Episode Transcript
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Beth Mace (00:03):
Hello, and welcome
to the NIC Chats Market
Conditions podcast series. Myname is Beth Mace , and I
currently serve as a SeniorAdvisor at NIC, focusing on the
economy and capital markettrends and implications. Thank
you so much for joining ustoday. The focus of this series
of the NIC Chats podcast istalking to experts and industry
leaders impacted by today'sproperty and capital market
(00:26):
condition and trends as itpertains to the senior
housing's transaction market,property, pricing, deal flow,
and market sentiment. As youlisten today, I hope that
you'll find some insights andideas that are relevant to you
and your business, be it as anoperator, developer, banker,
private equity provider, publicentity, or other capital
(00:47):
provider. Today's podcast willbe a free flowing conversation
with my guest , Jim Costello.
Jim is the chief economist forthe MSCI Real Assets team. Jim
and I have known each other formany years, tracing back to his
days as an economist and seniorstrategist at CBRE when I was a
director of research at AEWCapital Management, both
(01:09):
located in Boston. So, helloJim, and thank you for joining
me today in our inaugural NICChat's podcast series focused
on Capital Markets.
Jim Costello (01:17):
Thanks for having
me and it shows the Boston
Network continues to spread.
Beth Mace (01:23):
Yes, indeed. So,
Jim, tell us a little bit about
your role in the position forMSCI and from my perspective,
you have a really unique windowinto the capital markets and
transactions markets, and whatmakes this the case?
Jim Costello (01:37):
Sure. MSCI is a
global index provider helping
capital sources worldwideunderstand performance across a
wide range of asset classes,public assets and private
assets increasingly, theyacquired a company IPD in 2012
that helped them get into thereal estate market. It's now
(01:59):
real assets because we havesome indexes on the performance
of infrastructure as well. Butthen in 2021, they bought the
company I was with Real CapitalAnalytics, people might be more
familiar with Real CapitalAnalytics because we had
performance measures on sales,pricing of assets, and we're
(02:21):
trying to bring all thattogether to help people
understand the risks andinvestment opportunities that
are out there and just all theinformation around the
performance of these differentasset classes. It's been fun
being here because all theother asset classes, there's
wicked smart people as folks upin Boston might say. And it's
(02:41):
just been interesting to talkwith people in other asset
classes about how they'rethinking about the world and
the tools they use. And despiteeverything we try and do to
make real estate moretransparent and make, you know,
the real estate informationbetter , the other asset
classes just have wheneverything is priced daily and
(03:03):
by the minute , it's mindboggling , the type of things
they can do.
Beth Mace (03:08):
Absolutely. And then
if you go into the sort of the
smaller asset type of seniorhousing that's even more , less
transparent in the sense of thedata that's out there, getting
more and more transparentthrough efforts of our sister
company NIC MAP Vision, andthrough all the work that we've
done in the past with RCA andMSCI in terms of trying to get
information out there. So we'regonna focus on senior housing,
(03:29):
but initially, I want to give abroader perspective to our
audience on, it's really what'sgoing on in the capital
markets. So, you know, as we'vetalked about a lot has happened
in the capital markets sincethe Federal Reserve really
began raising interest rates inMarch of 2022. Today the Fed
Funds rate is in a range offive and a quarter to five and
a half up virtually from zero,17 months ago. As the Fed has
(03:52):
hiked interest rates 11 times,an unprecedented 11 times, and
the Fed really acted quickly totry to raise interest rates to
slow overall economic growth totry to take the steam out of
inflation. And there's a lot ofdebate about what caused
inflation. We won't get intothat, but certainly we've seen
a lot of progress and inflationnow is, you know, about , what,
3%, 3.2% , I think in thatrange of CPI and the most
(04:16):
recent data down from 9% abouta year ago. So we've made great
headway on that. But as aresult of that severe increase
in interest rates, there's beena lot of disruption in the
capital markets. So can youfocus and comment a little bit
on what you think is going onin the broader economy fed
policy, recent actions, andthen how that's translated into
capital market turmoil?
Jim Costello (04:36):
Sure. But instead
of talking about the Fed
relative to last year, I'mgonna take it back a little bit
further. When I've been out andabout giving talks and helping
people understand my view ofthe world. I've been, I'm not a
prop comic, but I've been usinga prop a bit recently. I've
been going into talks, I don'thave one today. I've been going
in with a rubber band . Andreally, that's what we're
(05:01):
dealing with. If you go back to2020 and, you know, the initial
shock of the lockdowns, thinkof it like you got the rubber
band, you're stretching it out,you pull it back and let go,
and it just reverberates backand forth. That's what's been
happening with every economicdata series, every price
measure, every investmentmarket you've had this zigging
(05:24):
and zagging back and forth asconditions react to the initial
shock and some follow-up shockthat was caused by it. And so,
for instance, in the commercialproperty deal market we are
tomorrow morning , Wednesdaythe 23rd, I'm not sure when
this is gonna come out, but onWednesday the 23rd, we're
(05:47):
publishing our July figures fordeal volume, and it looks like
commercial property will bedown 70% from a year earlier.
Beth Mace (05:57):
Well , 78 or 70?
Jim Costello (06:00):
And you were , I
mean, you said it yourself just
now. Wow, that's a, that's abig percent change, but it's a
big percent change on a basethat was elevated the year
before. So it's kind of , youknow, in this weird transition
period of the zigging andzagging a nd are you in the, in
(06:20):
the right place? And I thinkthat's the thing that people
are getting caught up on.
They'll hear something like the 70% decline a nd thinking,
oh, it's the end of the world.
It's another financial crisis,but it's this up and down in
response to that initial shock.
And at some point it shouldsettle out to something that's
more normal.
Beth Mace (06:42):
How would that
compare with like 2019? So
pre-covid the volumetransaction volumes of, you
know, year to date or even allof , you know .
Jim Costello (06:50):
Oh , yeah. And
that's, that's the kind of
analysis that I've been doing.
I've been talking to folks -don't focus on whether, you
know, you're on the zig oryou're on the zag. You gotta
focus on sort of pre pandemictrends. And there too, it is
down , you know, we are down onaverage, you know, that five
years before, you know thatthose happy days from 2015 to
(07:14):
2019 when deal volume was at ahealthy level, but not
excessively high that generallyspeaking, were lower than those
than those periods. Not as lowas the current market relatives
to last year though . But itvaries by property sector. Some
(07:34):
sectors are doing worse thanothers, and it's all about
uncertainty. The office sector,particularly the [C...] office
sector, that's doing the worst,that's the furthest down from
that period. You also had alittle bit of an excess in that
2015 to 2019 period for theoffices with Chinese money
coming in and trying to buy atmore of a capital preservation
(07:59):
kind of motivation as opposedto an IRR driven motivation. So
you had a little bit of excesspricing at the time. But even
stripping that out the officesector is lower than it had
been in that previous period.
Other sectors are still alittle bit good. The industrial
sector, it is at a higher levelthan where it was in the 2015
(08:21):
to 2019 period. Apartmentspretty close to that. So that
is a transition. But generallyspeaking, things that are
driven by the demographicdriven strategies , and
investment classes that have ademographic driven argument,
and the strategies arounddemography, you know ,
investors have been focusing alittle bit more on those simply
(08:44):
because they're morepredictable in this
environment.
Beth Mace (08:48):
Does that include
senior housing?
Jim Costello (08:50):
It includes
senior housing. It's, I mean,
it's down like every othersector.
Beth Mace (08:55):
We're talking
transaction volumes.
Jim Costello (08:57):
Transaction
volume and pricing. You
increase the Fed funds rate andsee the 10 year treasury going
above 4%. It doesn't matter ifyou have some good income
trends, you're gonna have a badday just on the capital side,
you know, that you can't getaway from that. But that's,
that's not necessarily the endof the world to have, you know,
(09:20):
a little bit of loss on value ,so long as you have some income
still moving ahead. And that'swhat some of these sectors
have. That's the challenge thatpeople have with things like
office, things like retail,things with some old hotels.
They're just not sure. It's theuncertainty around what's the
(09:40):
CapEx gonna look like movingforward versus the tenant
demand versus my ability tofinance. It gets complicated.
And in the face of complicationand uncertainty, buyers are
gonna step back. Nobody wantsto take that risk. And it
really, the reputational riskof being that person that , you
(10:01):
know , everyone talks about ata conference in five years and
says, Hey, remember Frank andwho did that last deal at the
top of the market? Where'sFrank now? Nobody wants to be
Frank.
Beth Mace (10:11):
So there's still
pretty big spread bid ask
spreads. Right. Which raiseuncertainty. And also , lack of
transparency between what abuyer is willing to pay and
what a seller is willing tosell at.
Jim Costello (10:23):
Exactly. But less
so of a bid ask spread for say,
the industrial sector.
Beth Mace (10:30):
Okay . So when will
this settle out? What's gonna
happen to cause this to finallyturn? So there's lots of talks
about maybe one, I mean , thefed's meeting this week in
Jackson Hole , we expect aspeech from Jerome Powell on
Friday. Any speculation aboutwhether there's gonna be one
more increase? Lately theconversation shifted from, you
(10:52):
know, the number of increasesto how long will it stay high?
How long will interest ratesstay high? Will they go back to
the levels that they once were,you know, is zero interest rate
policy ? Is that likely tooccur again ? And what has to
trigger that shift in themarkets? Is it just interest
rate or what else?
Jim Costello (11:09):
Yeah, honestly,
I'm not focused on what is or
is not gonna be said at thatconference to drive that come
to Jesus moment for pricing,really, it's gonna be, it will
be the distress situation. Youhave current owners who are not
(11:31):
realizing losses that they haveprobably seen on paper and
nobody's forcing them to. Andthat's when you are going to
see that, you know, reallytranslate through to people
being willing to give up theghost when they're forced to.
When they literally have thatreckoning m oment with their
lender who says, you know, yourlo an's c oming due, if we do
(11:57):
an appraisal on this, it's 20%below wh ere we gotta figure
something out here. And I thinkthat that has been
delayed...the low interest rateenvironment allowed some people
to kind of, you kn ow, extend th eir loans out to low rates
and kind of keep things going.
But we have about $1.5 trillionmaturing between 2023 and 2025
(12:21):
of c ommercial property loansthat we're tracking. And that's
as all that comes due you'regonna have some very
uncomfortable conversationsbetween bo rrowers a n d l
enders. An d I t hink th at i sg o nna d rive that activity.
Beth Mace (12:37):
Haven't the
regulators been a little
mindful of that? And I thinkthey've given some new guidance
to some of the lendinginstitutions in terms of when
they have to really be tough onsome of the borrowers.
Jim Costello (12:47):
They have. And
you know, the regulators,
that'll be an important thingfor the banks that are doing
lending. But the banks aren'tall of the commercial lending
world. And in fact, they're noteven the riskiest loans, the
riskiest loans were the loansthat were done by the debt
funds. They were the folks thatwere doing the highest LTV
(13:08):
loans, fewest covenants,shortest terms and that stuff.
There's no regulator tellingthem what they can and can't do
at that level. It's all aboutcapital preservation and trying
to get the most out of thatinvestment that they made on
the debt side. And so at thatpoint it's like working with an
(13:29):
old line hard money lender. I'mnot sure that...
Beth Mace (13:34):
They're gonna be so
forgiving.
Jim Costello (13:36):
Yeah. I mean,
they have their own investors
to look out for.
Beth Mace (13:40):
Okay. So with regard
to senior housing, a lot of the
debt financing for seniorhousing comes to the regional
banks, and it comes from theGSEs, Fannie and Freddie, less
so CMBS. So it's not the samesources of debt financing as
some others . So do you haveany insights or observations
about what you've seen insenior housing?
Jim Costello (13:59):
Yeah. You know,
if you think about it, because
the GSEs are involved , f orapartment, for senior housing,
there's a little bit of acushion that doesn't exist for
other property types. When welook at the distress that is
out there so far, e ither announced problems a t
(14:20):
properties, you know, rollingup to the portfolios that the
GSEs, manage or just things ofpotential distress things,
noting like delinquencies, short-term delinquencies, stuff
like that. It's still a smallportion of the market,
(14:41):
outstanding potential distress.
We reckon the senior housingsector is something like 3% of
the total market currentoutstanding distress, we think
i s about one p oint h alfpercent of the market. So it's
not a big portion of the marketso far.
Beth Mace (15:03):
Right. But about how
much would that be? So , if you
look at seeing housing relativeto, you know, the broader
commercial real estate industryin general, you'd say it's a ,
you know, 1%, 3%, somethinglike that. But what's the
dollar value of that? Do youhave an idea? So I'm trying to
just give it for our listenersa context because the listeners
are gonna be all senior housingfocused , or generally, or is
(15:23):
that that a big number or alittle number?
Jim Costello (15:26):
Well, the
transaction market, let's start
that way. For 2023, so farwe're tracking sales of around
$5.6 billion for the seniorhousing and care sectors.
Versus a total market for 2023across all property types of
around $205 million. So seniorhousing is around
Beth Mace (15:48):
Billion, right.
Billion.
Jim Costello (15:49):
Billion, right.
Sorry. So senior housing isaround 3% of the total
investment market. So the factthat the outstanding distress
is about 1.5% , says that, youknow , it , it hasn't been
impacted as much yet.
Beth Mace (16:05):
Probably focus more
on the office. Right. That's
where the dominant...
Jim Costello (16:09):
Oh yeah. The
office sector is the dominant
market rather dominant sectorfor outstanding distress just
the, you know , issues aroundtenant demand and ongoing CapEx
requests that is driving a lotof uncertainty and challenges
(16:30):
in the office sector, and it'sleading people to really pull
back on what they want to do inoffices.
Beth Mace (16:36):
Okay. So let's go
back to your comment. You said
that, you know, that sort ofdemographic strategies, so that
would be what other sectorsinclusive of senior housing,
but what other sectors wouldbenefit from sort of the
demographic trends that aregoing on
Jim Costello (16:51):
Student housing?
Yeah, apartments in generalgets a boost from that. The
medical office, type stuff.
Anything that's lab lifescience gets kind of a twofer
there both with a need forongoing medical spending as
people age plus new investmentsand new life science companies.
(17:15):
So there's activity there andself storage gets part of that
as well. People needing tostore stuff as, you know, they
have life circumstances change.
So all those kind ofdemographic driven strategies,
there's been more investorinterest in those because it's,
you know , there's a certainlevel of certainty. But
speaking as an economist, youknow, back in the day when
(17:39):
you're at, we'd provide, youknow , all these forecasts and
stuff , but we knew there was abig cone of uncertainty around
some of the economic drivers .
But the demographic drivers ,that is a little bit more
predictable. 'cause populationgrowth is you count the number
of young men, number of youngwomen, nature takes a course,
and you get population growth.
And that that is, you know, itleads to a property type that,
(18:01):
you know, property types aredriven by that , those
demographic features just tohave a more steady performance
metric.
Beth Mace (18:09):
Okay. So let's talk
about green shoots. So when
will we start to see some greenshoots in the transaction
markets? I think you said firstwe have to see the distress.
Yeah. To have that actuallyplay out and to sort of provide
some level of , I guess,transparency really, because
everyone's talking about thedistress. So what would it be
(18:31):
another green shoot that weshould be on the lookout for?
Jim Costello (18:34):
So, I think that
is the first one. You know , do
we see that start to pull away?
I think the other importantthing is just what's happening
with the availability of debt.
We had a record 2022 in manyperiods for a deal activity,
(18:57):
but then also mortgageoriginations. And so we've seen
a decline and mortgageoriginations over the last
year, and that mirrors thedeclines in deal volume. And so
the worry is that, well, i twill it continue down because
if it gets harder and harder tofind a loan, it'll b e harder
(19:19):
and harder for deal volume torecover.But y ou k now, what
I'm looking at f or, from somepreliminary second q uarter
figures, k ind o f shows thathas retreated a bit, but not at
an accelerating pace as it h adbeen earlier. Also, I 'm not
quite s ure i f, m aybe,
Beth Mace (19:39):
Maybe leveling off a
little bit...
Jim Costello (19:42):
Maybe leveling
off maybe, I'm not sure yet.
It's still a little preliminarythat data, but that's the kind
of thing I'm looking at. Andyou know, the, I've been
looking at data that we have,kinda looking at loans from the
loan level up. And I've beenlooking at the mortgage
originations index that ourfriends that right here,
Mortgage Bankers Association has some of t heir freebie
(20:02):
sunglasses. They, JamieWoodville there produces...
Beth Mace (20:05):
I know Jamie . Yep .
Jim Costello (20:06):
You should have
him next. He does a mortgage
originations index. And so I'vebeen looking at that to see,
you know, will we get anacceleration of the decline in
debt of availability ? Beauseif you, if you take the debt
stool away and 60% of thecapital stack might be debt ,
and this was the problem thatwe had in the s and l crisis
(20:29):
and in the financial crisis youhad in both cases nearly a
monoculture of debt in thefinancial crisis to run up the
financial crisis. I had lifeinsurance clients reaching out
to me for help trying to makethe case that there still is a
need for life insurancelending. The CMBS market can't
provide everything. And thenthe market fell apart and then
(20:53):
there was just no debt for abit because the CMBS market
exploded .
Beth Mace (20:57):
What about debt
funds? You see a lot of equity
groups creating debt funds.
Jim Costello (21:02):
Well, there are
debt funds out there, but my
point though is that, you know,when you have downturns where
you take the debt portion ofthe capital stack away, it hits
harder than if it's just, youknow, just repricing because of
property income. The S&Lcrisis, that was the second,
that was another example ofthat. You know, all we had
nearly a monoculture of debtcoming from banks and then
(21:27):
banks wouldn't lend at anyprice because there was just so
much uncertainty there. Andthat's what allowed the CMS
market to get going originallybecause of that illiquidity in
the other parts of the market.
And so if we don't have debtdisappear this time through, if
it's more expensive, but justit's still available at some
price, then that's the greenshoots that I'd be looking
(21:48):
forward to see that it's notcontinuing to accelerate down
that we can find some kind ofstable level on prices and deal
volume .
Beth Mace (21:55):
So let's talk about
this. What do we call the debt?
The debt walk in terms ofbanks, regional banks no longer
really providing as much debtas they once were because they
haven't increased theirinterest rates on their
deposits. So we see a lot ofloans coming out of a lot of
(22:16):
deposit base shrinking for theregional banks and going into
investment instruments where aconsumer like you or I can get
a higher rate of return. And sothere's a debt , a debt walk is
what I was talking . There's ,people are walking away from
that. We used to call it a bankrun or this, I guess we better
call it like a bank walkprobably than that . And so
(22:39):
there's a lot of concern, inthe senior housing industry.
Because a lot of the debt is infact coming from the regional
banks. That's a reallyimportant source of capital. So
what's your view on that, onthat bank walk concept?
Jim Costello (22:50):
Well, here's the
thing. At least you've got the
GSEs there. So if your onlysource of debt was regional
banks, this could be a bit of aproblem because, you know, if
you have one leg of the stooland you kick that out, you know
everything's gonna get wobbly.
(23:11):
But, you know, you've got atleast two there with, you know,
some of the credit coming fromthe GSEs. So there's an
alternative. Now , this was oneof the lessons of the Asian
financial crisis as well. Thoseeconomies at the time, the debt
that the Asian markets had wasonly bank financing. There was
pretty much no other source offinancing. And so they
(23:32):
developed more advanced creditmarkets in the aftermath is a
form of stability. So thesenior housing sector, you've
got a little bit more stabilityin the sense that you've got
leases , you know , that othersource. But I think also the
notion of the, the regionalbanks, there's deposits,
there's been stories aboutdeposits walking and it creates
(23:55):
issues where, you know, do theyhave the wherewithal to
continue lending? Do they haveto reserve more capital now
because of additional risks?
And so will that lead to acredit crunch on that side?
Those are the things we'relooking for. So far the in
aggregate, I'm not seeing ourpreliminary Q2 figures
(24:17):
suggesting that thatavailability fell even further.
I haven't looked at thespecifics of the regional banks
yet. There is one thing I am abit concerned about. You know,
there's been a lot of noisearound the regional banks that
I think is just wrongparticularly there's been
people saying that regionalbanks were behind 70% of all
(24:38):
commercial real estate lending,and now it's just bogus. That
was drawn from amisunderstanding of some fed
numbers. I t w as a very goodsurvey the Fed does of what
banks are doing, and they willshow in the banks 70% of
commercial real estate lendingcame from those regional banks.
(24:59):
But banks aren't everythingbecause there's life insurance
companies, there's the GSEs,there's debt funds, there's the
CMBS market. And so it's ananalysis that s ome in the
industry d id that just gotsome traction. But they didn't
understand that there were moresources of debt out there. But
I think the regional banks, theother thing that's important
(25:21):
here is that there's also sortof a bias against the regional
banks. I think at times by thebusiness press, you know, that
people really glommed onto thatstory because, you know, they
were trying to paint a story asif these regional banks are
coming in and now they're doing70% of the loans. They're
(25:43):
trying to paint a picture as ifit was, you know, Cletus the
Slack-Jawed Yokel coming in andmaking loans on office
buildings in Manhattan orsomething that these people
aren't sophisticated andthey're doing loans and more
sophisticated investors arepulling back. And also that
sort of bias against theseareas, that was just wrong
because it's not like they weresuddenly doing more deals in
(26:04):
other areas. It's just that theinvestment market was moving
more to the markets where theregional banks were more
active. There were simply fewerdeals. And the expensive
coastal markets where the bigmoney center banks and the CMBS
market was so dominant. And asthose deals pulled back,
because people were afraid totake on the risk of buying a
(26:26):
billion dollar office buildingin San Francisco as everything
was so uncertain, it didn'tfall back as much in middle
America. And you don't have to,there's much capital that
you're putting a risk if you'rebuying a senior housing
facility in suburban KansasCity, for instance the prices
(26:48):
in general are gonna be lower.
So the deal sizes are smaller.
And so that that migration tothe secondary and tertiary
markets that was happening onthe investment side. And so it
was only natural that the smallbanks were lending more on
those areas. 'cause that'stheir bread and butter. They
have those local relationshipsand know everybody. And that's
the other reason why the seniorhousing sector is probably so
(27:12):
driven by the regional andlocal banks. It's because it,
it's still very much a localbusiness. It's not, there's
been attempts that people havehad to consolidate the sector.
We've sent a number of entitylevel deals in recent in over
the last decade. But it's stillsomewhat disaggregated and
Beth Mace (27:32):
Regional banks are
really important. So let's just
shift a little bit, justbriefly 'cause we're gonna have
to wrap up in a minute, butlet's talk about private
equity. So there's a lot of,you know , private equity on
the sidelines, right. Waitingto come in for distress or
opportunistic funds. What i syour sense of the volume of
money that's there or what thatprivate equity will play in
(27:53):
terms of helping us sort o fcome out of this c ycle that
we're in capital markets?
Jim Costello (27:58):
Yeah, it's gonna
be tricky, you know, because I
think it's, people been talkinga lot about dry powder and all
the dry powder that's outthere. And if you extend that
analogy, the problem with drypowder is if a breeze pull
picks up dry powder can blowaway. I'm old enough to
(28:19):
remember people were talkingabout dry powder in the start
to the global financial crisisthat , oh, look at all this
money that's been raised. It'sgonna protect the downside
'cause you know, we're gonnahave capital flows in. It's
gonna keep prices from falling.
And once everybody saw that thewriting was on the wall for
price declines a lot of thatmoney pulled back.
Beth Mace (28:39):
Well, most of these
PE funds are fiduciary, so they
have to be mindful of theirclient , right?
Jim Costello (28:43):
Right. You know ,
it just makes sense. But if
they pull back, there's also anopportunity there because they
pull back and say, okay, wellwe still want to get in the
sector, but we now wanna gointo distress and we wanna buy
up everything on the cheap. Andso that's what happened last
time. And so I think peoplewill try to do that this time
too. But , you can't use theplaybook from the last
(29:05):
downturn. You can't just usethe the GFC playbook. And in
part because so much of thedistress that's out there is
different than before. Thedistress that was around in the
aftermath of the financialcrisis, it was financial driven
distress. It was a propertythat was bought at too high of
the leverage ratio, debtcoverage coverage was just
(29:29):
abysmal. And once everythingreset , there was no way they
were going to be able to makethat loan live and be mature
into some new kind of loan . Sothey had to give up the
properties. This time there aresome examples like that. The
multifamily syndicators in thesoutheast, there's some horror
(29:50):
stories there of people buyingat the peak of the market ,
raising money from privateinvestors who didn't really
know what they were gettinginto and loans coming due and
just got awful rate and terms.
So there's some of that, but byand large, the distress is more
of a fundamental issue. It'snot an office building that
(30:11):
just is otherwise cash flowing.
But with debt that wasstructured and properly and
someone flying into the city,putting some new debt on and
hopping back to New York thatday, it's a building where the
fundamental economic need haschanged and nobody has come to
the realization yet to whatneeds to happen to it.
Beth Mace (30:32):
That's for office.
How about for other CREsectors? How would say
different than the GFC?
Jim Costello (30:38):
And for other CRE
sectors? For retail this crisis
is in some sense no differentthan what we've been dealing
with. Retail's had for allproperty types, more distress
over the last 15 years andothers because it's always been
sort of a constant low levelform of distress , tied to
(31:02):
obsolescence. It's not theinternet coming in and
displacing retail, it's justobsolete buildings that slowly
have been given up to go . Weoverbuild retail tremendously
in the seventies to thenineties, and then you throw
some technological change inthere of the, of the internet.
It's not that it makes retailobsolete, it just obsolesces
(31:23):
some buildings faster. And sowe've had sort of a steady low
line pace of distress inretail.
Beth Mace (31:32):
Any feeling , this
might be more micro t han, you
know, but in terms of seniorhousing, how would this cycle
vary from t he GFC?
Jim Costello (31:40):
I haven't looked
at this cycle versus last. The
only thing that struck me wasthat it was just still a
comparatively small portion ofthe market. A demographic issue
.
Beth Mace (31:55):
You're right. And
one difference really was that
this was a health crisis thatstarted with the pandemic,
right? And then see now was oneof the sectors to get there .
The market fundamentals forsenior housing actually are
improving pretty sharply.
You've had almost, you know,two years of improvement in
occupancy rates. Demand hasnever been stronger. Inventory
growth has been slowed down. Sothe market fundamentals are
looking good and it's thecapital markets, it's a debt
(32:18):
situation that's really beenclobbering.
Jim Costello (32:20):
It's the same
story as after the 9/11, you
know, the hotel market for ayear was down, demand was down,
but then the stigma issue thathad clouded hotel , performance
went away and it had a steadyrebound when people kind of
went back to their real lives.
And it just seems like, youknow, the senior housing sector
(32:42):
went through something similar.
Beth Mace (32:43):
Yeah, that's good.
So in wrapping up , can yougive us like a one minute
soundbite on where you thinkwe're heading, what's gonna
cause it to shift and how longit's gonna be that we're in
this turmoil of capitalmarkets?
Jim Costello (32:56):
We are still
responding to 2020. The
pandemic is over, but thepandemic isn't done with us
yet. We're still seeing theafter effects of the medicine
to deal with the problems thatwere there at the time in terms
of a little bit of excessspending, a little bit of
(33:18):
excess liquidity. And now we'regetting some of the pullback in
the other direction. I thinkthe next three months, you
know, we are still dealing withthe after effects of what was a
high level of deal volume in2022, by the end of 2023, into
(33:40):
December and then into January,February, 2024. I think that's
when we're gonna get a reallygood reading on just where the
commercial property market is,because we won't have as much
of that distortion of thatexcess period of liquidity that
we had in 2022. And that'llgive us a really good read of
where things are. So once it's, cold and snowy up this way,
(34:03):
then I think we'll have a goodread.
Beth Mace (34:05):
Well , I'll be
hunkering down at that point.
Yeah. So that's great. So Jim,I wanna say thank you very
much. This has been reallyhelpful. I think our audience
is really gonna enjoy yourcomments and thank you for
kicking off our first of manypodcasts we're gonna be having
on this topic.
Jim Costello (34:18):
Thank you .
Always great to talk with you.
Beth Mace (34:20):
Thanks very much.