island and also for the islanders. So we really need to find the right balance. And of course I understand, you know that there are people who really enjoy cruising, but
then again you need to have everything in proportion. Let's say, you know, like Greece is a smaller country, so we need to have, you know, proportionate and balanced approach to things.
So Olga, we're looking at all different places we could go in Greece. We're already excited to plan our trip. I want to talk about costs. You're here in New York. You were telling us what we were doing news that it's shockingly expensive to be here.
And yeah, I'm sorry, I can say that.
Yeah, say whatever you want. Like, really, I won't be used to anyone?
Is it everything?
I used to live here twenty years ago? So it's not like I haven't been used to like New York being quite expensive compared to other places.
But I think that.
Nowadays it's like super super expensive everything.
Are you about hotels?
Food?
Everything?
Especially food? I mean compared to the prices that you would have in Athens. So for the prices that you would pay here for you know, relatively mediocre restaurant, plenty of you would have the same let's say, price in a Michelin Star restaurant in Athens. So you understand that the quality that you pay is, you know, not comparable.
What about lodging? When it comes to paying for a hotel? What should what's the range?
Well, you know, the good thing is that there's a very big offering. So I think that depending on your budget, you can find you know, something that's equivalent, you know, to what you want to spend.
How do you, as Minister of Tourism think about a company like Airbnb because they're pretty it's pretty controversial. There are some folks who in governments who don't like it because they think that it displaces housing for people who live in areas and drives up the price of housing. How are you thinking about it.
Well, it's true that.
It's you know, it's a challenge nowadays, you know, finding again the word is the right balance because of course we understand that there are a lot of people who would only look into this kind of accommodation that you know, they wouldn't go to a hotel, so they would look for short term rentals for their vacation. So as a country that appeals to a lot of people, you of course need to have all sorts of so the whole range of the offering when it comes to accommodation, so
both hotels and also the short term rentals. Well at the same time, if you do not have a framework, then of course this creates a lot of i would say social issues, especially when it comes to prices for locals. So for accommodation for locals. I'm also a member of Parliament, so I present Athens and we see that, you know, in the recent years, some very nice neighborhoods that used to be like full of younger people are now younger Greek people are now no longer residential areas because they're
very near the acropolis. So it was, you know, it made much more sense for people to just rent their apartments for visitors through these platforms Airbnb and other platforms for short term rentals.
So nowadays we have a stricter framework.
And really we try to have a very balanced approach because again we understand that this is something that appeals to a lot of visitors, but at the same time we also need have both the revenue, the correct revenue, and also you know, we don't need to have like the unfair competition to hotels, which you know, I have to go under a lot of scrutiny when it comes, you know, to the Ministry of Tourism controls and little frameworks for the way that they operate.
OK.
I want to go back to what your mission is to really expand tourism. Summer check, you got it down. There's lots of people who come in, but you'd like
to expand it throughout the year. And what's interesting is your Prime Minister was on with our TV colleagues in the fall, and specifically he made the point that you know, part of the reason that you guys can expand potentially your tourist season is because the climate change, right that it's impacting a little bit the environment, you know, so that's kind of an unforeseen I don't want to say benefit, but right because of what's happening, or you're just seeing
warming right throughout the year.
Well, you know, the climate crisis, I think is an issue for everyone to address, you know.
In a very strict manner.
So I understand that there's a silver lining for everything, but I think that the most important thing is, you know, to really address the impact of the climate crisis and really for every country to do whatever they.
To reverse the effect that we see in the environment.
And I think that this is important for us, it's important for our children and the future generations. So I think that all of us have a very big responsibility when it comes to to the environment and the climate. So Greece has a very strict, let's say, legislative process right now when it comes to the environment and environmental protection, and we have a plan for having all our hotels
sustainable by twenty thirty. So this is the most important thing for us that we see the climate crisis as an obligation for all of us to do something differently. And I think that this is also something that our visitors are considering when they make their bookings, because you know, the carbon footprint and you know what you're traveling would do through the environment is also something that is of
consideration to a lot of people nowadays. Right, So I think that we have to do our part of the responsibility.
Reality.
No, but I guess what I'm just saying, like the reality of not pointing fingers, I mean the reality of we talk to vineyards all the time, right, and maybe they're shifting where they're growing because climate change is just made a reality. If you can't cry here anymore, and the same thing, you know, for you guys, or for
any country, right they're looking at Okay, it's warmer. What does that mean potentially that we maybe have a longer growing season or a longer tourist season, right, I mean, it's just kind of the reality of it.
Unfor yes, I understand, but yeah, but on the other hand, you know, we really, especially politicians, we really have to be very firm when it comes, you know, to what we really have to do in order to reverse these very negative results to the environment. So this is why I really feel that I have to make this point, and also as a minister, I have to make sure
that especially tourism is really sustainable. But when we're talking about extending the season, we're not talking only about you know, the weather and the fact that it's you know, moderate year round. It's also that you can have these amazing experiences and agreece year round.
And you know, actually for me.
I would say that, especially for people who are interested in culture, it's much much better to enjoy all these amazing sites, you know, like two thousand and five year old sides outside the summer season, because I love why would you go there, you know, like when it's forty five degrees celsius and not go when it's much much nicer. And then you can also enjoy the wineries. You can also enjoy all all sorts of other activities in Greece.
Especially also for some people who are interested in skiing. You have to know that there are ski resorts in Greece. We are upgrading the ski facilities right now, so good to know.
And I'm from Creed, and you know Creed. You could have X. You could ski but off base, okay, and then you can go to the ocean.
Right.
We have to run. Olga Keva Aliani as she is the Minister of Tourism in Greece, joining us here in studio.
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