January 31, 2025 • 36 mins
This week, we look at where the Federal Reserve's 2% inflation target came from and how differently inflation is perceived across the country with the Fed presidents of New York, Minneapolis, and Chicago. Plus, we take you to two different office buildings in New York City, One Vanderbilt and 322 Eighth Avenue, to tell the story of the challenges that unite commercial real estate properties, regardless of class. And, Chinese AI startup DeepSeek roils global markets and the Magnificent 7.
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Episode Transcript
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Speaker 1 (00:02):
Bloomberg Audio Studios, podcasts, radio news.
Speaker 2 (00:20):
This is Wall Street Week. I'm David Weston, bringing you
stories of capitalism. This week, a Chinese startup triggers a
text selloff, raising questions about whether the Magnificent seven can
continue to drive the stock market. Plus the fates of
office buildings in New York City. Some are glitzier and
have more to offer their tenants than their Class B counterparts,
(00:42):
but they have more in common in the challenges they
face than meets the eye. But we begin with a
story about goals, how we set them, how we achieve them,
and how we change our behavior to make sure we
do goals like the Federal Reserve's goal of achieving two
percent inflation.
Speaker 3 (01:02):
Over time, inflation has moved much closer to our two
percent longer run goal or two percent objective, moving down
to two percent, But get back to two percent inflation?
Are two percent objective sustainably down to two percent? Confidence
that inflation is moving sustainably toward two percent?
Speaker 2 (01:21):
Given how often we hear about that two percent inflation goal,
you'd think it was just obvious, But it's not.
Speaker 4 (01:29):
I do think to the public, there is this question,
why can't the price level, go back to what it
was before. Why even have a two percent inflation target?
Speaker 5 (01:41):
I always get questions about it, even before the pandemic,
before the run up of inflation. Why isn't it zero?
Why aren't we aiming for zero instead of aiming for two?
Speaker 6 (01:51):
The question I'm asked the most on this is did
you just pluck that number out of the air?
Speaker 2 (01:56):
And over the years, the Fed's two percent target has
come under question from those that follow it closely. So
where did that two percent inflation target come from? For that,
we have to go all the way back to nineteen
ninety in New Zealand when Don Brash was the RBNZ governor.
Speaker 7 (02:16):
New Zealand had had very high inflation by certain by
OECID standards anyway, double digit inflation figures through much of
the seventies and early eighties, and the then labor government
decided that they were going to get inflation right down.
In ninety eighty eight, the Minister Finance, asked about inflation
dropping below ten percent for the first time in some years,
(02:38):
said well, aren't you satisfied now? And the minister said no,
I'm looking for zero inflation or maybe zero to one percent.
Over the next couple of years that was modified gradually,
so the target became zero to two percent by nineteen
ninety two, and that was the target that I signed
up to. Subsequently, of course, the target was slightly amended
(03:00):
and we went to a target at midpoint of two percent.
We could explain to people what we were targeting. People
understood the game, and in the early years, particularly of
my time as governor, I spent a huge amount of
time talking to farmers groups, rotary clubs, church groups, any
groups that would listen, making it very clear that we
were deadly serious about achieving that target.
Speaker 2 (03:23):
And from there it went worldwide.
Speaker 8 (03:26):
Inflation returns to our two percent medium term target.
Speaker 4 (03:30):
Inflation is now back to the two percent target.
Speaker 8 (03:33):
Inflation has been close to our two percent target.
Speaker 2 (03:36):
Canada followed suit, then the UK and others, and in
early twenty twelve the US adopted the two percent target.
Speaker 9 (03:45):
The Committee judges at inflation at the rate of two percent,
it's most consistent over the longer run, with our statutory
mandate clearly communicating to the public this two percent goal
for inflation over the longer run should help foster price
stability and moderate long term interest rates, and will it
enhance the committee's ability to promote maximum employment in the
face of significant economic disturbances.
Speaker 2 (04:08):
John Williams, now the New York FED President, was in
charge of the San Francisco FED when the policy was adopted.
He recalls that the motivation was transparency.
Speaker 6 (04:19):
When cher Bernanke came to the FED, you know, clearly
he had strong desire for us to continue the worker
on transparency, be clear about our objectives, which actually had
started under Chairman Greenspan, and the love of movement toward transparency. Then,
So going back to January or twenty twelve and the
discussions that led to that, I had just joined the
FMC in the spring of twenty eleven, so I was
(04:41):
there for that, and it was really a focus on
greater transparency, greater clarity about what does good look like.
We don't want inflation that's too low, we don't want
inflation that's too high, and importantly, what's the inflation rate
that's consistent with a dual mandate that the FED has,
which is relatively unique to the FED.
Speaker 3 (05:00):
Good afternoon.
Speaker 2 (05:01):
But the urge to have a clear, transparent inflation goal
didn't mean that the goal necessarily had to be the
two percent one that other countries had adopted.
Speaker 6 (05:11):
With nineteen participants or however many were in the room
at the time. There's always a wide range of views.
So if you were to ask the question is one
and a half percent or two or two and a
half percent? Are those right or wrong answers? I think
any of those answers would work. I think two percent
is a good kind of Goldilock's.
Speaker 2 (05:28):
Answer, given what other central banks had already done by
twenty twelve, chaer Bernanke's announcement was hardly a shock, but
it did spark plenty of debate, and one of the
voices initially against the target was the current Chicago FED President,
Austin Gouldsby.
Speaker 10 (05:46):
I wasn't in a FED at that time.
Speaker 4 (05:48):
I was actually kind of publicly critical that two point
zero percent conveys a false sense of precision, that the
inflation's a noisy series and just telling the difference. If
I told you how many months of inflation data would
it take, given the variability of the series, to tell
(06:09):
the difference between a two point zero percent inflation rate
and a two point two percent inflation rate, and the
answer is years of not decades of data before you
would be able to even tell the difference. So that's
why I was kind of critical at the time. But
that said, I've going to completely changed my view and
(06:30):
I'm now a strong advocate.
Speaker 2 (06:32):
Whatever the pluses and minuses of the fed's two percent
target were when it was adopted over a decade ago,
it's now well established and the markets have come to
depend on it. The FED has a two percent inflation
target on average. How does that affect the markets?
Speaker 11 (06:49):
It's extremely important. So I'll start with that because and
having that credibility that it is two percent over time,
because what we do is the market is essentially pricing
in and expect and a risk around the expectation over time.
Speaker 2 (07:03):
Pria Misra is a portfolio manager at JP Morgan.
Speaker 11 (07:07):
So, now if my inflation is somewhat understood, then I'm
pricing real rates over it, and so I'm talking about
the treasury curve. It contains that treasury curve the inflation pad.
Then we have to just price in where are real rates?
So I think it helps anchor expectation. It also tells
us how should the market price in the FED response
(07:30):
to either another policy shock, fiscal policy or a shock
to the economy.
Speaker 2 (07:35):
For someone dealing daily in the markets, like Misra. The
fact of simply having a clear target is more important
than exactly what that target is.
Speaker 11 (07:44):
Somewhere in the two to three percent range is fair. Now,
the Fed in twenty twelve pick two percent. It's somewhat arbitrary.
You could have picked two and a half, but they
picked two. I think it's a fair number. It allows
the fair if you think the Fed doesn't want to
go to negative rates, and look at Europe and it's
not clear the negative rates with that effective In fact,
they have all these negative externalities. It allows if inflation
(08:06):
is at two, it allows real rates to go negative
because effect funds gets to zero. That's a negative two
percent real rate, which is very stimulative for the economy.
So I think somewhen that two to three percent range
is important.
Speaker 2 (08:19):
As much as the markets rely on that fixed two
percent target, does it matter that the Fed doesn't hit
it all that often? Since cher Bernanke announced the target
in twenty twelve, it's been within zero point two percent
of target in only twenty of one hundred and fifty
five monthly readings, and in more recent times, inflation has
(08:39):
been stubbornly stuck above the target after peaking in twenty
twenty two. The core PCEE that's the Fed's preferred inflation gauge,
showed signs of progress when it fell to three percent
in twenty twenty three, but since then it's largely flatlined,
leaving some to speculate about possible upward risks to infl
(09:00):
given an economy that appears to be running hotter than anticipated,
perhaps because of structural changes, but suggests changing the inflation
target at this point to those in the markets, and
you get a strong reaction. The Fed has said we're
not looking at a two percent target right now. Let's
assume what counterfactual. What if the Fed tomorrow came out
(09:21):
and said it's not two percent, it's two and a half,
maybe even three percent. How would the markets react?
Speaker 11 (09:26):
My blood pressure is increasing, just as you say it,
because it's a Pandora's box, right, you start with it's
just a fifty basis point increase, it's a slippery slope.
A year later, well maybe it's another fifty basis Once
you open the door to any increase in the inflation target,
I think the market has to price in the risk
that could continue to rise given bad inflation is right
(09:50):
now above target. I think it's disingenuous for the FED
to raise that target. It's like me trying to run
a marathon and then when I realize it's really hard
to run that much, I just look my target to
a ten k. Not that I can run a lot,
but you know, it just doesn't sound credible.
Speaker 4 (10:06):
We said the target is two percent, and once you
set a target, that is a sacred promise that the
central Bank has made, and you can't debate coming up
with a new target just because you're not hitting the
old target. You got to finish your job before you
start looking for a new job.
Speaker 11 (10:27):
I would say on inflation, it all comes down to expectations.
So why do I think we should take the inflation
target for granted, is because expectations. It would be great
if inflation expectations are well anchored, because then if I'm
a business, I can plan for pricing, I can plan
for my investments over time because I know this is
where inflation, roughly speaking, on average, will be over time.
(10:51):
If I'm a household, I can have that same expectation.
If I'm an employee and I'm going to ask my
employer for a raise, again I have a sense of
that is.
Speaker 2 (11:01):
But for all the benefits of setting expectations for overall
inflation with a simple single goal of two percent, it
doesn't mean that everyone will experience the same level of
inflation across all socioeconomic groups, industries, or geographic areas. And
after a sharp ramping up of inflation, those expectations don't
(11:21):
return us to the prices we knew only three years ago.
So that is where we turn next. How people are
affected by inflation that hits us all differently.
Speaker 5 (11:32):
People feel the higher prices. I feel the higher prices,
and when I go and explain, well, inflation is coming down,
of course they don't see that because they go to
the grocery store as I do, and prices are still high.
I do the grocery shopping for my family. I still
have sticker shock. I haven't adjusted in my expectations about
what normal is when I go to the grocery store.
Speaker 2 (11:53):
When we come back, our colleague Michael McKee brings us
a story of how Americans in the Midwest react to
inflation and it hits them, and why they may not
always feel as reassured as the markets about that two
percent fed goal. That's next on Wall Street Week on Bloomberg.
(12:18):
This is Wall Street Week. I'm David Weston bringing you
stories of capitalism. Now, we continue our look at inflation,
the Federal Reserve's target rate, and how prices are felt
and viewed differently depending on where you live. To tell
that story, we bring in Bloomberg's International Economics and Policy
correspondent Michael McKee.
Speaker 12 (12:38):
The Fed is steadfastly committed to bringing inflation back down
to two percent. That much is clear, but inflation is
felt and measured differently all across America. Those in the
Midwest may feel differently about the Fed's progress than those
in the markets. While inflation may be slowing for many,
prices remain high, posing a challenge for businesses across the country,
(13:00):
such as one restaurant on Chicago's South Side.
Speaker 13 (13:07):
We're known for the best brisket in Chicago. We work
really hard to provide the area with true craft barbecue.
Our customers are regulars here because they love the atmosphere brisket.
Speaker 12 (13:21):
Dominice Leitch is the owner and chef at Lexington Betty
Spokehouse on Chicago's South Side. She opened in twenty nineteen,
and like other restaurratories in Chicago and across America has
seen firsthand how the surgeon inflation over the past five
years has affected small businesses.
Speaker 13 (13:38):
I'll bring it over to you when it's ready. Okay,
thank you. Everyone's favorite our brisket that we're known for.
Two years ago, I spend three dollars and eighty cents
per pound. Today I bought brisket for four dollars and
sixty cents per pound, which means we have to sell
it at a higher price. Inflation is really affecting the
restaurant because we have to spend more money on product,
therefore increasing the prices for our customers. It makes it
(14:01):
really uncomfortable. You typically have to give people explanation why
is brisky by the pound more this week than it
was last week, and disappoints people.
Speaker 12 (14:10):
The chilenges facing leech play out across America even as
inflation falls from the dramatic highs of twenty twenty two.
A recent survey found that twenty four percent of small
businesses identified inflation as the top problem they face.
Speaker 5 (14:24):
I think one of the things that we've learned in
the last two or three years is people really really
hate high inflation.
Speaker 12 (14:31):
But do people who aren't on Wall Street even care
that the Fed has a two percent target? The impact
of inflation is often felt more acutely in rural areas,
where household wealth tends to be lower, with far less
disposable income, those earning the least have to dedicate a
greater proportion of their income to everyday necessities. That divide
(14:51):
is compounded by the fact that wealthier Americans, often found
in urban areas, have relied on a booming stock market
to increase their wealth that offset some of the effects
of inflation. Is the experience of inflation different here in
your district in the Midwest and to the west than
it might be in New York on Wall Street?
Speaker 5 (15:11):
I think so. I mean, I think especially when you
go out to rural communities, and we have a lot
of rural areas, the challenges that families are facing are different.
I mean, they're all facing the higher prices that virtually
all Americans have faced, but they also have acute challenges.
Hospitals are closing in many rural districts because there's not
enough population to support those hospitals. In some cases, colleges
(15:33):
and universities are closing it's hard to get home construction built,
even though there's a lot of land available getting new
construction and new development built. So the challenges in rural
communities are different, but a lot of times they're driven
by price as well. So there's some important similarities, but
there's some specific differences in rural communities.
Speaker 12 (15:52):
For the likes of Neil Kashkari and Austin gouldsby a
large part of their districts cover vast rural areas. Focus
in John Williams's jurisdiction is naturally on Wall Street in
New York City, where analysts and traders immediately dissect any
inflation data, not just looking at the headline number, but
peeling back the layers to look at individual contributors, which
(16:15):
can vary widely.
Speaker 11 (16:16):
You get the headline number, the core number. Literally the
next second, I look at services, so services versus goods.
Then I look at where's shelter and what has been high?
So what's keeping inflation high is not a broad based
higher inflation across then I would be a little nervous
that are we getting stuck somewhere above too. It's really
a couple of components. It's shelter it's lagging. Zilow. Rents
(16:41):
are coming down, it's just taking a while. People who
own their homes, it takes a while for that to
show up in the data, so there's a lag there.
Auto insurance, medical insurance. These are imputed numbers. That's why
I think it's actually good for them to have that flexibility,
because why should they keep policy high just because shelter
and inflation, which is owner's equivalent rent is running above target,
(17:04):
just because it's adjusting slowly for.
Speaker 12 (17:06):
Those in the markets every day, like JP Morgan's priam Isra.
Communication is a critical part of a FED president's job,
and a clear target two percent makes that job a
lot easier.
Speaker 6 (17:18):
Well, you know, inflation is different in different parts of
the country, and it can be different at different times.
I think that you know where this became easier, unfortunately,
was when inflation was high and everybody said inflation it
was high everywhere. Inflation was clearly damaging to the economy.
It was harmful to families and businesses. Everybody wanted to
see inflation lower. I think the communication of the two
(17:39):
percent goal was incredibly powerful during this period because we
weren't questioning what should we should get inflation to what
is good look like, we said, absolutely, we need to
get to two percent. We're consistent on that. I think
people understood that the importance of price stability, the importance
of getting inflation back down. I think that was, you know,
regardless of all the debates of exactly how did you
come to two percent, it was a very clear, strong message.
(18:02):
It's a message that Chair Powell repeated over and over
that you know, we're not compromising on achieving that.
Speaker 12 (18:08):
That's not the kind of analysis Americans elsewhere are making.
They see inflation in the supermarket, at the pump, and
in their rent. They're still coming to terms with so
called sticker shock, something goules By and Kashkari say requires
a different kind of communication.
Speaker 5 (18:25):
We do a lot of conversation with labor unions and
one of the sources for me of information about people's expectations.
You know, in economics we talk about expectations matter, inflation
expectations matter. We talk to labor groups about what wage
rates they're negotiating in their multi year contracts, to look
at what is the inflation embedded in their own thinking
(18:48):
looking ahead two to three years now, as they're having
their negotiations. They might not be thinking, well, my inflation
expectations are x and I need this kind of wage growth,
but it's clear that inflation is woven into the fabric
of their thinking about the economy and the future, so
it does register. They may not be as technical as
a Wall Street analyst and how they talk about it,
(19:10):
but it's present in their thinking.
Speaker 14 (19:12):
Inflation is eating away at the funds available.
Speaker 12 (19:15):
Go back to the inflation of the nineteen seventies eighties,
Paul Volker's time in office, and people would do things
like bring two by fours and throw them in front
of the Fed book because they were mad at the
level of interest rates. You're in a kind of ironic situation.
People hate inflation, but they get mad at the people
whose job it is to fix it.
Speaker 10 (19:37):
Look, that's true.
Speaker 4 (19:38):
Nobody's nobody's ever like ah, my greatest central banker. They're
just mad if you don't do the job to keep
inflation law.
Speaker 10 (19:47):
I was close personal friend of Paul Volgar.
Speaker 4 (19:49):
He's a personal hero of mine and mentor his widow
uncle gave me that original two by four that they
sent to him, scribbled on the top of it. Please
reduce these insane interest rates, and I keep that in
my office on the shelf right next to my desk
here at Chicago FED as a reminder of two things. One,
(20:13):
the decisions that the central Bank makes effect regular people,
regular businesses, regular consumers, quite directly. And two, sometimes if
it starts going wrong, you got to make tough decisions.
What we want to once we're in this experience is
(20:35):
have wages growing faster than prices. And the good news
is lately that's what's been happening, and as productivity grows,
we can do that even more so. But if you
talk to regular people, I kind of think the world
of inflation targets is not in their space.
Speaker 12 (20:52):
Why is it so expensive the dynamics you just described
about wages and prices. I imagine that most of the
people you talk to when you go around in the
district and speak, they don't understand that. They don't think
of it that way.
Speaker 4 (21:06):
I think it's true that most people do not think
of it that way.
Speaker 10 (21:10):
And if you look in.
Speaker 4 (21:10):
The surveys, they're extremely upset about inflation. And then if
you say, but look at your wages, they tend to say,
I earned the wage increase.
Speaker 10 (21:22):
I got out of my hard work.
Speaker 4 (21:25):
The inflation I had nothing to do with, and so
that's the part that makes me upset.
Speaker 10 (21:31):
They are in reality.
Speaker 4 (21:32):
Tied together wage growth and price growth.
Speaker 12 (21:36):
On the surface, wages are growing faster than inflation. The
latest reading had wage growth at four point two percent
compared to an inflation print of two point nine percent.
Wages are going up, but are they going up enough
to offset the significant period of time where high inflation
comfortably outpaced any growth in wages. It turns out that
(21:57):
since the end of twenty eighteen, inflation still outpaces wage
growth overall. And who's benefiting from that wage growth anyway?
While all income groups have seen wage growth of the
last year, historically, America's wealthy have seen their average earnings
grow forty six point two percent since nineteen seventy nine,
compared to just seventeen percent for its lowest turners.
Speaker 5 (22:20):
The overwhelming message that we've received them, that I have
received is hey, high inflation is really bad. It was
very painful for my family, It was very painful for
my business. Get it all the way back down.
Speaker 8 (22:32):
You know.
Speaker 5 (22:32):
They might debate whether two percent should be the right target,
or one percent or zero, but get it all the
way back down to what we were used to before
the pandemic.
Speaker 12 (22:40):
And they probably couldn't necessarily put an exact figure on
what they were used to before the pandemic. So I
wonder is the two percent target necessary?
Speaker 5 (22:48):
It is necessary. It's necessary because those Wall Street analysts
that you talk about, they are very active in financial markets.
We know that most financial products ultimately get priced off of,
for example, the ten year treasury market. So it is
important that the people who are professionals in investing and
in forecasting understand what we're trying to do and have
confidence that we're going to achieve it. So I do
(23:09):
think having a specific numeric target is very helpful. It
becomes self reinforcing the more we demonstrate our ability to
hit it. But it needs to be a low enough
number that people on main Street don't need to spend
their time thinking about it. They have better things to
do with their time than thinking about inflation. That's our
job to get it back there.
Speaker 12 (23:29):
From Wall Street to main street. Inflation is felt by
all and target or no. Ultimately, the real goal is
former chair Alan Greenspan's definition of price stability. When people
don't think about inflation at all.
Speaker 2 (23:44):
Our thanks to Michael McKee, our international economics and policy
correspondent here at Bloomberg. Coming up next on Wall Street Week,
how office buildings in New York City are not created equal,
but finding capital and tenants might be the great equalizer.
I'm David Weston, and this is Bloomberg. This is a
(24:12):
story about sibling rivalry. Two members of the same families,
sharing many of the same traits and sometimes competing with
each other, but who lead very different lives. Office buildings
are part of the life's blood of New York City.
They come in a range of shapes and sizes.
Speaker 8 (24:34):
Typically, the marketplace is stratified between the A product and
B and C products, and A covers a wide definition
of quality buildings generally buildings of a newer vintage, but
in New York City, where the average age of buildings
are sixty five years old. Newer in New York City
could mean a building that's thirty or forty years old,
(24:56):
but it's generally buildings that are well located, have either
new vintage or have undergone heavy redevelopment. Big capital spends
over the past several years have modernized infrastructure, have efficient
floor plates, higher ceiling heights, and things that people find
im portan in today's work environments. But within the A product,
(25:16):
then you have the marquee product. You have the best
of the best.
Speaker 2 (25:21):
Stephen Durrell's is director of Leasing and Real Property at
sl Green and is responsible for one Vanderbilt, the new
office tower looming over a Grand Central station. The way
the New York City Controller keeps score, About sixty percent
of all Manhattan office space has some form of A grade,
(25:43):
but the top five star rating is reserved for only
thirteen percent, leaving about forty percent with the grade of
B or below. Ruth coulp Haber has spent her career
putting tenants into those millions of square feet of New
York office buildings. For her, the category of the building
makes an enormous difference in getting them leased.
Speaker 1 (26:05):
To say this is a tale of two cities is
an oft used, somewhat tired metaphor at this point, but
absolutely true. So let me paint a picture. You have
the A buildings such as one Vanderbilt, Hudson Yards, One Vanderbilt,
one block from Grand Central. The building's fall it just
(26:27):
opened during the pandemic. Two hundred dollars a foot in
rent is the last deal they did there. You go
two blocks from there and you have the Chrysler Building
and you have two thirty Park Avenue at the Helmsley Building.
These are icons of New York City real estate. These
(26:49):
are the grand domes of New York City office buildings.
Both of these buildings are in default on their mortgages
and are a good percentage empty. So that is what
I would call a tale of two cities.
Speaker 8 (27:05):
One.
Speaker 2 (27:06):
Vanderbilt falls squarely in the premium marquee category based on
location and amenities.
Speaker 8 (27:13):
Infrastructure, healthy work environments, a big amenity package, and things
that really address people's you know, how they want to
operate their business and what allows them to operate the
business their business from an infrastructure point of view. So
that is a unique part of the marketplace, and that
part of the market commands a distinct rental premium over
(27:34):
everything else. This in the Manhattan marketplace.
Speaker 2 (27:39):
Jeffrey Garral operates in a very different part of the
Manhattan office business, owning and operating what are called B buildings.
He comes from a family of real estate developers and
has been in the business since the seventies. He's now
chairman of GFP Real Estate formerly known as Newmark Holdings.
We talked to him at one of his buildings located
(28:00):
at the corner of eighth Avenue and twenty sixth Street
in the Chelsea area of Manhattan.
Speaker 14 (28:05):
You'll find a number at which point people will rent it.
It sometimes takes a while to figure it out. But
when I was much younger, we bought a building on
eighth Avenue five or five days and I was trying
to rent the space for sixteen dollars a foot. And
when somebody's I was young, said lower the rent to
(28:26):
thirteen dollars, you'll fill it. And exactly, I lower the
rent and I filled it, you know, because it's supplying
them in The guy wants to pay forty dollars. He's
looking at all the product that's out there at forty dollars.
Speaker 2 (28:42):
As much difference as there may be between the Marquee
one Vanderbilt and gfp's three twenty two Eighth Avenue, they
both face some of the same challenges, like the pandemic
and the effect it had on people just not going
into the office. Whatever class it was.
Speaker 1 (28:59):
What's really killing the office space industry now is a
trend that began before the pandemic, but then was accelerated
dramatically during the pandemic, which is working from home. Before
the pandemic twenty nineteen, the statistics are there were about
seven percent of the workforce working from home, but once
(29:23):
the pandemic started and then now we're at about twenty
eight percent, so it's a four times increase and it's
had a huge impact on the office space market.
Speaker 14 (29:35):
The pandemic was brutal because people just stayed home. You know,
everybody stayed home. I stayed home. Luckily, the government did
this program where they allowed companies to apply for a
loan and they could only use it for rent, insurance
(29:57):
and to pay their employees, and then eventually the loan
would be forgiven for the most part, so that helped
us enormously because the guy legally they couldn't put the
money in the pocket. They had to use it to
pay rent. So that kept us in business. And then
gradually when the COVID, you know, people started to come
(30:20):
back to work. Initially two or three days a week.
Now it's like our company is four days a week.
Speaker 2 (30:27):
But the seismic shock of the pandemic still didn't keep
sl Green from opening. It's One Vanderbilt in the middle
of the shutdown. You opened actually during the pandemic at
twenty twenty. Did that changed your plan at all?
Speaker 8 (30:40):
It didn't certainly give us a few moments of pause
as to what it meant for the real estate market,
would have meant for Manhattan overall. The grand opening of
One Vanderbilt, it's the recovery. But we were actually designated
a critical building to Manhattan because a lot of our
tenants were financial service tenniss tennis were signed up during
(31:01):
the construction period. So when we opened up, we were
sixty percent leased at that point in time, and we
literally cut the tape and opened the doors for businesses
in September of twenty twenty, So just as the world
started to awaken coming out of pandemic, and I think
you know lesson learned, there was even a new appreciation
(31:22):
for this location, in this building coming out of the pandemic,
largely because of its convenience to transportation, where if you
think back, how people they don't want the there used
to be the commute, the inconvenience of commute, and then
all of a sudden it was I really don't want
to do a two leg commute, get on the subway
after I've come off a train from my suburban home.
(31:44):
So the proximity to Grand Central made it even that
much more desire. But also to focus on a healthy
workplace environment. Clearly all of our tenants went through some
period of reflection as to whether or not they were
going to have some element of a hybrid work environ
ronments or some portion of their employees. Would you permanently
work from home?
Speaker 2 (32:04):
Another challenge shared by Marquee and be Office buildings alike
is the need to get financing, which means real sensitivity
to interest rates.
Speaker 8 (32:13):
There's no doubt it is tremendously difficult to capitalize new
construction in today's world. There's only a handful of players
in New York City that have the financial resources to
really have access to capital, have a balance sheet where
they can bring their own resources to bear. It is
rarefied air to find developers who have that capacity to
(32:39):
skill set to build, ability to assemble sites, access to capital,
and really have the vision in order to come up
with a design that meets the market and anticipates the
changing market as the years go by.
Speaker 2 (32:52):
And that sensitivity to rates gives a big advantage to
those able to borrow less, people like Jeff Garam, who
was able to buy his b buildings at affordable prices
years ago and resisted the temptation to leverage up when
rates went so low.
Speaker 14 (33:07):
I think we bought for five and a half million dollars.
And the reality is that the tech guys would rather
be in Soho Chelsea, Tribeca, the village. So loads are
the buildings we own because we weren't rich enough to
buy the glass buildings. So we're in pretty good shape.
It's just you know, you've gotta have the money, and
(33:30):
you're gotter not be over leverage. It's a simple business.
If you have too much debt, it's screwed.
Speaker 2 (33:35):
So what sort of leverage you typically see in an
office building?
Speaker 14 (33:39):
I think typically I've been through so many ups and
downs you learn don't get greedy. It's very tempting to
borrow too much right now. The buildings are my favorite
buildings are the ones that have no debt. I don't
have to think about it. Fortunately, I was smart enough
(33:59):
to see the handwriting on the wall, and I took
all the buildings that were low leveraged and refinanced at
the beginning of twenty twenty, so I have a lot
of ten year loans at three and a half percent,
three and three quarters.
Speaker 2 (34:14):
In the end, though, it's not about how well financed
the building is. It's about providing a space that makes
people want to work there, something one Vanderbilt was designed
specifically to do.
Speaker 8 (34:25):
What really distinguishes the building are things like super high
ceiling heights, column free floors, infrastructure that can support any
kind of business meeting, lots of air conditioning, lots of
electric capacity, and amenities. Amenities that come in the form
of shared meeting spaces. I'll shared auditorium, boardroom that make
(34:47):
available to the tenants a food and beverage program where
we have two one Michelin Star restaurants operated by world
class chef Daniel Blude. And a building that's oriented towards
a healthy work environments, which in a post COVID world
took on an importance that you know, none of us
really appreciated before COVID, the amenity offering specific to each.
Speaker 2 (35:10):
It just isn't realistic to expect a good solid bee
building like three twenty two eighth Avenue to compete with
the likes of a one Vanderbilt, and Durrell says there
probably isn't an appetite to build a lot of new
Bee buildings in Manhattan anytime soon, but that doesn't mean
they don't have a future.
Speaker 8 (35:28):
I mean, you know, it's there is a bit of
a misnomer to believe that there is no reawakening in
the beer market. We're starting to see that mid price
point product come back to life. Now, as I said earlier,
we're overs supplied with that product. But you know, there
is a place for certain businesses that can't afford two
(35:52):
hundred dollars foot rents, that you know, want to pay
sixty or seven or eighty dollars a square foot, and
there's an opportunity to reposition some portion of that marketplace
with new capital investment, to bring in new infrastructure and
menditize those buildings, particularly those that have proximity to public transportation.
Speaker 2 (36:15):
That does it. For this episode of Wall Street Week,
I'm David Weston. This is Bloomberg. Join us next week
for more stories of capitalism.
Bloomberg Audio Studios, podcasts, radio news.
Speaker 2 (00:20):
This is Wall Street Week. I'm David Weston, bringing you
stories of capitalism. This week, a Chinese startup triggers a
text selloff, raising questions about whether the Magnificent seven can
continue to drive the stock market. Plus the fates of
office buildings in New York City. Some are glitzier and
have more to offer their tenants than their Class B counterparts,
(00:42):
but they have more in common in the challenges they
face than meets the eye. But we begin with a
story about goals, how we set them, how we achieve them,
and how we change our behavior to make sure we
do goals like the Federal Reserve's goal of achieving two
percent inflation.
Speaker 3 (01:02):
Over time, inflation has moved much closer to our two
percent longer run goal or two percent objective, moving down
to two percent, But get back to two percent inflation?
Are two percent objective sustainably down to two percent? Confidence
that inflation is moving sustainably toward two percent?
Speaker 2 (01:21):
Given how often we hear about that two percent inflation goal,
you'd think it was just obvious, But it's not.
Speaker 4 (01:29):
I do think to the public, there is this question,
why can't the price level, go back to what it
was before. Why even have a two percent inflation target?
Speaker 5 (01:41):
I always get questions about it, even before the pandemic,
before the run up of inflation. Why isn't it zero?
Why aren't we aiming for zero instead of aiming for two?
Speaker 6 (01:51):
The question I'm asked the most on this is did
you just pluck that number out of the air?
Speaker 2 (01:56):
And over the years, the Fed's two percent target has
come under question from those that follow it closely. So
where did that two percent inflation target come from? For that,
we have to go all the way back to nineteen
ninety in New Zealand when Don Brash was the RBNZ governor.
Speaker 7 (02:16):
New Zealand had had very high inflation by certain by
OECID standards anyway, double digit inflation figures through much of
the seventies and early eighties, and the then labor government
decided that they were going to get inflation right down.
In ninety eighty eight, the Minister Finance, asked about inflation
dropping below ten percent for the first time in some years,
(02:38):
said well, aren't you satisfied now? And the minister said no,
I'm looking for zero inflation or maybe zero to one percent.
Over the next couple of years that was modified gradually,
so the target became zero to two percent by nineteen
ninety two, and that was the target that I signed
up to. Subsequently, of course, the target was slightly amended
(03:00):
and we went to a target at midpoint of two percent.
We could explain to people what we were targeting. People
understood the game, and in the early years, particularly of
my time as governor, I spent a huge amount of
time talking to farmers groups, rotary clubs, church groups, any
groups that would listen, making it very clear that we
were deadly serious about achieving that target.
Speaker 2 (03:23):
And from there it went worldwide.
Speaker 8 (03:26):
Inflation returns to our two percent medium term target.
Speaker 4 (03:30):
Inflation is now back to the two percent target.
Speaker 8 (03:33):
Inflation has been close to our two percent target.
Speaker 2 (03:36):
Canada followed suit, then the UK and others, and in
early twenty twelve the US adopted the two percent target.
Speaker 9 (03:45):
The Committee judges at inflation at the rate of two percent,
it's most consistent over the longer run, with our statutory
mandate clearly communicating to the public this two percent goal
for inflation over the longer run should help foster price
stability and moderate long term interest rates, and will it
enhance the committee's ability to promote maximum employment in the
face of significant economic disturbances.
Speaker 2 (04:08):
John Williams, now the New York FED President, was in
charge of the San Francisco FED when the policy was adopted.
He recalls that the motivation was transparency.
Speaker 6 (04:19):
When cher Bernanke came to the FED, you know, clearly
he had strong desire for us to continue the worker
on transparency, be clear about our objectives, which actually had
started under Chairman Greenspan, and the love of movement toward transparency. Then,
So going back to January or twenty twelve and the
discussions that led to that, I had just joined the
FMC in the spring of twenty eleven, so I was
(04:41):
there for that, and it was really a focus on
greater transparency, greater clarity about what does good look like.
We don't want inflation that's too low, we don't want
inflation that's too high, and importantly, what's the inflation rate
that's consistent with a dual mandate that the FED has,
which is relatively unique to the FED.
Speaker 3 (05:00):
Good afternoon.
Speaker 2 (05:01):
But the urge to have a clear, transparent inflation goal
didn't mean that the goal necessarily had to be the
two percent one that other countries had adopted.
Speaker 6 (05:11):
With nineteen participants or however many were in the room
at the time. There's always a wide range of views.
So if you were to ask the question is one
and a half percent or two or two and a
half percent? Are those right or wrong answers? I think
any of those answers would work. I think two percent
is a good kind of Goldilock's.
Speaker 2 (05:28):
Answer, given what other central banks had already done by
twenty twelve, chaer Bernanke's announcement was hardly a shock, but
it did spark plenty of debate, and one of the
voices initially against the target was the current Chicago FED President,
Austin Gouldsby.
Speaker 10 (05:46):
I wasn't in a FED at that time.
Speaker 4 (05:48):
I was actually kind of publicly critical that two point
zero percent conveys a false sense of precision, that the
inflation's a noisy series and just telling the difference. If
I told you how many months of inflation data would
it take, given the variability of the series, to tell
(06:09):
the difference between a two point zero percent inflation rate
and a two point two percent inflation rate, and the
answer is years of not decades of data before you
would be able to even tell the difference. So that's
why I was kind of critical at the time. But
that said, I've going to completely changed my view and
(06:30):
I'm now a strong advocate.
Speaker 2 (06:32):
Whatever the pluses and minuses of the fed's two percent
target were when it was adopted over a decade ago,
it's now well established and the markets have come to
depend on it. The FED has a two percent inflation
target on average. How does that affect the markets?
Speaker 11 (06:49):
It's extremely important. So I'll start with that because and
having that credibility that it is two percent over time,
because what we do is the market is essentially pricing
in and expect and a risk around the expectation over time.
Speaker 2 (07:03):
Pria Misra is a portfolio manager at JP Morgan.
Speaker 11 (07:07):
So, now if my inflation is somewhat understood, then I'm
pricing real rates over it, and so I'm talking about
the treasury curve. It contains that treasury curve the inflation pad.
Then we have to just price in where are real rates?
So I think it helps anchor expectation. It also tells
us how should the market price in the FED response
(07:30):
to either another policy shock, fiscal policy or a shock
to the economy.
Speaker 2 (07:35):
For someone dealing daily in the markets, like Misra. The
fact of simply having a clear target is more important
than exactly what that target is.
Speaker 11 (07:44):
Somewhere in the two to three percent range is fair. Now,
the Fed in twenty twelve pick two percent. It's somewhat arbitrary.
You could have picked two and a half, but they
picked two. I think it's a fair number. It allows
the fair if you think the Fed doesn't want to
go to negative rates, and look at Europe and it's
not clear the negative rates with that effective In fact,
they have all these negative externalities. It allows if inflation
(08:06):
is at two, it allows real rates to go negative
because effect funds gets to zero. That's a negative two
percent real rate, which is very stimulative for the economy.
So I think somewhen that two to three percent range
is important.
Speaker 2 (08:19):
As much as the markets rely on that fixed two
percent target, does it matter that the Fed doesn't hit
it all that often? Since cher Bernanke announced the target
in twenty twelve, it's been within zero point two percent
of target in only twenty of one hundred and fifty
five monthly readings, and in more recent times, inflation has
(08:39):
been stubbornly stuck above the target after peaking in twenty
twenty two. The core PCEE that's the Fed's preferred inflation gauge,
showed signs of progress when it fell to three percent
in twenty twenty three, but since then it's largely flatlined,
leaving some to speculate about possible upward risks to infl
(09:00):
given an economy that appears to be running hotter than anticipated,
perhaps because of structural changes, but suggests changing the inflation
target at this point to those in the markets, and
you get a strong reaction. The Fed has said we're
not looking at a two percent target right now. Let's
assume what counterfactual. What if the Fed tomorrow came out
(09:21):
and said it's not two percent, it's two and a half,
maybe even three percent. How would the markets react?
Speaker 11 (09:26):
My blood pressure is increasing, just as you say it,
because it's a Pandora's box, right, you start with it's
just a fifty basis point increase, it's a slippery slope.
A year later, well maybe it's another fifty basis Once
you open the door to any increase in the inflation target,
I think the market has to price in the risk
that could continue to rise given bad inflation is right
(09:50):
now above target. I think it's disingenuous for the FED
to raise that target. It's like me trying to run
a marathon and then when I realize it's really hard
to run that much, I just look my target to
a ten k. Not that I can run a lot,
but you know, it just doesn't sound credible.
Speaker 4 (10:06):
We said the target is two percent, and once you
set a target, that is a sacred promise that the
central Bank has made, and you can't debate coming up
with a new target just because you're not hitting the
old target. You got to finish your job before you
start looking for a new job.
Speaker 11 (10:27):
I would say on inflation, it all comes down to expectations.
So why do I think we should take the inflation
target for granted, is because expectations. It would be great
if inflation expectations are well anchored, because then if I'm
a business, I can plan for pricing, I can plan
for my investments over time because I know this is
where inflation, roughly speaking, on average, will be over time.
(10:51):
If I'm a household, I can have that same expectation.
If I'm an employee and I'm going to ask my
employer for a raise, again I have a sense of
that is.
Speaker 2 (11:01):
But for all the benefits of setting expectations for overall
inflation with a simple single goal of two percent, it
doesn't mean that everyone will experience the same level of
inflation across all socioeconomic groups, industries, or geographic areas. And
after a sharp ramping up of inflation, those expectations don't
(11:21):
return us to the prices we knew only three years ago.
So that is where we turn next. How people are
affected by inflation that hits us all differently.
Speaker 5 (11:32):
People feel the higher prices. I feel the higher prices,
and when I go and explain, well, inflation is coming down,
of course they don't see that because they go to
the grocery store as I do, and prices are still high.
I do the grocery shopping for my family. I still
have sticker shock. I haven't adjusted in my expectations about
what normal is when I go to the grocery store.
Speaker 2 (11:53):
When we come back, our colleague Michael McKee brings us
a story of how Americans in the Midwest react to
inflation and it hits them, and why they may not
always feel as reassured as the markets about that two
percent fed goal. That's next on Wall Street Week on Bloomberg.
(12:18):
This is Wall Street Week. I'm David Weston bringing you
stories of capitalism. Now, we continue our look at inflation,
the Federal Reserve's target rate, and how prices are felt
and viewed differently depending on where you live. To tell
that story, we bring in Bloomberg's International Economics and Policy
correspondent Michael McKee.
Speaker 12 (12:38):
The Fed is steadfastly committed to bringing inflation back down
to two percent. That much is clear, but inflation is
felt and measured differently all across America. Those in the
Midwest may feel differently about the Fed's progress than those
in the markets. While inflation may be slowing for many,
prices remain high, posing a challenge for businesses across the country,
(13:00):
such as one restaurant on Chicago's South Side.
Speaker 13 (13:07):
We're known for the best brisket in Chicago. We work
really hard to provide the area with true craft barbecue.
Our customers are regulars here because they love the atmosphere brisket.
Speaker 12 (13:21):
Dominice Leitch is the owner and chef at Lexington Betty
Spokehouse on Chicago's South Side. She opened in twenty nineteen,
and like other restaurratories in Chicago and across America has
seen firsthand how the surgeon inflation over the past five
years has affected small businesses.
Speaker 13 (13:38):
I'll bring it over to you when it's ready. Okay,
thank you. Everyone's favorite our brisket that we're known for.
Two years ago, I spend three dollars and eighty cents
per pound. Today I bought brisket for four dollars and
sixty cents per pound, which means we have to sell
it at a higher price. Inflation is really affecting the
restaurant because we have to spend more money on product,
therefore increasing the prices for our customers. It makes it
(14:01):
really uncomfortable. You typically have to give people explanation why
is brisky by the pound more this week than it
was last week, and disappoints people.
Speaker 12 (14:10):
The chilenges facing leech play out across America even as
inflation falls from the dramatic highs of twenty twenty two.
A recent survey found that twenty four percent of small
businesses identified inflation as the top problem they face.
Speaker 5 (14:24):
I think one of the things that we've learned in
the last two or three years is people really really
hate high inflation.
Speaker 12 (14:31):
But do people who aren't on Wall Street even care
that the Fed has a two percent target? The impact
of inflation is often felt more acutely in rural areas,
where household wealth tends to be lower, with far less
disposable income, those earning the least have to dedicate a
greater proportion of their income to everyday necessities. That divide
(14:51):
is compounded by the fact that wealthier Americans, often found
in urban areas, have relied on a booming stock market
to increase their wealth that offset some of the effects
of inflation. Is the experience of inflation different here in
your district in the Midwest and to the west than
it might be in New York on Wall Street?
Speaker 5 (15:11):
I think so. I mean, I think especially when you
go out to rural communities, and we have a lot
of rural areas, the challenges that families are facing are different.
I mean, they're all facing the higher prices that virtually
all Americans have faced, but they also have acute challenges.
Hospitals are closing in many rural districts because there's not
enough population to support those hospitals. In some cases, colleges
(15:33):
and universities are closing it's hard to get home construction built,
even though there's a lot of land available getting new
construction and new development built. So the challenges in rural
communities are different, but a lot of times they're driven
by price as well. So there's some important similarities, but
there's some specific differences in rural communities.
Speaker 12 (15:52):
For the likes of Neil Kashkari and Austin gouldsby a
large part of their districts cover vast rural areas. Focus
in John Williams's jurisdiction is naturally on Wall Street in
New York City, where analysts and traders immediately dissect any
inflation data, not just looking at the headline number, but
peeling back the layers to look at individual contributors, which
(16:15):
can vary widely.
Speaker 11 (16:16):
You get the headline number, the core number. Literally the
next second, I look at services, so services versus goods.
Then I look at where's shelter and what has been high?
So what's keeping inflation high is not a broad based
higher inflation across then I would be a little nervous
that are we getting stuck somewhere above too. It's really
a couple of components. It's shelter it's lagging. Zilow. Rents
(16:41):
are coming down, it's just taking a while. People who
own their homes, it takes a while for that to
show up in the data, so there's a lag there.
Auto insurance, medical insurance. These are imputed numbers. That's why
I think it's actually good for them to have that flexibility,
because why should they keep policy high just because shelter
and inflation, which is owner's equivalent rent is running above target,
(17:04):
just because it's adjusting slowly for.
Speaker 12 (17:06):
Those in the markets every day, like JP Morgan's priam Isra.
Communication is a critical part of a FED president's job,
and a clear target two percent makes that job a
lot easier.
Speaker 6 (17:18):
Well, you know, inflation is different in different parts of
the country, and it can be different at different times.
I think that you know where this became easier, unfortunately,
was when inflation was high and everybody said inflation it
was high everywhere. Inflation was clearly damaging to the economy.
It was harmful to families and businesses. Everybody wanted to
see inflation lower. I think the communication of the two
(17:39):
percent goal was incredibly powerful during this period because we
weren't questioning what should we should get inflation to what
is good look like, we said, absolutely, we need to
get to two percent. We're consistent on that. I think
people understood that the importance of price stability, the importance
of getting inflation back down. I think that was, you know,
regardless of all the debates of exactly how did you
come to two percent, it was a very clear, strong message.
(18:02):
It's a message that Chair Powell repeated over and over
that you know, we're not compromising on achieving that.
Speaker 12 (18:08):
That's not the kind of analysis Americans elsewhere are making.
They see inflation in the supermarket, at the pump, and
in their rent. They're still coming to terms with so
called sticker shock, something goules By and Kashkari say requires
a different kind of communication.
Speaker 5 (18:25):
We do a lot of conversation with labor unions and
one of the sources for me of information about people's expectations.
You know, in economics we talk about expectations matter, inflation
expectations matter. We talk to labor groups about what wage
rates they're negotiating in their multi year contracts, to look
at what is the inflation embedded in their own thinking
(18:48):
looking ahead two to three years now, as they're having
their negotiations. They might not be thinking, well, my inflation
expectations are x and I need this kind of wage growth,
but it's clear that inflation is woven into the fabric
of their thinking about the economy and the future, so
it does register. They may not be as technical as
a Wall Street analyst and how they talk about it,
(19:10):
but it's present in their thinking.
Speaker 14 (19:12):
Inflation is eating away at the funds available.
Speaker 12 (19:15):
Go back to the inflation of the nineteen seventies eighties,
Paul Volker's time in office, and people would do things
like bring two by fours and throw them in front
of the Fed book because they were mad at the
level of interest rates. You're in a kind of ironic situation.
People hate inflation, but they get mad at the people
whose job it is to fix it.
Speaker 10 (19:37):
Look, that's true.
Speaker 4 (19:38):
Nobody's nobody's ever like ah, my greatest central banker. They're
just mad if you don't do the job to keep
inflation law.
Speaker 10 (19:47):
I was close personal friend of Paul Volgar.
Speaker 4 (19:49):
He's a personal hero of mine and mentor his widow
uncle gave me that original two by four that they
sent to him, scribbled on the top of it. Please
reduce these insane interest rates, and I keep that in
my office on the shelf right next to my desk
here at Chicago FED as a reminder of two things. One,
(20:13):
the decisions that the central Bank makes effect regular people,
regular businesses, regular consumers, quite directly. And two, sometimes if
it starts going wrong, you got to make tough decisions.
What we want to once we're in this experience is
(20:35):
have wages growing faster than prices. And the good news
is lately that's what's been happening, and as productivity grows,
we can do that even more so. But if you
talk to regular people, I kind of think the world
of inflation targets is not in their space.
Speaker 12 (20:52):
Why is it so expensive the dynamics you just described
about wages and prices. I imagine that most of the
people you talk to when you go around in the
district and speak, they don't understand that. They don't think
of it that way.
Speaker 4 (21:06):
I think it's true that most people do not think
of it that way.
Speaker 10 (21:10):
And if you look in.
Speaker 4 (21:10):
The surveys, they're extremely upset about inflation. And then if
you say, but look at your wages, they tend to say,
I earned the wage increase.
Speaker 10 (21:22):
I got out of my hard work.
Speaker 4 (21:25):
The inflation I had nothing to do with, and so
that's the part that makes me upset.
Speaker 10 (21:31):
They are in reality.
Speaker 4 (21:32):
Tied together wage growth and price growth.
Speaker 12 (21:36):
On the surface, wages are growing faster than inflation. The
latest reading had wage growth at four point two percent
compared to an inflation print of two point nine percent.
Wages are going up, but are they going up enough
to offset the significant period of time where high inflation
comfortably outpaced any growth in wages. It turns out that
(21:57):
since the end of twenty eighteen, inflation still outpaces wage
growth overall. And who's benefiting from that wage growth anyway?
While all income groups have seen wage growth of the
last year, historically, America's wealthy have seen their average earnings
grow forty six point two percent since nineteen seventy nine,
compared to just seventeen percent for its lowest turners.
Speaker 5 (22:20):
The overwhelming message that we've received them, that I have
received is hey, high inflation is really bad. It was
very painful for my family, It was very painful for
my business. Get it all the way back down.
Speaker 8 (22:32):
You know.
Speaker 5 (22:32):
They might debate whether two percent should be the right target,
or one percent or zero, but get it all the
way back down to what we were used to before
the pandemic.
Speaker 12 (22:40):
And they probably couldn't necessarily put an exact figure on
what they were used to before the pandemic. So I
wonder is the two percent target necessary?
Speaker 5 (22:48):
It is necessary. It's necessary because those Wall Street analysts
that you talk about, they are very active in financial markets.
We know that most financial products ultimately get priced off of,
for example, the ten year treasury market. So it is
important that the people who are professionals in investing and
in forecasting understand what we're trying to do and have
confidence that we're going to achieve it. So I do
(23:09):
think having a specific numeric target is very helpful. It
becomes self reinforcing the more we demonstrate our ability to
hit it. But it needs to be a low enough
number that people on main Street don't need to spend
their time thinking about it. They have better things to
do with their time than thinking about inflation. That's our
job to get it back there.
Speaker 12 (23:29):
From Wall Street to main street. Inflation is felt by
all and target or no. Ultimately, the real goal is
former chair Alan Greenspan's definition of price stability. When people
don't think about inflation at all.
Speaker 2 (23:44):
Our thanks to Michael McKee, our international economics and policy
correspondent here at Bloomberg. Coming up next on Wall Street Week,
how office buildings in New York City are not created equal,
but finding capital and tenants might be the great equalizer.
I'm David Weston, and this is Bloomberg. This is a
(24:12):
story about sibling rivalry. Two members of the same families,
sharing many of the same traits and sometimes competing with
each other, but who lead very different lives. Office buildings
are part of the life's blood of New York City.
They come in a range of shapes and sizes.
Speaker 8 (24:34):
Typically, the marketplace is stratified between the A product and
B and C products, and A covers a wide definition
of quality buildings generally buildings of a newer vintage, but
in New York City, where the average age of buildings
are sixty five years old. Newer in New York City
could mean a building that's thirty or forty years old,
(24:56):
but it's generally buildings that are well located, have either
new vintage or have undergone heavy redevelopment. Big capital spends
over the past several years have modernized infrastructure, have efficient
floor plates, higher ceiling heights, and things that people find
im portan in today's work environments. But within the A product,
(25:16):
then you have the marquee product. You have the best
of the best.
Speaker 2 (25:21):
Stephen Durrell's is director of Leasing and Real Property at
sl Green and is responsible for one Vanderbilt, the new
office tower looming over a Grand Central station. The way
the New York City Controller keeps score, About sixty percent
of all Manhattan office space has some form of A grade,
(25:43):
but the top five star rating is reserved for only
thirteen percent, leaving about forty percent with the grade of
B or below. Ruth coulp Haber has spent her career
putting tenants into those millions of square feet of New
York office buildings. For her, the category of the building
makes an enormous difference in getting them leased.
Speaker 1 (26:05):
To say this is a tale of two cities is
an oft used, somewhat tired metaphor at this point, but
absolutely true. So let me paint a picture. You have
the A buildings such as one Vanderbilt, Hudson Yards, One Vanderbilt,
one block from Grand Central. The building's fall it just
(26:27):
opened during the pandemic. Two hundred dollars a foot in
rent is the last deal they did there. You go
two blocks from there and you have the Chrysler Building
and you have two thirty Park Avenue at the Helmsley Building.
These are icons of New York City real estate. These
(26:49):
are the grand domes of New York City office buildings.
Both of these buildings are in default on their mortgages
and are a good percentage empty. So that is what
I would call a tale of two cities.
Speaker 8 (27:05):
One.
Speaker 2 (27:06):
Vanderbilt falls squarely in the premium marquee category based on
location and amenities.
Speaker 8 (27:13):
Infrastructure, healthy work environments, a big amenity package, and things
that really address people's you know, how they want to
operate their business and what allows them to operate the
business their business from an infrastructure point of view. So
that is a unique part of the marketplace, and that
part of the market commands a distinct rental premium over
(27:34):
everything else. This in the Manhattan marketplace.
Speaker 2 (27:39):
Jeffrey Garral operates in a very different part of the
Manhattan office business, owning and operating what are called B buildings.
He comes from a family of real estate developers and
has been in the business since the seventies. He's now
chairman of GFP Real Estate formerly known as Newmark Holdings.
We talked to him at one of his buildings located
(28:00):
at the corner of eighth Avenue and twenty sixth Street
in the Chelsea area of Manhattan.
Speaker 14 (28:05):
You'll find a number at which point people will rent it.
It sometimes takes a while to figure it out. But
when I was much younger, we bought a building on
eighth Avenue five or five days and I was trying
to rent the space for sixteen dollars a foot. And
when somebody's I was young, said lower the rent to
(28:26):
thirteen dollars, you'll fill it. And exactly, I lower the
rent and I filled it, you know, because it's supplying
them in The guy wants to pay forty dollars. He's
looking at all the product that's out there at forty dollars.
Speaker 2 (28:42):
As much difference as there may be between the Marquee
one Vanderbilt and gfp's three twenty two Eighth Avenue, they
both face some of the same challenges, like the pandemic
and the effect it had on people just not going
into the office. Whatever class it was.
Speaker 1 (28:59):
What's really killing the office space industry now is a
trend that began before the pandemic, but then was accelerated
dramatically during the pandemic, which is working from home. Before
the pandemic twenty nineteen, the statistics are there were about
seven percent of the workforce working from home, but once
(29:23):
the pandemic started and then now we're at about twenty
eight percent, so it's a four times increase and it's
had a huge impact on the office space market.
Speaker 14 (29:35):
The pandemic was brutal because people just stayed home. You know,
everybody stayed home. I stayed home. Luckily, the government did
this program where they allowed companies to apply for a
loan and they could only use it for rent, insurance
(29:57):
and to pay their employees, and then eventually the loan
would be forgiven for the most part, so that helped
us enormously because the guy legally they couldn't put the
money in the pocket. They had to use it to
pay rent. So that kept us in business. And then
gradually when the COVID, you know, people started to come
(30:20):
back to work. Initially two or three days a week.
Now it's like our company is four days a week.
Speaker 2 (30:27):
But the seismic shock of the pandemic still didn't keep
sl Green from opening. It's One Vanderbilt in the middle
of the shutdown. You opened actually during the pandemic at
twenty twenty. Did that changed your plan at all?
Speaker 8 (30:40):
It didn't certainly give us a few moments of pause
as to what it meant for the real estate market,
would have meant for Manhattan overall. The grand opening of
One Vanderbilt, it's the recovery. But we were actually designated
a critical building to Manhattan because a lot of our
tenants were financial service tenniss tennis were signed up during
(31:01):
the construction period. So when we opened up, we were
sixty percent leased at that point in time, and we
literally cut the tape and opened the doors for businesses
in September of twenty twenty, So just as the world
started to awaken coming out of pandemic, and I think
you know lesson learned, there was even a new appreciation
(31:22):
for this location, in this building coming out of the pandemic,
largely because of its convenience to transportation, where if you
think back, how people they don't want the there used
to be the commute, the inconvenience of commute, and then
all of a sudden it was I really don't want
to do a two leg commute, get on the subway
after I've come off a train from my suburban home.
(31:44):
So the proximity to Grand Central made it even that
much more desire. But also to focus on a healthy
workplace environment. Clearly all of our tenants went through some
period of reflection as to whether or not they were
going to have some element of a hybrid work environ
ronments or some portion of their employees. Would you permanently
work from home?
Speaker 2 (32:04):
Another challenge shared by Marquee and be Office buildings alike
is the need to get financing, which means real sensitivity
to interest rates.
Speaker 8 (32:13):
There's no doubt it is tremendously difficult to capitalize new
construction in today's world. There's only a handful of players
in New York City that have the financial resources to
really have access to capital, have a balance sheet where
they can bring their own resources to bear. It is
rarefied air to find developers who have that capacity to
(32:39):
skill set to build, ability to assemble sites, access to capital,
and really have the vision in order to come up
with a design that meets the market and anticipates the
changing market as the years go by.
Speaker 2 (32:52):
And that sensitivity to rates gives a big advantage to
those able to borrow less, people like Jeff Garam, who
was able to buy his b buildings at affordable prices
years ago and resisted the temptation to leverage up when
rates went so low.
Speaker 14 (33:07):
I think we bought for five and a half million dollars.
And the reality is that the tech guys would rather
be in Soho Chelsea, Tribeca, the village. So loads are
the buildings we own because we weren't rich enough to
buy the glass buildings. So we're in pretty good shape.
It's just you know, you've gotta have the money, and
(33:30):
you're gotter not be over leverage. It's a simple business.
If you have too much debt, it's screwed.
Speaker 2 (33:35):
So what sort of leverage you typically see in an
office building?
Speaker 14 (33:39):
I think typically I've been through so many ups and
downs you learn don't get greedy. It's very tempting to
borrow too much right now. The buildings are my favorite
buildings are the ones that have no debt. I don't
have to think about it. Fortunately, I was smart enough
(33:59):
to see the handwriting on the wall, and I took
all the buildings that were low leveraged and refinanced at
the beginning of twenty twenty, so I have a lot
of ten year loans at three and a half percent,
three and three quarters.
Speaker 2 (34:14):
In the end, though, it's not about how well financed
the building is. It's about providing a space that makes
people want to work there, something one Vanderbilt was designed
specifically to do.
Speaker 8 (34:25):
What really distinguishes the building are things like super high
ceiling heights, column free floors, infrastructure that can support any
kind of business meeting, lots of air conditioning, lots of
electric capacity, and amenities. Amenities that come in the form
of shared meeting spaces. I'll shared auditorium, boardroom that make
(34:47):
available to the tenants a food and beverage program where
we have two one Michelin Star restaurants operated by world
class chef Daniel Blude. And a building that's oriented towards
a healthy work environments, which in a post COVID world
took on an importance that you know, none of us
really appreciated before COVID, the amenity offering specific to each.
Speaker 2 (35:10):
It just isn't realistic to expect a good solid bee
building like three twenty two eighth Avenue to compete with
the likes of a one Vanderbilt, and Durrell says there
probably isn't an appetite to build a lot of new
Bee buildings in Manhattan anytime soon, but that doesn't mean
they don't have a future.
Speaker 8 (35:28):
I mean, you know, it's there is a bit of
a misnomer to believe that there is no reawakening in
the beer market. We're starting to see that mid price
point product come back to life. Now, as I said earlier,
we're overs supplied with that product. But you know, there
is a place for certain businesses that can't afford two
(35:52):
hundred dollars foot rents, that you know, want to pay
sixty or seven or eighty dollars a square foot, and
there's an opportunity to reposition some portion of that marketplace
with new capital investment, to bring in new infrastructure and
menditize those buildings, particularly those that have proximity to public transportation.
Speaker 2 (36:15):
That does it. For this episode of Wall Street Week,
I'm David Weston. This is Bloomberg. Join us next week
for more stories of capitalism.
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