This is Master's in Business with Barry Ridholds on Bloomberg Radio. This week on the podcast, I have an extra special guest. Kathy Marcus is co CEO and Global COO of Pigium real Estate, a two hundred and eight billion dollar investor in real estate, part of the giant real estate investment firm Pigium. She has had a number of different positions within Pigium, including managing their flagship Core real Estate fund
before she moved into management. She has been on all of the big lists, Baron's one hundred most Influential Women in US finance, lots and lots of others. There are few people in the world better situated to discuss commercial real estate investing from every perspective. They do debt, they do equity, they invest in public real estate, invest in private. She has lived and invested through not just a great financial crisis, but the SNL crisis and a number of
other fascinating experiences in real estate. If you're at all interested in learning how a large investor in global real estate operates, then you're going to really enjoy this conversation. With no further ado. My discussion with pgem's Kathy Marcus.
Thank you.
It's good to have you here. So let's dive into your background, starting with your undergraduate work. You study real estate finance and entrepreneurial management at Wharton. As an undergraduate, you go to NYU to get a master's in real estate investment and development. So you knew from when you were essentially a teenager you wanted to be working in.
Real estate, and I'm very fortunate that it worked out because there's no plan B there. You can see. I did not study anything else. So people often ask me how at the age literally of seventeen, I knew that I wanted to be in real estate, and I think that I kind of triangulated on it. I have no family history, I have no I knew a real estate developer I thought was really great. I knew I wanted to do something in business. I was always good at math, but I really I just didn't relate to things that
were more esoteric bonds options. It just wasn't doing it for me. And I always really loved the built environment. I like architecture. I like as a real estate person you walk through your assets, you can touch and feel things. I love to see things developed. I like the idea of kind of urban planning. I always say, if I hadn't been a real estate investor, I would have loved to have studied more about urban planning. I like placemaking.
So really, if you combined wanting to be an investor with liking architecture design placemaking, it really leads you to real estate.
You anticipated one of my questions, which was was anyone in the family in real estate? My mom was a real estate agent, like home to everything from home designs and renovation to pricing and financing. Was dinner table conversation in my house. Nothing like that from you. This just wholly sprung up out of Nowah pretty much.
I mean, my dad was a small entrepreneur and did invest in some commercial real estate, but really not in a primary way. And my mom is a speech pathologist, So our dinner table conversation definitely had a business orientation, especially a small business owner, and so I definitely learned a lot there. And I think it also my dad's business was global, and so it pequked an interest in me in working internationally. But the real estate thing was kind of out of the blue.
So you graduate both undergrad and graduate with just real estate related training. What were your first few jobs after school?
Like I had a very traditional start, I started off as an analyst and I worked initially. My first two jobs were with syndicators, essentially in a business that doesn't exist anymore as it did. I worked for a very large syndicator right out of school, which was right around the time the tax laws changed and so that whole business was upended.
And before you go further define what a syndicator is for people who may not remember sure.
Essentially you buy assets. It could be all kinds of assets. The company that I worked for was called Integrated Resources, and we did a lot of real estate, but also
things like airplane leasing and movies. In fact, Dirty Dancing was one of the big movies that we financed while I was there, and so they needed people to help acquire the real estate and then also one of my primary jobs was to help capitalize it and find financing for it, because the idea of syndication is that you make a giant purchase and then you sell it off in smaller units to really more of a retail investor.
And in those days, it could be as small as like a twenty five to fifty thousand dollars unit that would be sold through a broker dealer, a Sharson Lehman. Lots of people who are no longer in the game, and it was a way for individual investors to a own assets in a small slice they could never access themselves. But in those days, they were very tax driven, very.
Favorable treatment of those purchases, not like regular stocks and bonds exactly, And all that went away with a couple of tax changes. First Reagan and then I think it was Clinton did some changes as.
Well, exactly as did Integrated Resources. Yeah, exactly.
Oh that's very funny. So you end up at PGUM eventually, and you start out, did you start out at the flagship core equity real estate fund or did you work your way towards that, because eventually you were running that for a few years.
I did. I worked my way toward that. I had two stops before that. I worked in sort of a quasi portfolio management role for like a single client account type business. And then I went to be the chief under writer for the US investments and really got to underwrite all new investments in the US, all across the country, all asset classes. It was a tremendous experience for me, something that we often have had as a rotational position.
So I did it for three years and it was a really great growth exit.
Now when you say all asset classes.
Sorry, all sectors of real estate.
Oh okay, so not because at one point in time you were doing something with equity.
Is that right, head of head of us equity at Pigeon real Estate meeting equity versus debt, not equities versus got it all right.
I want to think you. So it's been real estate all the way down.
That's the real estate through and through equity, debt, private, public, but always real estate.
So tell us a little bit about the experience of running the Core Flagship real Estate Fund. What was that Like? You did that for like eight years? Is that right?
I did it for longer. It was over ten, and it was a tremendous experience. And actually you had asked, you know, whether that was my first stop at pg in real estate formally Prudential real Estate Investors, and it wasn't. But it was the job that I wanted when I took the job. My first job at PGM. Essentially the person who was running the Core fund at the time was someone who I sought out as a mentor because I knew that that was the job that I wanted,
and I worked toward that. So I was on that fun team for over ten years, spanning kind of the run up to the GFC, so lots of good times for only about two to three years of my first couple of years there, and then I worked on it throughout the GFC and then became the senior portfolio manager during the recovery period. It was quite a time to be running that kind of a fund, or even just working on that kind of fund. It was a you know,
I had seen other crises. I mean, the SNL crisis in the real estate business was something that was a very pivotal learning experience for me, and I came into the GFC with some of those skills from working through the SNL crisis. But every crisis is different, and you know, when I was working through the SNL crisis, I was much more junior, so someone else, you know, was worried
about what would happen. They just told me what to do, and now this time I had to worry about what would happen, and it was it was a great experience.
So when I hear GFC and SNL crisis, I think workouts, reorgs, and distressed investing. Did you do all of that? What did you actually do in the eighth nine era, maybe even a little before when Short said rolled over.
Well, in the SNL crisis, I was doing primarily workouts, both debt and equity workouts, and I learned so much doing that, and was also in a big dispositions role in terms of real estate owned that have been foreclosed upon, but also performing and unperforming loans, commercial mortgage securitization, and
even residential mortgage securitization. So I was very, very distressed oriented during the SNL crisis, and I would recommend to anyone who wants to learn about a business, work through a major crisis, and you're going to get fifteen years of experience in three years. That was my experience.
To be fair, the SNL crisis, I don't want to downplay it too much, but it almost seems quaint, yes, compared to the GFC. It was. You didn't get that sense of free fall. It was clearly a mess, but it was like, all right, we'll figure this out. The GFC in real time was like holy cow, this thing is we're off the rails here.
Very different, right, and in particular in real estate because the SNL crisis. You could certainly make an argument that we shot ourselves in the foot in the SNL crisis.
Yeah, but that was really all the banks that were doing it.
It was the banks, But there were a lot of empty buildings. I mean, we were building and building building.
Texas notorious for see through.
Building building things exactly, so, so that was very different. And you're right, it felt like real estate was in free fall, and clearly the banking system was in free fall, but the government was there with you know, the big RTC bailout, and it didn't feel like the world was falling apart, right. The GFC felt like the world was
falling apart, and it was very difficult to understand. I think that the S and L crisis, you could understand that the banks were just lending, lending, lending and building building, and we had empty buildings, and even if you're not in real estate, you understood what that was about. The GFC was really a lot of esoteric financial products that you know, the average person didn't understand. It actually ended up that a lot of financial professionals didn't understand them either.
We didn't know that at the time, but it really felt so much more systemic, and it felt like this you know, giant thing that was almost not understandable to many people had gone awry, good good times.
You know, those of us who were working in the world defying then if you were not on the wrong side of what was going on, it was endlessly fascinating and just you know, a graduates degree and if you were in charge of assets that were collapsing, it had to be just nightmarish every day. It was relentless and just never seemed to end. So that was you know, all the people I know who started working in the industry after that, it's like, oh, you guys missed the big party.
It's amazing exactly well, you see that now you can tell who missed the party, because it took a lot of people who had you know, ten or twelve experience years of experience in our business. It took them way too long to figure out that the world had changed
because they hadn't experienced the world changing. And you know, those of you, those of us who've been through it a few times, you start to get that spidey sense that things are not as they should be, and you kind of go right into that mode of like, okay, stop spending money, shut down all the deals. And that's much more difficult for some one who hasn't experienced.
Immediate sur violence things exactly. And you know, the ironic thing is there's a generation who only last year discovered, hey, you know the rates can go up also, right, That was like an you know, an epiphany for a subgroup of people who it's like, oh, I didn't know they could raise rates. I thought they can only cut. So now you're really in a management position. What was that transition like from being a real estate investor to managing a very large real estate group of professionals.
It was a much more complicated transition than I had expected it to be. You know, it's an interesting story that I tell, which is that our CEO at the time came to me, this is when I was running our largest fund. I had only been an investor in my entire career, and he said, I'd really like for you to be my chief operating officer. And I actually said, which is, you know, embarrassing, but it is unfortunately some that women, especially if my age, do I said, oh, actually,
I'm not qualified for that job. I only took, you know, three accounting classes, and I'm you know, I don't think i'm your person. And he said, if I wanted an accountant, I wouldn't have come to you. I'm looking for a partner. I'm looking for someone who wants to learn how to run a global business. And I said, well, you know, I feel like I kind of know how to run a business. I'm running the largest fund. You know, there's lots of people working on this fund, huge revenues. I
know what I'm doing. And he said, you know what, I tried for three years, and I bet you're going to learn a lot. And he was one hundred percent right, you know, learning how to keep the trains on the tracks when you're an investment professional. And I was the worst. I was a massive prima donna. I had no appreciation for went on behind the scenes. If there was an error in a report or a number, I went ballistic. I had no understanding of what it takes to deliver operationally.
And I learned quite a bit about that and it's really been terrific, and I recommend it to all investors who want to ultimately run a business. Take on an operational role, because you will be shocked by how much you learn.
So there's so much stuff to unpack there. I have to work my way back to your initial response when offered the operating position. It's kind of funny because you're pointing out like this inherent difference between men and women. Men are just clueless as to her own lack of skills, but oh sure, what the hell, how hard can it be?
Let's rush in. Whereas and I don't want to man explain sexism to you, but it seems that women are more thoughtful and saying, hey, I don't know if I'm qualified for this, whereas a dude is just like, sure, well i'll give that a wait, fight a bear with my bear. Okay, where do I go? Men? Men are just the sort of self confidence, unjustified. I wonder how much that explains what we've seen, especially in finance, in the gender gap at senior levels, which is certainly getting better.
It is point at present. But I'm just curious if that philosophical difference is why men rush in and women sort of think about and say, well, that's really weigh the.
Pros and cons one hundred percent, and you know Interestingly, you would certainly not be the first man to man explain sexism to me. It happens all the time, which just kind of goes back to the self awareness. It
happens constantly. But I will say things have gotten a lot better, but you know, somewhere in the middle is probably you know, a much better place to be, because I will say that, you know, women have a tendency if there are a hundred things that you need to have for a job, if they have ninety nine, you think they're not qualified, myself included. Right, I think I've
gotten better. But you know, if there are a hundred things and a man might say, you know what I could do sixty or seventy percent of that, that's probably good enough.
Right, I think you're being generous. I think, like, you know, I know a dude who's in that space. I could do what he does. I think it's like that sort of you know, not to overstate mail arrogance and recklessness, but there is certainly a degree of Hey, worse comes to worse, I land on my face, and I think to some degree that's positive but often leads to the Peter principle.
So exactly, and I do hope that you know, younger women in business broadly and in finance, you know, can can learn from those lessons. That's why I is embarrassing of a story as it is. I always tell it, especially to younger women, because I don't want them to make that same mistake. I was very fortunate that, you know, I had a boss who really pushed me, because that I wouldn't have taken it necessarily my own volition.
Huh. Really really interesting. So let's talk a little bit about that giant portfolio of investments. What type of real estate does PGIUM invest in? Do you have specific geography sized types, what.
Do you think of We have a very very broad investing mandate. We invest in in the US, in Latin America, which is really primarily Mexico at this point, across Europe, the UK, and across Asia, so we really hit all the major markets and all the major geographies. And also we invest in pretty much all the major food groups
and even some of the alternative food groups. In real estate, so everything from very traditional office which I'm sure we'll talk more about, all kinds of residential retail, data centers, industrial manufactured housing, seniors housing, you name it, and we probably have a bucket of capital for it.
So let's dive into those sectors. I didn't hear you mention laboratory or medical, which I know is an up and coming area. Is that a space you guys are in as well? Warehouses is another definitely fast growing space. Let's break those down. Let's start with office. What's going on in the world of office investing. Are there certain things you guys like to invest office wide? Are there areas you stay away from what's happening in that space?
So right now I'm going to talk about traditional office, not about medical office or lap science, but in the traditional office space. We're not investing in a tremendous amount of office right now like everyone else. We're in a little bit of a wait and see. We have an existing office portfolio that we're dealing with, and you know, I'm sitting here in your Bloomberg office and it's a
buzzing hive of lots of people. There are many office buildings you could walk into in any city around the world where that would not be the case.
So this is clearly a Class A building. And when we look at other Class A buildings on Park Avenue, they seem to be fairly you know, seventy five to eighty percent buzzing. I don't even want to say occupied. But once you drop to the class B buildings, it's a whole different story. How do you think about the different quality of real estate investing and is that reflected in their prices?
Yet so in particular in office, you know there are going to be winners and losers, and the winners are going to be I wouldn't even say just A not all the A inventory is really going to be a winner. You have to be kind of a high A. You have to be an A that isn't just an A because of its location. It's an A because it also has esg attributes. It has wellness attributes, It has things that draw employees back to the office and make them want to be there. And you have to in these days.
When I was young, the office was shelter and a place where people could make sure you worked all day. Now the office is it has to be better than your home or people are not going to come. So here in your office there's lots of free food and free snacks, and it's nice and bright, and there's lots of vibrant and smart people walking around, that's a draw. But if you're in an old office building without light, you have low ceilings, you have no amenities, you don't
have a lot of wellness attributes to your building. You're not in your public transportation, You're going to have a hard time attracting people to come to your office, particularly younger people. And if you don't have the ESG qualifications, it's even worse.
So we'll talk more about ESG later. Tell us about wellness. How does a building contribute to overall wellness?
Many ways, but I would say that the primary way that really has been underscored, even more so since COVID is in air quality. And air quality is huge, and there is a lot of data around employees feeling better, not getting sick, as often having more energy, not being exhausted. That's around air quality and fresh air in particular is very very important.
And that's not an expensive or difficult retrofit, is it. That's something that could be done fairly easily. If I think it was sixty minutes or somebody talked about that not too long long ago.
That assumes you have modern systems, So that's a big assumption. Not all buildings have the systems that would make that an easy conversion. But there's lots of other things you could do. You could have a gym, you could you know, encourage your employees to get outside, you know, not in the city as much, but other places, and increasingly in Manhattan, people have outdoor spaces for their employees so they can get out and get some fresh air, get some sunshine.
You know, instead of drinking coffee in a cold dark room, you could sit on a patio. It's those types of things that are good for your physical health and your mental health.
Huh, really interesting. Let's talk about some other sectors you mentioned medical, office and lab space. Yes, what's going on in there? Is that still a growth area?
It's still a growth area. I would say that some of the hype, particularly of the lab space, has been taken out, and I think that's a good thing. For a while, people were buying what I would say would be subpar office buildings turning them into lab buildings. And lab buildings are best purpose built. There's a lot of extra bills and whistles that you need for a lab building.
If you think of like the absolute perfect lab building, it's going to have you know, a lot more load bearing because you're gonna have really heavy machinery, it's going to have higher ceilings, it's going to have a lot of natural light, it's going to have extra water, it's going to have redundant electricity. There are experiments being run in these spaces that if you know, you have a power outage, you could lose fifteen years worth of work and data. So you really have to have you know,
a lot of redundancies in your systems. Is very expensive to build, but the good thing is that it's very reusable. If you have one tenant and they leave, you can pretty much have a plug and play with the next tenant. So I think it's great that there's less of this kind of conversion into lab space than there had been.
But the reality is that a lot of things that are really demographic trends, an aging population, people living longer, you know, advances in healthcare, needing to have green energy sources, needing to be able to create you know, clean water. A lot of this experimentation and a lot of the venture capital funding is all occurring in these lab buildings.
Really interesting you mentioned converting offices to lab buildings. There's been a lot of chatter about converting all of the excess office space to residential. Some people say that's much harder than it appears, especially with some of the bigger citywide block buildings that are from the sixties and seventies. They don't have the light and don't have the access to windows. What's the prospect for those sort of conversions.
And let me just throw in, I remember Post nine to eleven, the whole Lower Manhattan or a ton of those offices got converted to residential very very successfully. What are the odds of that happening in other city centers.
So we did some of those projects in Lower Manhattan and or Manhattan. The floor plates tend to be smaller, the buildings are smaller, they're thinner, and they're they're taller, right.
So you're never too far from a window, never too.
Far from a window, So it is a little bit easier, especially some of the historic buildings downtown. One of the ones that we converted into high end condos, you know, had been an old JP Morgan building. It was where his office was. So those buildings were just smaller by definition,
smaller floor plates, more windows. There's a lot of capital being raised to convert office to residential, And it's a really kind of a romantic notion that we have too much office and we have a structural shortage of housing. Wouldn't it be like the nicest thing in the world if you could take all of this you know, bad office, if you will, and convert it into affordable housing. Wouldn't that be fantastic. First of all, the numbers don't work.
The physical structures don't lend themselves that well. There's probably you know, under five percent of the office stock that would lend itself to that. And it's very expensive in a way. You would have to be able to get the land for free, and someone would have to pay to demolish the existing office building. So it's it's really very very.
Talking about converting. You're talking about knocking down a functional but unattractive building and putting up a brand new high road.
In many ways, that would be actually the cheaper route to go, because you might say a functional building, it's not functional for residential. It doesn't have the windows, it doesn't have the plumbing. You know, you have to break things into units. You don't want units that look like bowling alleys. You need more elevators. I mean, there's just
lots of stuff that you need. So there will be some of that done, and some of it's happening, some of it's happening right now in Lower Manhattan and other cities in DC in particular, but it's not going to be a whostsale solution.
So you mentioned ESG earlier. How does pgium integrate ESG factor into their investment process? What does that mean for real estate investment?
We integrate ESG into everything that we do, from the very beginning of identifying a potential investment, through acquisition, through operations, and through disposition. And you know, there is a lot of you know, political consternation, a lot of a divide, particularly in the United States around ESG, where there are there's a politicization of ESG in real estate. We're actually very fortunate because there's really no conflict with you know, ESG,
especially the E in real estate investing. If you have a more sustainable building, you're using less energy, you're using less water, you have more efficient systems, you are in near public transportation, you have an ESG certification, you're going to have higher income, therefore a higher value of your asset. You're going to be able to track the best tenants, the best tenants are not going into a building that
does not have ESG certification. And if you're in your public transportation, you know every tenant is looking for that. So I really feel that ESG is just it's just table stakes in real estate and investing. So we're fortunate that we don't have the controversy.
It's not just higher income. You're describing much lower costs as well. Exactly, So the building is a more profitable unit versus a comparable non ESG compliant type of building. Is that exactly?
And you know it's a way if you reduce your operating expenses, you're just increasing your bottom line. And if you take an older building that is just like you know, it's leaking energy all over the place, and you upgrade it to have the systems, you have just completely improved the value of your asset. Because we value real estate based on the net operating income, and that is the key to being able to increase value.
Kind of hard to politicize, improving your bottom line is exactly. So let's talk about the target net zero emissions from real estate projects by twenty fifty. What does net zero mean and how does one get there?
So there's lots of ways to get there, and net zero can mean there are various ways in real estate pathways to get to net zero. There are already several buildings office buildings around the country that are net zero and that was accomplished through a variety of things. One using different building techniques, different building materials. You can use
green concrete, you can have less embedded carbon. For the institutional real estate industry, embedded carbon is a huge issue because you buy an asset and there's already this giant carbon footprint that you had no control over and maybe it was created fifty years ago. So that's a whole other issue. But things like green concrete, things like different sensors that you can use that help you build more efficiently.
And if you look at you know ESG and its entirety, which is also a lot about safety and keeping people safe and healthy. That there are lots of new construction techniques that it's just safer construction where you might have robots doing things that were very unsafe. You might have drones, you know, photographing buildings instead of having people having to
go up on scaffoldings. So we have a lot of opportunity in the built environment to mitigate and embedded carbon, but also to reduce our use of carbon.
Huh. Really really interesting. So let's talk a little bit about what's been going on the past couple of years and what it looks like over the next few years. You're not taking out a mortgage to buy a single family home, You're doing these big projects. How does the dislocation and volatility of the enormous right increases we've seen in twenty one and twenty two affect the projects.
You look at, It actually affects you know, commercial real estate investors in much the same way as it would a residential investor.
Just the cost of carry, the cost.
Of carry, and you know, a lack of liquidity, which is much worse in the commercial markets than it is in the residential market.
You can't just have an open house and sell a fifty story building over the weekend.
That doesn't exactly know that, that doesn't work. So the lack of liquidity is you know, is often at the heart of every real estate crisis that we have, and that's really driving you know, a lot of what's going on, which is of course all driven by the changes in the real in the interest rates and you know, we're coming upon six quarters, you know, into this new interest rate environment, and we had you know, a nice long free money party that was really good for real estate.
It was fantastic real estate. It was it was great. And and so of course, you know, as works in real estate, that your interest rates come down and the yields on the investments come down, and everyone's expectations are you know, not too far off from where you know, treasuries used to be, right, and and that is, you know, the treasuries were so low that you could be have a four percent, five percent yield, even three percent on a real estate investment and still have a nice cushion
over treasury. So it was a very very accommodative environment for real estate. And now that has all changed. And you know, in private markets the repricing always takes a lot longer than public markets. And you even see that within real estate looking at the real estate private markets and the real estate public markets.
You guys in both right and public, yes, we do. So if tell us a little bit about how they've responded. I'm going to assume private markets react a little more slowly than public markets do. Tell us about that process.
The private markets react much more slowly and in a much more measured way, and without the same sort of level of very very quick reaction and maybe even overreaction. You hardly ever see that in the private markets. And the reason is you are in the real estate public markets. The market, meaning the stock market, is determining value, and there's a lot more at play there than just the value of the real estate assets, whereas in the private markets it's appraisal based, and so it takes a long
time for appraisals to really reflect market value. And part of that is the methodology which has been around forever, which really relies very heavily on comparable transactions, and comparable transactions in a period of you know, little to no liquidity, they're just not happening, and so appraisers need a data set and a set of facts to create a record in order to substantiate lowering values and increasing yields, and
they just haven't really had that. Now that's starting to happen, and we are seeing a repricing, but it's very very slow. It will ultimately probably be a much slower repricing than we had in the GFC. The GFC took eight quarters in private real estate to completely adjust, but the vast majority was a shock in the first two quarters, and then it just kind of, you know, eked out over
several more quarters. We have something totally different here. Where the first couple quarters, after the interest rate increases, it was almost like people were in denial and nobody really knew what to do because we had very little price adjustment. And now that you know, some people have a gun to their head, there are some transactions that are happening or starting to see, you know, a trail if you will,
of evidence of where values should be. But you know, most of these assets are priced quarterly, very different than the daily pricing in the stock market. And if it takes you know, if it used to take you know, call it forty five to sixty days to complete a transaction from beginning to end, it's now double or triple that. So it's just taking much longer to get the evidence.
So the October data for single family homes October twenty twenty three record low number of transactions. Are you suggesting that in the private commercial real estate you're also seeing much slower transactions and that's what's causing this lag for a repricing. How do you work around that?
Yes, much, much, much lower transaction activity. And it's interesting because you know, for a large owner like us, these days, when we're talking about transactions or most talking about dispositions, in a normal business cycle, we would, when we say transactions, were mostly talking about acquisitions. So it's very, very different, and that impacts both the debt and equity sides of the business. So on the equity side, we would like to sell some assets and improve our liquidity, and there's
not a lot of buyers there. The buyers that are there are generally buying without any debt. So if you think about the fact that we're also a lender, that really impacts our lending business. Our lending business has much lower production values across all asset types than it's had historically, and again it's because of the lack of transaction activity.
So I'm assuming you are both buying and selling within the same quarter, within the same month. What's the thought process like about what properties you want to sell and what Similarly, how do you think about what you want to buy at the same time you're really reconfiguring your holdings.
Yes, i'd say there there's two categories of the types of assets we want to sell right now, one is you know, kind of just bottom line those that will sell. So if we need to raise some capital, if we have some debt that we want to pay off, if we want to redeploy some capital, you can sell multi family in the southeast this is in the US, and you can sell industrial. Those are the two things that sell right now. And even then you're probably going to
take a lot longer selling those assets. And very interestingly, you might not recognize one name on the list of bidders. Oh really, it's not the big institutional names. It's not the people like us. It's people who are buying unlevered, people with friends and family, family offices. Really more in your space than in mind. And very interestingly, we often have never heard of the people.
And they want a hard asset as opposed to a cash flow based on all, right, it'll cost us this much to borrow, and here's what we'll see income, and that's what we a revenue. This is something totally different. They want to have a hard asset and actually own it, right.
And they might want to own it for a very very long time, especially you know those kind of owners and right now it's an advantage to be an all cash buyer, and during this cycle of very low interest rates, it was not an advantage to be an all cash.
Buyer when cash is free. Exactly that, you know who doesn't make any difference. Which kind of you're sort of describing like the edges of a distressed market. But I don't get the sense that the market is fully the real estate market is fully distressed. How do you identify, Hey, we can pick up stuff really inexpensively. Flip side of this is, hey, maybe we're not going to get what we want for our holdings. How do you balance that?
Well, it is a balance, and you know, it is true to say that right now, the distress is in the capital markets. It's in the ability to get to and the ability to find equity if you want to do a development. Forget about construction loans, which are almost impossible to get right now. But from a fundamentals perspective, with the exception of office and in particular traditional office,
most property types are doing quite well. In industrial warehouses, as you mentioned, rents are still going up in most markets and are expected to continue. In multifamily rentals, we're seeing a little bit of softness in some markets where there was a lot of supply, but long term, we're not concerned because we know we have a structural lack of housing. So there's retail, believe it or not, retail who was not everyone's favorite a couple of years ago.
Even retail assets are doing pretty well right now.
So the publicly traded real estate investment trusted pretty poorly in twenty two and twenty three. Was this a rate story or is this just a question of too much of one type of product not enough of another.
The interest rates story definitely played into it. But if you think about you know reads and who invest in reads, there are definitely pure play real estate investors who invest in ates, like us and some of our competitors, but there's also lots of individual investors who are investing in reads. There's lots of big index funds that are investing in reads, so it's not always a you know, a real estate decision maker who is influencing the cost of some of
these stocks. But overall, I would say that if you were to take something away from the difference between the public markets and the private markets, the public markets react very quickly and often overreact and we do think that there has been an overreaction here. However, the themes are fairly similar. If you look at some of the office rates, they've been clobbered, and that's a reflection, of course, of
people's concerns around the office market. But what's interesting in the public space is that the best office rates, meaning the office rates that have the highest quality assets the kind that I mentioned before, ESG qualifications, modern new near public transportation, those have taken about the same hit as once with Class B assets, So that doesn't really make sense.
There is some kind of a play there. Also, if you look at alternatives, right some of the self storage, data centers, some of the alternative sectors within real estate in the public markets have reacted quite differently than you might expect and from one another. So you know, right now most rates are still selling at a pretty significant discount to net asset value, which net asset value would be a good proxy for real estate value for the
actual asset value. So that's an opportunity, you know, for us, we see that as an opportunity. And our takeaway is that the public markets have overreacted and overshot, and the private markets have underreacted and somewhere in the middle is the right value. Huh.
That's really interesting. So with the caveat that Wall Street has been wrong about this for two or three years. Wall Street is now anticipating at least two rate cuts in twenty twenty four. Should real estate investors be thinking about this? If that happens, what would the impact be and do you think that's a realistic outcome?
Well, first of all, I think we should all be praying for that, because that would be very, very good for real estate overall. You know, from a realistic perspective, I don't anticipate any of that happening in the first half of the year. I anticipate, and I say this extremely sadly, I think the first half of the year is going to be, you know, more of the same of what we've seen, and it's going to be a
very interesting twenty twenty four. All around the world, you have, you know, lots of things going on around interest rates and you know, stock markets and business. But underlying all of that are a lot of very high profile elections around the world, not just the US, and you have you know, a geopolitical tinder box in many places. So
it is going to be very very interesting. If you look at you know, what is happening with inflation, what is happening you know, if you really interrogate some of the jobs numbers and you know where the consumer seems to be going, it would lead you to believe. I think that you know, we're not going to see any more hikes, and that sometime next year we're going to
start to see, you know, some decreases. Whether we get to two, I certainly hope so, And you know it, really I think I don't think anyone has the expectation that we're going to go back to zero interest rates. But if we could just get down to like two or three instead of four or five, that would be pretty amazing.
At this point, I would take you know, low fourth, that'd be a huge, huge change. But you mentioned something that I have to ask about. We have all these elects both here and abroad. How do geopolitics and elections affect commercial real estate.
Well, I'm going to come off as very cynical, but we keep talking about this recession and when a recession is going to come, and I just have a hard time believing that we're going to be in a recessionary environment facing a presidential election in this country. I think that everyone is going to do everything in their power for that not to happen.
Meaning across pulling all the levers from the federal government to the federal Reserve. Everybody's looking to avoid a recession, especially if inflation keeps falling the way it has been over the past year and a half. I mean, you could easily look at CPI and say, real estate peaked in June twenty twenty two, it's been straight down for the next eighteen.
Months, right, right exactly?
Huh. Quite fascinating. So your global COO, let's talk a little bit about the global stratgy. How does PGEUM, which I really think of as a US New Jersey based real estate investment company, how do you think about the global investing opportunities that are out there.
Well, it's very interesting that as much as PGEUM is a global brand, it does always come down to prudential being in New Jersey. It gets discussed all the time, But we are, within PGEUM real Estate in particular, a very very global company. We operate in fourteen different countries and we have been investing in Europe and Asia for twenty to twenty five years. We've been at this for
a very long time. Now, our US businesses are larger and more mature, and it's really just because we have a long head start in the US over our international businesses. But you know, today's investor, especially the most sophisticated investors,
they're investing globally and they're allocating globally. And it used to be, especially from the perspective of an American investor in real estate, that in order to leave the home country in order to invest in Europe, in order to invest in Asia, there have to be a huge return premium. It was the way of compensating for the country risk, maybe some currency risk, and just the general lack of certainty around investing in a market that maybe you don't
know that much about. And that has completely changed in that the driving factor behind people being global investors is really around diversification. It's far less around yield premium. Now you can certainly chase yield premiums in developing markets, but if you're investing in non developing markets outside of your home country and their mature markets, you should not expect
much of a risk premium. At the end of the day, it's about diversification, because if you think about it, think about the world right now, right now, in the US. As much as we may complain about what's going on here, most global investors would tell you that the greatest prospect for income growth and for economic growth is in the US, and you would want to be if you're an Asian investor. There's certainly a lot of growth that can go on
in Asia, but it's a bit more volatile. You might want to have some eggs in the US basket, you might want to have some eggs in the European basket. So global investing is just here to stay. In my view, it's much more of a trend. And if you want to be a big global player in any particular asset class or asset type, you have to be a global provider.
So let's look around the world and get an assessment of what's going on. When I look at Europe, I see it not only a very mature area, but I also see an economy that hasn't really recovered fully from the pandemic or arguably from the Great Financial Crisis.
And.
Seems to be rolling from one country's recession to the next. Now Germany is looking really soft, what do you see in terms of opportunities in Europe.
We definitely still see opportunity in Europe, but in terms of you know, the economies, and you mentioned Germany. Germany definitely is you know, is a concern for us, right
we invest quite a bit in Germany. The UK Rexit has not been kind to real estate values in the UK, but there are still opportunities and it's a lot of the same themes which you know, for us, we really think of them around demographics, around digitalization, and around decarbonization, and if you really think about demographics, there's a lot of the same story, which you know also often leads you to the living sectors. We think about for young
people needing affordable first time apartments. For families, maybe with interest rates where they are and with housing costs where they are not being able to afford that to buy a single family home, maybe they want to rent a single family home. Young professionals maybe remaining renters for much longer than they used to because the barriers to home ownership are so much higher. We have an aging population,
we need seniors housing. There's so many different aspects of housing that we just don't have enough of, particularly at the affordable end of the spectrum. Affordable housing is a crisis almost everywhere in the world, and in particular, affordable seniors housing is really in crisis.
Huh. Really interesting. So let's address Brexit, which hasn't come up recently. I was genuinely shocked it even happened because it was so obvious the negative economic ramifications that would lead from it. How are things in the UK Have they recovered from that? Is this still a persistent drag on their economy and what does that mean to their real estate?
I think it is still a persistent drag. I think that you see evidence of businesses that were from regulatory perspective, in London and now maybe they're in Ireland, maybe they're in the Netherlands. You definitely have seen a bit of a drain from London. There are pockets of the London office market that are not doing that well. The good news is that London does have a little bit more of a modern stock than a lot of other cities
from an office perspective. But definitely, I mean, inflation has really taken a toll on the UK and while it's certainly getting better, if you think about kind of just you know, constant dominoes falling up Brexit and then the pandemic and the war in Ukraine, and inflation and high energy costs and the high food costs. It's really noticeable. I can tell you. I travel to London quite a bit, and even just as a visitor, I notice how much more expensive everything is.
And that traces back to Brexit, not just the reason bout them.
I think it's a combination of things, but I think Brexit was the first domino to fall.
And you mentioned demographics. We know you're investor in Asia. Are you an investor in Japan? We are, And what's going on there? Their demographics are uniquely.
Challenging, Yes, uniquely challenging. And you know, if you the one very positive thing is that interest rates are still relatively low in Japan, still not as low as they had been, but they're they're still.
Low, and they're not negative anymore, right exactly.
There's still very accommodative of real estate. But you know, the demographic story in Japan is very difficult, with just a you know, really really a preponderance of the population is aging and that just keeps, you know, increasing, you know, not a whole lot of immigration into Japan, so definitely a problem. And you know, there was a lot of hype around the Olympics and what that might mean for Japan, and I think a lot of that ultimately, you know,
didn't come to fruition from a tourism perspective. Now, you know, it's sad to say for my Japanese colleagues, but you know, the yen is quite weak, and so I think that there has been an increase in tours. I was recently in Japan and I saw a lot of American families traveling there. It used to be cost prohibitive to bring
a family to Tokyo and now it's not. So hopefully there's some kind of a jump start there, but definitely the aging population in Japan is tough in the fact that there's been very very little real wage growth there.
Huh, really really interesting. Let me throw you a curveball. Tell us about Real Asset X. What's going on there? This is almost like a skunk Works project, you guys have.
Real Asset X is our innovation lab that we recently launched, and the purpose of it is really to help to advance technology and innovation, particularly around ESG in the real estate industry. Not just for our portfolio, but for the industry more broadly. And you know, we're really looking at
kind of two different sides of our lab. One is a bit more operational, where we're thinking of ways to more efficiently run our own business, more efficiently run our own properties, to use our data in ways that help us to run the business, help us to serve our clients better. On the other side of the lab is a bit more aspirational of what could we do with all that data, What better investment outcomes could we have by leveraging our data. You know, I mentioned that our
US businesses are very mature. We launched our core open end fund that I used to manage. We launched that in nineteen seventy. We have data going back that far and we have lots of data. And in our lending business, we've been lending for way longer than that, so we have lots of data that we can leverage and so we're very excited about that. We have several university partnerships where we are working on certain problem statements, and we
have them all around the world. So that's very very exciting. And you know, it's a journey, right I'll tell you that our first problem statement we worked on with one of our university partners here in the United States, was really around trying to predict multi family rents, and you know, using artificial intelligence, using some machine learning, using our own data,
but other data as well. And at the end of the day, you know, we didn't come up with a great answer, but now we have you know, a lot of new information that we're going to ask the question differently as we continue to pursue this. So it is definitely a trial and error and I think that when people give the impression that they kind of plugged in the AI machine and all of a sudden they have, you know, really really great answers, that's not how it works.
It takes a lot of work. And I think our launching of our lab and our outreach to our university partners is our way of acknowledging that this is a process, and it's a learning process, and it takes more than just a real estate investment manager to make progress. There.
Sounds really exciting, all right, I only have you for a few more moments, so let me jump to our favorite questions that we ask all of our guests, starting with what have you been streaming lately. Give us your favorite Netflix or Amazon or podcast, whatever's keeping you entertained.
Sure. I recently finished Daisy Jones on the sixth, which was recommended to me by another woman in the business, and I'm going to be fifty eight next week. There for someone of my age, it just brings you back to kind of your middle school and high school years. With the music, it's fantastic. It's a little bit of the story of Fleetwood Mac not loosely basically fantastic.
Yeah, the woman who played Daisy Jones, I was I don't know a third way through it. When my wife says, you know, that's Elvis Presley's daughter, I was like, oh what, I had no idea, Right, she was fantastic.
Fantastic, So I really loved that. And in terms of a movie or documentary, also perfect for a woman of my age is called Being Mary Tyler Moore, and it's about Mary Tyler Moore, and you know, she was such an icon for young girls in the seventies of She lived on her own, she had this cool job, she was intentionally single, she had this social life, she was dating. It was really very formative and they speak to a lot of women, mostly famous women who were so influenced
by watching that show. And I definitely was, and she was really, you know, very much of a trailblazer and a remarkable woman. So I'd recommend that.
Huh, I'm going to put that on my list. And when you were talking earlier, I was thinking of two things. I don't know if you spend much time on YouTube, but there are some amazing channels. One is Architectural Digest does this, so there's lots of house listenings and just stupid,
you know, spec twenty million dollar mansions in LA's. But the thing they do that's so interesting you kind of reference this is they'll sit down with an architect and he will describe a particular type of architecture that's endemic to a specific city, or they'll describe a very specific So one guy who does New York, here's the history of New York residential apartment buildings and how they've progressed
over the years. And the one I just I didn't see it yet but it just dropped was New York Museums and the architecture of Guggenheim, MoMA, the Met and Whitney And just like, if you like architecture. It's kind of fascinating. The other thing you mentioned that really made me think of a different channel was about the ESG
and the location close to mass transit. There is this he's kind of crazy Canadian expat who relocated to the Netherlands with his family, and his channel is called Not Just Bikes and it's all about how to build a city that is not only net zero but just built around mass transit, not cars. And it's a again, if you're interested in urban planning, the city design and architecture, endlessly fascinated. That's great, that's a rabbit hole you can talk too. So you mentioned one of your mentors early.
Tell us about who your mentors were and who helped shape your career.
The person who is most influential in my career from a young age is a woman named Yvon Competello, who I worked for when I was in my late twenties and early thirties, and she taught me everything I know about real estate, but also taught me a lot about being a woman in this business. She taught me how to be a very tough negotiator. She taught me how to kind of manage working in a man's world, and she always expected a lot of me but also always
supported me. And I've tried to emulate some of the way that she managed me and the way she managed and led others. It really was very influential.
Huh. Very interesting. Let's talk about books. What are some of your favorites? What are you reading right now?
Right now, I'm reading a book called Eligible by Curtis Sittenefeld, who she writes a lot of you know, more pop culture, I guess type books, but this happens to be a modern take on Pride and Prejudice. So Pride and Prejudice obviously was very tongue in cheek itself, and this is a modern tongue in cheek version of that of, you know, an overbearing mother trying to marry off her daughters, et cetera. But I'm really enjoying that. I tend to read to escape.
And I am also just finished a book by Daniel Silva, who has written like thirty two books, and I think I've read every single one of them. And you know, it's a series of spy novels and instead of the Cia, it's the Mosad, and the protagonist is, in addition to being an amazing masad agent. He's an art historian in art and artist and art restorer, so it kind of combines things. I'm very interested. When I was young, I wanted to be a spy and I love art, So for me, those are great books.
Huh really, what's the name of the silver Book?
This one I think is called The Collector?
Huh. Really interesting, And we're down to our final two questions. What sort of advice would you give a recent college grad interested in a career in real estate investing?
My greatest advice that I give to everyone is try to do a little bit of everything. If you ultimately want to specialize, if you ultimately want to only do equity acquisitions, that's great. Don't make that decision when you're twenty two or twenty three years old. Do a little bit of debt, do a little bit of equity, do acquisitions,
do asset management, do dispositions, do portfolio management. I think that especially when you hit a crisis, the most well rounded real estate people are the ones who've done a lot, and they're the most successful in a down environment. If you think about it, when you might not you might be an asset manager. But if you've never worked in debt. How are you going to know how to do a workout of your loan that now is in default. So
I just think do a little bit of everything. And the one regret that I have is that so far I've only worked in the US in terms of living and working, and I wish I had had an excellent adventure, you know, three years in London, three years in Powers, something like that, and I would recommend that to all young people.
Very interesting and our final question, what do you know about the world of real estate investing today? You wish you knew twenty five or so years ago when you were first getting started.
I wish I knew that it would evolve in the way that it has. I think that when I got into the business, which is thirty five years ago, it was far more opaque and less institutional, and I guess that for some people that made it feel like, you know, it was there were higher barriers to entry to being in the business. But I actually really appreciate how much more transparent the businesses and how much more institutional it is, and the fact that it's more accessible to more people.
Used to just be only the wealthiest people in the world could invest in institutional real estate. I know anybody can, and I think that's terrific.
Huh, very very interesting. Thank you Kathy for being so generous with your time. We have been speaking with Kathy Marcus. She's co CEO and global Chief Operating Officer at Pgium real Estate. If you enjoyed this conversation, check out any of the previous five hundred or so we've done over the past nine years. You can find those at Apple Podcasts, Spotify, YouTube, wherever you find your favorite podcasts. Sign up from my
daily reading list Ridolts dot com. Follow me for however much longer it continues to circle the drain at rid Holts on Twitter. Follow all of the Bloomberg Family of podcasts on Twitter at podcast I would be remiss if I do not thank the crack team that helps put these conversations together each week. My audio engineer is Rich summani Attikavlbron is my project manager. Sean Russo is my researcher.
Analock is my producer. I'm Barry Riddholts. You've been listening to Masters of Business on Bloomberg Radio.