July 21, 2023 • 39 mins
A slow-motion crisis is unfolding in the global commercial real-estate market, thanks to the double-whammy of higher interest rates and lower demand for office space following the Covid-19 pandemic.
John Fish, who is head of the construction firm Suffolk, chair of the Real Estate Roundtable think tank and former chair of the Federal Reserve Bank of Boston, joined the What Goes Up podcast to discuss the problems facing the sector and what’s being done to help.
“The biggest problem right now is the capital markets nationally have frozen,” he says of the US. “And the reason why they’ve frozen is because nobody understands value. We can’t evaluate price discovery because very few assets have traded during this period of time. Nobody understands where bottom is.”
One step in the right direction, he says, is recent guidance from federal regulators that allows lenders more flexibility when it comes to borrowers who need to refinance properties.
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Episode Transcript
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Speaker 1 (00:13):
Hello, and welcome to What Goes Up, a weekly markets podcast.
My name is Mike Reagan. I'm a senior editor at Bloomberg.
And my colleague Vildana Hirich, who typically co hosts with me,
is off this week, so it's just me and this
week on the show. Well, the stock market has obviously
been on fire this year, there's no doubt about that,
(00:34):
but there's trouble brewing in another market that is very
systemically important, commercial real estate. In fact, concern about this
market has reached the magazine cover phase. This week, New
York's magazine featured a picture of the Manhattan Skyline with
the headline Worthless, and it pointed out some of the
more high profile troubles among those famous skyscrapers. And a
(00:55):
few weeks ago, our own Business Week magazine featured a
headline that said commercial real estate is getting scary and
a picture of those creepy twin ghosts from the Shining
standing at the end of an office hallway. How scary
is it? Are we at Shining level scary yet in
commercial real estate? I don't know, but we're going to
get into it with a guest this week who knows
(01:16):
quite a bit about the commercial real estate sector. In fact,
he's one of those guests who if I were to
read you a list of everything he's involved in, well,
it would probably take up all the time we have
for the podcast, so I'm just going to stick with
the highlights. As I introduced him here. He is the
chairman and CEO of Suffolk, which is one of the
largest privately owned construction firms in the country. He's also
(01:37):
the chair of the Real Estate Roundtable trade group. Also,
he's the chair of Boston College as well as the
former chair of the Federal Reserve Bank of Boston. His
name is John Fish. John, Welcome to the show.
Speaker 2 (01:50):
Mike. It's a pleasure to be here. Thank you very much.
Speaker 1 (01:52):
That's a lot of chairs, John, I was saying, but
it's good to have you in our chair this week
to talk about this commercial real estate issue going on.
But I'll toll us a little bit about Suffolk for
those who aren't familiar with your business. You guys were
involved in what I consider to be one of the
coolest buildings in the US, which is in Hollywood, Florida,
the hard Rock Hotel, which is basically designed like a
(02:16):
giant guitar. I think that's one of my favorite buildings
ever built.
Speaker 2 (02:19):
Yeah, Mike, the job you're reported to is called the
Hollywood High Rocks, about one point eight billion dollar project
we built down there about four years ago for the
seminal drive down there, which are very apportionate. The company
started back in nineteen eighty two. I came from a
four generation family of business, my brother who was a
year old that took over the family business. My dad
lent me eighty thousand dollars to start Suffolk as a
non union business, and through a lot of great help
(02:42):
and a lot of support across the board, we've grown
the business nationally into about a five point six to
six billion dollar business. And I feel very humbled and
lucky to be able to say that to you and
to me as an organization. And how we've done that
is we've created an environment really based on people and
understanding how how important culture is to a go organization.
As we often say, culture eats strategy for lunch at
(03:05):
the end of the day. And we have it Suffolk.
What does it call it? Cult like culture? Now? What
Suffolk does. We're a general contracting business, but also we
have different tentacles we call verticals that is, we have
a technology company called Suffolk Technology. We just raised and
closed one hundred million dollars regulated fund last week, which
invest in prop tech, construction tech solutions. We've made about
(03:27):
thirty investments. There's a seed in Series A investments. We're
very proud of that. We also have a Suffolk Capital Arm.
We don't compete with our clients. We invest with our
clients in the GP stack of the development capital stack,
and that provides us with a sense of alignment of
interest in the construction, which typically doesn't happen, so therefore
people partner together much nicer. We also have a design
(03:49):
firm and it's really digital design. It's not the typical
design firm. We do design support, we design assist, and
we do design built. And the idea is how do
we leverage technology and artificial intelligence in the twenty first
century to create a more predictable, accurate design. And we're
not fully there yet. We're leveraging some very good solutions
(04:11):
in the country right now and globally that allowing ourselves
to provide that much more accurate and level of predictability
in the design process of the job. And then lastly,
we have a self perform arm that provides you know,
material deliveries, equipment and concrete and label the typic type
of self performed projects around the country. So overall, our
ultimate vision as a company is how do we integrate
(04:34):
the entire built world into a seamless platform by leveraging
data and technology. Now, Mike, why I say data is
because we're probably one of the few construction companies in
the country that have a clean data link. It's taken
us at probably about seven or eight years to accomplish that.
We have probably got twenty nine to thirty data analysts
(04:55):
in the company. Probably out five years ago. We started
using and leveraging data to provide a sense of predictability
and accuracy to what we're doing the role.
Speaker 1 (05:05):
It's funny, John, I thought this was going to be
the week where I get a break from talking about
AI in the markets, but uh, I guess not. It's
fascinating to me that AI is even finding some applications
in the construction industry, and I want to get into
that later. But first let's get into that commercial real
estate topic that I started this all off with, because
I think it is very much front and center for
(05:27):
a lot of investors. These days of exactly what's going
on in the cre market. You know, it's fascinating you.
You mentioned an eighty thousand loan from your father to
get this huge company going, so clearly you know a
little bit about how to handle the financing of this business.
But I want to start with the basic John, because
I think for a lot of people who aren't in
(05:48):
the weeds in this sector, they don't quite appreciate the
differences between residential and commercial real estate financing. You know,
most of us we look forward to that day where
we finally make the final payment on our thirty year
fixed rate mortgage and we pop the champagne and burn
the mortgage. It's a much different ballgame in commercial real estate.
(06:09):
So talk to us about that difference, how the financing
of these projects is different, and why this spectacular rise
in interest rates that we've experienced this year is so
dangerous to this sector.
Speaker 2 (06:22):
I really think you need to take a step back
and really unpack what has transpired over the last fifteen
to twenty years to get to that answer. And again
I think we all agree sort of hit up against
the black Swan event, That's what I would call at
the end of the day. And you couple that with
prior monetary policy back after two thousand and seven, and
fiscal policy basically living at the zero bound of interest
(06:43):
rates over a ten year period. To poll, I call
that people sort of drinking from the punch bowl generally speaking,
and continue on, and all of a sudden we have
the pandemic. The world basically stopped. And when the world stopped,
all of a sudden, the government injected almost two and
a half trillion dollars worth of money to stimulate the
comedy and coup with that, then they went forward to
build back better in the Chips Act, so a total
(07:05):
of six point five trillion dollars of stimulus. And so therefore,
all of a sudden, in a very very short period
of time, we had inflated amount of capital in the
system on a global basis, not just nationally here. And
as a result of that, what happened is interest rates.
I mean, the inflations started the spike, and I think
(07:25):
the Fed candidly, I think misjudged this concept of transitory
and non transitory, and they classified as a transittory. We
found out that it really wasn't transfittory. It was embedded
in the system, and I don't think the Fed responded
quick enough to the situation. Again, I'm not trying to
blame anybody, but I think nobody had a glass ball.
And once they did react back in November twenty second,
(07:47):
it was almost too late. Inflation had junk grewing to
nine percent. All of a sudden, you had the supply
chain issues going on, the material rates went up at
the end of the day, and the cost of construction,
first time in history, was greater than the value that
you were creating from the building itself. We've never seen
that before. So all of a sudden, over twelve month,
(08:07):
thirteen to fourteen month period of time, the Federal Reserve
slams on the brakes, has over five hundred and twenty
five basis points jumping rates, which really causes at the
end of the day, a complete shock to the system.
People that were buying capital were borrowing capital at that
point in time at three, four, five six percent. Now
(08:28):
all of a sudden, are in double digits. And when
you talk about these large structures, especially in New York
City and that article you're talking about, you get all
these buildings out there, amazing almost one hundred million square
feet a vacant office space is staggering at the end
of the day. And you say to yourself, well, right now,
we're in a situation where those buildings about forty five,
(08:48):
fifty five, sixty five percent occupied, and all of a sudden,
the cost of capitals is what those buildings is almost doubled.
So you've got a double Whimmen, You've got vacancy down,
so the value is down as less income coming in,
and the cost of capital has gone up exponentially at
the end of the day. So you've got a situation
where timing is really, really, really impacted the development industry substantially. Now,
(09:11):
when you take a look at that, the biggest problem
right now is because of that, the capital markets nationally
are frozen. And the reason why they're frozen is because
nobody understands value. We can't evaluate price discovery because very
few assets have traded during this period of time, nobody
(09:32):
understands where bottom is. Therefore, until we achieve some sense
of price discovery, if people understand value, will never work
ourselves through that. Now, what I would say to you
is late at the end of the tunnel came just
a little bit. Was back in June twenty ninth when
the occ the FDIC and the federal government provided policy
(09:54):
guidance to the industry as a whole. And that policy
guidance I think is very very important for a couple reasons. One,
it shows the government with a sense of leadership on
this issue because it's this issue that people don't want
to touch, because it really can be cosynogenetic at the
end of the day. It also provides a sense of
direction and support for the lending community and the borrowers
(10:17):
as well. And by doing such what happens now is
the clarity. Basically what they're saying, it's similar to trouble
debt restruction program. They're saying, listen, any asset out there, Well,
you've got a qualified borrower and you've got a quality asset.
We will allow you to work with that borrower to
(10:38):
ensure you can create the gre create the value that
was once in that asset itself. It will give you
eighteen to thirty six month extension basically pretend to extend.
Whereas what happened in two thousand and nine that was
more of a long term forward guidance proposal and it
really impacted the cities at the end of the stategically
(10:59):
important finn institutions. This policy direction is really geared towards
the regional banking system. And like why I say that
because right now the Ciffies do not have what the
Jesus the call today don't have a real big book
of real estate debt on their books, probably less than
eight or seven percent, whereas the regional banks across the
(11:21):
country right now, thousands of them have over probably thirty
to thirty five and some even up to forty percent
of their book in real estate. So that forward guidance
gave at least the good assets and the good bars
and opportunity to go through a workout at the end
of the day.
Speaker 1 (11:35):
You know, it's funny, John, I was going to respond
to your answer by saying, is this extended and pretend?
Speaker 2 (11:40):
You know?
Speaker 1 (11:40):
It's that seems to me almost like a derogatory thing
phrase that people use for this type of guidance from
the FED or this type of approach to solving this problem.
But is is that the wrong way to think about it?
Is extend and pretend? Actually the way to get us
out of this mess at least, you know, stop stop
the bleeding this some degree.
Speaker 2 (11:58):
Let me say this to you. I think some many
well known financial guru stated that this was not material
to the overall economy, okay, and I'm not sure that's
the case. I don't want to challenge that individual. I
don't use a name. But when I think about the
impact that this has in the regional banking system, basically Suburbia, USA,
(12:19):
we had Silicon Valley Bank go down, we had Signature
Bank go on, we Serve Republic go down. If we
have a systemic problem in the regional banking system, the
unintended consequences of that could be catatonic. In addition to that,
what will happen is when real estate values go down.
Seventy percent of all revenue in cities in America today
(12:41):
come from real estate. So all of a sudden you
start lowering and putting these buildings in the foreclosure. The
financial spicket stops right all of a sudden, the tax
rivers go down, and people think, okay, that's okay. Well
what happens is you talk about firemen, policemen, teachers in
main street USA. At the end of the day, we've
(13:01):
never gone through something as tumultuous as this. Right now,
I think back into I think nineteen late sixties, and
we have to be very, very cautious that we don't
tip over the building that we think is really stable.
Speaker 1 (13:14):
At the end of the day, as you point out,
it's really those regional banks that probably are the biggest players,
at least from you know, public equity banks that we track,
some of the biggest players in commercial real estate. But
even today and today's Wednesday, July nineteenth, Goldman Socks came
(13:39):
out with its earnings. And you don't think of Goldman
as being a huge property lender, but of course they
had they do have some commercial real estate on their books,
and they blamed real estate for about a billion dollar
hits or earnings. And I know a lot of the
other big banks are increasing loan loss provisions for real estate. Oddly,
Goldman's stock rallied on the day. You know, the equity
(14:00):
market is in this risk on mode. This seems like
it's a problem that's going to linger with us for
years and sort of be a very slow to unfold.
Do you think the equity markets, you know, if you
had to put your spuddy senses on, are they sort
of whistling past the graveyard on this issue?
Speaker 2 (14:16):
Do you think it's one of the questions of the day.
To be very very candid with you. First off, I
would say about Goldman's earnings today when they go down,
I think fifty six percent from last quarter, and I
think you can sort of put that in a category
of Goldman is more of a transactional institution versus b
JP Morgan, whereas really a lending institution, so interest income,
(14:37):
mortgages and so forth and so on. But Goldman, I
think is really interesting thing because one maybe billion dollars
in real estate, but also what it's saying out there,
there is instability in the financial markets. Overall transactions, IPOs,
various other types of issues that go on really are
frozen right now. And that's not good for main street America,
(15:00):
the community at all. And what we need to figure
out is, I'm going to come back to this issue
of a level of stability, a level of pictability. I
think you hit a fifty two week high. I think
this weeks my knowledge, and you back and set yourself.
You've got someone almost like a point in time. We
take a look at version of of the two and
ten right, which is sort of an indie indicator. Somewhere
(15:22):
you've got consumer spending right now still relatively strong, but
I would caution people right now, we had two and
a half trillion dollars of consumer spending probably back two
and a half years ago when we were all this
money was given us by the federal goverment. We're down
to five hundred billion right now, so I think that's
done to wind down a little bit more. We've got
inflation that's gone from nine percent down to three. But
I think let's not talk about inflation. Let's talk about
(15:44):
core because cores at four point eight, we're still stubborn
on the energy side of things, on the housing side
of things. Then I'd say, take a look the labor markets, Candlely, Mike,
we are at zero one employment in construction okay, we
on at three point four to three point six. Where
at zero okay? How set in an economy that basically
is notting to freeze itself up. And lastly, I think
(16:04):
from a foreign policy point of view, we don't know
where the Ukrainian thing is going, not even to mention
the China situation in Taiwan. And I think overall, when
you put all those pieces of the puzzle together, it's
really the equation we've used the form of views in
the past of two percent inflation. I don't think that's
as applicable today as it was in the past. Larry
(16:27):
Summers was asked a question on your show of Bloomberg
with David weston what he thought about two percent inflation?
Is that really something that's mandated by the Fed? Yes,
it is the mandated they served in the FED, So
I understand that, but really I'm not sure that's really
what we need to be shooting for. And to me,
what we need to be shooting for is probably something
more than the three three and a quarter range. And
(16:48):
why I say that is because I think that one
of the underbellies of what's going on right now is
inflation was at a long period of time zero bounce
because there was a lot of phasis on globalization, and
all of a sudden, material costs and labor costs that
we were offshoring was substantially lower than what's we're doing
(17:11):
when were on shore those type of things. Now, all
of a sudden, the Trump administration, we start to nationalize things,
and i'd say week in our relationship with places like China,
the cost of labor on shore and the cost of
material on sure is moving up, So all of a
sudden you're in a situation where it shouldn't be a
(17:31):
real surprise as we nationalize and on shore and reindustrialize
our country and the less reliant of the European Union
and China and India, Okay, that we're having this sort
of sticky inflation at the end of the day. So
I think, what's going to happen. We're going to go
through a cycle over the next twelve to twenty four months.
We're really going to understand for the first time in
(17:52):
the twenty first century how important globalization is to the
overall impact of our US economy. I think it's extremely important.
I think we need to reindustrialize America and on shore things.
America is the best country in the world by far,
but at the end of the day, in the global economy,
we need to be able to compete, and I think
this issue of globalization is a very very important equation
(18:13):
or element for us to compete. Right.
Speaker 1 (18:15):
As you alluded to briefly, interest rates are obviously the
major pressure point on commercial real estate right now, but
not the only one. You know, we went through this
pandemic the entire world went to work at home for months,
if not years, or at least the entire office workforce
went home. I know a lot of big companies are
(18:37):
very actively trying to get everyone back into the office
on a more regular basis. Big city mayors politicians are
very actively in that camp too. But to some degree,
I feel like the horses out of the barn and
the world has learned that a lot of these jobs
can be done effectively, productively at home, and I can't
(18:59):
help but wonder if that is just a game changer
for commercial real estate going forward. The idea of ever
getting back to the values of these office buildings before
the pandemic seems like such a long shot to me.
I mean, is that you know, when you think of
it in the sober light of days, is that the
right way to think about this or not?
Speaker 2 (19:20):
Mike. I think Jim Collins talks about not all points
in time are equal in his books, and to me,
we're at a point in time where really it's a
new era. I think we've got a generational issue. I
think this is going to be around for you at
least a half or if not more, of a decade
because of the individuals that grow up during this time period.
But at the end of the day, I think what
we need is a recalibration. And I don't think it's
(19:43):
weird it is today. I think there's somewhere in the
middle between where it is today and where it was before,
and I think we as a capitalist society will get there.
It might take two or three or four years to
get there, but I would say this, I really believe
strongly for the sake of Main Street USA. We all
have recent wantsibility. The downtowns of America San Francisco, Seattle,
(20:04):
even Boston right now in New York City are hurting.
We have a responsibility both economically and socially to come
back to work at some point in time. And if
we don't come back to work, we need to allow
the competitive forces to dictate next steps. Meaning if people
are working from home, that means we can offshore things
to India and China at half that cost. And I
(20:25):
think eventually, what's going to happen as part of that equilibrium.
That's exactly what's going to happen. Okay, in the sake
of downtown's the peacher shops, coffee shops, the school teachers. Okay,
we need to think about the unintended consequences of this
strategy moting for work, John, I'm.
Speaker 1 (20:41):
Wondering from the perspective of the head of a construction company.
You know, a lot of times when this issue of
office vacancy comes up, a lot of people, granted, people
not intimately familiar with this industry, you think, well, you know,
some of these cities still have a strong demand for
residential buildings. Can't we just convert these office buildings into residential?
(21:05):
And I know you know enough spend said about the
difficulties involved in that. You know, big office building, it
doesn't have the plumbing, the electric, enough windows to convert
everything into apartments. But I wonder is it feasible to
think about going forward that when you build a building,
is it possible to do it in a way where
(21:25):
it's flexible to go residential if that's the in demand market,
convert back to office. I mean, is that too far
fetched to think think about when you're building a building,
too impractical or too like?
Speaker 2 (21:39):
I think you hit the spot on. I think absolutely
if you're doing what is a clear, spare building with
a concrete plat, late construction will get too technical and
your free columns columns. Look at in certain areas, you
know what your core is. If you design that initially, again,
you can't be as efficient both in the commercial side
and the residential side as you want to be. They
(22:01):
would be compromises across the board. I don't think we're
going to get to that. I think about thirty percent
of twenty five percent of billions out there have the
ability to be converted. I think when you really talk
about residential, it's a whole different sort of kettle offish
what I mean by that residential shortfall. We have right
now about six million units of housing that we need
(22:22):
to create in America. We're only creating about a million
to a million a half a year. That four million.
We need to come together as business and government and
develop thoughtful policy to incentivize people to want to build,
both from transit type of environment to a nimbiism not
in my backyard. We need to forestall all those particular
(22:44):
things and allow the real estate construction be able to
produce what they're capable of producing in an expedited way.
In today, the prices of homes the boss I read
in the Boston Globe this morning, nine hundred thousand dollars
was the average price of a home in round the
Boston community. How do you expect a family raising two
or three children, even both parents working bill a ford
(23:07):
and nine hundred thousand dollars mortgage. So I think what
we need to do is we need to have very
thoughtful incentivized programs to allow more building ubiquitously throughout the
United States of America.
Speaker 1 (23:20):
And I assume that labor issue that you mentioned is
a big part of sort of what's going on in
the construction market these days. You know, I mean, look,
the labor market's tight everywhere, but wow, you said it's
they're near close to zero percent on employment in construction.
What do you suppose is driving that? Is it immigration
(23:41):
lack of immigration? Is it better opportunities elsewhere? All the above?
Why is labor so tight in the construction market right now?
Speaker 2 (23:49):
It is somewhat complicated, But let's try to unpack it
a little bit. When I think about this is if
we take a look back two thousand eight, construction employment
was at seven point seven million. It wasn't until twenty
eleven construction got down to about five point four and
that was a two point four roughly million decrease, so
there's a lag in construction when the economy stats turning
(24:12):
itself or slowing itself down at the end of the day. Second,
I think, what's a big problem right now is when
I think about this, you know, as I unpacked this
interest rates. Right now, people cannot move out of their
homes when they're locked into a thirty rate fixed at
three and a half to four percent, and you're going
to buy into a six or seven percent lorgust. So
therefore people aren't moving out. But then again, we need
to generate no housing, so there's a really you know,
(24:34):
sort of inequilibrium there. Then you take a look at
the demand for housing, which I spoke about the Amouney units. Next,
you talk about the fiscal policy right now, Not only
do you two and a half trillion dollars of cash
right we get built back better the chips build all
of a sudden, we get six point five trillion dollars
pumped in the economy, which is creating a lot of
demand at the end of the day. And lastly, I
would say most importantly, I would say that so the
(24:56):
icing on the cake of this discussion is immigration. We
right now are bringing in as few immigrants in the
United States and notcerent citizenship. I think probably in the
last twenty five to thirty years at a point in
time needs to be the opposite. But to me, this
issue has become politicized. We need to recognize the only
(25:16):
way we can grow our economy is grow our ability
to consume seventy percent of GDP's consumption. If we don't
grow our economy, we don't grow our population. We grow
ability to consume. We're not going to work ourselves out
of this. Secondly, workforce participation as low as sixty two
percent today, the lowest right now on record. Okay, people
don't want to work, COVID post retirees at fifty five
(25:38):
years old. And lastly, people don't want to get involved
in a hardcore construction business. It's changed, and what we
rely on is a lot of first generation members give
into our business. We recruit as a company right now
out of community college's both tech schools. We don't need
a college degree. All we want is a heart and
a desire to want to work. We'll train them ourselves,
(25:58):
and I think that is is one of the reasons
or solutions to this unemployment crisis at the end of
the day. But to me, what we need to do
is we need to let the COVID in the pandemic
go through a digestive system. So we come out to
that new Norman about I think twelve to eighteen months,
and we'll understand how to solve this issue with a
(26:19):
much more degree of accuracy at that point in time.
Speaker 1 (26:36):
John, if I could ask you to sort of think
back to your days at the Boston FED and put
that central banker hat on again for us. One of
the interesting disconnects between the markets and what Chair pal
and other members of the FED have been saying this
year is the notion of when the FED will actually
pivot and start cutting rates. If you look at the
(26:57):
short term interest rate markets FED fund futures all year,
they've been convinced that a pivot to lower rates is
on the horizon. You know, earlier in this year, they're
pricing cuts by the end of this year. Now that
hasn't happened, they're pricing cuts pretty aggressive cuts for next year.
Is the market right about that? And is it this
(27:17):
commercial real estate issue that possibly could prove them to
be right if it causes enough ripple effects in the economy.
Speaker 2 (27:24):
Mike, let me go back to two thousand and eight
and nine when I was at the FED and then
I became the cheer of the FED. I was amazed
at once we're going through the tumult. Back then, the
way that the researchers at the FED were understanding what
was going on. They were using a lot of historical
(27:44):
formulas to try to understand what was currently going on
this great financial crisis, and not a lot of it
added up to the end of the day. And so
I think some of the ways they look at things
might be a little bit outdated. And who am I
to because I'm not an economist. I respect Janet Yell
and I respect J. Powell. But today, right now, with
(28:06):
this high interest rate environment, I think what a lot
of people are clamoring for. We need to give it time.
All of a sudden, we've reduced inflation in less than
twelve months from nine to three, from core from almost
ten to four point eight. That is monumental. We need
(28:27):
to give the prescription that the FED has given the
patient time to get through the system. I believe the
twenty fifth, twenty six we're going to see a twenty
five basis point jump I'm hoping that through August they
take a little siesta, we can back in September and
all of a sudden, the data is pointing out that
(28:49):
the prescription they've given the patient is working, and let's
take the foot off the gas, and then I think
if we stabilize, as you know, historically, anytime the FED
to high time before they raise interest rates and stop
raising interest rates is at the lowest end nine months
up to the highest end I think thirteen to fourteen months.
So I'm hoping we hit that nine month trigger sometime
(29:11):
this fall, and then nine months from now it was
seven months now, we start seeing a reduction in those rates,
and that would be my prediction. So I'm sitting back
saying to myself late spring of next year, we're going
to start seeing some adjustments to the overall federal funds rates,
which I think once people know, though, in my opinion,
that the FED is no longer going to get you
(29:31):
raising the rates, I think that's going to be a
harborde for the economy to start turning itself and give
much more stability to the capital markets and allow us
to achieve the sense of price stability that we really
need to move the real estate industry forward.
Speaker 1 (29:44):
Will it require some significant pain between now and then
for that to happen?
Speaker 2 (29:49):
Mike, I am concerned. Scott Reckler, a very good friend
of mine from Eric, talks about he sees this slow
running train going forward. I would see the momentum of
the train in the last three or four five months
is picked up quite substantially. And I just am concerned
for the unintended consequences of what comes out of this mess.
And I think it's all avoidable in many respects. No
(30:11):
taxpayer bailout at the end of the day. It's a
lot of people working with each other understand the implications
in the material nature of real estate having on our
overall national economy.
Speaker 1 (30:21):
Right, John, Like we mentioned at the beginning, I was
surprised to find out that you're paying very close attention
and perhaps even utilizing artificial intelligence. You know, I think
of construction as sort of this industry that's not, you know,
prone to technological disruption like many other industries. But I
guess I'm wrong about that. Talk to us about the
(30:43):
idea of AI in construction. Where it's headed, you know,
are you using it now? How could it help you
run your business potentially.
Speaker 2 (30:52):
Let me sure a brief story. Last week, I was
up in New Hampshire at Manchester Hampshire with a guy
by the name of Dean Kayman a company.
Speaker 1 (30:59):
Called Deck this segue inventor right exactly, and he.
Speaker 2 (31:03):
Owns a company called Army. And what he's doing using
artificial intelligence to manufacture of organs.
Speaker 1 (31:10):
Wow.
Speaker 2 (31:10):
And I was completely mic blown away. So that's the extreme,
and I applaud him for what he's doing, and I
was just overly overly impressed, and I just want to
wish him the best of luck. On the construction side,
I think AI can be the single most impactful solution
that's ever had on our industry. Let me tell you
(31:32):
why productivity and construction in the last fifty years has
actually gone down. It's the only category of an hunting
and fishing okay that productivity has lowered. True story, Okay.
And therefore, when you think about technology solutions in a
blue collar environment. The biggest challenge in construction real estate,
(31:52):
I put it in two things. One the design of
the building and the schedule of the building. If we're
able to leverage official intelligence through generative design okay, like
Elon Musk does like Boeing does. Okay, there's no doubt
if we improve the accuracy of those design documents, we
(32:13):
will move mountains. As ways to costs and predictability. Just
think about the Empire State building. It took fourteen months
to building in the thirties. It takes five years to
Buili Bilding today. Now look at the schedule side of things.
We have a very difficult time measuring productivity if we
leverage AI. There's a solution out they call open Space,
which is one of the company that we invested in.
(32:33):
It adds to contract labor productivity and labor production on
a job site. We never had that type of artificial
tool before in our toolbox. Now we do that. So
I think over the next eighteen months to thirty six months,
we're going to see more creative and interesting solutions that
impact productivity and lower costs in our business that we've
(32:54):
seen in the last thirty forty years.
Speaker 1 (32:57):
Fascinating stuff. You know, the mind reels when you think
of all the potential applications of AI and how disruptive
it can be throughout the economy. I never would have
thought of it in the construction industry. It makes total
sense now that you laid out for me. I appreciate that,
John Fish. He is chairman and CEO of the construction
company Suffolk. He is also chair of the Real Estate Roundtable.
(33:21):
Really a privilege to hear your thoughts. John. I can't
let you go quite just yet. Though. We do have
a tradition on this show where we're going to make
you tell us the craziest thing you've seen in markets
this week. I hope you're prepared.
Speaker 2 (33:32):
What I always says, I'm gonna go back to that.
You know, Dean came an issue, okay, and that maybe
not in markets, but what it gives to me, it
brethes new life into what's possible.
Speaker 1 (33:43):
Yeah.
Speaker 2 (33:44):
And as we often look at the glass half full, okay,
I mean half empty, I look at a half full
and I see the potential of something like artificial intelligence
on our construction category. On other categories, you know, whether
it be educational situation, you know, boss, in college admissions.
I'm a severe dyslexic, so all of a sudden, using
series series my best friend to be honest with you,
(34:06):
and then I take a look at what's going on
in the hospital system of bringing on this hospital, you know,
radiology your DNA sequencing. People don't know one or four
colonospits are bad. And so if we're able to improve
the radiology and the accuracy of that type of studies,
I mean, it's going to change the world. So to me,
how do we take a look at it with the
(34:27):
proper guardrails Artificial intelligence which is a conversation of the
day in a way that a better is man and
doesn't destroy man. And I would like to see us all,
especially the business community, not look the government to take
the lead in this, but carry on the conversation with
a sense of entrepreneurialism and knowing that this can give
(34:49):
our country a competitive vantage. One last thing I want
to point out to you is that when you take
a look at artificial intelligence, over the last three or
four years, this past year, the United States America has
invested over fifty billion dollars artificial intelligence. The Chinese invested fourteen,
okay UK has invested four, and Israel invested three. So
(35:12):
we have a substantial jump on this conversation. And I
sit back and say to myself, how do we come
together as a country, government and business to leverage the
hell out of this tool that's in our box today
that could change the world the way we live.
Speaker 1 (35:28):
That's great to hear the thoughts of a glass half full. Guy.
I think many of us when we hear about this
new disruptive technology, we go half empty immediately. But it's
nice to hear the glass half full angle on it, John,
I appreciate that. I'll give you my craziest thing, John,
I like the alternative asset classes. The more alternative the better.
And one of the funniest things. I think it's not funny.
(35:49):
I guess it makes sense, is old Apple products, first
generation Apple products. When they come up for auction, they
can sell for some surprising prices. And the latest example
is an original iPhone. So the first iPhone that came
out in I think it was two thousand and seven,
courtesy have a story in Fortune. Its dubbed the Holy
(36:10):
Grail iPhone to collectors because they did a four gigabyte
model and an eight gigabyte model, but no one bought
the four gigabyte, so it was discontinued very quickly. There's
very few specimens of it available, especially still unused in
the box, never activated like this, So to the type
of people that are interested in this stuff, God bless them,
(36:32):
but this is what they're after. So I regret to
inform you John good news and bad news. Bad news
is you're a contestant on a game show. Here we
like to call the prices precise. The good news is
Baldonna's off, so you're the only contestant. You're gonna win
no matter what. But what do you think this iPhone
Holy Grail original iPhone four gigabyte in the box, unactivated,
(36:54):
sold for at auction by LCG Auctions. Mindy, this was
a few hundred bucks. I think when it first came
out it was under a thousand.
Speaker 2 (37:02):
I think I would ask me maybe twenty five thousand dollars.
Speaker 1 (37:05):
Twenty five thousand, that's that's a good guess. I one
hundred and ninety thousand for an iPhone, So I think
they said three hundred times the original price.
Speaker 2 (37:16):
Mike, I would say you, this is I think the
iPhone introduction, the iPhone was revolutionary. People can look at
that and that was a point in time when the
world started to change. Yeah, I think right at that
same point in time today with AI, all of a sudden,
people look back ten years, twenty years when I when
did this? You know, November twenty two when Open Ai
came up with this conversation, all of a sudden, it's
(37:36):
been the headlines every single day. So I think we're
very similar points in time as it relates to evolution,
and I think it's an exciting point in time to
be honest with and I feel that this could really
really help America in a very very positive way.
Speaker 1 (37:50):
Yeah, you're absolutely right that the launch of that product
really change. It changed all our lives, you know, significantly.
It's fascinating how disruptive that was to the electronics industry,
and I think you're right in that. Who knows all
the various ways that AI will be disruptive, but without
a doubt, it's a game changer and really fascinating to
(38:11):
hear your take on that and commercial real estate and
everything else. John Fish, hope we can have you back
again someday.
Speaker 2 (38:18):
Thank you very much to honor and prose to be here.
Speaker 1 (38:29):
What goes up. We'll be back next week. Until then,
you can find us on the Bloomberg Terminal website and app,
or wherever you get your podcast. We'd love it if
you took the time to rate and review the show
on Apple Podcasts. So more listeners can find us, and
you can find us on Twitter, follow me at break Anonymous.
Wildna Hirich is at Bildna Hirich. You can also follow
(38:49):
Bloomberg Podcasts at Podcasts. What Goes Up is produced by
Stacy Wang. Thanks for listening, See you next time.
Hello, and welcome to What Goes Up, a weekly markets podcast.
My name is Mike Reagan. I'm a senior editor at Bloomberg.
And my colleague Vildana Hirich, who typically co hosts with me,
is off this week, so it's just me and this
week on the show. Well, the stock market has obviously
been on fire this year, there's no doubt about that,
(00:34):
but there's trouble brewing in another market that is very
systemically important, commercial real estate. In fact, concern about this
market has reached the magazine cover phase. This week, New
York's magazine featured a picture of the Manhattan Skyline with
the headline Worthless, and it pointed out some of the
more high profile troubles among those famous skyscrapers. And a
(00:55):
few weeks ago, our own Business Week magazine featured a
headline that said commercial real estate is getting scary and
a picture of those creepy twin ghosts from the Shining
standing at the end of an office hallway. How scary
is it? Are we at Shining level scary yet in
commercial real estate? I don't know, but we're going to
get into it with a guest this week who knows
(01:16):
quite a bit about the commercial real estate sector. In fact,
he's one of those guests who if I were to
read you a list of everything he's involved in, well,
it would probably take up all the time we have
for the podcast, so I'm just going to stick with
the highlights. As I introduced him here. He is the
chairman and CEO of Suffolk, which is one of the
largest privately owned construction firms in the country. He's also
(01:37):
the chair of the Real Estate Roundtable trade group. Also,
he's the chair of Boston College as well as the
former chair of the Federal Reserve Bank of Boston. His
name is John Fish. John, Welcome to the show.
Speaker 2 (01:50):
Mike. It's a pleasure to be here. Thank you very much.
Speaker 1 (01:52):
That's a lot of chairs, John, I was saying, but
it's good to have you in our chair this week
to talk about this commercial real estate issue going on.
But I'll toll us a little bit about Suffolk for
those who aren't familiar with your business. You guys were
involved in what I consider to be one of the
coolest buildings in the US, which is in Hollywood, Florida,
the hard Rock Hotel, which is basically designed like a
(02:16):
giant guitar. I think that's one of my favorite buildings
ever built.
Speaker 2 (02:19):
Yeah, Mike, the job you're reported to is called the
Hollywood High Rocks, about one point eight billion dollar project
we built down there about four years ago for the
seminal drive down there, which are very apportionate. The company
started back in nineteen eighty two. I came from a
four generation family of business, my brother who was a
year old that took over the family business. My dad
lent me eighty thousand dollars to start Suffolk as a
non union business, and through a lot of great help
(02:42):
and a lot of support across the board, we've grown
the business nationally into about a five point six to
six billion dollar business. And I feel very humbled and
lucky to be able to say that to you and
to me as an organization. And how we've done that
is we've created an environment really based on people and
understanding how how important culture is to a go organization.
As we often say, culture eats strategy for lunch at
(03:05):
the end of the day. And we have it Suffolk.
What does it call it? Cult like culture? Now? What
Suffolk does. We're a general contracting business, but also we
have different tentacles we call verticals that is, we have
a technology company called Suffolk Technology. We just raised and
closed one hundred million dollars regulated fund last week, which
invest in prop tech, construction tech solutions. We've made about
(03:27):
thirty investments. There's a seed in Series A investments. We're
very proud of that. We also have a Suffolk Capital Arm.
We don't compete with our clients. We invest with our
clients in the GP stack of the development capital stack,
and that provides us with a sense of alignment of
interest in the construction, which typically doesn't happen, so therefore
people partner together much nicer. We also have a design
(03:49):
firm and it's really digital design. It's not the typical
design firm. We do design support, we design assist, and
we do design built. And the idea is how do
we leverage technology and artificial intelligence in the twenty first
century to create a more predictable, accurate design. And we're
not fully there yet. We're leveraging some very good solutions
(04:11):
in the country right now and globally that allowing ourselves
to provide that much more accurate and level of predictability
in the design process of the job. And then lastly,
we have a self perform arm that provides you know,
material deliveries, equipment and concrete and label the typic type
of self performed projects around the country. So overall, our
ultimate vision as a company is how do we integrate
(04:34):
the entire built world into a seamless platform by leveraging
data and technology. Now, Mike, why I say data is
because we're probably one of the few construction companies in
the country that have a clean data link. It's taken
us at probably about seven or eight years to accomplish that.
We have probably got twenty nine to thirty data analysts
(04:55):
in the company. Probably out five years ago. We started
using and leveraging data to provide a sense of predictability
and accuracy to what we're doing the role.
Speaker 1 (05:05):
It's funny, John, I thought this was going to be
the week where I get a break from talking about
AI in the markets, but uh, I guess not. It's
fascinating to me that AI is even finding some applications
in the construction industry, and I want to get into
that later. But first let's get into that commercial real
estate topic that I started this all off with, because
I think it is very much front and center for
(05:27):
a lot of investors. These days of exactly what's going
on in the cre market. You know, it's fascinating you.
You mentioned an eighty thousand loan from your father to
get this huge company going, so clearly you know a
little bit about how to handle the financing of this business.
But I want to start with the basic John, because
I think for a lot of people who aren't in
(05:48):
the weeds in this sector, they don't quite appreciate the
differences between residential and commercial real estate financing. You know,
most of us we look forward to that day where
we finally make the final payment on our thirty year
fixed rate mortgage and we pop the champagne and burn
the mortgage. It's a much different ballgame in commercial real estate.
(06:09):
So talk to us about that difference, how the financing
of these projects is different, and why this spectacular rise
in interest rates that we've experienced this year is so
dangerous to this sector.
Speaker 2 (06:22):
I really think you need to take a step back
and really unpack what has transpired over the last fifteen
to twenty years to get to that answer. And again
I think we all agree sort of hit up against
the black Swan event, That's what I would call at
the end of the day. And you couple that with
prior monetary policy back after two thousand and seven, and
fiscal policy basically living at the zero bound of interest
(06:43):
rates over a ten year period. To poll, I call
that people sort of drinking from the punch bowl generally speaking,
and continue on, and all of a sudden we have
the pandemic. The world basically stopped. And when the world stopped,
all of a sudden, the government injected almost two and
a half trillion dollars worth of money to stimulate the
comedy and coup with that, then they went forward to
build back better in the Chips Act, so a total
(07:05):
of six point five trillion dollars of stimulus. And so therefore,
all of a sudden, in a very very short period
of time, we had inflated amount of capital in the
system on a global basis, not just nationally here. And
as a result of that, what happened is interest rates.
I mean, the inflations started the spike, and I think
(07:25):
the Fed candidly, I think misjudged this concept of transitory
and non transitory, and they classified as a transittory. We
found out that it really wasn't transfittory. It was embedded
in the system, and I don't think the Fed responded
quick enough to the situation. Again, I'm not trying to
blame anybody, but I think nobody had a glass ball.
And once they did react back in November twenty second,
(07:47):
it was almost too late. Inflation had junk grewing to
nine percent. All of a sudden, you had the supply
chain issues going on, the material rates went up at
the end of the day, and the cost of construction,
first time in history, was greater than the value that
you were creating from the building itself. We've never seen
that before. So all of a sudden, over twelve month,
(08:07):
thirteen to fourteen month period of time, the Federal Reserve
slams on the brakes, has over five hundred and twenty
five basis points jumping rates, which really causes at the
end of the day, a complete shock to the system.
People that were buying capital were borrowing capital at that
point in time at three, four, five six percent. Now
(08:28):
all of a sudden, are in double digits. And when
you talk about these large structures, especially in New York
City and that article you're talking about, you get all
these buildings out there, amazing almost one hundred million square
feet a vacant office space is staggering at the end
of the day. And you say to yourself, well, right now,
we're in a situation where those buildings about forty five,
(08:48):
fifty five, sixty five percent occupied, and all of a sudden,
the cost of capitals is what those buildings is almost doubled.
So you've got a double Whimmen, You've got vacancy down,
so the value is down as less income coming in,
and the cost of capital has gone up exponentially at
the end of the day. So you've got a situation
where timing is really, really, really impacted the development industry substantially. Now,
(09:11):
when you take a look at that, the biggest problem
right now is because of that, the capital markets nationally
are frozen. And the reason why they're frozen is because
nobody understands value. We can't evaluate price discovery because very
few assets have traded during this period of time, nobody
(09:32):
understands where bottom is. Therefore, until we achieve some sense
of price discovery, if people understand value, will never work
ourselves through that. Now, what I would say to you
is late at the end of the tunnel came just
a little bit. Was back in June twenty ninth when
the occ the FDIC and the federal government provided policy
(09:54):
guidance to the industry as a whole. And that policy
guidance I think is very very important for a couple reasons. One,
it shows the government with a sense of leadership on
this issue because it's this issue that people don't want
to touch, because it really can be cosynogenetic at the
end of the day. It also provides a sense of
direction and support for the lending community and the borrowers
(10:17):
as well. And by doing such what happens now is
the clarity. Basically what they're saying, it's similar to trouble
debt restruction program. They're saying, listen, any asset out there, Well,
you've got a qualified borrower and you've got a quality asset.
We will allow you to work with that borrower to
(10:38):
ensure you can create the gre create the value that
was once in that asset itself. It will give you
eighteen to thirty six month extension basically pretend to extend.
Whereas what happened in two thousand and nine that was
more of a long term forward guidance proposal and it
really impacted the cities at the end of the stategically
(10:59):
important finn institutions. This policy direction is really geared towards
the regional banking system. And like why I say that
because right now the Ciffies do not have what the
Jesus the call today don't have a real big book
of real estate debt on their books, probably less than
eight or seven percent, whereas the regional banks across the
(11:21):
country right now, thousands of them have over probably thirty
to thirty five and some even up to forty percent
of their book in real estate. So that forward guidance
gave at least the good assets and the good bars
and opportunity to go through a workout at the end
of the day.
Speaker 1 (11:35):
You know, it's funny, John, I was going to respond
to your answer by saying, is this extended and pretend?
Speaker 2 (11:40):
You know?
Speaker 1 (11:40):
It's that seems to me almost like a derogatory thing
phrase that people use for this type of guidance from
the FED or this type of approach to solving this problem.
But is is that the wrong way to think about it?
Is extend and pretend? Actually the way to get us
out of this mess at least, you know, stop stop
the bleeding this some degree.
Speaker 2 (11:58):
Let me say this to you. I think some many
well known financial guru stated that this was not material
to the overall economy, okay, and I'm not sure that's
the case. I don't want to challenge that individual. I
don't use a name. But when I think about the
impact that this has in the regional banking system, basically Suburbia, USA,
(12:19):
we had Silicon Valley Bank go down, we had Signature
Bank go on, we Serve Republic go down. If we
have a systemic problem in the regional banking system, the
unintended consequences of that could be catatonic. In addition to that,
what will happen is when real estate values go down.
Seventy percent of all revenue in cities in America today
(12:41):
come from real estate. So all of a sudden you
start lowering and putting these buildings in the foreclosure. The
financial spicket stops right all of a sudden, the tax
rivers go down, and people think, okay, that's okay. Well
what happens is you talk about firemen, policemen, teachers in
main street USA. At the end of the day, we've
(13:01):
never gone through something as tumultuous as this. Right now,
I think back into I think nineteen late sixties, and
we have to be very, very cautious that we don't
tip over the building that we think is really stable.
Speaker 1 (13:14):
At the end of the day, as you point out,
it's really those regional banks that probably are the biggest players,
at least from you know, public equity banks that we track,
some of the biggest players in commercial real estate. But
even today and today's Wednesday, July nineteenth, Goldman Socks came
(13:39):
out with its earnings. And you don't think of Goldman
as being a huge property lender, but of course they
had they do have some commercial real estate on their books,
and they blamed real estate for about a billion dollar
hits or earnings. And I know a lot of the
other big banks are increasing loan loss provisions for real estate. Oddly,
Goldman's stock rallied on the day. You know, the equity
(14:00):
market is in this risk on mode. This seems like
it's a problem that's going to linger with us for
years and sort of be a very slow to unfold.
Do you think the equity markets, you know, if you
had to put your spuddy senses on, are they sort
of whistling past the graveyard on this issue?
Speaker 2 (14:16):
Do you think it's one of the questions of the day.
To be very very candid with you. First off, I
would say about Goldman's earnings today when they go down,
I think fifty six percent from last quarter, and I
think you can sort of put that in a category
of Goldman is more of a transactional institution versus b
JP Morgan, whereas really a lending institution, so interest income,
(14:37):
mortgages and so forth and so on. But Goldman, I
think is really interesting thing because one maybe billion dollars
in real estate, but also what it's saying out there,
there is instability in the financial markets. Overall transactions, IPOs,
various other types of issues that go on really are
frozen right now. And that's not good for main street America,
(15:00):
the community at all. And what we need to figure
out is, I'm going to come back to this issue
of a level of stability, a level of pictability. I
think you hit a fifty two week high. I think
this weeks my knowledge, and you back and set yourself.
You've got someone almost like a point in time. We
take a look at version of of the two and
ten right, which is sort of an indie indicator. Somewhere
(15:22):
you've got consumer spending right now still relatively strong, but
I would caution people right now, we had two and
a half trillion dollars of consumer spending probably back two
and a half years ago when we were all this
money was given us by the federal goverment. We're down
to five hundred billion right now, so I think that's
done to wind down a little bit more. We've got
inflation that's gone from nine percent down to three. But
I think let's not talk about inflation. Let's talk about
(15:44):
core because cores at four point eight, we're still stubborn
on the energy side of things, on the housing side
of things. Then I'd say, take a look the labor markets, Candlely, Mike,
we are at zero one employment in construction okay, we
on at three point four to three point six. Where
at zero okay? How set in an economy that basically
is notting to freeze itself up. And lastly, I think
(16:04):
from a foreign policy point of view, we don't know
where the Ukrainian thing is going, not even to mention
the China situation in Taiwan. And I think overall, when
you put all those pieces of the puzzle together, it's
really the equation we've used the form of views in
the past of two percent inflation. I don't think that's
as applicable today as it was in the past. Larry
(16:27):
Summers was asked a question on your show of Bloomberg
with David weston what he thought about two percent inflation?
Is that really something that's mandated by the Fed? Yes,
it is the mandated they served in the FED, So
I understand that, but really I'm not sure that's really
what we need to be shooting for. And to me,
what we need to be shooting for is probably something
more than the three three and a quarter range. And
(16:48):
why I say that is because I think that one
of the underbellies of what's going on right now is
inflation was at a long period of time zero bounce
because there was a lot of phasis on globalization, and
all of a sudden, material costs and labor costs that
we were offshoring was substantially lower than what's we're doing
(17:11):
when were on shore those type of things. Now, all
of a sudden, the Trump administration, we start to nationalize things,
and i'd say week in our relationship with places like China,
the cost of labor on shore and the cost of
material on sure is moving up, So all of a
sudden you're in a situation where it shouldn't be a
(17:31):
real surprise as we nationalize and on shore and reindustrialize
our country and the less reliant of the European Union
and China and India, Okay, that we're having this sort
of sticky inflation at the end of the day. So
I think, what's going to happen. We're going to go
through a cycle over the next twelve to twenty four months.
We're really going to understand for the first time in
(17:52):
the twenty first century how important globalization is to the
overall impact of our US economy. I think it's extremely important.
I think we need to reindustrialize America and on shore things.
America is the best country in the world by far,
but at the end of the day, in the global economy,
we need to be able to compete, and I think
this issue of globalization is a very very important equation
(18:13):
or element for us to compete. Right.
Speaker 1 (18:15):
As you alluded to briefly, interest rates are obviously the
major pressure point on commercial real estate right now, but
not the only one. You know, we went through this
pandemic the entire world went to work at home for months,
if not years, or at least the entire office workforce
went home. I know a lot of big companies are
(18:37):
very actively trying to get everyone back into the office
on a more regular basis. Big city mayors politicians are
very actively in that camp too. But to some degree,
I feel like the horses out of the barn and
the world has learned that a lot of these jobs
can be done effectively, productively at home, and I can't
(18:59):
help but wonder if that is just a game changer
for commercial real estate going forward. The idea of ever
getting back to the values of these office buildings before
the pandemic seems like such a long shot to me.
I mean, is that you know, when you think of
it in the sober light of days, is that the
right way to think about this or not?
Speaker 2 (19:20):
Mike. I think Jim Collins talks about not all points
in time are equal in his books, and to me,
we're at a point in time where really it's a
new era. I think we've got a generational issue. I
think this is going to be around for you at
least a half or if not more, of a decade
because of the individuals that grow up during this time period.
But at the end of the day, I think what
we need is a recalibration. And I don't think it's
(19:43):
weird it is today. I think there's somewhere in the
middle between where it is today and where it was before,
and I think we as a capitalist society will get there.
It might take two or three or four years to
get there, but I would say this, I really believe
strongly for the sake of Main Street USA. We all
have recent wantsibility. The downtowns of America San Francisco, Seattle,
(20:04):
even Boston right now in New York City are hurting.
We have a responsibility both economically and socially to come
back to work at some point in time. And if
we don't come back to work, we need to allow
the competitive forces to dictate next steps. Meaning if people
are working from home, that means we can offshore things
to India and China at half that cost. And I
(20:25):
think eventually, what's going to happen as part of that equilibrium.
That's exactly what's going to happen. Okay, in the sake
of downtown's the peacher shops, coffee shops, the school teachers. Okay,
we need to think about the unintended consequences of this
strategy moting for work, John, I'm.
Speaker 1 (20:41):
Wondering from the perspective of the head of a construction company.
You know, a lot of times when this issue of
office vacancy comes up, a lot of people, granted, people
not intimately familiar with this industry, you think, well, you know,
some of these cities still have a strong demand for
residential buildings. Can't we just convert these office buildings into residential?
(21:05):
And I know you know enough spend said about the
difficulties involved in that. You know, big office building, it
doesn't have the plumbing, the electric, enough windows to convert
everything into apartments. But I wonder is it feasible to
think about going forward that when you build a building,
is it possible to do it in a way where
(21:25):
it's flexible to go residential if that's the in demand market,
convert back to office. I mean, is that too far
fetched to think think about when you're building a building,
too impractical or too like?
Speaker 2 (21:39):
I think you hit the spot on. I think absolutely
if you're doing what is a clear, spare building with
a concrete plat, late construction will get too technical and
your free columns columns. Look at in certain areas, you
know what your core is. If you design that initially, again,
you can't be as efficient both in the commercial side
and the residential side as you want to be. They
(22:01):
would be compromises across the board. I don't think we're
going to get to that. I think about thirty percent
of twenty five percent of billions out there have the
ability to be converted. I think when you really talk
about residential, it's a whole different sort of kettle offish
what I mean by that residential shortfall. We have right
now about six million units of housing that we need
(22:22):
to create in America. We're only creating about a million
to a million a half a year. That four million.
We need to come together as business and government and
develop thoughtful policy to incentivize people to want to build,
both from transit type of environment to a nimbiism not
in my backyard. We need to forestall all those particular
(22:44):
things and allow the real estate construction be able to
produce what they're capable of producing in an expedited way.
In today, the prices of homes the boss I read
in the Boston Globe this morning, nine hundred thousand dollars
was the average price of a home in round the
Boston community. How do you expect a family raising two
or three children, even both parents working bill a ford
(23:07):
and nine hundred thousand dollars mortgage. So I think what
we need to do is we need to have very
thoughtful incentivized programs to allow more building ubiquitously throughout the
United States of America.
Speaker 1 (23:20):
And I assume that labor issue that you mentioned is
a big part of sort of what's going on in
the construction market these days. You know, I mean, look,
the labor market's tight everywhere, but wow, you said it's
they're near close to zero percent on employment in construction.
What do you suppose is driving that? Is it immigration
(23:41):
lack of immigration? Is it better opportunities elsewhere? All the above?
Why is labor so tight in the construction market right now?
Speaker 2 (23:49):
It is somewhat complicated, But let's try to unpack it
a little bit. When I think about this is if
we take a look back two thousand eight, construction employment
was at seven point seven million. It wasn't until twenty
eleven construction got down to about five point four and
that was a two point four roughly million decrease, so
there's a lag in construction when the economy stats turning
(24:12):
itself or slowing itself down at the end of the day. Second,
I think, what's a big problem right now is when
I think about this, you know, as I unpacked this
interest rates. Right now, people cannot move out of their
homes when they're locked into a thirty rate fixed at
three and a half to four percent, and you're going
to buy into a six or seven percent lorgust. So
therefore people aren't moving out. But then again, we need
to generate no housing, so there's a really you know,
(24:34):
sort of inequilibrium there. Then you take a look at
the demand for housing, which I spoke about the Amouney units. Next,
you talk about the fiscal policy right now, Not only
do you two and a half trillion dollars of cash
right we get built back better the chips build all
of a sudden, we get six point five trillion dollars
pumped in the economy, which is creating a lot of
demand at the end of the day. And lastly, I
would say most importantly, I would say that so the
(24:56):
icing on the cake of this discussion is immigration. We
right now are bringing in as few immigrants in the
United States and notcerent citizenship. I think probably in the
last twenty five to thirty years at a point in
time needs to be the opposite. But to me, this
issue has become politicized. We need to recognize the only
(25:16):
way we can grow our economy is grow our ability
to consume seventy percent of GDP's consumption. If we don't
grow our economy, we don't grow our population. We grow
ability to consume. We're not going to work ourselves out
of this. Secondly, workforce participation as low as sixty two
percent today, the lowest right now on record. Okay, people
don't want to work, COVID post retirees at fifty five
(25:38):
years old. And lastly, people don't want to get involved
in a hardcore construction business. It's changed, and what we
rely on is a lot of first generation members give
into our business. We recruit as a company right now
out of community college's both tech schools. We don't need
a college degree. All we want is a heart and
a desire to want to work. We'll train them ourselves,
(25:58):
and I think that is is one of the reasons
or solutions to this unemployment crisis at the end of
the day. But to me, what we need to do
is we need to let the COVID in the pandemic
go through a digestive system. So we come out to
that new Norman about I think twelve to eighteen months,
and we'll understand how to solve this issue with a
(26:19):
much more degree of accuracy at that point in time.
Speaker 1 (26:36):
John, if I could ask you to sort of think
back to your days at the Boston FED and put
that central banker hat on again for us. One of
the interesting disconnects between the markets and what Chair pal
and other members of the FED have been saying this
year is the notion of when the FED will actually
pivot and start cutting rates. If you look at the
(26:57):
short term interest rate markets FED fund futures all year,
they've been convinced that a pivot to lower rates is
on the horizon. You know, earlier in this year, they're
pricing cuts by the end of this year. Now that
hasn't happened, they're pricing cuts pretty aggressive cuts for next year.
Is the market right about that? And is it this
(27:17):
commercial real estate issue that possibly could prove them to
be right if it causes enough ripple effects in the economy.
Speaker 2 (27:24):
Mike, let me go back to two thousand and eight
and nine when I was at the FED and then
I became the cheer of the FED. I was amazed
at once we're going through the tumult. Back then, the
way that the researchers at the FED were understanding what
was going on. They were using a lot of historical
(27:44):
formulas to try to understand what was currently going on
this great financial crisis, and not a lot of it
added up to the end of the day. And so
I think some of the ways they look at things
might be a little bit outdated. And who am I
to because I'm not an economist. I respect Janet Yell
and I respect J. Powell. But today, right now, with
(28:06):
this high interest rate environment, I think what a lot
of people are clamoring for. We need to give it time.
All of a sudden, we've reduced inflation in less than
twelve months from nine to three, from core from almost
ten to four point eight. That is monumental. We need
(28:27):
to give the prescription that the FED has given the
patient time to get through the system. I believe the
twenty fifth, twenty six we're going to see a twenty
five basis point jump I'm hoping that through August they
take a little siesta, we can back in September and
all of a sudden, the data is pointing out that
(28:49):
the prescription they've given the patient is working, and let's
take the foot off the gas, and then I think
if we stabilize, as you know, historically, anytime the FED
to high time before they raise interest rates and stop
raising interest rates is at the lowest end nine months
up to the highest end I think thirteen to fourteen months.
So I'm hoping we hit that nine month trigger sometime
(29:11):
this fall, and then nine months from now it was
seven months now, we start seeing a reduction in those rates,
and that would be my prediction. So I'm sitting back
saying to myself late spring of next year, we're going
to start seeing some adjustments to the overall federal funds rates,
which I think once people know, though, in my opinion,
that the FED is no longer going to get you
(29:31):
raising the rates, I think that's going to be a
harborde for the economy to start turning itself and give
much more stability to the capital markets and allow us
to achieve the sense of price stability that we really
need to move the real estate industry forward.
Speaker 1 (29:44):
Will it require some significant pain between now and then
for that to happen?
Speaker 2 (29:49):
Mike, I am concerned. Scott Reckler, a very good friend
of mine from Eric, talks about he sees this slow
running train going forward. I would see the momentum of
the train in the last three or four five months
is picked up quite substantially. And I just am concerned
for the unintended consequences of what comes out of this mess.
And I think it's all avoidable in many respects. No
(30:11):
taxpayer bailout at the end of the day. It's a
lot of people working with each other understand the implications
in the material nature of real estate having on our
overall national economy.
Speaker 1 (30:21):
Right, John, Like we mentioned at the beginning, I was
surprised to find out that you're paying very close attention
and perhaps even utilizing artificial intelligence. You know, I think
of construction as sort of this industry that's not, you know,
prone to technological disruption like many other industries. But I
guess I'm wrong about that. Talk to us about the
(30:43):
idea of AI in construction. Where it's headed, you know,
are you using it now? How could it help you
run your business potentially.
Speaker 2 (30:52):
Let me sure a brief story. Last week, I was
up in New Hampshire at Manchester Hampshire with a guy
by the name of Dean Kayman a company.
Speaker 1 (30:59):
Called Deck this segue inventor right exactly, and he.
Speaker 2 (31:03):
Owns a company called Army. And what he's doing using
artificial intelligence to manufacture of organs.
Speaker 1 (31:10):
Wow.
Speaker 2 (31:10):
And I was completely mic blown away. So that's the extreme,
and I applaud him for what he's doing, and I
was just overly overly impressed, and I just want to
wish him the best of luck. On the construction side,
I think AI can be the single most impactful solution
that's ever had on our industry. Let me tell you
(31:32):
why productivity and construction in the last fifty years has
actually gone down. It's the only category of an hunting
and fishing okay that productivity has lowered. True story, Okay.
And therefore, when you think about technology solutions in a
blue collar environment. The biggest challenge in construction real estate,
(31:52):
I put it in two things. One the design of
the building and the schedule of the building. If we're
able to leverage official intelligence through generative design okay, like
Elon Musk does like Boeing does. Okay, there's no doubt
if we improve the accuracy of those design documents, we
(32:13):
will move mountains. As ways to costs and predictability. Just
think about the Empire State building. It took fourteen months
to building in the thirties. It takes five years to
Buili Bilding today. Now look at the schedule side of things.
We have a very difficult time measuring productivity if we
leverage AI. There's a solution out they call open Space,
which is one of the company that we invested in.
(32:33):
It adds to contract labor productivity and labor production on
a job site. We never had that type of artificial
tool before in our toolbox. Now we do that. So
I think over the next eighteen months to thirty six months,
we're going to see more creative and interesting solutions that
impact productivity and lower costs in our business that we've
(32:54):
seen in the last thirty forty years.
Speaker 1 (32:57):
Fascinating stuff. You know, the mind reels when you think
of all the potential applications of AI and how disruptive
it can be throughout the economy. I never would have
thought of it in the construction industry. It makes total
sense now that you laid out for me. I appreciate that,
John Fish. He is chairman and CEO of the construction
company Suffolk. He is also chair of the Real Estate Roundtable.
(33:21):
Really a privilege to hear your thoughts. John. I can't
let you go quite just yet. Though. We do have
a tradition on this show where we're going to make
you tell us the craziest thing you've seen in markets
this week. I hope you're prepared.
Speaker 2 (33:32):
What I always says, I'm gonna go back to that.
You know, Dean came an issue, okay, and that maybe
not in markets, but what it gives to me, it
brethes new life into what's possible.
Speaker 1 (33:43):
Yeah.
Speaker 2 (33:44):
And as we often look at the glass half full, okay,
I mean half empty, I look at a half full
and I see the potential of something like artificial intelligence
on our construction category. On other categories, you know, whether
it be educational situation, you know, boss, in college admissions.
I'm a severe dyslexic, so all of a sudden, using
series series my best friend to be honest with you,
(34:06):
and then I take a look at what's going on
in the hospital system of bringing on this hospital, you know,
radiology your DNA sequencing. People don't know one or four
colonospits are bad. And so if we're able to improve
the radiology and the accuracy of that type of studies,
I mean, it's going to change the world. So to me,
how do we take a look at it with the
(34:27):
proper guardrails Artificial intelligence which is a conversation of the
day in a way that a better is man and
doesn't destroy man. And I would like to see us all,
especially the business community, not look the government to take
the lead in this, but carry on the conversation with
a sense of entrepreneurialism and knowing that this can give
(34:49):
our country a competitive vantage. One last thing I want
to point out to you is that when you take
a look at artificial intelligence, over the last three or
four years, this past year, the United States America has
invested over fifty billion dollars artificial intelligence. The Chinese invested fourteen,
okay UK has invested four, and Israel invested three. So
(35:12):
we have a substantial jump on this conversation. And I
sit back and say to myself, how do we come
together as a country, government and business to leverage the
hell out of this tool that's in our box today
that could change the world the way we live.
Speaker 1 (35:28):
That's great to hear the thoughts of a glass half full. Guy.
I think many of us when we hear about this
new disruptive technology, we go half empty immediately. But it's
nice to hear the glass half full angle on it, John,
I appreciate that. I'll give you my craziest thing, John,
I like the alternative asset classes. The more alternative the better.
And one of the funniest things. I think it's not funny.
(35:49):
I guess it makes sense, is old Apple products, first
generation Apple products. When they come up for auction, they
can sell for some surprising prices. And the latest example
is an original iPhone. So the first iPhone that came
out in I think it was two thousand and seven,
courtesy have a story in Fortune. Its dubbed the Holy
(36:10):
Grail iPhone to collectors because they did a four gigabyte
model and an eight gigabyte model, but no one bought
the four gigabyte, so it was discontinued very quickly. There's
very few specimens of it available, especially still unused in
the box, never activated like this, So to the type
of people that are interested in this stuff, God bless them,
(36:32):
but this is what they're after. So I regret to
inform you John good news and bad news. Bad news
is you're a contestant on a game show. Here we
like to call the prices precise. The good news is
Baldonna's off, so you're the only contestant. You're gonna win
no matter what. But what do you think this iPhone
Holy Grail original iPhone four gigabyte in the box, unactivated,
(36:54):
sold for at auction by LCG Auctions. Mindy, this was
a few hundred bucks. I think when it first came
out it was under a thousand.
Speaker 2 (37:02):
I think I would ask me maybe twenty five thousand dollars.
Speaker 1 (37:05):
Twenty five thousand, that's that's a good guess. I one
hundred and ninety thousand for an iPhone, So I think
they said three hundred times the original price.
Speaker 2 (37:16):
Mike, I would say you, this is I think the
iPhone introduction, the iPhone was revolutionary. People can look at
that and that was a point in time when the
world started to change. Yeah, I think right at that
same point in time today with AI, all of a sudden,
people look back ten years, twenty years when I when
did this? You know, November twenty two when Open Ai
came up with this conversation, all of a sudden, it's
(37:36):
been the headlines every single day. So I think we're
very similar points in time as it relates to evolution,
and I think it's an exciting point in time to
be honest with and I feel that this could really
really help America in a very very positive way.
Speaker 1 (37:50):
Yeah, you're absolutely right that the launch of that product
really change. It changed all our lives, you know, significantly.
It's fascinating how disruptive that was to the electronics industry,
and I think you're right in that. Who knows all
the various ways that AI will be disruptive, but without
a doubt, it's a game changer and really fascinating to
(38:11):
hear your take on that and commercial real estate and
everything else. John Fish, hope we can have you back
again someday.
Speaker 2 (38:18):
Thank you very much to honor and prose to be here.
Speaker 1 (38:29):
What goes up. We'll be back next week. Until then,
you can find us on the Bloomberg Terminal website and app,
or wherever you get your podcast. We'd love it if
you took the time to rate and review the show
on Apple Podcasts. So more listeners can find us, and
you can find us on Twitter, follow me at break Anonymous.
Wildna Hirich is at Bildna Hirich. You can also follow
(38:49):
Bloomberg Podcasts at Podcasts. What Goes Up is produced by
Stacy Wang. Thanks for listening, See you next time.
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