Oct 13, 2021
Joseph Biasi spends his Days
Analysing Economic Trends and their Relationship with Commercial
Real Estate for CoStar – the Leading Real Estate Data Analytics and
Aggregator in the US.
In this episode we talked about:
Useful links:
https://www.costar.com
https://www.linkedin.com/in/joseph-biasi-a5a1b669
Transcriptions:
Jesse (0s): Welcome to the
working capital real estate podcast. My name is Jesper galley. And
on this show, we discuss all things real estate with investors and
experts in a variety of industries that impact real estate. Whether
you're looking at your first investment or raising your first fund,
join me and let's build that portfolio one square foot at a time.
All right, ladies and gentlemen, welcome to working capital the
real estate podcast. My special guest today is Joseph Biassi.
Joseph spends his days analyzing economic trends and the
relationship with the commercial real estate sector.
And he works for CoStar advisory services. For those of you that
don't know what CoStar is, they're the leading real estate data
analytics and aggregator in the us. And I'm not sure if Canada as
well, but I wouldn't be surprised we use them pretty much every
day. They're our go-to for analytics, for properties, for research
and a part of our underwriting process. Joseph, how's it going?
Great. How are you doing? I'm doing great. Do I have that right,
Joseph, in terms of CoStar where they're at today, maybe you could,
you could let the audience know a little bit about your position
there and CoStar in general and what you guys do.
Sure. Yeah.
Joseph(1m 10s): CoStar is a data analytics platform and a data
vendor. We, we track pretty much every commercial building that we
can at least get research on across the United States. We are
moving into Canada as well, more and more. We're getting better
coverage in Canada and as well as Europe, my job in particular is I
sit on top of that data as a consultant. I'm a senior consultant
with advisory services. And my job in particular is to advise
client both developers as well as investors on macro economic and
commercial real estate trends
Jesse (1m 45s): Right on. Yeah. What I've noticed is we have, I
think 84, 85 offices now, and we've, we've pretty much switched
over completely to CoStar and that goes for Canadian and, and us
markets, but it's definitely come a long way in terms of the
coverage that we have at least, you know, in our major markets, you
pretty much, you've got everything covered there.
Speaker 1 (2m 7s): Yeah. I mean, we've been really pushing research
recently.
Speaker 0 (2m 11s): So this was, this was something we were at, we
were at this panel and in new Orleans this past, I guess two
weekends ago now, and we were talking about, you know, where, where
people can find information, those people looking for deals in the
market and a lot of, a lot of what we do on the investing side and
not just in brokerage, but we'll, you know, when we tried to track
down owners, a lot of times we're looking at properties on CoStar
trying to find the beneficial, the true owners and reach out to
them directly for off market deals.
Speaker 1 (2m 38s): Yeah. So I, I, before actually, before I worked
at CoStar, worked in brokerage. And so I was, I I've been a user,
it's a fantastic site for anybody who wants to do any kind of real
estate deals, right. On a little biased, but
Speaker 0 (2m 52s): Yeah, a little biased. So in terms of the, the
actual market, I thought what would be, will be just that would be
useful and educational for our listeners is talking a little bit
about what's been going on in the market over the last year or two
and the outlook for the next, let's call it a mid to mid to
longterm. And by longterm for me, I think five years, I don't think
longer than that, but yeah. You know, let's talk a little bit about
the commercial real estate market in general, over the last two
years, how have things changed in terms of the data that you're
seeing in terms of the way you approach the market and, and your
analysis?
Speaker 1 (3m 31s): Great question. Yeah. So, you know, when the
pandemic hit, I think there was a lot of fear going around and that
translated into a lot less commercial real estate deals,
particularly in the office sector. Everybody began to work from
home. We knew, we noticed a pretty steep drop off in transaction
activity, which has since returned. And that's, that's pretty much
been the story is we had this initial 20, 20 decline, a couple of,
a couple of quarters of, you know, pretty severe transaction volume
decline. And it's all become back effectively, but it's come back
in a very different way.
And that's the actual story behind what's happening in the
commercial real estate market is if you look at the macro macro
numbers, you know, total amount of transaction, the total
transaction volume is back. But if you look at where that's
happening, it's very different. For example, the Dallas Fort worth
had more transaction activity in 2020, the first half of 2021 than
New York. That's not normal. We're seeing, we're seeing those rooms
moved down to, if you're talking about retailer, multi-family,
we're seeing them move down to the south, the study United States,
as opposed to, you know, the new York's and the San Francisco's of
the world.
Phoenix is another market we've seen, which is, I suppose, as a
Western market, those, those Sunbelt markets are where we're seeing
the most demographic growth. We're seeing the most transaction
activity. And we're seeing the biggest pricing gains across all
four, four major property types
Speaker 0 (4m 55s): In terms of the, to go from geographic to the
property types, if, you know, starting with retail, I guess. Cause
that's, that's the one where when the pandemic first started, there
was the big question of retail, which I think for, for the most
part has been overbuilt. I don't think it's a surprise in the U S
Canada. Canada's pretty. Yeah. I mean, we are as well, but I think
we're somewhere in between the U S and in most European countries
on a per square foot basis. But talk about retail, you know, how
has that analysis been over the last, you know, call it a year to
two years?
Speaker 1 (5m 29s): I think retail, it, at least in my opinion is
one of the most fascinating property types. Like, yeah, you're
absolutely right. There needs to be some level of rationalization.
If the landscape has changed, it is no longer the place where
people go deep. The only place people go shopping to buy goods,
that doesn't mean it's going away and there's still, I would argue
opportunities. And I think that's the way we've been trying to, to
talk about retail, which is look, you know, you're not, if you're
looking at a class B or class seem, all those are going to
struggle, but if you're looking at, you know, there's still good
opportunities and you just, there's a lot more nuance and a lot
more detail that you need to look into for a retail building the
tenants matter so much in a retail building, even more than an
office or an industrial building, because if you have a good
grocery anchor, a neighborhood center in a well-populated area,
that's still a good asset.
And that, that I think has kind of been, under-reported just due to
the fear around retail during the pandemic and the fear around
retail because of e-commerce.
Speaker 0 (6m 36s): Yeah. It's a, it's one of those things that
we've always talked about that, you know, good grocery store,
anchored retail. I can't imagine in a lot of these markets, if
anything, they were a bit, some of those properties were buoyed by
the fact that the only places that were open were the Walmarts or,
you know, these grocery stores that were anchored.
Speaker 1 (6m 54s): Exactly. And we're, you know, we are seeing,
you know, returns to normal leasing patterns in the Southern states
where, you know, where retail really does follow rooftops. And in
those Southern states, we've seen pretty much a full recovery, and
we've seen a pretty much a full recovery in terms of pricing as
well. Whereas if you talk about, you know, these, these tertiary
markets in the Midwest, or some of these coastal gateway markets
that have really struggled during the pandemic, there's still,
there's still losing people. They're still struggling to kind of
recover.
Speaker 0 (7m 25s): So have you seen, I know you, you track a lease
terms and different differently structures. Have you seen a
difference in the way that retailers are approaching their leases?
You know, where you could have some retailers in the past doing 5,
10, 15, 20 year leases, has that, has that shifted or is it, is it
too early to tell
Speaker 1 (7m 43s): It's a, it's a little early to tell, just
because we're, we're finally kind of getting back at least down
south, but the, the tenants that they're looking for at certainly
become far more focused on either, you know, necessity based
retail, certain tenants like dollar stores. So these, these
discount stores are doing really well. And then experience-based
tenants have done are something that landlords are really looking
into as a long-term longer-term play. At some point, this pandemic
will become less and less, have less and less of an effect on the
economy.
And a lot of landlords believe that the future of real estate of
retail is experiential. That you're drawing people there for
something more than just a shopping experience.
Speaker 0 (8m 28s): Does CoStar track the rezoning or
reclassification of buildings in terms of, for example, one of the,
one of the, the guesses that, you know, that we have is that retail
and, and certain types of office buildings may be converted, maybe
switch the use might be switched even in hospitality, potentially
hospitality going to multi-family. But if do you track that type of
thing?
Speaker 1 (8m 54s): Yeah. It hasn't occurred as much as you would
think, given the amount of airtime, not an ink that's been spilled
on it. It really hasn't happened. It does happen, you know, so I
went to college in Worcester and the Greendale mall in Worcester
got turned into an Amazon distribution center, but that isn't
really the rural quite yet. They're still working on that because,
you know, it's, a lot of people think that a mall is going to turn
into an industrial center, like a distribution center, and it's
more likely to be knocked down and turned into multi-family center
because it's still the highest and best use is, is multifamily for
a dense urban area.
We're, we're, we're starting to see some of these malls really
struggle.
Speaker 0 (9m 36s): Yeah. I think you're absolutely right with the
amount of ink that's been spelled as a that's been spilled on it
because it is one of those things, I guess, more of an academic
thing. It's logical to think that okay. But I think the reality is
you get in transaction costs the actual time it takes to convert
these things. There's a little bit more that goes on with it. If
you, if you kind of slide from retail, move into the, the office
space. So my partner and I on the brokerage on predominantly work
in office investment sales, as well as leasing, they, I don't, you
know, despite some of, you know, what, what has been said last
year, that markets haven't been affected.
I just think a lot of people were saying certain things were, what
we saw was a large, large drop-off in office. And not surprisingly,
I'm assuming that's, that's what you S what you've seen. And if
not, maybe you could provide some insight there.
Speaker 1 (10m 26s): All right. No, absolutely. I, I, if you look
at where most of the transaction activity has fallen off, it's been
an office and it really has a lot to do with uncertainty. Right.
It's, you know, what will work from home look like in five years
from now, because if you, and you know, this probably better than I
do, if you're buying an office for your leasing office, it's, it's
a five to 10 year lease or three to 10 years typically. So you're,
you're really guessing what's going to happen down the road. So
when you're buying office, it's, it's a little scary right now.
And I, I understand that the shop view for CoStar advisory
services, and I do not speak for all of CoStar district health, say
for CoStar advisory services, is that, you know, the office, there
will be less demand for office because I work from home, but we
don't believe this is the death of office everybody's going to be
working remotely. And we also don't believe that. And I personally
don't believe that, you know, these downtown offices are going to,
you know, go away anytime soon. I I've in that downtown, these
downtown clusters are going to severely struggle.
I think the actual concern for office, if we want to think about
where, where we might see struggle is those class B offices in
urban areas that have less, that don't have as good a commutability
score that aren't dark, aren't able to draw. Don't have the same
amount of amenities. Those, I think are the ones that well, we
think are going to struggle a little bit more. Yeah. It's funny.
You
Speaker 0 (11m 53s): Mentioned that I was having a conversation
with a, with a colleague of mine. And I was, we were talking about
that specific thing where a lot of suburban markets actually,
haven't been doing particularly poorly with office and then these
downtown connected, but there's, these Midtown markets are like
these markets that are tertiary markets, that if, unless they have
good connectivity, it's a really, you know, there's a question mark
about how they'll do well, we've also seen though, is that the, the
office side, like you were saying before, the underwriting has
changed to the extent that, you know, we, they want to see is what
type of tenant, what, you know, where are they in the lease?
What are their rights? And, and it's funny too, that you mentioned
five-year and then kind of went back to three-year because what
we've seen is that, you know, when I started in brokerage, really,
it was rare to find even three-year head leases. It was typically a
five-year minimum. Where now, if one thing has happened from COVID,
we've seen all kinds of different lease lease terms.
Speaker 1 (12m 47s): Yeah. I mean, if you, if you think about going
to selling a building, occupancy matters more than anything else,
even, you know, that's the, that's the first and only thing I, if
you have to take some rent losses, you'd rather take some rent
losses and lose occupancy. So peop landlords are for office
buildings are, you know, it is definitely a tenants market right
now, but we, in terms of the, the urban areas, I think the reason
they lose out is because the downtown offices have that
commutability and then the suburban offices have that advantage of
being able to drive to them.
If I'm in, I'm in Boston, which is a famously difficult Metro to
drive in. And there's no way I'm going to go drive to, let's say
Brighton, which is just outside the main city to go to an office
there, but I'd be willing to go to suburban office and I'd be
willing to take the T down to than the downtown crossing, for
example.
Speaker 0 (13m 37s): Yeah, for sure. And you, you know, one thing
too, is like we've had, what we've seen is that the CFO or COO,
depending on, or the real estate, you know, facilities manager,
whoever's dealing with the company's real estate. It has been a lot
of like kicking the can down the road, because like you said, it's,
it's, you're making a decision. That's going to impact five, 10
years. Whereas if you're buying an investment, one thing you can
say is that interest rates are where they're at right now. You can,
you can, you know, logically pursue maybe a little bit more risky
investment, but for the people that work at a company, they're
like, I'm not going to make a decision where in a year from now I
could look like this was the terrible, the worst thing I did for
the company.
Speaker 1 (14m 12s): Right. Right. Exactly.
Speaker 0 (14m 14s): So if we, okay, so that's retail office. If we
switch now to, to industrial, because one thing that was really a
cool stat that I saw when, when COVID just happened was the fact
that retail sales did not decrease. It's just where the sales
happen changed. Right. There was a pivot to online sales, total
sales didn't D decrease, at least at the beginning of the pandemic,
the data that I was looking at. So I'm curious, I mean, I think
it's no surprise industrial's doing pretty well today.
Speaker 1 (14m 48s): Yeah, no, it's not. It's no surprise. And it
continued to do well. The pandemic, you are somehow seeing cap rate
declines, which I think if you said two years ago, most people
would be like, there's no way, but I just given how quickly we
begun to really shift into e-commerce and the, you know, the room
to run in terms of e-commerce. If you look at Europe, Europe uses
e-commerce far more than the United States does still, but kind of
going back to your point about retail sales it's, I've been
tracking it very closely for that specific reason.
If you look at retail sales, and this is because, you know, the
government stepped in and enacted a lot of stimulus by, by June of
2020 retail sales had more sales than you would expect, given what
you would expect pre pandemic. So if you forecast it out pre
pandemic, but retail sales should be, and it's a fairly linear
trend, you would expect them to have, you know, X amount of retail
sales. And we're, we've seen exceed that basically since June of
2020, and about 35% of that is e-commerce, which is impressive when
only 16% of retail sales is e-commerce right now.
So e-commerce is pushing along, is pushing along retail sales. And
realistically there's only, only it can only go up in terms of
e-commerce. I want to be careful in saying that, because I know
that's gotten people in trouble before. It can only go up in terms
of e-commerce industrial is starting to become, starting to see a
lot of construction. If you want to talk about the property type in
particular, we're starting to see more speculative construction,
but on the, at the, at the, at the other end of it, you can make
the argument that it's pretty easy to turn off the industrial
tap.
If you it's just, you're building a big slab of concrete and yeah,
exactly. It's a slab of concrete. Got you build a box and you're
good to go. And there's a lot of reasons to believe that structural
shifts from retail, from onsite retail to e-commerce means strong
sales, and that's not even getting into three PLS and manufacturing
tenants that we do also expect to do quite well. Amazon alone
accounts was one, a hundred million square feet of absorption in
2020. And I, I don't know if they're going to do that again, but
they are already, they're already in the, you know, they continue
to be the player in the market and continue to push industrial.
So do you think,
Speaker 0 (17m 20s): Look at the, on the topic, the three PL or
third, third party logistics and last mile delivery, like, do you,
do you, do, do you break down industrial into these sub categories
for your analysis?
Speaker 1 (17m 31s): Yeah. Yeah. I mean, you almost have to, right,
because that's how, that's how tenants think about it. You have
these big distribution centers and then you have these last miles
and, you know, these last miles tend to be these, these crappy
frankly buildings that are in well better located areas. And the
great thing, if you're looking from an standpoint about these last
miles, they're not usually the highest and best use. So there isn't
a ton of new construction in the last mile, despite the huge amount
of demand for the last mile, at least according to what we're
seeing.
Speaker 0 (18m 5s): So in terms of the, the actual investment sales
side of the industrial coin, when, you know, we see in our market,
which I think pre pandemic, we were at 2%, I know Toronto is, I
know LA and Toronto you'd know better than I would, but I know that
we were at the top and north America with the, in terms of how
lower vacancy rates were and continue to be on the industrial side.
And what we've seen on the investment sales side is there's only so
much product that, you know, you've seen, oh my God, that thing's
traded again, that's traded three times in the last year.
Are you seeing that same stuff in these really hot markets where
properties have, basically, I'm assuming it's a constraint on the,
on supply right now.
Speaker 1 (18m 45s): Yeah. I mean, I, you know, everybody is out
for industrial and they're continuing to increase their allocation.
It's it's, you know, when we talk to clients, it's the first thing
they always say is don't worry, we're going to increase our
allocation to industrial really? Usually at the cost of office and
retail. Well, not usually, always at the cost. No. Yeah. It, it,
you know, that's, that's the other side of the coin, right? Is we
saw 6% rent growth so far in 2021, we can be concerned about
construction and market specific.
If you look at like, you know, inland empire, for example. Yeah.
There's a lot of construction or, you know, Las Vegas, for example,
there's a decent amount of construction, but at the same time, the
amount of demand that we're seeing come in and given it's a
structural shifts, it means that you could, you should expect
continued demand. That being said, we're getting to a point where
cap rates are going to struggle. Maybe a little bit to continue to
decline.
Speaker 0 (19m 45s): I was going to say, it's for reminds me like
economics 1 0 1. We're like, no, that the shift it's the whole
demand curve moving, not just going up along, right? Like there's
a, there's an innovation here. There's, there's a structural shift
to less retail and more, more industrial distribution.
Speaker 1 (20m 0s): I was actually trying to the other day to think
of a, a good comparison. And I think we landed on radio for retail
retail's radio where it it's still gonna have a use, but it's not
the same use that it used to have an industrials TV now, the
television. Cool. That's the entertainment. Yeah.
Speaker 0 (20m 22s): So where does, where does vaulty Rez line up
with that? If we, if we go to multi Rez, which you have to think
that, you know, prior to the pandemic, we were like, can cap rates
keep going down? And then they kept going down. And even right now,
buoyed by I'm sure interest rates are multi-res team. I think, did
their, did their had a banner year for 2020, like a record year for
them?
Speaker 1 (20m 46s): Yeah, we we've hearing that a lot is that, you
know, 20, 20 and now 2021 in particular, it's been a great year.
2021 saw the largest increase in rent we've ever seen quarters for
Q3. So we just finished up two, three, we're still finalizing the
results, but shaping up that Q2 Q3 and Q1 of 2021 are the top three
years in terms of demand for multi-family. And it, you know, that's
across the board. However, if you start breaking it down by
markets, the south in particular is really, really very strong.
I mean, I'm going to keep harping on myself just because it is as
strong as it is, but you know, multi-family is price per unit has
gone up by 30% compared to pre-recession averages in Sunbelt
markets rents in, like, for example, Austin increased by 15%, six
months, you get, you kind of become to begin to become worried more
about affordability than anything else, which is at some point,
this becomes a economic macro economic problem, which of course
then comes back to haunt investors.
You know, a lot of that gain has already happened and really have
seen a deceleration, which you would expect given seasonal trends
in multi-family. And, you know, in some of these markets, you
really are beginning to hit the, the affordability limit. And
that's where you can start making a great argument for like, for
manufactured homes or for mobile home parks. For example,
particularly in the south, the Southern states, they don't work as
well in the Northern states. I would argue at least mobile home
parks.
Speaker 0 (22m 27s): Yeah. Neither up here.
Speaker 1 (22m 30s): It gets a little chilly. I know, but it's,
multi-family has done, has probably been the outperformer, which,
you know, given all the news around how well single-family pricing
has done is isn't that surprising. And if you, if you look at
single family, a single family price growth compared to
multi-family rent growth, single family price growth in almost
every single market has grown faster.
So it's not like your, your other options is getting any easier to,
to afford.
Speaker 0 (23m 8s): Yeah. And in terms of like your outlook on
this, in terms of the actual properties themselves, like, are we
finding that in these markets that there are underperforming assets
that are now being utilized to their, to their, you know, market
rents, you know, value, add deals. Do you think that is what's
happening in a lot of these markets? Or do you think that the
pressure of lower interest rates is, is what's fueling most of,
most of the acquisition in, in multifamily being an asset class
that's pretty much being subsidized or was subsidized for the last
year, year and a half by the government in most in countries.
Speaker 1 (23m 46s): Yeah. I mean, that's a huge part of it. And
then on top of that, I think lower interest rates is extremely
helpful for multi-family acquisitions. You know, part of it is it,
some of it has to be just the inflation hedge that you'd get for
multi-family. If, if you were to all concerned about inflation and
you want to look in real estate multi-family is probably your best
bet just given. And we can talk about this at some point, just
given the short lease term is, but the, the eviction moratorium
also, at least in our opinion, has had a pretty big effect on
multifamily demand because on one end, you're, you know, you are
seeing a huge spike in terms of demand, but then we kind of scratch
our heads at it for a while.
But then if you think about it, we weren't evicting anybody.
There's 800,000 evictions in the U S per year. I don't know what it
is for Canada. That's 800,000 units that aren't going, that aren't
in negative demand. We aren't, we aren't building, you know, these,
these class C units were, if we're building anything, it's, it's a
class, a, a, that's the only thing you can really afford to build
right now that will, that will pencil. So, you know, people are,
people are basically sitting in their home, sitting on their
apartments, they're unwilling to move.
So we aren't seeing that, that negative demand. And on the other,
the other side, we're seeing a huge uptick in people separating how
tools, if you're, let's say you're a 22 year old kid and you you're
living with four roommates, we're seeing people decouple those
households and begin to move out into their own places. All of that
kind of leads to these, this huge spike in, in multi-family.
Speaker 0 (25m 36s): Yeah, I guess the real question, like you said
before, it's, it's the affordability aspect you have, like you
said, 30% increase, I think in evaluation, but 15% increase in
rental rates. And there is, there is a certain level where, you
know, you, you just hit a, you hit a wall in terms of affordability
from the, from the consumer point of view.
Speaker 1 (25m 56s): Yeah. I think it's, it's going to have, it was
a concern even before the pandemic was, you know, a home
affordability shelter affordability, and it certainly did not get
better.
Speaker 0 (26m 8s): And on the construction end, you, you, you
mentioned class a, are you seen quite a bit of construction on the
multi-family side? Generally,
Speaker 1 (26m 14s): It's pretty, it's pretty much in line with the
last couple of years, to be honest with you, which was pretty
significant. But on the other end, we saw a huge amounts of
construction delays even before the pandemic. And it, it kind of
acted as this filter for, for supply being added, frankly,
especially, especially down south where there's huge amounts of
demand, there's huge amounts of supply waiting to be added. But at
th at the same time, they just can't get it out. Whether it be
supply costs, labor is certainly a problem. Anybody and anybody
who's trying to build multi-family right now has told me that labor
is almost impossible to find at this point.
Yeah.
Speaker 0 (26m 51s): I mean, just even on the small scale or we're
doing projects in our area, it's, it is extremely slow. And, you
know, you talk to anybody in the construction industry. They'll,
they'll tell you the same thing right now. Not just supplies, but
labor as well. If we shift over to, to that piece on inflation,
it's been a hot topic in terms of ink spilled. I'm sure it was one
of those things that, yeah, the over the last little while there's
been enough fuss bulled over on, on the inflation side, what's your
view from the data that you guys are seeing?
Speaker 1 (27m 25s): Yeah. I, I take the view that I am in
agreement with the bond market and the fed that it is transitory. I
think the definition of transitory has been changing pretty
significantly because at first I think it was six months and now
it's probably going to be a little bit longer than that. Kind of
where I begin to split a little bit from the fed at least, is that
it's inflation is likely to be higher for longer. I don't think
it's going to be quite as high as it has been. A lot of that. A lot
of the reasons it's been high currently, it has a lot more to do
with the pandemic and kind of short-term factors.
You know, you can think about shortages and chips. You can think
about shortages and car parts, for example, or appliances, as well
as transportation demand, which should burn itself off and on top
of the stimulus. But the fed changed how it does it targets
inflation. And I think it really went under reported. I think a
lot, it, it didn't really make as much noise as it should have
because what they're essentially doing now is they're saying, okay,
we need to make up for really chronically low inflation in the, the
last cycle.
So we're going to allow inflation to run hot, to get the labor
market gains that we saw at the end of the last cycle. Because if
you look at between 2018 and 2020, the federal site statistics
around minority wage gains, for example, it didn't really begin to
appear until the economy was basically at full employment. What
that three, 3.5, 3.4% unemployment rate. They want to see that
again, that's Jerome Powell has basically explicitly stated that
that's what they're looking for.
That being said, the fed has begun to sound a little bit more
hawkish. Cause I think they, I know they were taken by surprise by
the how high inflation got, and they're, they're likely going to
raise rates by the end of next year. All of that said, I, I still
believe the fed is willing to let inflation run above that 2% mark
for the next couple of years.
Speaker 0 (29m 30s): So for those that don't know what you're
referring to in terms of the under-reporting is the fact that
they've, they've broken off of the, the, what they used to be the
2% target, is that right?
Speaker 1 (29m 40s): Yeah, I, yeah. I mean, I was in colleges,
every continent was, you know, they target 2%, they adjust rates
based off of that. That's obviously a little more complicated than
that, but now they're targeting a longer term inflation average of
2%. And because inflation from 2010 to 2019 ran between, you know,
according to their measure of inflation PC around between 1.5 and
1.8% for most of that, they view allowing it to run from two to 3%
as making up for some of that loss, those loss pricing increases
over the last cycle.
Speaker 0 (30m 15s): So in terms of, from the investor perspective,
if your outlook as to how that informs your decisions from a real
estate point of view, you know, what does, what does that leave us
with in terms of the discussion that we've had even today in terms
of the different asset classes and how you view economic decisions
and investment decisions?
Speaker 1 (30m 35s): Yeah, I mean, look, inflation is here to stay
at, which is actually fair, especially since it's not, you know,
hyperinflation I, where the fed is going to be forced to raise
rates quickly. Hopefully, you know, it's actually good news for
real estate. Real estate is a real asset, you know, I'm sure, you
know, everybody, every economist has said this at some point, you
know, real estate is a real asset. It, it benefits from a real
value gains and holding real value, which means that in an
inflationary environment, commercial real estate itself is a good
play within those property types.
There are some that are better than others, especially if you're
unsure of how stable and the inflation rate is going to be the
shorter, the lease term, especially in a higher demand property
types that, you know, you can think about industrial or especially
multi-family, it means you can adjust your, your rent increases to
match inflation. If you look at, and we've seen this actually in
the market, if you look at NOI gains real NOI gains from Nate
grieve since 1990, there was only two real periods of actual real
NOI gains from the nineties to the, from early nineties to the late
nineties and from 2010 to 2015.
Other than that, if you deflate real and alive for multi-family,
it's basically flat, which, which essentially means that NOI is
just, is, is working as an inflation hedge. You get the same real
return year after year. That that makes multi-family really
attractive. Industrial actually has not done that well, based on
that same measure up until very recently.
Speaker 0 (32m 12s): Yeah. I liked the idea. I was always told by a
mentor of mine there where, you know, real estate is one of those
few industries investment that you can download inflation to your,
to your customer, you know, pretty much one for one.
Speaker 1 (32m 27s): Yeah, you can, it, it is extremely easy to
just pass on that inflation to the investor, unlike pretty much any
other asset class. I mean, if you think about bonds, for example,
you can't do that for the most part. You just, you know, if you
invest in a bond, you you're losing real value every, every coupon
payment.
Speaker 0 (32m 44s): Yeah. And I th and I think to your point
earlier where you have those shorter terms with multifamily, it's
obviously easier to do, but I was just reading a lease yesterday
that was kind of the old school lease where the, it was over 10
years, but the, the bump ups, the step-ups and rent were basically
the CP attached to a CPI inflator. So we haven't seen those as
much, usually landlords, if anything, at least prior to the
pandemic, they would just say, okay, it's, you know, 10 bucks a
square foot now 12 bucks 14. And usually that would be more than
inflation, but they have some mechanism in there.
Speaker 1 (33m 17s): Yeah. Well, I was going to say, the other
thing landlords might want to start thinking about is, is indexing
it to inflation and that's, that's actually the great part. I mean,
that's why we target a specific inflation rate is because then you
can make these easy decisions. I know inflation is going to be 2%,
it's a very stiff assumption. So, you know, we can, we can just
assume a 2% going forward. Now you have to start thinking about,
okay, is it, you know, is it going to go, you're making a bet. Is
inflation going to be long-term?
Is this higher inflation could be long-term or is it going to come
back down? How much is it going to come back down? It's really
difficult. And while it does sound really nice to indexed, to
inflation, if you're an office, a landlord right now, I think you
struggle a little bit because you don't have the negotiating power
necessarily that you did two years ago.
Speaker 0 (34m 5s): Yeah, absolutely. So in terms of, so in terms
of that, how that view informs the interest rate discussion, the
way that, you know, the fed will respond, if, you know, if
employment is higher than, or full employment, or if changes in
inflation that, that they're measuring, how, how do you see that
impacting the interest rate decisions?
Speaker 1 (34m 27s): Yeah, so I, I I'm, I think I'm in the minority
here, at least in terms of the broader economics where I really
don't see interest rates increasing significantly. And I know
that's a really economist answer to touching it a little bit, but I
don't see interest rates hedging or increasing significantly
because one of what the feds, the fed said about how they're going
to react to inflation, they said, they're willing to let inflation
run hot. They care more about the labor market gains right now on
that needs us more liquidity in the system for longer, which, you
know, can go only a few places.
It can, it can drive. And we have seen equity increase by
multiples. And then the only other place we can go really is bonds
for, you know, those multi-trillion dollar that multi-trillion
dollar liquidity pool we have right now. I mean, it's at the point
where the banks just basically don't know where to put the money.
All of that, to me suggests a, you know, short, you know, lower
interest rates on top of that. If you think about the demographic
factors that are affecting the United States, you know, slower
demographic growth going forward, that's not going to change.
That's baked in effectively. Unless people begin to move here in a
mass on top of technological change, you know, you would expect to
see more automation going forward. I think it's coming faster than
a lot of people like to acknowledge that pushes down prices, which
then pushes down interest rates. And I know globalization is no
longer it, maybe isn't moving forward as quickly or as moving
forward at all. But globalization still means a lower interest rate
environment.
You know, the fed in 2018, tried to push interest rates to 2.5% and
ran into huge liquidity problems in the market. There isn't there,
they don't and they view, and this is their view. They don't view
the neutral interest rate as much higher than rate where they're no
longer stimulating nor creating drag on the economy is much higher
than two or two and a half percent. So all of that, to me suggests
maybe slightly higher interest rates from what was the tenure at.
At one point I, you know, 50, 50 basis points, but maybe not, it's
probably gonna be lower than it was before, before the
pandemic.
Speaker 0 (36m 45s): Would there be something that would change
that view for you or, or a few factors that would change that view
for you in terms of where interest rates could go? Cause, I mean,
that's usually the big thing where a lot of people say, oh, if
inflation is going in this direction, interest rates have to, you
know, come up to that, you know, come up as a result of that. But
yeah, what are, what are, what are some factors that may, may kind
of give you pause to, to think it might go the other way or at
least increase over what you're, what you're talking about?
Speaker 1 (37m 13s): That's a great question. And, you know, as
inflation has continued to stay high, it's been something I've been
thinking more and more about, but the, you know, inflation first
and foremost above all else, if inflation gets out of hand, it, it
becomes a inflation spiral. That's when I think, you know, you'll
begin to see interest rates really start to hike. The other, the
other concern would be the fed. It depends on who Biden dominates
next year for the fed.
If we get someone who's hawkish, if we see you're going to see some
more hawkish fed governors, I think that in a more hawkish fed
chairman that could change my view on interest rates. And finally,
we begin, we begin to S you know, removing chewy really begins to
drain liquidity faster than I thought it would. No we're right now,
we are still buying billions of dollars of bonds every month. I
don't expect removing QV would do that, but that could drive
interest rates higher if the, if the market begins to react to, or
begins to become concerned about liquidity in the us, into global
bond markets.
Right. I, I sh I should mention real quick that also there are wars
and pandemics that I can't predict. I learned that last year.
Speaker 0 (38m 40s): Yeah. That was a, it was, I remember two, two
or three years ago. And I won't say who the company was, but, you
know, I remember it was couched almost as a joke, you know, barring
any geopolitical disputes or a global pandemic. And I was like, oh
my God. But yeah, those are always the things you're like, you
know, there's these extra exogenous factors that you're not going
to be able to, to forecast these black swans. So I guess the, you
know, from the real estate perspective, that's a good overview of
where we're at today in terms of the different asset classes.
And we're, you know, the view of the economy is just want to be
mindful of your time. Joseph, we have four questions. We ask
everybody before we, we end the episode. So if you're okay with
that, we'll kick it off.
Speaker 1 (39m 25s): Absolutely.
Speaker 0 (39m 26s): What's something, you know, now in your
career, you wish you knew when you started.
Speaker 1 (39m 32s): That's a great question that it's okay to be
wrong and it's okay to make a mistake. I think I was, at least at
the beginning of my career was a little more concerned about
mistakes and being wrong. If you're, if you're an economist, if you
work in economics, you know, if you work in real estate and you're
trying to forecast trends, you're, you're going to be wrong and
that's okay. It's just, just, don't be wrong. You just learn from
the mistake. Don't make the same mistake twice, twice, I think is
what I needed to learn as opposed to you have to be right the first
time.
Speaker 0 (40m 1s): Yeah. It's all always lies. I camera it was
like Truman or something that said, ah, give me a one-handed
economist. Everyone says on the, on one hand, on the other hand,
but yeah. I
Speaker 1 (40m 11s): Mean, I'm certainly, I'm certainly guilty of
that
Speaker 0 (40m 15s): While you want to be precise with your answers
in terms of mentorship, what would you tell younger people coming
into the industry or your views of mentorship in general?
Speaker 1 (40m 25s): Oh, I would not be where I am without mentors.
I think it's so important to talk to people who that are in a place
that you want to be, or are doing things that you want to do. I've
had some fantastic mentors for both in real estate and in, in
economics before, before I worked in commercial real estate, I was
working in banking regulation. I was thinking regulation research,
I suppose I worked with some fantastic economists that taught me
everything I knew, including, you know, my, my advisor in
college.
I, I, you know, like find someone that you think is worthwhile to
talk to and then just bug them. I think I was my first job. I was
in the chief economist office, every opportunity I could just
asking questions, being curious, trying to learn as much as I could
cause that, and it's, it's paid dividends for me.
Speaker 0 (41m 25s): Awesome. Are there any recommendations you
could give a book recommendations, podcasts, I guess, with the
spirit of this conversation, maybe in real estate or economics?
Yeah.
Speaker 1 (41m 34s): There's, that's not a good question. There's
two, there's two, there's two that I, one that I love just for all
time, which is thinking fast and slow by data economy, which, you
know, I, I like to think that I don't necessarily subscribe to the,
the basic, the, what a lot of mainstream economists think about in
terms of models. I think there's more to it than that. And David
Kahneman does a really good job of breaking down how people think
and how that relates to economics. Fantastic book.
It's a really interesting read, even if you're not an economist and
the other one is the rise and fall of economic of us economic
growth. I believe it's, I'm reading it right now. So I should know
the name.
Speaker 0 (42m 17s): Yeah. We'll put a link. I think I know the
one, the one you're talking about,
Speaker 1 (42m 23s): I, you know, the first economist I worked
under was an economic historian. So he instilled that interest in
me. And it basically shows that, you know, the century from 1870 to
1970 was a period of unbelievable technological change and economic
growth. And I it's really fascinating and it informs a lot of what
I think will happen going forward in terms of slower, you know,
slower but steady economic growth. We're not going to see those
four to 5% GDP gains without, you know, huge amounts of stimulus
anymore.
And it was good.
Speaker 0 (42m 54s): Yeah. I have a, if it's Robert Gordon, is that
a that's right? Yep. Okay. We'll put it.
Speaker 1 (43m 0s): I think it's a fantastic book. I really like
it. If you liked economics, I would suggest that it's.
Speaker 0 (43m 6s): Yeah, no, it's, it's one of those things where
I w was interested in reading, but unless you get like a
recommendation, sometimes you go down a rabbit hole, but the
Conaman that's I think, correct me if I'm wrong. I think Conaman
was the first non economist to win the Nobel prize in
economics.
Speaker 1 (43m 23s): Yeah. He was a psychologist and I it's, it's a
lot about how the brain thinks and makes decisions and you know, it
really attacks that idea of rationality and really looks at why
people actually make decisions. It's, it's a great book. It really
changed how I thought about, you know, economic modeling and where
I work, how we, how markets work.
Speaker 0 (43m 45s): Very cool. We'll put a link to both last
question. First car, make and model.
Speaker 1 (43m 51s): Oh, I had a 2004, a Honda accord, which is it.
And it was, it had a bigger engine than it was supposed to have,
which was great because if you've ever driven in Massachusetts, all
of the on-ramps are about five feet long, so you have to really gun
it. And so that was a fantastic car. I missed that car still. I
would rather drive that than when I'm driving now.
Speaker 0 (44m 20s): Right on. I feel like a lot of engines were
stuffed into those older Accords and civics, Joseph, for people to
connect with you or a, you know, anything related to the
information or data you do with CoStar work and they reach out,
Speaker 1 (44m 34s): Yeah, we have a website, I'll send it to you
for blankets, CoStar advisory. You know, you can always find me. I
write a lot of articles for the website, so you'll see me on
CoStar, if you have it, which I would suggest otherwise, you know,
just I'm on LinkedIn.
Speaker 0 (44m 54s): My guest today has been Joseph Biassi Joseph.
Thanks for being part of working capital.
Speaker 1 (44m 59s): Thank you for having me.
Speaker 0 (45m 10s): Thank you so much for listening to working
capital the real estate podcast. I'm your host, Jesse, for galley.
If you liked the episode, head on to iTunes and leave us a
five-star review and share on social media, it really helps us out.
If you have any questions, feel free to reach out to me on
Instagram, Jesse for galley, F R a G a L E, have a good one. Take
care.