Welcome to the Bloomberg Penel podcast. I'm Paul Swinge you. Along with my co host Lisa Brahma Waits, each day we bring you the most noteworthy and useful interviews for you and your money, whether at the grocery store or the trading floor. Find a Bloomberg Penl podcast on Apple podcast or wherever you listen to podcasts, as well as at Bloomberg dot com. Our next guest is a great person to talk about Bay Area real estate, Susan Loenberg.
She's president of Loenburg Corporation based in San Francisco. Susan, thanks so much for joining us. When when when people think about the San Francisco or Bay Area real estate think they think about the residential side and people being priced out of their homes and they can't move here and the cost of living is maybe even worse than New York. But you focused on the industrial side of the market. Tell us about how that market is today. Is that as perhaps overheated as a residential side, it
is amazingly overheated. Um, we are shocked at the rents were getting. We're getting rents, you know, and higher in industrial than we had underwritten deals for for years. Um. It's part of the barrier we have here is there's a huge demand and growth due to the Internet business and new businesses developing that send out They don't need the bricks and mortar of a retail, but they act like one over the Internet. So that changed the business
greatly and caused a huge upsurge in demand. The other thing we're really facing the barriers the cost of construction. When you talk about it's not just the price of land going up, it's every metal stud has gone up, goes up two to three times a year, and cost you know, all the things that go into building and building rebar metal. Um. What municipalities are looking to developers
to balance their budgets. I mean, so, Susan, you're actually in the hottest area of commercial real estate right now, fulfilment centers, warehouse space. People are saying this is the area to get into given how the Amazon, the amazon ification of retail. Thank you, I have. Really it's struggled. It's struggled my time. UM. I'm just wondering how much competition you're seeing right now. And you know, with pricing, do you think that you're getting good value right now
on a buy? No? I think the values are terrible. We haven't bought anything since two thou because you've got two things going on. You've got money being very cheap. You've got rents being at their historical highs. I mean beyond the beyond. We and um less than twenty years ago, we underwrote a project here in San Francisco, and we thought maybe we could get seventy eight cents square foot. We're hitting it out of the bark. We we just did a deal at two fifty two dollars and fifty cents.
I mean, that's true. So the cost of goods and the cost of you are going up. How they say there's no inflation, I don't personally get, but so so that I'm wondering who's buying and you know they are they at risk of some some pretty big losses. UM. You know, here's the deal. I think. I think that the difference for someone like me who I buy one off, I buy one building, I go after I chase buildings. When you're a real you're not that one building doesn't
have to stand on its own. It gets put into a big portfolio and if it performs at two percent, it gets absorbed in that great deal that you did ten years ago. That's pumping out, you know, fift So when you put those together, you get a good return. You get a stock return, you don't get a real estate return. And reads fundamentally changed the way people look or way read people. They can buy things at a
lower cap right than we can. So if we ask you to kind of look into your crystal ball a little bit, how long can this Bay Area expansion continue? Because it's just it's been ten years plus. I said it was going to be seventeen. Okay, I said it was. I said it was going to be nineteen. Um, you know there's got to be a correction. We're not going to see O eight again. We're just not going to see two thousand and eight. It's a Bay Area losing business.
I mean, I'm not going to move my fulfillment center here. If it's so so expensive, Why would't I go to Austin, Texas or Salt Where are your customers? Right? Well, presently I'm just kind of sending it everywhere, right, might not, I don't know, I guess you would, but you know, the look, people want to live here. You know, at the end of the day, you know, I'm a native
San Francisco. I was born here, and it kills me when people who have moved here ten fifteen, two years ago say, oh, the city has changed, the city has changed. And I say to them, Okay, here's the deal. If you don't want to live in a dynamic, diverse, totally exciting city, moved to with all due respect to Peka, moved to a small town in the Midwest. It will be fine, you'll enjoy it. It'll be great. Go with
the one sing. But if you want to be in a dynamic city that you know, you've got food, you've got arts, you've got you know, you can go skiing into I was you know, this is it? People want to live here? Yeah? Well, and I hear you and and and you know, just to speak to what you're talking about, Paul. As we were driving in and we just saw all the cranes just coming up. I mean every couple of feet you just see a crane, just buildings coming up. I'm wondering. You're talking about how you
haven't bought anything since two thousand fourteen. Are you selling? We have sold a couple of things. We have sold. We're very good buyers and were terrible sellers. What do you mean by that? I don't like to sell, but I never met anything I didn't want to buy. But but but I'm wondering, were you compelled to sell because because the prices were just so high? No, that's not my that would not be my motive. If that won't be, then I'd be out. Then I would retire and just
play golf. That's why would just sell the business. Because keep so keep in mind are the way we have constructed our small business is it's all about cash flow. People say to me, what's your portfolio worth? I have no idea, and I could care less. It's worth what someone's gonna buy it, but it's gonna pay me for. The things we have sold have been like a single tenant building that was sort of special purpose. The tenant wanted to buy it, a user wanted to buy it.
They were more strategic sales than they were um aspirational sales. Let's call it, you know, or taking advantage of this heated market. Because our our whole thing is that we would rather have met really good and healthy cash flows to disperse to our partners and to ourselves than worry about value. Because the rent is more important to us are the are the lending Is the lending community here concerned about the I would be, But the capital is
still available. It's still available because it's yes, the capital is absolutely still available. We're speaking with Susan Loeenberg, president of the Loenberg Corporation, who is speaking here at the Eisneramper real Estate Summit in San Francisco. I'm curious you said that we're not heading toward another two thousand and eight collapse. Can you give us some analogy? What are we heading towards a correction? So what does that look like? I think it's I think it's I think it could
be twenty. I think it could be twenty depending on what happens with trade. So now, okay, here's something in verse that's gonna totally countersay what I'm doing. So now, with China, my understanding is in the wine industry, where we're very heavy, um wine is not they're putting the brakes on exporting wine to China because China saying, oh, well, you know you want they're playing that game, Well, they gotta put it somewhere. Every year, that wine's got to
come off the vines. It can come out. I mean we can arrange. Okay, well, I'm gonna put my single up. We can easily have stiff delivered to you. You mentioned the Wine country. How did the fires impact any of your properties because there was such terrible news, such terrible loss. Yeah, it didn't affect it at all. We had it virtually had no effect other than my partner's calling me constantly saying, have we burned down yet? And I'm saying no, we're fined.
But but but it does raise a question, especially as we hear about climate change and some of the effects with respect to drought, with respect to fires in California, how how are your colleagues responding to that. I think everybody's got their head in the sand. I don't think people were really responding to it. All. That must stand in high value since it sounds great. But yeah, this sounds like it's not going to topple that much though, because you just have there's too much demand to be here.
People want to live here. It's a great place. First of all, if you're in I guess Austin, Texas would be one. You could truck it in from Houston, you could, you know, if that's where your markets. But so much product. I have an apartment that overlooks the bay, and thank you very much, and I'll probably lose it in the downtown because but you see just containership after containership after containership coming through the bay, and then you see these
ships leave half filled. I mean, there are so many products coming in here that are being distributed from here. Yeah. What about the tax changes. I mean, I know that people have been talking about how, you know, this faut deductions, how that's affecting property values and it's affecting where people are deciding to live. I mean, I understand with industrial properties is a lag time with respect to where people live,
and then how that affects into the commercial properties. But I'm just wondering, you know, is that something that people are talking a lot about. You know, I I would be nervous, to be honest with you about if I were a homebuilder, I'd be kind of I'd be a little nervous right now. I'd be cautious about what I were going to bring out of the ground because I'll give you an example. Um, my assistant, I've got her
into a house. It was great, she she saved it was you know, I showed her how it would all work, and she could deduct the interest in the property tax as well. Her deduction. She got back last year four thousand dollars, she told me this year she got yeah. Right. But she's in the house though, so she's not gonna go She's not going to lose the house. She's just not going to spend as much, right because she doesn't
have that extra whatever. The number is twenty one dollars to go maybe buy some new clothes or buy a washer dryer. So that's going to have some effect. And that's we and we've seen that on the East Coast as well in the metro New York area. Susan Loenburg, thank you so much. Susan as president of Lohenburg Corporation, joining us live here in San Francisco at the Eisener Amper real Estate Conferences, and thank you so much. Well,
we're about halfway through the first quarter earning season. I think by and large we're going into earnings people where I think pretty bears looking for three to four decline in SMP earnings numbers seem to have come in a little bit better. To see how much better we welcome our next guest, Gina Martin Adams. Gina is the chief equity strategist for Bloomberg Intelligence. She is in the Bloomberg eleven three oh studio. Gina, thanks so much for joining us.
What is your take here a little more than halfway through the quarterly earning season? Um, thank you for having me, Paul. So far, so good. As you alluded to, expectations were pretty low, so you know, take it for what it's worth, but companies are on track to print about a one percent decline in earnings year over year. That assumes that everyone who was reported, plus all of the expectations come in as as expected, we'll get about a one percent to client in earnings on a year of a year basis.
That's obviously substantially better than the four point one percent to client that analysts were expecting at the start of the season. So companies are beating what I would have considered to be a very low bar. The big change over the last week relative to prior weeks was actually we had more companies even guide for better earnings for
as a whole than guided lower. And this is a big shift because for months and months and months now we've had companies, you know, kind of hammering down forward expectations as a component of every earning season. If we can continue to see this recovery and guidance emerge, and then then over the next several weeks, that could really start to shift expectations and change some people's opinions with
respect to the outlook for earnings. I I don't think a lot of people are expecting a whole lot this year. This is important. I want to just make sure we get that right and kind of hammer at home or the past week, more companies have upgraded guidance going forward for the rest of the year. Uh than anything else. That's really interesting to me. I'm wondering where is that
growth coming from. Well, it's unfortunately so what we find is very few companies actually provide guidance anymore these days, so we don't want to read too much into it. But frankly, the biggest driver of the turnaround in growth is a turnaround from earning suppression in the first half to slightly better performance in the second half for more cyclical industries, in particular those industries that are exposed to
overseas economic conditions. Tech and industrials really stand out. UH. Groups that had a bigger compression and earnings expectations on tougher comparisons in the first half of this year. Their comparisons ease into the second half year. Some of that is due to tax so it's uh, you know, it's it's not one big story driving recovery. I think it's different industries and sectors that are experiencing really strong decline in the first half of this year, with a modest
bounce back expected in the second half. So, Jeanne, we heard from the Fed and the chairman yesterday kind of still on the sidelines, kind of status quo. So my guess is that kind of brings the earnings picture or keeps the earnings picture very much in focus for investors. So how do you think about the back half of the year. Clearly, I think the expectations were for a better second half of the year. Uh does that still
hold for you? Yeah, it does. I think for the market it's going to be a story of more give and take. Right, the first part of this year has been all about valuation expansion driven by much easier than expected FED policy, at least much easier than expected back in December, right, and that shift in FED policy has allowed for rally and bonds, which has elevated valuations in the equity market. Now, the FED seems to be pretty you know, it was presenting a pretty persistent message of yes,
we're on hold. We don't know if that next move is going to be up or down, so we're data dependent. Now that creates a different environment for stocks, right. We've alrea rerated to anticipate much easier monetary conditions going forward. We have to contend with this whole is a Goldilocks or is it not? Because if growth gets too hot, that's great for earnings, but that's not great for bond prices and multiples. It's not great for our anticipated FED
increase um. Right, So I think that you could have tighter monetary policies slightly offset better growth into the second half, which just creates a more volatile condition, a dicier situation for stocks than that which existed in the first half. It doesn't necessarily eliminate the overall bolt trend. So I want to get your sense on the micro aspects of the macro that we're seeing. We saw productivity jump the
most since two thousand fourteen in the first quarter. I'm wondering how much of this is people are actually, uh, you know, just working harder and then are going to get paid for it. And how much is it that frankly, companies don't have to pay people as much as perhaps they would have otherwise had to pay them, and they're just working harder. In other words, Uh, those margin part where it's just aren't there to the degree that we
expected them to be. Right, Yeah, I think that that's a really good point, Lisa, And it's um, you know, the answer is very tbd. I think one of the things we struggle with is economic data, you know, is going to very accurately capture what we pay in a monetary wage, but may not accurately accurately capture payments of
other forms. Right, increasingly, individuals um in the workforce are getting paid via healthcare allowance, they're getting paid via other forms of benefits, not necessarily through accelerating wages, which are much easier to measure so as opposed to you know, flash back to the nineteen fifties and nineteen sixties when a lot of these measurements were developed. You could just measure an average hourly wage. Now half of our workforce is on a salary, not an average hourly wage UM.
Many of our much of our workforce has you know, additional benefits that are paid through corporations. That was certainly not the case fifty years ago. So I think part of it is a measurement issue. What we see in the SMP five hundred, frankly, is quite a bit of evidence that suggests companies have a degree of pricing power UM instead of recording sort of pressures with respect to
escalating payments to companies. The pressures on the margin lines are more about companies spending a little bit too much an environment of slower revenue growth. So there's a lot of moving parts in this story. I'd say that the biggest the biggest problem is the economic data doesn't always match up with the experience of corporate America. So, Gina, we're, you know, ten plus years into this economic cycle, we've stock markets back are near all all time highs. What
sectors tend to perform better in such an environment? I mean, work should investors kind of be thinking from a sector perspective? Yeah, I think every cycle is different, UM. In terms of our sector allocation model. Right now, it implies that you probably want to approach the market with something of a barbelled strategy where and it fits very well with this
notion that the easy gains are done. We're moving from an environment in which the rising tide lifted all boats to an environment where investors have to contend with Yes, earnings growth is probably going to improve, but if it does, it probably means that the economy is strengthening, and that may mean tighter monetary policy going forward. So you balance those two things, and I think the result of that is you want to mix of cyclical and defensive industries
toward the top of your sector allocation. One thing we've seen all cycle is growth stocks outperforming value stocks. I don't think any evidence has a surface to suggest that that strategy is suddenly going to flip on its head. Growth is still very very much in demand, still continues to outperform value, despite you know, investors that are pounding
the table on these valuations spreads widening. I think structurally, when you're an environment of very very slow growth and very little inflation pressure with a flat yield curve, it's just it just promotes gross Gina Martin Adams, thank you so much for taking the time out of your very
busy schedule. Gina Martin Adams, Chief Equities, try to just for Bloomberg Intelligence, and when she talks about a flat yield curve, indeed go and I think San Francisco most people would agree as kind of the birthplace of the gig economy. Start your own company, start your own website, start your own app. But when you do that, you need a place to work. And that is why shared
workplaces have become really commonplace in this new economy. Elton Quas a general manager for the North California region for we work on the largest shared workspace companies. He joins us here live Alton. Thanks for joining us. Thank you so much for having me. I mean, you've got to have the easiest job in the world. I mean I could rent space in the Northern California Bay Area market. How hot is it. It's amazing. So we started off here in the Bay Area in two thousand and eleven.
The company we work started in New York City in two thousand ten, and since then we have thirty locations here in the Bay Area over ten cities. Uh So we go anywhere from San Jose all the way up to Mill Valley, and then we just recently announced Sacramento as well. So no matter where you live or work,
you have a place to be. So one thing that I'm struggling to understand is what's the barrier to entry here, especially as other community commercial real estate operators start to think, you know what, the gig economy is here to stay. We're gonna do cooperative workspace to definitely. So as a member, there's actually no barrier to entry. What we do is we provide flexible workspaces for any size of company. So whether you're a fortune or you're entrepreneur, you could sign
up today and start working tomorrow. Actually um, and you don't have to pay the capital expenses, you don't have to design the offices, everything is done for you. Um. If you are another I guess industry leader trying to get into the coworking space, that might be a little bit tough, just because we have foreigner locations around the world and that is continually to grow. Every single day. On average, we actually open two locations a day, which
is pretty exciting globally. And what what why that's important is because a member at one location is a member around the globe, and you really have membership anywhere, and so you have a home in a place to work. So what is kind of a typical We Work member UM is it kind of a single purses and a small company. What's a typical one looked like? Absolutely? So. Our enterprise business is growing tremendously, and we started that
in two thousand seventeen. Really, UH overt of our member base now is enterprise companies and they take full floors, they take an entire building, and we do everything full service for them, from designing building and then operating the space with our community management teams. UH so that is
a growing segment. We also have an MLB segment where if you're medium to large sized business, you can get a full space a headquarters space for you, so no longer you have to go through the hasshole of finding your own real estate and then finding your own general contractor and then arc texture firm. All that is provided
UH through us, which makes it really easy. And then we have the creative community that is part of the UH we Work community, and that is our heart and bread and butter, and it keeps the energy alive in our spaces and in every single We Work location that you go to, you'll see a membership level such as hot desk or dedicated desk or some private offices that are for the smaller UH companies to allow them to groom, and we also connect them with other community members to grow.
So we worked a file confidentially for an initial public offering, and it raises a question about the growth opportunity. You're talking about some of the growth areas, but the degree to which growth and can accelerate given the fact that we Work, I believe is the biggest commercial property user in both San Francisco as well as in New York.
So already kind of saturated in those areas. Given that fact, I mean, these are all sort of marginal sort of gains, is there another sort of big acceleration in the growth of We Work. So what I would say in terms of we Work is where global platform and with our member or base, we can do a lot with that. UM the WE company as a whole now has different avenues and business lines that UM we play a part in.
So we have we Work, which is the workspace mission, and then we have we Live, which is our living mission, and then we have we Grow, which is our education mission. So through that we're building really communities outside the walls of just we work. How much attraction have you gotten with we Live and we Grow? So the two of those are just beginning and they're really exciting. We're getting a lot of demand. Both of them are in New
York City right now. Um, we're looking for expansion, but those are just in the early stages and I think there's a bright future ahead for us. So in this Northern California Bay Area, we've heard all day how expensive real estate it is, how new construction is expensive. What are the economics for we work in this marketplace? Definitely? So for we Work, I think the value add that we're able to provide for companies coming into the Bay
area is a flexible workspace. And as you know, today, companies are so agile, they're growing so fast, their headcount projections are changing every single day, and the lexibility allows them to really kind of take care of their business and not have to work about the facilities management aspect
aspect or the office space management aspect. And if you're adding another ten two hundred people tomorrow, you need the flexible space to grow without adding a tenure lease, and we Work allows you to do that on flexible terms but costly for you to get the most for you to get this space, it's very expensive, so you're bearing that big cost, right. We have relationships with some of the largest landlords and we continue to grow that presence
and the portfolio presence with landlords across the world. Really uh So, definitely, it is expensive we work, and um I would say the real estate market here is expensive. But I think the beauty about we work is we're able to go into any city around the world, and our entrance into San Mateo or entrance into Palo Alto or entrance into Sacramento are just a few examples where we're able to connect the workforce to the places where people want to work, which also decreases commute times for
a lot of people. So companies don't necessarily need to be in San Francisco exactly. Yes, we know that a lot of tech companies want to have presents, but they don't need to have their entire headquarters here, and we provide them with the agile warkspaceed solution to to provide for that. But if they also want to have a presence in San Jose as well as San Francisco, they can do that and they don't have to work with too many different operators to make that happen. Elton Quark,
thank you so much for spending the time. Elton Quacks, general manager for the Northern California region at We were joining us here from the Eisner amper A real estate summit in San Francisco. Tesla is in the market with an offering of stock and bonds a little over two billion dollars as it tries to shore up its balance sheet. To see get some deeper analysis of this, we welcome Joel Levington. Joel is a senior credit analyst for Blueberg Intelligence.
He joins us on the phone. Joel, thanks so much for joining us. Uh, it seems like a move in the right direction for this company in terms of its balance sheet. Is it enough? Paul, You're You're absolutely right, and uh, I think it is enough, certainly for if you assume that the company should be at least re cash flow break even, and I think it should be
a little bit better than that. It should be able to pay down all of its deep maturities over the timeframe and also keep a decent amount of liquidity on the balance sheet. So Joel, can we just talk about the capitulation here, because This really is capitulation. And basically Elon Mosk have been coming out and saying we don't need more capital, We're doing great. Now it comes out we need more capital. We need it from the equity markets. We needed for the depth markets. I mean, what what
caused this this sort of turnaround here? Well, I think it boils down to Lisa is operational execution. You know, if you look at what he was saying on the earning skulls just a week ago, is that he really wanted to hold capital tight and force his company to perform better. That hasn't worked out the way that he had hoped for and as a result needs additional liquidity.
So I would say, you know, he on his company, the company hasn't performed the way it needs to and hence needs the band aid of additional liquidity right now. So Joel Health has uh testlas bonds performed. It's I mean, if you're if you're a bond investoris company, you're really taking some risk here. The company, as you know that really hasn't had any They've been free cash flow negative. So how have the bonds performed and kind of what's
the expectation here? Sure, that's a great question. Uh, the bonds actually traded in a pretty narrow range between eighty four and eighty eight dollars. Uh, you know over the past year or so, and today they're up about a point and a half, so at about eighty six and a half, so the rate in the range that they have been. That said, the auto sector has performed very well this year on on risk adjusted returns, and so it has been a major laggard. So you know, like,
where do you go from here? I don't really think it breaks out of its range until it can show some operational improvement. If that's shown, I do think that you could see the bonds, um, you know, see more mean reversion than what's already happened today. So I'm struggling a great You did put this in a perspective in a really great way tool, which is basically, yeah, there's a rally, but it's pretty tepid. Right, We're not talking
about massive gains here in the bonds. I'm trying to figure out why investors are constructive at all on this capital ray has given the fact that Tesla seems to be burning through the through, burning through their cash and frankly, the capitulation does speak to execution issues. You're totally right, Lisa. I think we have a lot of deals that are going on, particularly in autos, which you know as an example, Addie, and it's the same thing a couple of weeks ago.
It's really on the hope or promise for stronger tomorrow is what you're banking on if you're an investor right now, and that you know, at least with that with with both companies actually hasn't turned out to be the right call. Eventually, I think that will be for Tesla, but um, you know, again you kind of wonder how long it will be given that they've repeatedly missed expectations to me, I guess the key catalyst here after the liquidity event would be to get a CEO in place that would be a
strong operator. How about a in your management team that actually stays um the yes right. So the question I have so if you're an equity or or bond investor here, what is what's kind of the metrics the one or two metrics that you're looking at that from an operational perspective that tells you, hey, I think they've really got this thing going. That's a great question, Paul. I would say the two things that people really look to are the volume of production that comes out, and that's really
on the model three. And I think what what people are really focused on is getting volume at seven thousand a week or higher. And then I think the other things you have to look at is operating margins UH and moving those towards peer like levels, which would be an even a margin somewhere and kind of like the nine to eleven percent range. If you could do that, you'd have a much stronger profile here at a certain point.
Could the positive sort of movement that we're seeing in the bonds and the stocks the stock is up two also come from the fact that Elon Musk is sort of being realistic. I think so, and you know, I think really what's what's embedded into the stock are two issues. One was liquidity concern that would that continue to grow, and the other is the execution issue. Today, what you're seeing is an alleviation of the financial risk side. Right.
The liquidity will be fine, it'll be sound, and it's a reminder that a fifty billion dollar company can go back into the capital markets and get more money if it needs to. The other side remains a wide open question and UM and unfortunately today you won't resolve that answer right but right now people are interested in the immedia and not necessarily the long term. Joel Lovington, thank you so much for being with us. Joe Lovington, Senior
credit analyst for Bloomberg Intelligence. Thanks for listening to the Bloomberg PANL podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. Paul Sweeney, I'm on Twitter at pt Sweeney. I'm Lisa abram Woit's I'm on Twitter at Lisa A. Bramwo. WIT's one before the podcast. You can always catch us worldwide on Bloomberg Radio