April 4, 2024 • 39 mins
Join CBRE Global Chief Economist Richard Barkham on Peaks & Portfolios: Presented by PEG Companies, as he explores 2023's unexpected economic strength and its implications for 2024. Discover how government interventions and stimulus measures fueled surprising GDP growth, mitigated a banking crisis, and supported construction activity. Barkham also analyzes U.S. migration and demographic trends, offering predictions for the economic outlook and opportunities for commercial real estate investors.
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Episode Transcript
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Rachel Oh (00:04):
Welcome to Peaks and Portfolios presented by PEG
Companies, your go-to podcastfor all things commercial real
estate investment.
I'm Rachel oh, and togetherwe're diving into current events
, trends, issues andopportunities impacting the CRE
investment space, fromdissecting the latest market
moves to sharing insights ontoday's commercial real estate
(00:25):
landscape.
It's time to maximizeportfolios here in the Peaks of
the Mountain West and beyond.
Okay, welcome everybody Againfrom the Peaks of the Mountain
West up here on the WasatchFront.
We are excited to talk realestate, the economy and anything
(00:49):
else that may come about.
Thank you for joining us todayfor this week's episode of Peaks
and Portfolios.
It's a great time to do a bitof check-in and see where we are
in terms of the economy, theworld, especially as we are
recovering, if you will, from,let's say, a very challenging
and rather interesting 2023.
To help us ruminate better onthis start to the year, we are
honoured to have our veryesteemed guest, richard Barkham,
(01:10):
global Chief Economist, globalHead of Research and the Head of
America's Research for CBRE.
Welcome, richard.
Richard Barkham (01:17):
Well, thank you very much indeed.
I'm delighted to be here.
Thank you for inviting me.
Rachel Oh (01:22):
Oh my gosh, Richard, we are so ecstatic to have you
and again, thank you.
I know that you have a superbusy schedule, so we appreciate
you carving a bit of time for us.
Remind me, where are youcalling in from today?
Richard Barkham (01:33):
So I'm based in Dallas.
You can clearly perceive thatI'm not Texan but, I've adjusted
to Texan life.
I previously lived in Boston,which I enjoyed, but I come from
the UK and I was based inOxford and working in London.
But I've been in the States forseven years now.
Rachel Oh (01:54):
Okay, so do we like barbecue?
Are we a fan?
Richard Barkham (01:57):
We do like barbecue, we do.
Yes, if you're going to eatbarbecue, texas is a good place
to do that and you don't miss.
Rachel Oh (02:05):
Your is a fish and chips.
What do we eat over across thepond?
Something like that.
Richard Barkham (02:10):
I do miss fish and chips and I always have it
when I go back to the UK.
But no, I don't miss.
I don't miss the UK too much.
I like the dynamism and theopenness of the United States.
I feel that your talent goesfurther in the US than I think
it does in the UK, so I'veenjoyed being here.
Rachel Oh (02:30):
Good.
Well, we appreciate just allthe variety.
You know all the differenttypes of thought that come in,
and so thank you for enjoyingour country and especially being
in the big, the big state ofTexas.
Before we kind of launch in, Iwanted to, just in case people
aren't always aware.
I mean, you have a veryillustrious title, but I think
you have a very impressivebackground, so I think it's
always helpful for people tohear.
It looks like you've joinedCBRE in 2014 as their global
(02:53):
chief economist and then in 2018, you were also appointed the
global head of research.
You lead a team of 600researchers worldwide.
So, again, thank you so muchfor taking time out of your day
to help us.
You're regularly in the mediaand I'll be honest, Richard, I
might have stalked you a bit, sodon't be nervous and you
present widely, obviously todifferent business audiences,
(03:14):
but you do hold a PhD ineconomics.
You are, I believe, the authorof two books, numerous academic
publications, and you serve on apart-time basis as a senior
fellow and lecturer in realestate at Harvard University and
the professor of practice atthe University of North Carolina
.
So again, we very muchappreciate you taking the time
(03:35):
to hear over the internet,whatever you call this speak
with us as we're kind of hailingin from the peaks of the
Mountain West.
So, if you don't mind, I wouldlove to back up a little bit and
see, kind of, if you could justsum up how you saw the end of
2023, the overall economy, theimpact on real estate, both from
(03:57):
the fundamentals as well ascapital markets.
How would you summarize the endof the year 2023?
Richard Barkham (04:05):
Well, I'll be quite honest with you.
2023 really caught us bysurprise.
And it caught us by surprisebecause the economy performed a
lot stronger than we hadexpected.
I'd been expecting a recession.
You know, we've seen thesharpest rise in interest rates
in 40 years over the last 18months, and interest rates
(04:26):
normally slow the economy up,but they did not in 2023.
And we've just had the revisedGDP numbers for Q4, up 3.4%.
So that was a surprise.
So we've spent a lot of timethinking about why that happened
.
Actually, it's quite aninteresting answer.
It comes down to governmentaction.
(04:48):
So I would say three thingsreally transformed 2023.
I mean one.
You know, you'll remember itdidn't last for long, but we had
a banking crisis in March andApril.
Rachel Oh (05:02):
Oh, I remember we clear funds through First
Republic.
Oh, well, indeed so all handson deck and again it's just
clearing funds.
It wasn't that we hadsignificant, but just the
appearance of anything to dowith Silicon Valley, bank or
First Republic.
And so, yes, okay, go on.
Sorry, yes, I almost forgotabout that.
Richard Barkham (05:24):
No, that's right.
Well, I mean, that could easilyhave spiraled out of control,
but I think the fact that theFed used all of its techniques
that they learned in the greatfinancial crisis took about the
Fed about a year to deal withthis in the financial crisis,
but it all, you know, it usedall of those tools and
techniques in about a week, okay, stabilized the banking system.
(05:44):
So I think that was one bulletwe dodged in 2023.
But there was another very,very strange thing about 2023,
which is the government deficitwent up from 5.2% of GDP to 7.2%
of GDP, or numbers of thatnature.
So we also saw a great bigstimulus, direct stimulus.
(06:08):
Now, you know, that was veryodd and it didn't come.
It came about for a wholevariety of reasons, including
natural disasters, and certainbig states were allowed to remit
taxes at a later date ohinteresting.
Rachel Oh (06:23):
So you know that was.
Richard Barkham (06:24):
You know, that was.
You know it was more a failureof tax receipts than spending.
But fiscal stimulus is fiscalstimulus and it really boosted
the economy.
And I think one final thing youknow normally when interest
rates go up you see a drop-offin construction activity.
That's what happened in thegreat financial crisis.
(06:45):
Really, the construction sectordid not drop.
In fact, construction has beenelevated, really, and that's due
to the CHIPS and the IRA Act,and the creation of structures
for manufacturing has been very,very instrumental.
So that's an indirect impact ofgovernment policy.
(07:06):
And just one final thoughtthat's not going to go away.
We've now got the impact of theInfrastructure Act that
preceded the CHIPS and the IRAAct.
Rachel Oh (07:16):
Okay, All the public works.
I mean all the yeah.
Richard Barkham (07:19):
Yeah, okay, some people think I mean it's
been calculated there are 32megaprojects out there, each of
them worth about a billion inconstruction expenditure.
They're starting to flowthrough now, so that's a
stimulus to the economy too.
So all of those three things, Ithink, gave us a much stronger
2023 than we expected.
(07:41):
But, of course, you know, it'shad the impact, I think, of
keeping inflation higher than wewould have expected.
Inflation is dropping, but thelast mile is pretty sticky and
part of it is just due to, youknow, that kind of more demand
in 2023 than we had expected.
Rachel Oh (08:01):
Yeah, now it's interesting that you say that
because again, I know theeconomy was relatively healthy,
but from where I sit.
So of course our vantage pointis we do a lot of ground up
development, we've been veryactive in opportunity zones so
as a result, we had a lot ofcapital come in from there and
so we're really heavy in thesegrowth states.
Again, we're in the mountainWest and construction costs have
(08:22):
absolutely crushed us rightWith, coupled with interest
rates, and so for us, capitalmarket, on the capital market
side, I mean it was a tough year, it was a really challenging
year.
We just did not get theactivity that we typically do,
and so just thoughts on that.
So it sounds like constructioncosts are I mean for us they've
leveled out in our region and weknow they're not going to go
(08:45):
back down.
But it does sound like you'resaying from a more national
level, they'll just continuecorrect with this RIA and the
infrastructure and all of thosethings will continue to put
pressure.
Richard Barkham (08:58):
Yeah, I mean, I think you know some of the
construction cost growth that wesaw was pandemic related.
You know we had big disruptionto global supply chains kicked
in, you know, 2020, 2021 andlasted into 2022, frankly, so
that's.
You know.
Those global supply chains havecome, you know, much more.
(09:18):
They're back to normal really.
So that's good and that will.
You know, keep a little bit ofa break on construction costs.
But normally in a period ofhigh interest rates,
construction would drop, soyou'd also have demand side
easing.
But I don't think that's goingto happen.
So we're not going to seeconstruction costs racing away
(09:42):
as we have done in the last, uh,several years.
Rachel Oh (09:44):
Yeah, but you know, you know a steady three, four,
five percent increase, I thinkis is very probable yeah, yeah,
no, I mean, that's what we'reseeing and hey, at least it's
not the astronomical, likespikes that we saw in the.
Richard Barkham (09:58):
Well, I would say, you know this might be one
point which is a more of a kindof theoretical point, and I love
theoretical points?
Rachel Oh (10:06):
Of course you do.
You're an economist, you'resupposed to.
Richard Barkham (10:09):
But I think it's going to be difficult on
the construction side to getprojects to pencil out and in
the longer term I have to sayit's problematic for people who
construct space and it'sproblematic for us who lease new
space as well.
But keeping a break on thesupply side is going to give us
(10:31):
a little bit more.
You know, uppishness in rentsum, not in the next 24 months,
but in the longer term it'sprobably quite good for value
recovery to have some sort ofbreak on construction,
frustrating though that is.
Rachel Oh (10:48):
Yeah, no, again, it's always nice to see the silver
lining, and certainly, you know,and again, in our business, we
have a lot of multifamily and,you know, hospitality and the
rents have taken a little bit ofa dip.
They're holding steady, andagain, our markets, but we have
a lot of supply coming on too,and so I think there'll be a bit
of a dip.
But I think, to your point,we've had a slowdown in new
(11:09):
builds and so that will correctitself.
But no, okay, well, that'sinteresting.
So for you, 2023 was a strongeryear than you had anticipated,
based on you.
Call them the three.
Richard Barkham (11:21):
Well, three factors, three facets, three,
three factors, three, threefacets of government action.
Rachel Oh (11:28):
okay, that were you know, a little bit unexpected.
Okay, no, I haven't heard itthat way, so I really appreciate
that.
So, at the end of 2023, thenwhen you're looking to 2024,
curious as to what you werethinking 2024 would start off,
as I'm curious, you know what doyou?
You know what were you, whatdid you predict and what did you
get right and what did you getwrong?
Richard Barkham (11:45):
Well, I mean, 2024 hasn't elapsed yet, so I'm
hanging on to my forecast.
I'll evaluate those, you know,in 2025.
But you know, I think you knowwe're still I mean the impact of
government won't be there.
We've still got high interestrates.
So I think we do see a slowdowncoming and some of the leading
(12:08):
indicators are beginning to showthat.
You know, we talk a lot about asoft landing and I think we're
going to get a soft landing.
But I think soft landing isoften misunderstood.
You know soft landing is, youknow, people think it's like,
you know, sort of falling backon a feather bed, and you know
there's no problems.
You know, sort of falling backon a feather bed and you know
there's no problems.
But soft landing just means weavoid a really deep recession.
(12:30):
A soft landing is still goingto be problematic and throw up
issues and challenges.
So you know, I think some of thestrength of 2023 has spilled
into 2024.
So the Q1 is a bit strongerthan we'd expected, but I think
the slowdown is going to come inQ2 and Q3.
(12:52):
And I think we're going to seea much weaker labour market and
that might start to, you know,create some alarm bells for the
Federal Reserve, and you knowthen we're into a little bit of
a problem that you know.
The Fed is seeing the alarmbells in the labour market, that
(13:13):
last mile of inflation isremaining sticky.
So what does it do?
Does it hold out to absolutelyforce inflation to 2% or does it
take account of the strength ofthe economy?
And I think it will do thelatter.
I think we will begin to seecuts from June, maybe two, maybe
(13:34):
three cuts in 2024.
But I think the Fed wouldrather see inflation trend lower
over two years and maintain thehealth of the economy than
really be aggressive to getinflation down more quickly.
Rachel Oh (13:51):
Even it being an election year.
Richard Barkham (13:54):
Well, particularly being election year
, the Fed doesn't want to tankthe economy in election year, it
just wants to be as neutralpolitically as possible.
Rachel Oh (14:03):
Is anyone neutral anymore, truly?
Richard Barkham (14:05):
Well, you know I live in.
You know as a technocraticeconomist I hope you know I
think people are.
You know there is underlying.
You know the economic variablesare kind of apolitical.
You know you've got jobs,you've got growth, you've got
inflation and you've got.
Rachel Oh (14:19):
You've got jobs, you've got growth, you've got
inflation and you've got to doyour best with economics,
science and data to to keepthose on track yeah, I mean
again, all these numbers havebeen coming out and in I'm a
little you had mentioned, youknow, the jobs, the labor market
, I mean jobs actually increasedby quite a bit right 275 000 it
says.
Richard Barkham (14:40):
Although there was a correction of the previous
numbers but unemploymentremoved higher slightly yeah,
unemployment, I think, is now3.8 percent, up from the
cyclical low of 3.4 percent.
Okay, yes, we've got 275 000jobs, largely in government and
health care, so I think it'spossible to say that they are
(15:02):
still pandemic catch-up.
Yeah, I mean, and I don't thinkthey'll continue because I don't
think the states will havequite as much revenue as they
did but we're still not quiteback to trend level in
healthcare and obviously peoplehave deferred a lot of
procedures during the pandemicthat are just flowing through.
Plus the natural ageing of thepopulation, you know it's just
(15:23):
creating, you know, real growthin the health sector.
But I think the corporate sectoris pretty much finished with
hiring now and everything pointsto a bit of a downturn in
corporate hiring and thedownturn in the labor market
more generally.
Rachel Oh (15:39):
Okay, so then let's talk about a couple of things.
Back in 2023, I used to hear alot of investors say let's just
survive.
Well, especially in real estate, let's survive until 2025.
And 2024 was just going to besort of a dead year.
In my particular position, I'mactually surprised and it's in
concert with what you're sayingbut there's much more optimism
(16:02):
in 2024 than 2023, certainly,and I think there's going to be
a lot more movement in thesecond half of the year.
So curious if that and that'sjust again, this is just my
conversations and the wayinvestors are looking at real
estate.
Curious if that's in concertwith what you think.
Richard Barkham (16:19):
Well, it's certainly in concert with what I
hear and it probably is inconcert with what you think.
Well, it's certainly in concertwith what I hear and it
probably is in concert with whatwe believe is going to happen.
I think the optimism is comingthrough from the fact that we've
had this hike in interest ratesand we're still getting growth.
So we're seeing actuallyfundamentals coming back a
little bit.
In real estate, industrialleasing looks like it's a bit
(16:41):
stronger as we move through Q1.
And there's been no slackeningin multifamily leasing either.
Retail leasing quite healthy.
I mean, the office sector hasgot bigger problems.
So I think some of the optimismis coming through real estate
fundamentals actually survivingthis hike in interest rates
quite nicely, but of courseactually surviving this hike in
interest rates quite nicely.
But of course capital marketsare very difficult and you know
(17:08):
there has been a repricing inthe market.
So opportunities you know arebeginning to emerge.
But people are just waiting, Ithink, for that first cut in
interest rates which I thinkwill come in June.
Yeah, and you know we will seeactivity pick up, uh in in the
second half.
I don't, I don't think it'sgoing to be a, you know, a real
(17:29):
strong surge uh you know,because I think the bond rate,
you know, is going to remainelevated and kind of volatile,
which will be a headwind.
But I do think activity willpick up in the second half and
then up again.
But the traditional patternover 10 years is for capital
(17:49):
market cycles to build up slowly, accelerate towards the end and
then drop off.
So I think we'll see the samesort of pattern a slow build in
capital markets activity asprices come down, as rental
growth prospects pick up, asinflation, as interest rate
(18:09):
comes down and all those dealsslowly but surely start to
pencil out.
Rachel Oh (18:14):
Yeah.
Richard Barkham (18:15):
But it's not like a recession.
You know where.
You know there's distressselling, absolutely there isn't
that and there isn't that.
There has been a price drop,but it's not that big and you
know the banks have still gotissues in lending really.
So this is going to be a slowbuild, I think.
Rachel Oh (18:35):
Yeah, so I have so many questions for you, but let
me one of the things Fire awayplease.
So I want to be structured here.
So you mentioned opportunities.
You're mentioning sort of thedebt environment, banks you know
we keep hearing about I thinkone of the reports I've seen is
$2.2 trillion of debt coming duebetween now and the end of 2027
(18:57):
.
A lot of this is CMBS debt,over-leveraged, you know
over-leveraging by certaingroups, et cetera, et cetera.
A lot of it obviously CMBS debt, overleveraged, you know
overleveraging by certain groups, etc.
Etc.
A lot of it obviously is in theoffice space, but it's
certainly we're looking athotels, apartments, you know
just all the different assetclasses in commercial real
estate.
So just curious about yourthoughts on that, what is I mean
?
Is there a real number?
Is it as because we, you know,we're starting to adapt to kind
(19:20):
of leverage that opportunity aswell?
But I think everyone is, and soI'm just curious how do you see
that?
Or what are you seeing in termsof all this maturing debt
coming due and what are trulythe opportunities there?
Richard Barkham (19:33):
Well, I've heard this story before.
I heard it in 2016, with a lotof funds winding up In 2016,.
People were expecting a marketcollapse and it didn't happen.
A lot of funds, you know,winding up in 2016.
People were expecting a marketcollapse and it didn't happen.
You know these things are verymalleable when it comes to it.
I mean, there are a lot of.
There is a lot of debt fallingdue, and but we've got to
(19:56):
remember, at the moment, youknow, the vast majority, even
with 20% office market vacancy,the vast majority of real estate
is income producing still.
And I think, behind the scenes,the Fed and the FDIC are working
with the banks and looking atthem very closely and saying, if
you can be flexible as long asthose loans are being serviced,
(20:21):
then you know you may have seena value drop, but you know, as
far as possible, extend the termof the loans.
And so you know people call itkicking the can down the road,
but that affected what it is,but it's you know it's creating,
you know it's preventing acrisis developing, but at the
same time.
(20:41):
So you know, is there any cost?
Is there any consequence?
Well, I mean, of course thereis.
Whilst the banks are extendingloans, they do have to make
provisions against those losses.
So I think in the bankingsector, you know, every quarter
that rolls by and banks are ableto provision more, they haven't
fully provisioned.
(21:01):
Yet that rolls by and banks areable to provision more.
They haven't fully provisioned.
Yet it makes that crisis lessand less of a problem.
Even if they have to write offloan values, if they've got
provisions against it, then thatwon't turn into a crisis.
But what effectively it meansis, whilst banks are doing that,
the debt availability is goingto be very, very tight.
(21:23):
Now there is you know, you knowas well as I do there is
liquidity in the market.
Rachel Oh (21:27):
Tons, yes, and they're all seem to be waiting
in the wings, by the way, butanyway, they're all waiting in
the wings.
Richard Barkham (21:34):
The small banks and the regionals, I think, are
going to be out of the marketfor some while and they were
very important in the finalphases of the you know that
period 2015 to 2020.
The region, even beyond intothe, into the, into the pandemic
, the regionals were veryimportant and it's not
completely clear who is going totake their place yet.
(21:55):
So I think the debt environmentis going to remain difficult,
uh uh, not completely dried up,but it's going to be tough for
at least another couple of years, I would think.
Rachel Oh (22:08):
Yeah, yeah, no, I appreciate that and thank you.
Richard Barkham (22:12):
You know, again we're starting to see that's
better than a financial crisis.
Yes, yes, it really is.
Rachel Oh (22:17):
No more financial crisis.
Please.
Let's just take a break fromall of that.
Okay, so one of the things thatwe hear a lot about if you've
mentioned it a few times too,and I think everyone is still
trying to scratch their headaround this but office, like,
what is like, where is officegoing to fall in the end, Do you
think?
Because I think people arestarting to go back, but even if
(22:41):
they do, it's only a few days aweek.
Because I think people arestarting to go back, but even if
they do, it's only a few days aweek.
And so I'm just curious, withall this, you know, and 20% is a
decent vacancy rate, sosignificant, so tell me what you
think about office.
Richard Barkham (23:04):
I mean, I think you know, at the peak of the
last cycle, office vacancy gotdown to 12% and it's rocketed up
to 20%.
And you know companies, youknow the United States has been
particularly badly hit, I wouldsay globally, you know, partly
because its cities are biggerand the commute is longer and
people prefer to work home andthe houses are bigger and people
got nice environment to work athome.
So, and there's a third factor,I think in the, in the case of
(23:26):
the states, just the techcompanies probably had over
expanded um and, you know,taking the opportunity of remote
working to cut back up, youknow, on their, their office
footprints, sure, so that'scaused, you know, that's caused
vacancy to go to to 20.
I mean, I think you know officethat's caused vacancy to go to
20%.
I mean, I think you know officecycles usually last about 10
years or eight years.
(23:47):
You know, I think we're at thebottom of the office cycle.
I think vacancy will probablypeak out this year and then we
will see a slow long-termdecline in vacancy that will
last eight or nine years.
Long-term decline in vacancythat will last eight or nine
years.
I don't think it's going backto 12% where it was previously,
but it might get down to 14% and15%.
(24:08):
We've got positive leasing,anything that's built after
2010,.
We're still seeing positive netabsorption.
So the best space is still indemand and we've still got the a
development pipelineconstruction completions I
forget what it is.
It may be 35 million squarefeet this year and maybe down to
(24:29):
14 or 15 million square feetnext year yeah uh, you know so
occupiers will be heading forthat space.
Uh, very much um, and then, Ithink you know, they'll start to
go for the best available Bplus space, just like any other
cycle.
Yeah, but I think you know thereal estate that is built in the
(24:50):
80s and the 90s and even theearly 2000s might be, you know,
structurally obsolete and willhave to be taken out of the
stock.
That is easier said than doneand that's going to take a long
while.
Rachel Oh (25:04):
Yeah, now, in a future conversation that I'm
going to be having, we're goingto be talking to Gensler, who
has a whole algorithm, I believe, or something on the viability
of office conversion tomultifamily.
Because, again, there's allthis, we believe at least
everyone this opportunity.
We ourselves have done oneoffice to multifamily.
Because, again, there's allthis, we believe, at least
(25:24):
everyone this opportunity.
We ourselves have done oneoffice to multifamily conversion
and we've done an office tohospitality.
Neither were easy projects.
They were difficult.
Richard Barkham (25:31):
I mean the easiest one that I can see is
actually office in the, withsuburban office office to
industrial distribution.
You know, because that kind ofcampus style is a bit more
suitable.
We've seen.
You know, because that kind ofcampus style is a bit more
suitable, we've seen, you know,a fair amount of that in New
Jersey and the East.
But the actual, you know, Idon't know that the economics
(25:52):
will ever quite square out withthose 80s and 90s buildings,
glass and steel.
It may well be that you knowplaces like New York where 50%
of the office stock is actuallypre-war.
Sure, you know a more cellularmight have some sort of
advantage, sure.
And replacement costs are sohigh there, I could see how, if
it, if it could pencil in, itmay be maybe yeah it may well
(26:15):
need some government support aswell you know states or city
authorities providing some grantaid in order to speed the
transition, but I think theupper end of the office sector
will be very lively and willattract, you know, occupiers and
that's what we're seeing.
(26:36):
But it will be a long slowoffice cycle, Okay, okay, well,
that's helpful you.
It will be a long slow officecycle.
Rachel Oh (26:42):
Okay, okay, well, that's helpful.
You know I really appreciateyour comments about office and I
know that's something thateveryone is still we're all
trying to kind of sort throughand figure out.
It reminds me of you know,something I read recently from
you again as I was sort of doingmy research to better
understand you, and youmentioned in a recent
conversation, and quote unquote,I have here we're moving into a
(27:05):
world of the hotelification ofreal estate, where you've got to
treat assets not as chunks ofconcrete but as service
offerings.
And you know, in that context Ibelieve it had to do around
office, and so I just wanted tosee if you could comment further
on that.
I thought that was reallyinteresting.
What does that mean?
Richard Barkham (27:24):
Well, I mean, I think we're going to.
I mean, you know whathotelification is it's.
You know hotels are you knowkind of short or medium term
lets, and hotel operators haveto really focus on brand and
experience and they have toadjust their you know as well as
I do adjust their pricing on adaily basis according to supply
and I their you know as well asI do adjust their pricing on a
daily basis according to climatesupply.
Rachel Oh (27:44):
Yes.
Richard Barkham (27:44):
And I think you know office occupiers are going
to office landlords are goingto have to do more or less the
same thing.
Now begun to see it prior tothe pandemic, you know had its
ups and downs.
You know that idea that inbetween the occupier and the
landlord there is anintermediate operator that
(28:05):
really focuses on, you know,quality and service and you know
dynamic pricing with big datain the background.
Sure, yeah, you know givingkind of much more accurate
pricing sort of signals.
In some cases, landlords willdo that for themselves.
I think that's the way of thefuture.
I think as well, companies aswell.
(28:28):
The world is so dynamic andvolatile Companies don't quite
know what they're going to neednext year.
So, you know, I think theflexibility now it's going to
cost more.
Rachel Oh (28:39):
You know, I think the flexibility.
Richard Barkham (28:41):
This flexibility, um, now it's going
to cost more, you know, uh, forfor occupiers, but you know that
that will be, I think, whatthey're willing to, you know pay
for um, but I think in someways as well it can reduce the
uh instead of having to refit anoffice every time a new
occupier comes in.
sure you know, if you can have astandardized kind of fit out
(29:04):
that works across many occupiers, in some ways that can reduce
costs in operating offices.
So I think the hotel modelcoming into, but I think
probably you know, in some areas, particularly of distribution,
particularly also with you know,in some areas, particularly of
distribution, particularly alsowith you know, last mile
distribution, having big hubsthat lots of different operators
(29:26):
can operate out of and managethem in some sort of hotel sort
of framework, and it's notdissimilar really to what
multifamily operators do either.
Although they tend to be longerleases, you're not far from
hotel standards in many.
So I mean, I think thehotelification of real estate is
(29:49):
alive and well and gainingground.
Rachel Oh (29:51):
Yeah, no, it is so interesting how, again, what was
proven and what has worked foryou know decades has just been
up, upended, and now it's justthis fast race to you know who
can adapt to what first andwhat's the most creative.
You know kind of readadaptation, if you will, of of
what was a standard and there'sjust no more standards.
Richard Barkham (30:12):
It doesn't seem like no and the workplace has
got to compete.
You know you've got acomfortable home where you can
work not completely the same waythat you did, and there are
some you know disbenefits ofworking at home, but you know
against that.
Then you've got the cost of thecommute and you know workplace
(30:33):
experience.
The workplace is going to haveto work a lot harder and I don't
think the downtown areas willwill completely recover.
I think there's probably been apermanent shift not I wouldn't
overstate it, sure, um, but apermanent shift towards living
and working in the suburbsrather than working in the
(30:54):
suburbs and commuting downtown.
Yeah, um, which?
Which cities will have torecover from?
And we're doing quite a lot ofwork on the future of cities.
We're about to produce CBREwill produce a big report on the
future of American cities inthe not too distant future.
Rachel Oh (31:10):
Yeah, in fact I was waiting right before part of my
research because you'd mentionedin one of your previous
podcasts that it was coming outthis first quarter.
So I thought, oh, it must beout and I couldn't find it
anywhere.
So when is it coming out?
May?
Richard Barkham (31:27):
Early May.
I'm not going to pin myselfdown to a date, that's OK.
Rachel Oh (31:31):
That's OK.
I was really excited to seethat it's so interesting because
you know.
So again, we're in the MountainWest.
My office is in Provo, utah.
I live in Salt Lake City, butyou know we are three and a half
million in the entire state,which you know, and it's mainly
because topography Right We'vegot mountains and canyons and
(31:51):
things, so there's just only somuch that can be inhabitable.
And we were, as I'm sure youknow and I always like to pound
our chest a little bit but wewere the fastest growing state
in the last census count.
So from 2010 to 2020, we werethe fastest growing state
amongst much of other mainlyMountain West states and Sunbelt
states.
And during the pandemic, youknow, our office never closed.
(32:13):
There were certainlyindividuals that did work from
home, mainly because the familyand whatnot, but our culture is
very much in the office.
I'm an extrovert, so I have tobe around people I'm not good in
just in my home.
But I bring this all up becauseduring the pandemic, we were
already growing, we were alreadytopping charts in terms of
(32:34):
fast-growing states, and thenthe pandemic occurred and then
we got a huge influx of newpeople right, and so now you're
starting to see this shift inAmerica overall.
You know it used to be sort oflike, you know, the tried and
true investments on thesecoastal cities and the gateway
markets and now you're seeing aninflux of capital and interest
in.
You know, I call them the smilestates, we can call them
(32:54):
whatever you will, but primarilyyou've got the Sunbelt, you've
got the Mountain West, you'vegot, you know, up there in the
Pacific Northwest and cities arechanging and the way people
look at investment in realestate in the US is changing.
So just curious, you know, withthis future of cities that
you're mentioning report comingout, the way you see the changes
(33:15):
in growth across the country.
You know, what are yourthoughts on that, like
post-pandemic, and then, ofcourse, with all the numbers
that we're starting to see, allthe reports, what are your
thoughts there?
Richard Barkham (33:28):
You know cities are not the same, so I don't
want to release the report toosoon.
But there are four categoriesof cities, broadly speaking, in
America, and you've referred tothe small cities, or the Sunbelt
states we call them.
You know the Southern sprawlersor the sprawling darlings, and
(33:53):
you know they are very much thefocus of domestic migration and
you know, I think the secretsbehind that are fairly obvious.
I mean slightly lower taxes,slightly up until recently, more
land availability, giving youlower housing costs, and I think
(34:15):
you know people are migratingthere very, very rapidly.
I don't know that that'snecessarily going to, you know,
to ease up Now.
One of the consequences, ofcourse, of that and your
property investors will want totake this into account is that
all of that inward migrationover the pandemic period, you
(34:39):
know, saw a real acceleration inconstruction activity.
So you've now got a lot ofthose markets oversupplied with
for instance, multifamilyproperty and also industrial
property.
So you then have to say toyourself well, should I invest
in those states you know we'regoing to be looking at?
(34:59):
You know negative rental growthfor a couple of years, that's
not always attractive.
On the other hand, if we wantto invest in those, you know
over 10 years, you know you'reprobably going to get that
rental growth coming through andsee some cap rate contraction
as well and, as I say, I don'tknow it's going to be that easy
(35:21):
going forward to create good newstock.
So I think it's a veryinteresting time for investors
in that category of those highlydynamic growing states which
have got excess supply.
It might just turn out to be agood opportunity right now, even
though the next 18 months isnot easy.
Rachel Oh (35:43):
Right.
Richard Barkham (35:43):
But on the other hand, you've got superstar
cities up in the Northeast,you've got Los Angeles and New
York, yeah, and in its own way,you know New York is doing well
because you know the coastalcities rely on international
migration.
International migration, legalinternational migration has
(36:04):
picked up.
Rachel Oh (36:05):
Yeah.
Richard Barkham (36:05):
And those you know, those northeast
multifamily markets are quitehot at the moment.
Rachel Oh (36:10):
Yeah.
Richard Barkham (36:11):
We're near as much new supply in those markets
.
Sure, in any case, with that, Idon't want to tell you the
whole research.
Rachel Oh (36:19):
Yeah, that's OK, we will wait for the report to come
out.
Richard Barkham (36:21):
There are four categories of cities, and the
investment strategies that youtake depend on the category of
city and depend on your timehorizon, but I think it's going
to be a very interesting timefor investors over the next 24
months, not without risk at all,but also plenty of opportunity
too.
Rachel Oh (36:40):
Sure, okay, now that we are, you know again, we're
starting off into 2024.
You have a lot more data.
You've got a report coming out.
You've got all these things.
What are your predictions forthe rest of 2024, in the next
years?
Um would love to pick yourbrain on that.
Richard Barkham (36:57):
So I mean I think we're going to avoid a
hard recession in 24 and 25, butI do see some more economic
turbulence coming along.
Interest rates are going tocome down, but probably not
quite as quickly as peopleexpected and I think that's
going to create turbulence.
But you know growth of around1.6% GDP and 1.6% in 2025.
(37:20):
I think some of the headwindswill persist into 2025.
Sure, I think there's got to bea further value adjustment in
the real estate market andprobably the market that's
adjusted the most and is mostlikely to lead us out of it out
of you know, this kind ofdownturn in transaction activity
(37:41):
is industrial.
You know industrialfundamentals are picking back up
, bidders are out there, so Ithink that's going to lead us
out and probably multifamily tofollow.
And actually what we're seeingalso, you know retail coming
back into fashion with investors.
Really, you know particularlysuburban retail where there's
been a permanent shift.
(38:02):
Now that's been dominated byprivate capital, but the
institutions are coming back inand then I think probably we're
going to have to see some verycreative it might even be a
presidential election issue somecreative thinking about what we
do with, you know, obsoleteoffices over the next 24 months,
but you know, I think it's oneof the.
(38:25):
It's a very odd situation wherewe've had the end of a real
estate cycle without having arecession you know, macro
recession going along with it.
So I think you know we're at thestart of another real estate
cycle which will run for eightyears or so.
Rachel Oh (38:40):
Well, good, well good .
Your report is coming out.
So when your report is comingout, we'd love to have either
you or a colleague.
If you wouldn't mind, would yoube able to help us dissect that
a bit?
Would that be something that wecould do?
Richard Barkham (38:53):
Absolutely, absolutely.
One of my colleagues or myselfcan come along and talk about
the future of American cities.
Yeah, we'd be very happy to dothat.
Rachel Oh (39:02):
Excellent.
Well, richard, thank you somuch.
So, again, we appreciate yourtime.
We appreciate you sharing withus your thoughts and insights,
especially as we head into 2024.
I feel good about the yearcoming up and I feel good about
the years to come.
So, again, thank you so muchfor joining us for this week's
episode of Peaks and Portfolios,and with that I think we'll
(39:22):
sign off.
Thank you, richard, my pleasure.
Thank you for having me.
Okay, well, thank you so much,richard, for joining us this
week.
Your comments have beenincredibly insightful and we are
ever so grateful for youjoining us today.
In the meantime, thank you toall who have joined us today.
From the peaks of the MountainWest, I am Rachel oh, your host
(39:42):
for Peaks and Portfoliospresented PEG Companies, as we
dig into all things real estate.
Thank you all for joining.
We'll see you next time.
Welcome to Peaks and Portfolios presented by PEG
Companies, your go-to podcastfor all things commercial real
estate investment.
I'm Rachel oh, and togetherwe're diving into current events
, trends, issues andopportunities impacting the CRE
investment space, fromdissecting the latest market
moves to sharing insights ontoday's commercial real estate
(00:25):
landscape.
It's time to maximizeportfolios here in the Peaks of
the Mountain West and beyond.
Okay, welcome everybody Againfrom the Peaks of the Mountain
West up here on the WasatchFront.
We are excited to talk realestate, the economy and anything
(00:49):
else that may come about.
Thank you for joining us todayfor this week's episode of Peaks
and Portfolios.
It's a great time to do a bitof check-in and see where we are
in terms of the economy, theworld, especially as we are
recovering, if you will, from,let's say, a very challenging
and rather interesting 2023.
To help us ruminate better onthis start to the year, we are
honoured to have our veryesteemed guest, richard Barkham,
(01:10):
global Chief Economist, globalHead of Research and the Head of
America's Research for CBRE.
Welcome, richard.
Richard Barkham (01:17):
Well, thank you very much indeed.
I'm delighted to be here.
Thank you for inviting me.
Rachel Oh (01:22):
Oh my gosh, Richard, we are so ecstatic to have you
and again, thank you.
I know that you have a superbusy schedule, so we appreciate
you carving a bit of time for us.
Remind me, where are youcalling in from today?
Richard Barkham (01:33):
So I'm based in Dallas.
You can clearly perceive thatI'm not Texan but, I've adjusted
to Texan life.
I previously lived in Boston,which I enjoyed, but I come from
the UK and I was based inOxford and working in London.
But I've been in the States forseven years now.
Rachel Oh (01:54):
Okay, so do we like barbecue?
Are we a fan?
Richard Barkham (01:57):
We do like barbecue, we do.
Yes, if you're going to eatbarbecue, texas is a good place
to do that and you don't miss.
Rachel Oh (02:05):
Your is a fish and chips.
What do we eat over across thepond?
Something like that.
Richard Barkham (02:10):
I do miss fish and chips and I always have it
when I go back to the UK.
But no, I don't miss.
I don't miss the UK too much.
I like the dynamism and theopenness of the United States.
I feel that your talent goesfurther in the US than I think
it does in the UK, so I'veenjoyed being here.
Rachel Oh (02:30):
Good.
Well, we appreciate just allthe variety.
You know all the differenttypes of thought that come in,
and so thank you for enjoyingour country and especially being
in the big, the big state ofTexas.
Before we kind of launch in, Iwanted to, just in case people
aren't always aware.
I mean, you have a veryillustrious title, but I think
you have a very impressivebackground, so I think it's
always helpful for people tohear.
It looks like you've joinedCBRE in 2014 as their global
(02:53):
chief economist and then in 2018, you were also appointed the
global head of research.
You lead a team of 600researchers worldwide.
So, again, thank you so muchfor taking time out of your day
to help us.
You're regularly in the mediaand I'll be honest, Richard, I
might have stalked you a bit, sodon't be nervous and you
present widely, obviously todifferent business audiences,
(03:14):
but you do hold a PhD ineconomics.
You are, I believe, the authorof two books, numerous academic
publications, and you serve on apart-time basis as a senior
fellow and lecturer in realestate at Harvard University and
the professor of practice atthe University of North Carolina
.
So again, we very muchappreciate you taking the time
(03:35):
to hear over the internet,whatever you call this speak
with us as we're kind of hailingin from the peaks of the
Mountain West.
So, if you don't mind, I wouldlove to back up a little bit and
see, kind of, if you could justsum up how you saw the end of
2023, the overall economy, theimpact on real estate, both from
(03:57):
the fundamentals as well ascapital markets.
How would you summarize the endof the year 2023?
Richard Barkham (04:05):
Well, I'll be quite honest with you.
2023 really caught us bysurprise.
And it caught us by surprisebecause the economy performed a
lot stronger than we hadexpected.
I'd been expecting a recession.
You know, we've seen thesharpest rise in interest rates
in 40 years over the last 18months, and interest rates
(04:26):
normally slow the economy up,but they did not in 2023.
And we've just had the revisedGDP numbers for Q4, up 3.4%.
So that was a surprise.
So we've spent a lot of timethinking about why that happened
.
Actually, it's quite aninteresting answer.
It comes down to governmentaction.
(04:48):
So I would say three thingsreally transformed 2023.
I mean one.
You know, you'll remember itdidn't last for long, but we had
a banking crisis in March andApril.
Rachel Oh (05:02):
Oh, I remember we clear funds through First
Republic.
Oh, well, indeed so all handson deck and again it's just
clearing funds.
It wasn't that we hadsignificant, but just the
appearance of anything to dowith Silicon Valley, bank or
First Republic.
And so, yes, okay, go on.
Sorry, yes, I almost forgotabout that.
Richard Barkham (05:24):
No, that's right.
Well, I mean, that could easilyhave spiraled out of control,
but I think the fact that theFed used all of its techniques
that they learned in the greatfinancial crisis took about the
Fed about a year to deal withthis in the financial crisis,
but it all, you know, it usedall of those tools and
techniques in about a week, okay, stabilized the banking system.
(05:44):
So I think that was one bulletwe dodged in 2023.
But there was another very,very strange thing about 2023,
which is the government deficitwent up from 5.2% of GDP to 7.2%
of GDP, or numbers of thatnature.
So we also saw a great bigstimulus, direct stimulus.
(06:08):
Now, you know, that was veryodd and it didn't come.
It came about for a wholevariety of reasons, including
natural disasters, and certainbig states were allowed to remit
taxes at a later date ohinteresting.
Rachel Oh (06:23):
So you know that was.
Richard Barkham (06:24):
You know, that was.
You know it was more a failureof tax receipts than spending.
But fiscal stimulus is fiscalstimulus and it really boosted
the economy.
And I think one final thing youknow normally when interest
rates go up you see a drop-offin construction activity.
That's what happened in thegreat financial crisis.
(06:45):
Really, the construction sectordid not drop.
In fact, construction has beenelevated, really, and that's due
to the CHIPS and the IRA Act,and the creation of structures
for manufacturing has been very,very instrumental.
So that's an indirect impact ofgovernment policy.
(07:06):
And just one final thoughtthat's not going to go away.
We've now got the impact of theInfrastructure Act that
preceded the CHIPS and the IRAAct.
Rachel Oh (07:16):
Okay, All the public works.
I mean all the yeah.
Richard Barkham (07:19):
Yeah, okay, some people think I mean it's
been calculated there are 32megaprojects out there, each of
them worth about a billion inconstruction expenditure.
They're starting to flowthrough now, so that's a
stimulus to the economy too.
So all of those three things, Ithink, gave us a much stronger
2023 than we expected.
(07:41):
But, of course, you know, it'shad the impact, I think, of
keeping inflation higher than wewould have expected.
Inflation is dropping, but thelast mile is pretty sticky and
part of it is just due to, youknow, that kind of more demand
in 2023 than we had expected.
Rachel Oh (08:01):
Yeah, now it's interesting that you say that
because again, I know theeconomy was relatively healthy,
but from where I sit.
So of course our vantage pointis we do a lot of ground up
development, we've been veryactive in opportunity zones so
as a result, we had a lot ofcapital come in from there and
so we're really heavy in thesegrowth states.
Again, we're in the mountainWest and construction costs have
(08:22):
absolutely crushed us rightWith, coupled with interest
rates, and so for us, capitalmarket, on the capital market
side, I mean it was a tough year, it was a really challenging
year.
We just did not get theactivity that we typically do,
and so just thoughts on that.
So it sounds like constructioncosts are I mean for us they've
leveled out in our region and weknow they're not going to go
(08:45):
back down.
But it does sound like you'resaying from a more national
level, they'll just continuecorrect with this RIA and the
infrastructure and all of thosethings will continue to put
pressure.
Richard Barkham (08:58):
Yeah, I mean, I think you know some of the
construction cost growth that wesaw was pandemic related.
You know we had big disruptionto global supply chains kicked
in, you know, 2020, 2021 andlasted into 2022, frankly, so
that's.
You know.
Those global supply chains havecome, you know, much more.
(09:18):
They're back to normal really.
So that's good and that will.
You know, keep a little bit ofa break on construction costs.
But normally in a period ofhigh interest rates,
construction would drop, soyou'd also have demand side
easing.
But I don't think that's goingto happen.
So we're not going to seeconstruction costs racing away
(09:42):
as we have done in the last, uh,several years.
Rachel Oh (09:44):
Yeah, but you know, you know a steady three, four,
five percent increase, I thinkis is very probable yeah, yeah,
no, I mean, that's what we'reseeing and hey, at least it's
not the astronomical, likespikes that we saw in the.
Richard Barkham (09:58):
Well, I would say, you know this might be one
point which is a more of a kindof theoretical point, and I love
theoretical points?
Rachel Oh (10:06):
Of course you do.
You're an economist, you'resupposed to.
Richard Barkham (10:09):
But I think it's going to be difficult on
the construction side to getprojects to pencil out and in
the longer term I have to sayit's problematic for people who
construct space and it'sproblematic for us who lease new
space as well.
But keeping a break on thesupply side is going to give us
(10:31):
a little bit more.
You know, uppishness in rentsum, not in the next 24 months,
but in the longer term it'sprobably quite good for value
recovery to have some sort ofbreak on construction,
frustrating though that is.
Rachel Oh (10:48):
Yeah, no, again, it's always nice to see the silver
lining, and certainly, you know,and again, in our business, we
have a lot of multifamily and,you know, hospitality and the
rents have taken a little bit ofa dip.
They're holding steady, andagain, our markets, but we have
a lot of supply coming on too,and so I think there'll be a bit
of a dip.
But I think, to your point,we've had a slowdown in new
(11:09):
builds and so that will correctitself.
But no, okay, well, that'sinteresting.
So for you, 2023 was a strongeryear than you had anticipated,
based on you.
Call them the three.
Richard Barkham (11:21):
Well, three factors, three facets, three,
three factors, three, threefacets of government action.
Rachel Oh (11:28):
okay, that were you know, a little bit unexpected.
Okay, no, I haven't heard itthat way, so I really appreciate
that.
So, at the end of 2023, thenwhen you're looking to 2024,
curious as to what you werethinking 2024 would start off,
as I'm curious, you know what doyou?
You know what were you, whatdid you predict and what did you
get right and what did you getwrong?
Richard Barkham (11:45):
Well, I mean, 2024 hasn't elapsed yet, so I'm
hanging on to my forecast.
I'll evaluate those, you know,in 2025.
But you know, I think you knowwe're still I mean the impact of
government won't be there.
We've still got high interestrates.
So I think we do see a slowdowncoming and some of the leading
(12:08):
indicators are beginning to showthat.
You know, we talk a lot about asoft landing and I think we're
going to get a soft landing.
But I think soft landing isoften misunderstood.
You know soft landing is, youknow, people think it's like,
you know, sort of falling backon a feather bed, and you know
there's no problems.
You know, sort of falling backon a feather bed and you know
there's no problems.
But soft landing just means weavoid a really deep recession.
(12:30):
A soft landing is still goingto be problematic and throw up
issues and challenges.
So you know, I think some of thestrength of 2023 has spilled
into 2024.
So the Q1 is a bit strongerthan we'd expected, but I think
the slowdown is going to come inQ2 and Q3.
(12:52):
And I think we're going to seea much weaker labour market and
that might start to, you know,create some alarm bells for the
Federal Reserve, and you knowthen we're into a little bit of
a problem that you know.
The Fed is seeing the alarmbells in the labour market, that
(13:13):
last mile of inflation isremaining sticky.
So what does it do?
Does it hold out to absolutelyforce inflation to 2% or does it
take account of the strength ofthe economy?
And I think it will do thelatter.
I think we will begin to seecuts from June, maybe two, maybe
(13:34):
three cuts in 2024.
But I think the Fed wouldrather see inflation trend lower
over two years and maintain thehealth of the economy than
really be aggressive to getinflation down more quickly.
Rachel Oh (13:51):
Even it being an election year.
Richard Barkham (13:54):
Well, particularly being election year
, the Fed doesn't want to tankthe economy in election year, it
just wants to be as neutralpolitically as possible.
Rachel Oh (14:03):
Is anyone neutral anymore, truly?
Richard Barkham (14:05):
Well, you know I live in.
You know as a technocraticeconomist I hope you know I
think people are.
You know there is underlying.
You know the economic variablesare kind of apolitical.
You know you've got jobs,you've got growth, you've got
inflation and you've got.
Rachel Oh (14:19):
You've got jobs, you've got growth, you've got
inflation and you've got to doyour best with economics,
science and data to to keepthose on track yeah, I mean
again, all these numbers havebeen coming out and in I'm a
little you had mentioned, youknow, the jobs, the labor market
, I mean jobs actually increasedby quite a bit right 275 000 it
says.
Richard Barkham (14:40):
Although there was a correction of the previous
numbers but unemploymentremoved higher slightly yeah,
unemployment, I think, is now3.8 percent, up from the
cyclical low of 3.4 percent.
Okay, yes, we've got 275 000jobs, largely in government and
health care, so I think it'spossible to say that they are
(15:02):
still pandemic catch-up.
Yeah, I mean, and I don't thinkthey'll continue because I don't
think the states will havequite as much revenue as they
did but we're still not quiteback to trend level in
healthcare and obviously peoplehave deferred a lot of
procedures during the pandemicthat are just flowing through.
Plus the natural ageing of thepopulation, you know it's just
(15:23):
creating, you know, real growthin the health sector.
But I think the corporate sectoris pretty much finished with
hiring now and everything pointsto a bit of a downturn in
corporate hiring and thedownturn in the labor market
more generally.
Rachel Oh (15:39):
Okay, so then let's talk about a couple of things.
Back in 2023, I used to hear alot of investors say let's just
survive.
Well, especially in real estate, let's survive until 2025.
And 2024 was just going to besort of a dead year.
In my particular position, I'mactually surprised and it's in
concert with what you're sayingbut there's much more optimism
(16:02):
in 2024 than 2023, certainly,and I think there's going to be
a lot more movement in thesecond half of the year.
So curious if that and that'sjust again, this is just my
conversations and the wayinvestors are looking at real
estate.
Curious if that's in concertwith what you think.
Richard Barkham (16:19):
Well, it's certainly in concert with what I
hear and it probably is inconcert with what you think.
Well, it's certainly in concertwith what I hear and it
probably is in concert with whatwe believe is going to happen.
I think the optimism is comingthrough from the fact that we've
had this hike in interest ratesand we're still getting growth.
So we're seeing actuallyfundamentals coming back a
little bit.
In real estate, industrialleasing looks like it's a bit
(16:41):
stronger as we move through Q1.
And there's been no slackeningin multifamily leasing either.
Retail leasing quite healthy.
I mean, the office sector hasgot bigger problems.
So I think some of the optimismis coming through real estate
fundamentals actually survivingthis hike in interest rates
quite nicely, but of courseactually surviving this hike in
interest rates quite nicely.
But of course capital marketsare very difficult and you know
(17:08):
there has been a repricing inthe market.
So opportunities you know arebeginning to emerge.
But people are just waiting, Ithink, for that first cut in
interest rates which I thinkwill come in June.
Yeah, and you know we will seeactivity pick up, uh in in the
second half.
I don't, I don't think it'sgoing to be a, you know, a real
(17:29):
strong surge uh you know,because I think the bond rate,
you know, is going to remainelevated and kind of volatile,
which will be a headwind.
But I do think activity willpick up in the second half and
then up again.
But the traditional patternover 10 years is for capital
(17:49):
market cycles to build up slowly, accelerate towards the end and
then drop off.
So I think we'll see the samesort of pattern a slow build in
capital markets activity asprices come down, as rental
growth prospects pick up, asinflation, as interest rate
(18:09):
comes down and all those dealsslowly but surely start to
pencil out.
Rachel Oh (18:14):
Yeah.
Richard Barkham (18:15):
But it's not like a recession.
You know where.
You know there's distressselling, absolutely there isn't
that and there isn't that.
There has been a price drop,but it's not that big and you
know the banks have still gotissues in lending really.
So this is going to be a slowbuild, I think.
Rachel Oh (18:35):
Yeah, so I have so many questions for you, but let
me one of the things Fire awayplease.
So I want to be structured here.
So you mentioned opportunities.
You're mentioning sort of thedebt environment, banks you know
we keep hearing about I thinkone of the reports I've seen is
$2.2 trillion of debt coming duebetween now and the end of 2027
(18:57):
.
A lot of this is CMBS debt,over-leveraged, you know
over-leveraging by certaingroups, et cetera, et cetera.
A lot of it obviously CMBS debt, overleveraged, you know
overleveraging by certain groups, etc.
Etc.
A lot of it obviously is in theoffice space, but it's
certainly we're looking athotels, apartments, you know
just all the different assetclasses in commercial real
estate.
So just curious about yourthoughts on that, what is I mean
?
Is there a real number?
Is it as because we, you know,we're starting to adapt to kind
(19:20):
of leverage that opportunity aswell?
But I think everyone is, and soI'm just curious how do you see
that?
Or what are you seeing in termsof all this maturing debt
coming due and what are trulythe opportunities there?
Richard Barkham (19:33):
Well, I've heard this story before.
I heard it in 2016, with a lotof funds winding up In 2016,.
People were expecting a marketcollapse and it didn't happen.
A lot of funds, you know,winding up in 2016.
People were expecting a marketcollapse and it didn't happen.
You know these things are verymalleable when it comes to it.
I mean, there are a lot of.
There is a lot of debt fallingdue, and but we've got to
(19:56):
remember, at the moment, youknow, the vast majority, even
with 20% office market vacancy,the vast majority of real estate
is income producing still.
And I think, behind the scenes,the Fed and the FDIC are working
with the banks and looking atthem very closely and saying, if
you can be flexible as long asthose loans are being serviced,
(20:21):
then you know you may have seena value drop, but you know, as
far as possible, extend the termof the loans.
And so you know people call itkicking the can down the road,
but that affected what it is,but it's you know it's creating,
you know it's preventing acrisis developing, but at the
same time.
(20:41):
So you know, is there any cost?
Is there any consequence?
Well, I mean, of course thereis.
Whilst the banks are extendingloans, they do have to make
provisions against those losses.
So I think in the bankingsector, you know, every quarter
that rolls by and banks are ableto provision more, they haven't
fully provisioned.
(21:01):
Yet that rolls by and banks areable to provision more.
They haven't fully provisioned.
Yet it makes that crisis lessand less of a problem.
Even if they have to write offloan values, if they've got
provisions against it, then thatwon't turn into a crisis.
But what effectively it meansis, whilst banks are doing that,
the debt availability is goingto be very, very tight.
(21:23):
Now there is you know, you knowas well as I do there is
liquidity in the market.
Rachel Oh (21:27):
Tons, yes, and they're all seem to be waiting
in the wings, by the way, butanyway, they're all waiting in
the wings.
Richard Barkham (21:34):
The small banks and the regionals, I think, are
going to be out of the marketfor some while and they were
very important in the finalphases of the you know that
period 2015 to 2020.
The region, even beyond intothe, into the, into the pandemic
, the regionals were veryimportant and it's not
completely clear who is going totake their place yet.
(21:55):
So I think the debt environmentis going to remain difficult,
uh uh, not completely dried up,but it's going to be tough for
at least another couple of years, I would think.
Rachel Oh (22:08):
Yeah, yeah, no, I appreciate that and thank you.
Richard Barkham (22:12):
You know, again we're starting to see that's
better than a financial crisis.
Yes, yes, it really is.
Rachel Oh (22:17):
No more financial crisis.
Please.
Let's just take a break fromall of that.
Okay, so one of the things thatwe hear a lot about if you've
mentioned it a few times too,and I think everyone is still
trying to scratch their headaround this but office, like,
what is like, where is officegoing to fall in the end, Do you
think?
Because I think people arestarting to go back, but even if
(22:41):
they do, it's only a few days aweek.
Because I think people arestarting to go back, but even if
they do, it's only a few days aweek.
And so I'm just curious, withall this, you know, and 20% is a
decent vacancy rate, sosignificant, so tell me what you
think about office.
Richard Barkham (23:04):
I mean, I think you know, at the peak of the
last cycle, office vacancy gotdown to 12% and it's rocketed up
to 20%.
And you know companies, youknow the United States has been
particularly badly hit, I wouldsay globally, you know, partly
because its cities are biggerand the commute is longer and
people prefer to work home andthe houses are bigger and people
got nice environment to work athome.
So, and there's a third factor,I think in the, in the case of
(23:26):
the states, just the techcompanies probably had over
expanded um and, you know,taking the opportunity of remote
working to cut back up, youknow, on their, their office
footprints, sure, so that'scaused, you know, that's caused
vacancy to go to to 20.
I mean, I think you know officethat's caused vacancy to go to
20%.
I mean, I think you know officecycles usually last about 10
years or eight years.
(23:47):
You know, I think we're at thebottom of the office cycle.
I think vacancy will probablypeak out this year and then we
will see a slow long-termdecline in vacancy that will
last eight or nine years.
Long-term decline in vacancythat will last eight or nine
years.
I don't think it's going backto 12% where it was previously,
but it might get down to 14% and15%.
(24:08):
We've got positive leasing,anything that's built after
2010,.
We're still seeing positive netabsorption.
So the best space is still indemand and we've still got the a
development pipelineconstruction completions I
forget what it is.
It may be 35 million squarefeet this year and maybe down to
(24:29):
14 or 15 million square feetnext year yeah uh, you know so
occupiers will be heading forthat space.
Uh, very much um, and then, Ithink you know, they'll start to
go for the best available Bplus space, just like any other
cycle.
Yeah, but I think you know thereal estate that is built in the
(24:50):
80s and the 90s and even theearly 2000s might be, you know,
structurally obsolete and willhave to be taken out of the
stock.
That is easier said than doneand that's going to take a long
while.
Rachel Oh (25:04):
Yeah, now, in a future conversation that I'm
going to be having, we're goingto be talking to Gensler, who
has a whole algorithm, I believe, or something on the viability
of office conversion tomultifamily.
Because, again, there's allthis, we believe at least
everyone this opportunity.
We ourselves have done oneoffice to multifamily.
Because, again, there's allthis, we believe, at least
(25:24):
everyone this opportunity.
We ourselves have done oneoffice to multifamily conversion
and we've done an office tohospitality.
Neither were easy projects.
They were difficult.
Richard Barkham (25:31):
I mean the easiest one that I can see is
actually office in the, withsuburban office office to
industrial distribution.
You know, because that kind ofcampus style is a bit more
suitable.
We've seen.
You know, because that kind ofcampus style is a bit more
suitable, we've seen, you know,a fair amount of that in New
Jersey and the East.
But the actual, you know, Idon't know that the economics
(25:52):
will ever quite square out withthose 80s and 90s buildings,
glass and steel.
It may well be that you knowplaces like New York where 50%
of the office stock is actuallypre-war.
Sure, you know a more cellularmight have some sort of
advantage, sure.
And replacement costs are sohigh there, I could see how, if
it, if it could pencil in, itmay be maybe yeah it may well
(26:15):
need some government support aswell you know states or city
authorities providing some grantaid in order to speed the
transition, but I think theupper end of the office sector
will be very lively and willattract, you know, occupiers and
that's what we're seeing.
(26:36):
But it will be a long slowoffice cycle, Okay, okay, well,
that's helpful you.
It will be a long slow officecycle.
Rachel Oh (26:42):
Okay, okay, well, that's helpful.
You know I really appreciateyour comments about office and I
know that's something thateveryone is still we're all
trying to kind of sort throughand figure out.
It reminds me of you know,something I read recently from
you again as I was sort of doingmy research to better
understand you, and youmentioned in a recent
conversation, and quote unquote,I have here we're moving into a
(27:05):
world of the hotelification ofreal estate, where you've got to
treat assets not as chunks ofconcrete but as service
offerings.
And you know, in that context Ibelieve it had to do around
office, and so I just wanted tosee if you could comment further
on that.
I thought that was reallyinteresting.
What does that mean?
Richard Barkham (27:24):
Well, I mean, I think we're going to.
I mean, you know whathotelification is it's.
You know hotels are you knowkind of short or medium term
lets, and hotel operators haveto really focus on brand and
experience and they have toadjust their you know as well as
I do adjust their pricing on adaily basis according to supply
and I their you know as well asI do adjust their pricing on a
daily basis according to climatesupply.
Rachel Oh (27:44):
Yes.
Richard Barkham (27:44):
And I think you know office occupiers are going
to office landlords are goingto have to do more or less the
same thing.
Now begun to see it prior tothe pandemic, you know had its
ups and downs.
You know that idea that inbetween the occupier and the
landlord there is anintermediate operator that
(28:05):
really focuses on, you know,quality and service and you know
dynamic pricing with big datain the background.
Sure, yeah, you know givingkind of much more accurate
pricing sort of signals.
In some cases, landlords willdo that for themselves.
I think that's the way of thefuture.
I think as well, companies aswell.
(28:28):
The world is so dynamic andvolatile Companies don't quite
know what they're going to neednext year.
So, you know, I think theflexibility now it's going to
cost more.
Rachel Oh (28:39):
You know, I think the flexibility.
Richard Barkham (28:41):
This flexibility, um, now it's going
to cost more, you know, uh, forfor occupiers, but you know that
that will be, I think, whatthey're willing to, you know pay
for um, but I think in someways as well it can reduce the
uh instead of having to refit anoffice every time a new
occupier comes in.
sure you know, if you can have astandardized kind of fit out
(29:04):
that works across many occupiers, in some ways that can reduce
costs in operating offices.
So I think the hotel modelcoming into, but I think
probably you know, in some areas, particularly of distribution,
particularly also with you know,in some areas, particularly of
distribution, particularly alsowith you know, last mile
distribution, having big hubsthat lots of different operators
(29:26):
can operate out of and managethem in some sort of hotel sort
of framework, and it's notdissimilar really to what
multifamily operators do either.
Although they tend to be longerleases, you're not far from
hotel standards in many.
So I mean, I think thehotelification of real estate is
(29:49):
alive and well and gainingground.
Rachel Oh (29:51):
Yeah, no, it is so interesting how, again, what was
proven and what has worked foryou know decades has just been
up, upended, and now it's justthis fast race to you know who
can adapt to what first andwhat's the most creative.
You know kind of readadaptation, if you will, of of
what was a standard and there'sjust no more standards.
Richard Barkham (30:12):
It doesn't seem like no and the workplace has
got to compete.
You know you've got acomfortable home where you can
work not completely the same waythat you did, and there are
some you know disbenefits ofworking at home, but you know
against that.
Then you've got the cost of thecommute and you know workplace
(30:33):
experience.
The workplace is going to haveto work a lot harder and I don't
think the downtown areas willwill completely recover.
I think there's probably been apermanent shift not I wouldn't
overstate it, sure, um, but apermanent shift towards living
and working in the suburbsrather than working in the
(30:54):
suburbs and commuting downtown.
Yeah, um, which?
Which cities will have torecover from?
And we're doing quite a lot ofwork on the future of cities.
We're about to produce CBREwill produce a big report on the
future of American cities inthe not too distant future.
Rachel Oh (31:10):
Yeah, in fact I was waiting right before part of my
research because you'd mentionedin one of your previous
podcasts that it was coming outthis first quarter.
So I thought, oh, it must beout and I couldn't find it
anywhere.
So when is it coming out?
May?
Richard Barkham (31:27):
Early May.
I'm not going to pin myselfdown to a date, that's OK.
Rachel Oh (31:31):
That's OK.
I was really excited to seethat it's so interesting because
you know.
So again, we're in the MountainWest.
My office is in Provo, utah.
I live in Salt Lake City, butyou know we are three and a half
million in the entire state,which you know, and it's mainly
because topography Right We'vegot mountains and canyons and
(31:51):
things, so there's just only somuch that can be inhabitable.
And we were, as I'm sure youknow and I always like to pound
our chest a little bit but wewere the fastest growing state
in the last census count.
So from 2010 to 2020, we werethe fastest growing state
amongst much of other mainlyMountain West states and Sunbelt
states.
And during the pandemic, youknow, our office never closed.
(32:13):
There were certainlyindividuals that did work from
home, mainly because the familyand whatnot, but our culture is
very much in the office.
I'm an extrovert, so I have tobe around people I'm not good in
just in my home.
But I bring this all up becauseduring the pandemic, we were
already growing, we were alreadytopping charts in terms of
(32:34):
fast-growing states, and thenthe pandemic occurred and then
we got a huge influx of newpeople right, and so now you're
starting to see this shift inAmerica overall.
You know it used to be sort oflike, you know, the tried and
true investments on thesecoastal cities and the gateway
markets and now you're seeing aninflux of capital and interest
in.
You know, I call them the smilestates, we can call them
(32:54):
whatever you will, but primarilyyou've got the Sunbelt, you've
got the Mountain West, you'vegot, you know, up there in the
Pacific Northwest and cities arechanging and the way people
look at investment in realestate in the US is changing.
So just curious, you know, withthis future of cities that
you're mentioning report comingout, the way you see the changes
(33:15):
in growth across the country.
You know, what are yourthoughts on that, like
post-pandemic, and then, ofcourse, with all the numbers
that we're starting to see, allthe reports, what are your
thoughts there?
Richard Barkham (33:28):
You know cities are not the same, so I don't
want to release the report toosoon.
But there are four categoriesof cities, broadly speaking, in
America, and you've referred tothe small cities, or the Sunbelt
states we call them.
You know the Southern sprawlersor the sprawling darlings, and
(33:53):
you know they are very much thefocus of domestic migration and
you know, I think the secretsbehind that are fairly obvious.
I mean slightly lower taxes,slightly up until recently, more
land availability, giving youlower housing costs, and I think
(34:15):
you know people are migratingthere very, very rapidly.
I don't know that that'snecessarily going to, you know,
to ease up Now.
One of the consequences, ofcourse, of that and your
property investors will want totake this into account is that
all of that inward migrationover the pandemic period, you
(34:39):
know, saw a real acceleration inconstruction activity.
So you've now got a lot ofthose markets oversupplied with
for instance, multifamilyproperty and also industrial
property.
So you then have to say toyourself well, should I invest
in those states you know we'regoing to be looking at?
(34:59):
You know negative rental growthfor a couple of years, that's
not always attractive.
On the other hand, if we wantto invest in those, you know
over 10 years, you know you'reprobably going to get that
rental growth coming through andsee some cap rate contraction
as well and, as I say, I don'tknow it's going to be that easy
(35:21):
going forward to create good newstock.
So I think it's a veryinteresting time for investors
in that category of those highlydynamic growing states which
have got excess supply.
It might just turn out to be agood opportunity right now, even
though the next 18 months isnot easy.
Rachel Oh (35:43):
Right.
Richard Barkham (35:43):
But on the other hand, you've got superstar
cities up in the Northeast,you've got Los Angeles and New
York, yeah, and in its own way,you know New York is doing well
because you know the coastalcities rely on international
migration.
International migration, legalinternational migration has
(36:04):
picked up.
Rachel Oh (36:05):
Yeah.
Richard Barkham (36:05):
And those you know, those northeast
multifamily markets are quitehot at the moment.
Rachel Oh (36:10):
Yeah.
Richard Barkham (36:11):
We're near as much new supply in those markets
.
Sure, in any case, with that, Idon't want to tell you the
whole research.
Rachel Oh (36:19):
Yeah, that's OK, we will wait for the report to come
out.
Richard Barkham (36:21):
There are four categories of cities, and the
investment strategies that youtake depend on the category of
city and depend on your timehorizon, but I think it's going
to be a very interesting timefor investors over the next 24
months, not without risk at all,but also plenty of opportunity
too.
Rachel Oh (36:40):
Sure, okay, now that we are, you know again, we're
starting off into 2024.
You have a lot more data.
You've got a report coming out.
You've got all these things.
What are your predictions forthe rest of 2024, in the next
years?
Um would love to pick yourbrain on that.
Richard Barkham (36:57):
So I mean I think we're going to avoid a
hard recession in 24 and 25, butI do see some more economic
turbulence coming along.
Interest rates are going tocome down, but probably not
quite as quickly as peopleexpected and I think that's
going to create turbulence.
But you know growth of around1.6% GDP and 1.6% in 2025.
(37:20):
I think some of the headwindswill persist into 2025.
Sure, I think there's got to bea further value adjustment in
the real estate market andprobably the market that's
adjusted the most and is mostlikely to lead us out of it out
of you know, this kind ofdownturn in transaction activity
(37:41):
is industrial.
You know industrialfundamentals are picking back up
, bidders are out there, so Ithink that's going to lead us
out and probably multifamily tofollow.
And actually what we're seeingalso, you know retail coming
back into fashion with investors.
Really, you know particularlysuburban retail where there's
been a permanent shift.
(38:02):
Now that's been dominated byprivate capital, but the
institutions are coming back inand then I think probably we're
going to have to see some verycreative it might even be a
presidential election issue somecreative thinking about what we
do with, you know, obsoleteoffices over the next 24 months,
but you know, I think it's oneof the.
(38:25):
It's a very odd situation wherewe've had the end of a real
estate cycle without having arecession you know, macro
recession going along with it.
So I think you know we're at thestart of another real estate
cycle which will run for eightyears or so.
Rachel Oh (38:40):
Well, good, well good .
Your report is coming out.
So when your report is comingout, we'd love to have either
you or a colleague.
If you wouldn't mind, would yoube able to help us dissect that
a bit?
Would that be something that wecould do?
Richard Barkham (38:53):
Absolutely, absolutely.
One of my colleagues or myselfcan come along and talk about
the future of American cities.
Yeah, we'd be very happy to dothat.
Rachel Oh (39:02):
Excellent.
Well, richard, thank you somuch.
So, again, we appreciate yourtime.
We appreciate you sharing withus your thoughts and insights,
especially as we head into 2024.
I feel good about the yearcoming up and I feel good about
the years to come.
So, again, thank you so muchfor joining us for this week's
episode of Peaks and Portfolios,and with that I think we'll
(39:22):
sign off.
Thank you, richard, my pleasure.
Thank you for having me.
Okay, well, thank you so much,richard, for joining us this
week.
Your comments have beenincredibly insightful and we are
ever so grateful for youjoining us today.
In the meantime, thank you toall who have joined us today.
From the peaks of the MountainWest, I am Rachel oh, your host
(39:42):
for Peaks and Portfoliospresented PEG Companies, as we
dig into all things real estate.
Thank you all for joining.
We'll see you next time.
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