Market Volatility, Real Estate, And The Supply Chain

with Ellen Zetner, chief US economists from Morgan Stanley. She grew up in Austin, Texas. Did you know that? Man? I did know that. You did know that? Okay, so business Ohio was awesome, But I am a little jealous. I feel like growing up in Texas would be the second best. That would be cool thing to Growing up in Austin is like the it town right now. Back then it was like up and coming right. Let's ask going, I know, Ellen, Ellen, tell us about Austin. Should we

be relocating there like all the kids are doing. I've been there since the nineteen seventies. The I own real estate there, so I'm on the winning end of it right now. But it's a shock if you grew up there and you go back to visit, it's like, what, I have to wait for a reservation? What do you mean, I can't just walk in anywhere. Can tell you. As shocking as it is, if you grew up there, it is still a really cool town when you go back to visit. I just love the old keep Austin weird,

you know that. I like the new awesome because they put in CODA and I've seen UM Formula one there. I've seen Moto g P there. It's absolute and absolute blasts such a great trap. I think that was a good move when they when they put it in there. Hey, you know, I used to do economic development modeling for the State of Texas when GW was still governor there, and boy, we really did a good job at attracting

those big venues. You know. It's a great place to do business, by the way, you know what it I often think of the housing um bubble or the housing situation. Maybe it's a bubble, maybe not um when I think of Austin, how do you look at you know, the incredible rise in prices that we've seen coupled with lack of inventory. Well, the lack of inventory is always the number one reason why that pushes up prices, and of course homebuilders finally catch up and then that's usually when

the cycle turns. But I think this time, you know, we did some work back in nineteen pre COVID that where we looked at the demographic trends in the U S where millennials plus gen Z our biggest demographic bubble ever.

I mean, they dwarf the baby boomers, and when we looked at their preferences and how they approach housing, it's set up for a really strong trend of fundamental demand for housing and specifically single family rentals because they still want mobility UM and want to be able to work wherever.

Then COVID hits and it's that additional catalyst. So I think we're seeing a lot of magration patterns around the US that we're already gravitating toward these areas with high home prices already, that have just continued UH to pressure those areas higher. Now, eventually home prices will be so out of line with with fundamental income that it will push people back towards UH multi family units or delay their home buying decisions. But you've got to reach that point.

We also had obviously incredibly low interest rates plus a ton of fiscal stimulus. Did that add to it? And are we set up for a reckoning? Now? Yeah? Well I think so certainly it added to it. I mean, I think out of out of all that we've talked about, including covid UM, the number one determined is always the cost of housing, which the interest rates are a big chunk of that. So you've got record low mortgage rates UM that had moved lower from already very low levels

uh in the last cycle. So that was that was a huge boost behind the REFI way, freeing up more income, getting more people into homes being able to afford them. So you know, naturally, right as the cycle gets uh, you know, the economy gets tighter and tighter, the FED does want to slow that down, and they slow that down by restricting access to credit, and they're doing that by raising rates. UM. Now how quickly they raise rates will matter. I mean, they don't want to choke off

economic activity. Uh. And so you know, the fear out there in the market is that the Fed's going to hike in March and just keep on going almost you know, being deaf to any kind of incoming data or financial conditions. And that's just not the case, right The FED will still be uh. FED path will be determined by incoming data. UM. But I tell you what I'm most interested that was also the case last cycle, and that is that, unlike pre GFC cycles, the household balance sheet is locked in

at an extraordinarily low fixed rate. So one thing that we saw in the last cycles, what's what we when we finished the leveraging, we never levered back up. And the longer that the rates remain low, the more chance you give for the balance sheet to transition into those very low fixed rates. The majority of debt we hold is in mortgages, and the outstanding yield on effective yield on all of those mortgages is in the threes uh.

And so it's just we're just very insensitive to a rising interest rate environment right now in terms of the household side. It's encouraging talk to just real quickly. What was your take on the I m F move today to cut the GDP forecasts? Is that surprise you at all? No? I mean, I think you know what we've seen is that the I m F tends to get into this pattern of lagging behind changes in in street forecasts. I mean, you know when the Build Back Better Plan, so so

as you mentioned it's driven by China and US downgrades. Well, I downgraded first quarter GDP growth um sharply on the back of the Build Back Better Plan that failed to pass, simply because we had assumed that that child tax credit that low income households were getting would be extended, and so that takes a chunk out of uh personal consumption in the first quarter. Besides the omicron effects, you've got

to account for the omicron effects as well. Uh. You know, we haven't even started to get the really bad data yet because we haven't gotten January data yet. So as we're moving into February and we're already on the other side of o Macron, we're gonna be getting January data confirming just how big of us slow down there was, so you could get as low as a one handle on GDP this quarter. But the FEDS looking through that

going to give that a pass. And here's why, because there are so many factors you can point to that are one off. So I think they're going to deliver that March hike. I know you're gonna be talking to Danielle about that. She's a she's a she's a great gal um. But but yeah, but I think the growth scare is real and I think people have been building that into their forecast. All right, Ellen, thank you so much for joining us to really appreciate getting your thoughts.

Ellen's that in their chief US economist from Morgan Stanley and an avid fly Fisher person. All right, let's talk about the consumer. It's some better and expected numbers out today. Joining us to break it down. Lyn Franco, director of the Economic Indicators and Serve is at the conference board. Lynn talked to us about the consumer. How is he and or she looking? The consumer is holding up, I think remarkably well. Even though we did have a bit of a dip in January where we saw the index decline,

but mixed news there. We saw the consumers gave the present situation a stronger rating than they had in December, a little bit of softening in terms of their expectations. Um, but holding up remarkably well. So talk to us about you know, one of the things I think when I think about the consumer is the labor market. You know, I keep hearing about there are three or four or five million people that are not back in the labor market. Yet I see for sales, I mean, I see, you know,

help wanted signs everywhere. How does the labor market play into consumer confidence data that you see, It plays a very big role. And actually we're getting some very positive readings. So in terms of the percent of consumers who tell us that jobs are plentiful, we did a little bit of a dip from nine to one, but by historical standards, a very strong reading and the present to tell us, you know, jobs are hard to get dipped a little bit.

So I think they're very positive on the labor market, a little bit of softening in their expectations um, but still strong. So we expect that this, coupled with, you know, some of the wage increase that we're seeing, to help continue to support consumer confidence in the months ahead. Is there any concern about FED rate rises? I mean, we've gone from expecting too to seeing three in the dots to now Goldman Sachs forecast four saying the risk is

to the upside. Um. Does this hit consumer confidence at all? It's not really hitting consumer confidence. I mean, we do ask a question about interest rates. Um, and it's not really having any significant impact. You know, we'll see if it does, and when it occurs, soften growth a little bit and that could hurt confidence, but it's not having

an impact. Neither is inflation. Surprisingly, we've actually seen back to back months declined in consumers inflation expectations, so which seems that at least the heightened uncertainty and concern that they were expressing in November seems to be cooling a bit. All right, Lynn, thank you so much. We appreciate that as always getting that monthly data check from you. Linn Franco, Director of Economic Indicators and Surveys at the conference board.

On the train today, Matt, there was like again nobody on the train of my commute in here. That's awesome. People are not coming into the office. I don't know when or if they ever will. I don't know what that means for the people who own these beautiful, huge, sky high office towers here in New York City. UM, but let's check in and get some with a professional who might have some color on that. Hassam Naji, President

and CEO of Marcus and Mill Chup. That's a publican traded company on the n Y S C M M. I for those folks that are interested in the real estate bis So Hassam, thanks so much for joining us here. I don't get it. I don't think people are coming back to work. I don't know who is going to ever take up a lot of this commercial office space. What do you think, Well, there's definitely a transition going

on within the office sector. If you zoom out, commercial real estate has such a menu of options from drug stores and fast food restaurants being very, very stable and have done very well throughout the pandemic. We call necessity retail,

grocery anchored stores ironically in retail doing very well. Apartments on fire because demand is at record levels, and you switch over to the office buildings and seniors housing facilities, those are the two where there's a lot of uncertainty and clouds over future demand because of what's happened through the pandemic. People are changing lifestyles, they are working virtually and they're going to be we believe, for forever. But that doesn't mean that the office market is in for

a permanent doom and gloom. In that you see the new demand forming new company formations are at a record level just in the last nine months of New York at it almost two hundred thousand jobs. A lot of those jobs are being executed virtually right now. But as the virus becomes more of a kind of a part of normal life and not a constant speed bump and you know resurgence and panic kind of on and off

interruption to business. In the next two to three years, we really do believe people will come back into the office because of the collaboration and teamwork. Demand will be less because people will be in a hybrid work model, partly virtual, partly in the office. But new demand is going to also offset some of that short term. Remember most leases that are in place now, sty'll have three and a half to four years before they expire, so the tenants are obligated to pay rent, so it's it's

kind of a buffer. But as these leases roll over, that's where the uncertainty kicks in with a new demand offset the hybrid work model or is the office market in for some you know revaluations and price corrections. Well, and we've seen kind of a bifurcation, you know, on Wall Street there are some firms that are saying, hey, you know what, I'm gonna reduce my UM commercial real estate bills and UM save some costs that way because

I don't need as many people in the office. Others are saying, you know what, we need a lease extra space because we can't be sitting these people, um like little hamsters right next to each other and they're tiny little bullpen the way I do it here, desks, I'm not I'm not criticizing the way we do it here. I love the way we do it, but um, not everybody likes to be sitting in these little desks and not have your own office and not have any space

and not have any privacy. So you know, you're seeing um people go at this and differ of ways. That's exactly right. And we're seeing more team oriented space reconfiguration.

You're seeing some of the tech giants acquire new office buildings and and the fact that many many industries rely heavily on that in person training, in person interaction, and I do think I mean look at the IBM, for example, that led the charge in telecommuting over the last fifteen years, and a few years ago they put an end to that because of the inefficiencies it was creating for the cultural part of their team, collaboration and so on. People

want to be together, they want to work together. I just don't think we need to come back into the office, you know, from eight to five every single day. Thanks to technology, the hybrid work model is actually you know, much more efficient. But from an office perspective, you have to wait to see what's going to make up the you know, that reduced demand. The good news is that there's very little construction at a at a national level.

There are pockets where we had some buildings underway, and so apply is going to be a short term problem in light of the lower demand. But all in all, the office market is out of the historical cycle of overbuilding and then crashing that hasn't happened for the last two cycles. Miami, what a story there? Maybe just because I'm in New York and but I just hear so many stories of people relocating businesses, relocating personally residences to Miami.

Is there any end in sight for the growth of South Florida, well, South Florida, Texas, Arizona, Nevada, all these U states that are benefiting from the outmigration from California and New York and some of the other states are

actually seeing a surgeon office demand. To your point, We've done some case studies for our office investor clients showing that in some of these pockets there is a dearth of office space and there's gonna be a development wave because demand is the exceeding supply that migration was happening pre COVID, but based we got significantly elevated after the

pandemic hit. We don't see it slowing down so much this year by going into it'll level off, and urban America in New York in particular, San Francisco, Chicago will take time to recover. But three or five years from now, I think we'll be talking about what a great investment opportunity urban real estate was during this time. Alright, Hassam, we really appreciate getting your thoughts. As Sam Nagy, president and CEO of Marcus and Mill chap that is a

real estate development company. But you know, it's interesting you cannot get an apartment in New York City. Um, but I just don't know where all the people are. I don't know where they're going, what are they doing. They're not coming into the offices, So I'm not sure what they're doing. I want to bring in Laura Moody. She is CEO and co founder of Bobby, which is a

baby formula delivery startup. But she's also a board member of some startups that have become big businesses that you know, task Rabbit for example, um eat Reel a former product operations exact at Google Finance, and we're glad to have her on the program. Laura, thanks so much for your time. UM. Talk to us first of all about what it's like doing business in startups or younger UM firms during the pandemic. I mean, do you have to just be able to pivot a lot faster? Do you have to be a

lot more agile lovely to be here with you? I mean absolutely, UM, I mean now more than ever, the need to be agile to watch the change in consumer trends is more important than ever. But I will say I think as a startup, and especially one that predominantly operates online, were given an opportunity to leave those consumer trains a lot easier and better than most companies can. So, Laura, talk to us about again. Your company, FOSS focuses primarily

in a baby formula delivery market. How is your business changed during the pandemic? Well, um, so many people. You've probably seen the news and the scarcity of instant formulate today on retail shelves. So being a direct consumer instant formula company, we've seen a huge trend of people coming online over the last year. The instant formula category has seen the increase alone in people coming to purchase online

in two four of last year. Bobby really saw that impact with a hundred and eighty seven percent growth in our sales. So we need to remove the anxiety of someone showing up to retailer not being able to buy the instant formula of choice and have peace of mind that when they need their formula, they can get it on time wherever they are. By the way, as someone who recently had a baby, I've got a lot of experience with this, and I got a couple of questions.

Number One, it does seem to me, although maybe this is pure snobbery, that the European formula market is better than the US formula market in terms of the end product. Is that right? I love that you're calling this out, you know, I know I always hate pointing fingers at any one formula or a collective of formulas to say one is better than another. But you're right, there is a clamoring for EU formula across this country, and it really comes down to the way the recipe is designed

and the standards. If you look at the EU market, the last time that they have updated their standards it was in two thousand nineteen. In comparison to here in the US, the last time was in the nineteen eighties. So to put simply, maybe there is some truth to people turning to EU formula. I also have noticed that, and this may be worse than the EU than in the US, there was a huge push from UM for

hospitals and doctors towards breastfeeding, which is great. We all know it's very healthy way to raise kids, but I don't know that everyone understands how difficult it can be for a lot of people, and there is a m a stigma on, at least in the EU mothers who can't do it and go straight to formula. Is that you think going to change as we come up with healthier UM formulas and more nutritious ways to feed babies. I mean, I mean, first off, it's amazing to hear

you as a new dad. Even just highlighting this, we need to have the conversation and we need to be more open about it. The reality is the world that we're living in today does not match the world that we used to live in, and there's a lot of reasons that we need to be open to accepting formula as an alternative. You look at what it means to become a parent or even to preparent in today's world. There's more adoption, surrogacy, same sex couples, moms who have

a doubleness sectively underlying health conditions. I mean, you finish so many as Titus. I mean that is that was my issue. I don't think a lot of men understand how serious it is and how uh and how widespread it is. In any case, it's been great talking to you, and I hope we can talk to you again. Laura. UM. I'm obviously interested in the subject, and we are all all interested in um starting these businesses and helping our society grow in a faster and healthier way. Laura Modi

is the CEO and co founder of Bobby. Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews of Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller three. On False Sweeney, I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio