The Outlook On Real Estate

at Bloomberg dot com Slash podcast. Commercial real Estate for just you know, walking down the streets of New York City, we need a lot of empty spots right across the street from where we are in next door, yep, and next door lots of commercial real estate empty. Um. But you know, on the residential side, it is extraordinarily hot and I can attest to that. Let's talk all things real estate. We do that with Hassan Naji, President and chief executive officer of Marcus and Millichap, and real estate

firm based in Calabasas, California. I've been to Calabasas, California. Pretty cool place, all right, Hassan, thanks so much for joining us here. I know you guys reported some earnings this morning. Give us the lowdown of what you're were re reporting today. Good afternoon, Thanks for having me on the program. We were very proud to report the largest revenue and the income quarter in our fifty year history.

The second quarter was a reflection of a lot of delayed and canceled transactions that we're still able to resurrect from last year, as well as incredible new demand from buyers that see commercial real estate as a great investment

because the economy is recovering. We added almost a million jobs in July and we're back to UH sixteen and a half million jobs of the twenty two million that we've lost, So the recovery is bringing a lot of confidence into the fact that eventually those empty spaces you were talking about right there in Manhattan will get re occupied.

And interest rates are so low, with so much liquidity in the marketplace, that the investment community is seeing real estate as a great play right now, given we're stocks are at, given when bronze are at and the fact that commercial real estate has proven to be a very good inflation hedge going into an economic expansion, So all those things are happening. We as a company have had a number of key execution strategies. We've acquired nine firms

in the last three years. We have done a number of technology upgrades which were just in time for the pandemic, where we had no downturn in our operations or any kind of a disruption. Thankfully, technology investments have really paid off and that productivity that we brought to our salesforces is really showing up in the numbers. Breaking out the types of commercial real estate that are the most popular ones, where do you see that? I mean, it's hard to

believe it's offices, But is it restaurants? Is it gym's What kind of commercial real estate is seeing the most success. Well, the beauty of commercial real estate is that there's something for everyone on the menu. For risk of our investors, a G baby movements that are very yield and cash flow sensitive, apartments and single tenant at least those are your drug stores, your fast food restaurants, auto parts types of outlets where you have one tenant on a long

term lease. The cash flow is very predictable there, they've been incredibly popular. Apartments have been very popular for many, many decades because they're stable regardless of the economic cycle for the most part, and uh, there's so much demand for affordable housing that apartment demand has been very very strong.

On the other end of this spectrum. You have hotels and office buildings to it to a very large extent, and shopping centers that were hit incredibly hard by the pandemic, of course, and for those more higher risk, higher return types of investors, those asset classes are providing a phenomenal uh if you will acquire and fix it or acquire and ride the recovery play And we're seeing both ends of those safety and then more high risk, high return

ends at the spectrum play out in the marketplace. You know, maybe just have my New York City bias here, but I am less cautious, much less cautious on the rebound of commercial real estate. You know, we're just seeing hassam. Some companies like Wells Fargo and black Rock announced some delays in bringing people back to the office. I think this is going to be folks just kind of feeling

it out a little bit. I think you're right. In the urban markets, where we have so much dependency on public transportation, the new rounds of outbreaks have been a major concern. Even without frankly, the resurgence of new cases COVID cases, we knew that the urban markets would take time to recover. People are going to be cautious and there is going to be a kind of a dampening effect on office space usage and office space demand in the near term, probably the next twelve to eighteen months.

But on the other end of the scale, if you look at the fact that new business formations in the United States are at a record high, we're seeing this job growth resurgence and changes in the economy where people have discovered you can have a hybrid work model. People can work from home some of the time at least and and commute much less and be more productive. On top of all that, you're seeing new generation of companies.

Forming companies will eventually start to expand and there will be a backfill for demand, uh that is dampened by this new hybrid model and cautiousness. It's not a straight up recovery where it's a hockey stick for for the office market. We don't expect that, but we do believe

that there will be a recovery. In Urban America has so many different benefits that were really thriving pre pandemic, and I think it's a matter of time before those come back, and I would a gin that that's part of the reason why some of the markets that were hardest hit by the pandemic are also poised for the biggest recovery. We're talking New York, San Francisco, Austin. Correct. Absolutely.

If you look at the twelve months job creation, New York is number one over the last twelve months at eight point three percent employment growth with over three thousand jobs created. It's the number one metro on this list that I'm looking at produced by a research department, followed by Boston, Chicago, Dallas, Los Angeles, Philadelphia, DC, Atlanta, Detroit, and Northern New Jersey. From a percentage perspective, those metors, a lot of those metros were hit very, very hard,

and they're making a big comeback. To your point, all right, talk to us about interest rates here. We're obviously historically low interest rates, although do have the rates popping up today of the tenure up to about one point nine On that strong jobs gain, people are betting that rates are in fact going to rise again from historically low levels. How sensitive is kind of the commercial side of the

real estate business to interest rates. It's very sensitive because the cost of debt plays a big part in the way you value commercial real estate. Most commercial real estate of vast majority of the transactions do rely on financing from banks and credit unions and other forms of of lenders, life insurance companies, UH, the commercial mortgage backed securities the MBS marketplace, and therefore interest rates play a big part. On average, we see loan to value ratios of somewhere

between depending on the property type. So where interest rates go, valuations UH follow, and we are expecting interest rates to rise. They have to. We can't stay at these record low

levels forever. But the beauty of the balance in the marketplace for commercial real estate is that if inflation is coming back, if interest rates are rising and those are being accompanied by job growth, by new occupancies, by some new demand of stilling those empty spaces you are commenting on in Manhattan and other places, then the rents should be going up and the income levels of the properties should be going up along with inflation and along with

interest rates. That's why commercial rules it is viewed as an inflation hedge, especially property types like hotels which are marked to market on a daily basis depending on demand for their room rates, and apartments which typically have a twelve month lease. And UH, we're we don't get concerned about interest rates rising as long as it's rising for the right reasons, economic growth and and new demand being created.

If we get variations and interest rates because of some shock or because of some credit freeze, that's a whole different story. All right, Son, thank you so much for joining us. We really appreciate your perspective and experience. As Nagi, CEO of real estate firm Marcus and Millichap m m I is the stock symbol ticker to put into your Bloomberg. They reported some earnings. Uh, so we appreciate getting his thoughts on the real estate market. Good news on the economy.

To end the week here, all right, let's get some insight into some of that economic data. We welcome Sarah House. She's director and senior economist at Wells Fargoes Corporate and Investment Banks. Sarah, thanks so much for joining us here. I love to get your take on the job's number and kind of where we are in this economic reopening. Yeah. I think all around, it was a pretty strong report that was hard to find fault with, so, of course

we saw perils come in better than expected. We saw a nice upward revision to the prior two months the unemployment rate self for all the right reasons, as we did see a drop in the number of people reported unemployed even as the labor force rose, and of course you saw another decent gain in earnings. UM. I think if you want to nitpick with with the report, you could probably look at the participation rate and maybe wonder

why it's it's not rising further. But I think it comes down to the fact that there's still a lot of constraints on the labor supply right now, and I think given where we are with the delta variant, we're probably going to see those constraints get prolonged a little bit here in the upcoming months. Sarah, will we look at that increased cost of labor, like, why are the sharp jumping wages over the past few months, Um, What

do you think maybe contributing to that? It just speaks to how reluctant I think a lot of workers are to come back, either because they are concerned about the coronavirus or they have childcare issues, and so I think what we're seeing is that employers have have really had to pony up to get workers back in the door, especially in those lower paced sectors where maybe those extra unemployment benefits are replacing a higher rate of income UM.

But also those are the same sectors where you are doing a lot of in person contact and so there are greater health risks and so employees have have to be compensated it for that, and we've seen a pretty sharp jump in wages as a result. So, for example, just in the leisure and hospitality sector, wages are of

about eight percent since the start of the year. Were there any other standout sectors that you saw, well, Transportation warehousing has been another, So this is an area that's obviously been in high demand given the strength in good spending that we've seen over the course of the pandemic.

And this is also another sector that you tended to have a lower pay rate to begin with, and so that that means that you're going to have to see UM stronger wages there, I think, to entice some workers back into the jobs market again given those health concerns and the offset provided by some of those unemployment benefits. Sarah, Okay, So now the discussion I think pivots a little bit to the FED. What does the FED takeaway from this job's report and maybe some of the other echo data

we see out there. Yeah, I think overall this is a pretty strong report and what the Fed wants to see is as far as progress growth goes on the labor market. And then the big question though, is this enough to maybe move some of the more devish members of the Fed off their their taper timing. Um. I think you know, this certainly kicks the box if you're

in the government Waller camp. But I think when you look at the clouds on the horizon with with the delta variant and how that might slow the timing of when we get clarity on on just how much the labor supply comes back, I think that might keep some folks wanting to see um that fall data, which would probably put the taper announcement more towards December, and it may or may not raise the case for raising rates. Right, So, I mean, I think the case for for raising rates

is still pretty far off. But what we've seen, um, you know, particularly from Governor Wallers comments, but even from vice vice share claratives comments as well, is that they are thinking about the flexibility later on down the road. So if we continue to see upside surprises in inflation, if we continue to see some pretty strong jobs numbers and rapid improvement in the labor market. They want that optionality.

But I think we we still see some some of your term risks on the horizon that we think they'll will probably stay patient a little longer yet. And Sarah, I just want to fall up on that inflation point you were making here. I mean, on those rare days when I was paying attention in economics class, I was taught you can't really have real inflation unless you're gonna have wage inflation. And I'm not sure this report kind of suggests that that's on the table here. How do

you think about inflation and going forward? Well, I think we have some continued upward pressure that we're seeing. So you know, there's a couple of of the categories that have made a lot of headlines, like used autos that are probably do do for some payback here pretty soon. But we still have a lot of pressure in the system if we look at what's happening across supply chains and what that's doing to the goods picture. But I think what's really important is we look further down the road.

Is this um pressure that we are seeing from from the labor side now part of this might be a little bit overstated of what the post COVID trend is, given that there is this timing mismatch between how soon employers want workers back and and how soon that labor is willing to return. And so we have seen some pretty remarkable increases, at least some within different industries over over the past few months. But I think this is a source of probably more durable inflation pressures over over

the coming months. That's going to keep the overall pace of inflation elevated and and slow to return back towards the FEDS two percent target. And how much does this delta variant threaten this progress and any near term progress. I think it threatens to slow the progress. I don't think this is going to derail the expansion by any means. So we have tools to deal with the virus, so you know, as compared to the prior waves, we have

access to really good vaccines. And then we have learned over the course of the past sixteen months or so, how did you business and how to still um have you know, economic activity within UM within this environment, so businesses have adjusted, UM we have we we know how to have better health hygiene and so I think that's going to limit the dent to activity, but it is going to to weigh on the margin. And so I think UM again, probably somewhat slower um than we would

have expected maybe a month or six weeks ago. All Right, Sarah, thank you so much for joining us. We really appreciate your thoughts and insight. Sarah House, director and senior economist for Wells Fargo's corporate and investment bank. Right now, let's go talk about getting some of these Wall Street folks back into the office. We need an ire here back

in the office of the Interactive Rovers studio. But we've seen, you know, some news come out of the last couple of days from the legs of Wells Fargo and in black Rock that perhaps perhaps they are going to delay this from September to October. Amazon came back and said all the way to January. But let's talk about the Wall Street folks. And to do that we welcome Hannah Levitt. She's a financi reporter for Bloomberg News. Joinings on the

phone from New York. So, Hannah, it seems like we're seeing some of these big investment banks backtrack a little bit on their scheduling. Yeah, so it's it's really a confusing time, right because there's those rising cases, there's to dom CDC guidance and so well, different banks were already taking you know, for each bank there's their own approach,

and that gulf has kind of gotten wider recently. And what you're seeing is you have two firms, really JP Morgan and Goldman Sacks, that are really leading the charge on return to office. You know, they called workers back at least on a part time basis earlier this summer. And then you have some other firms that are taking it slower. And so that's like Wells Fargo for example.

You know, they were pointing to early September is when they were going to start that process of getting people back into the office, and they said yesterday that it would be um October instead, so and we saw Black Crock do the same thing. So it's yeah, there definitely is uh, you know, different approaches going on here, Kenna.

Do you know what I wonder if this has more to do with the data for the delta variant or it has to do with the fact that a lot of people are resigning if their companies ask them to go into work. Yeah, you know, that's a really interesting question.

And I also think that, um, something worth exploring here is just you know, for the firms that have already started doing this, I don't know how you unring that bell, um, so that you know you're dealing with kind of apples and orangers when you're talking about, um, you know, sending people back home versus when you start bringing people back.

So follow up on Nita's line there, I mean, are we is there examples where we've had like major I don't know groups or trade eating deaths, or say or maybe a regional office in Florida or Texas saying we

don't really need to come back. Um, you know, I mean, I think when you think about some of these big banks, you think about all all the locations that they have and them really being you know, a cross section of the country in that way, and especially when you are when you start looking at like their branch operations as well, which is kind of a different question because those people

have been going in uh this whole time. But yeah, I think that that people's reactions, my senses at the banks kind of um, you get the diversity of reactions that you know, you're you're seeing and reading about, so you know what I see. Also, we know that Goldman, Sachs and JP Morgan there they are not forcing workers to get the shot. Um, but we found out last week I believe that it would be legal for employees to require shots. And so I wonder how much of

that also played into the decision. Uh. Yeah, and we've we have seen them stop short. You know, a couple uh, a couple of banks have warned that this might be on the table, but no one uh of the big you know, of the giant lenders like JP Morgan and Goldman have not mandated that. We've seen Morgan Stanley say only vaccinated employees can return to our New York offices. But then you know, we we wrote about yesterday to

vaccine employees then got uh COVID at their office. So this really just shows again like the the different approaches that are being taken, and also the reality that, um, this pandemic is still very much going on. Yeah, and Hannah, we had I remember we made a pretty big deal when JP Morgan brought their people back. I know Snali Bassik from Bloomberg News is actually reporting on site there

in New York City, at their headquarters. Have we had any feedback from the JP Morgan folks about how things might be going. I mean, I think so they were people at JP Morgan, we're going back into the office, um. For they've been doing that for a while, so that there was, um, you know, at the time, which I believe they put out a memo in mayor June saying by July people should be in you know, at least part time, UM. But a lot of people were already going in UM. And so I think that that stayed

pretty consistent. And lastly, do you think that um just going forward, this might be a thing that companies may do. They may require workers to get the shot or or else. I think that's a great question. And uh, I mean we've seen we've seen firms and other industries do it. So I guess the question really is, are are these banking giants going to take the plunge and do that? And I guess that remains to be seen. All right. Hannah, thank you so much for joining us. We appreciate it.

Hannah Levitt, financial reporter for Bloomberg News, joining us on the phone from New York. Now let's get over to Ethan devit. She is the c i O at Monetta. They've got twenty seven points four billion dollars in assets under management. And first off, well, first off, good morning, thanks for joining us. Let me ask what you your

reaction is to this job's number. Well, obviously, I would consider this quite a lagging indicator here in that this was the job sport which came out in advance of the delta variants, leading to increase mass mandates across the country and just ongoing uncertainty to saw today the Auto Show and New York was counceled, and this is that we're in a climate up great uncertainty, and if we have renewed mass mandates, will this mean certain indoor vince

venues will close? And what's going to happen to to to the employment in that case? So I'd say it's really it's it's interesting, and it is certainly consoling to markets that markets have reacted accordingly. But I see this is actually more looking to pass, not really an indicator of what the rest of the summer and the fall

will hold. All Right, it's a very good point, and the uptick in the delta variant has been disturbing, to say the least, we've seen it effect the real omy, with a number of Wall Street firms and mega cap tech firms pushing back their return to work. Um, how you know, how how difficult is it to work with this kind of uncertainty. It's extremely difficult. And I've said before that markets really are sort of fishing for answers

right now. They're sort of playing around in areas such as the is it going to be good for the stay at home stocks? Is the tech stox of pelotons, zooms the slacks? Are are we going to see return to some of the value names that were overlooked? And then we saw a cyclically come back at the beginning of the year, but they then fall off again as some of the uncertainty came into the summer. So I think it's really a question of fishing. There is still

strong support. I've spoken before about the wall of money that I believe it's still poised to enter markets upon a correction. Every correction is is very short lived, as we've seen even in this past week and last week. It really is that a day long and then markets will will will crowd back in again, Investors will cred back in again, and for that reason, it's really everything

is happening in real time. It's very dynamic. We're very short cycled right now, so tremendous uncertainty, but still the momentum is still upwards. I want to talk about the persistence of two things then, from your perspective, inflation and E s G investing. I know they're very different issues, but um I had the same question in each one. So is inflation transitory? Let's start with that one. I

don't believe that it is. I think we are here with significantly higher rates of inflation that we've been comfortable with over the past a number of years, where we've really been hovering around about two percent. There have been deflationary forces causing that, just generally that the gig economy and components come down, and then of course supply shortages and and other disruptions of COVID led to the somewhat artificial supplied constraints which have led to some of the

increases we're seeing now. But I don't believe it's transitory. I think we're looking at stay higher levels for at least the next eighteen months. And because the companies have been able to weather this form so far, there has been a built up of inventory. They have been relatively able to push prices through to consumers. They have pricing power. I think they were going to see margins contracting as

a result of persistent inflation. That's going to cause jitters, and I think consumers themselves are going to kind of let the A bulliants die down a little bit from stimulus checks and from the pent up be cash pile that they've built over COVID that will dissipate, and then we're going to see I think inflation really starting to buy. Yeah. I mean we're starting to hear that from more and

more economists and more business leaders. Honeywell internationals UM CEO Darius and Damsi yesterday told us that he sees downward pressure on supply and upward pressure on demand and he's not seeing either one of those things kind of um turned look like they're gonna turn around in the near future. How do you think the FED is going to start to react to this, because now we even you know, some members of the Pharaoh Reserve Um Open Monetary Committee

are are starting to say the same thing. I don't see them reacting. I think they will find any way in order to to classify inflation that it is not a real time concern. They're prepared to tolerate at somewhat higher levels of inflation. We've already seen that. I think what is dominating the Fed's response is their unwillingness to rock the boat of the so called I think it's

still a fragile economic recovery. I think the delta various a reminder that we're not back to to to normal yet much as money would like, and therefore markets are still quite fragile. And I see the FED is being more driven by the desire not to rock that boat than than a need to react to inflation, which they don't think so far, is is actually too much of a concern. Uh So can you take advantage of that as an as an investor? Or? Is it too difficult?

I mean, don't fight the Fed? Is hard, don't don't fight the Fed. Um, if we're going to look at lower for longer rates, what's going to mean that traditional fixed income is not going to be a great still not going to be a great place to be, and

we're not in a rising rate environment. But I still don't think there's a particularly good upside and core fixed income today, I think, whether the FED likes to recognize it or not, inflation is here, and how do we respond to inflation and how do we allow portfolios to be UM to be resilient against inflation. Well, Equity traditional equity holding are traditionally a good head against inflation in

the medium to long term, not for inflation shocks. But given that most investors have a solid equity underpinning of their portfolios, I believe those portfolios will be resilient in the medium terms as far as inflation shocks. Typically, commodities might respond well to inflation shocks, but there tend to be too volatile for most investors to hold. So what like commodities will real acts, infrastructure investing, real estate investing. They tend to have more typical triggers are linked to

inflation and to provide more inflation resilience going forward. So I always encourage investors to have a portion of their portfolio that is designed to participate in inflationary conditions, and not just medium to long term conditions, but also inflationary shocks. And that's where real assets come in great great insight. Let's get to e s G now, and UM want to get your take on this, because it's a conundrum, right, you want to do good, but you also want to

make returns? Can you do both? Absolutely? We believe in sustainable investing, and I would question whether any business model that is not sustainable would actually be a long term business model you would want to be investing in. Any way, I think the notion that E s G investing evolves

the return sacrifice in a somewhat antilicated one. I think now investors are more sophisticated and more aware of the nuance sit in that E s G. I've described it as a hygiene factor going forward, that E s G risks are just like any sort of risk factors that will have to be assessed in any assessment of a

portfolio or an investment fund investment. So I would say that you know, E f G factors are now just part of the investing due diligence, so that we're aware of that and when it's the decision is made as to whether a risk reward is a active that will take into account to ES chief factors. As far as certain other areas, like say renewable energy or water conservation, they may have quite distinct kind of missions or purposes

attached to those investments. So maybe an investor who is passionate about ocean conservation and wants to invest in a water technology fund that would still have to have a meaningful rate of return, I would suggest before it makes a viable investment opportunity. I don't believe in return sacrifice, but I do believe in looking at it holistically in terms of what you want to achieve from your investment. All right, even, thanks very very much for joining us.

Evan Devitt there, chief investment officer at Moneta, and we're talking obviously about a little bit about E s G, but a lot about UM, the jobs number, the FED reaction, and how you as an investor can cassion on discrepancies that we see in this in this market. 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 Fall Sweeney, I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio