VIDEO | The State of CRE: 2024 Momentum and Outlook

Welcome, everybody. I'm Ian Formigle, Chief Investment Officer here at CrowdStreet. Today, I'm honored to have two highly esteemed members of the Naveen real estate team, Sean Leas and Donald Hall, as we talk through the 2024 state of play of commercial real estate and our outlook.

So we fast forward to the next slide, just a couple of housekeeping items before we get into the agenda and then we will get right into it. Investments on CrowdStreet are offered through CrowdStreet Capital, our registered broker dealer. It is important to note that today's presentation is brought to you by CrowdStreet, but this is for informational purposes only. Nothing that we say today should be construed as investment advice or a recommendation to make an investment. We’re going to talk about things today, some of which might be forward-looking, but these are for informational purposes only and best efforts, kind of what we think type of scenarios. Investing in commercial real estate does entail risk and any investments that are contemplated by investors should be reviewed in consultation with an advisor of their choice.

So with that, let's go ahead and discuss the agenda for today because it is action-packed. We are going to begin with a macro overview from Donald Hawk, who is the global head of research at Noveen. We will then move on into some market fundamentals discussions with Sean Lease, who is Chief Investment Officer of their funds. And then we'll get into some closing remarks. We'll kick things around a little bit in terms of where we see the market today and then we will allow ample time for question and answers from the guests. So with that, Donald, let’s go ahead. Yeah, so there we go. There’s our speaker lineup for today. So we know why you're here and that is to get right into the research that we are super fortunate to have Noveen share with us today. So with that, I'm gonna kick it over to Donald to kick it off. Thanks, Donald.

Thanks, Ian. Hey, look, I really appreciate you inviting us here today to join in your webinar. I really appreciate the time we spend together sharing ideas, going back and forth, talking about the market. At Noveen Real Estate, I'm lucky to lead a team of researchers globally. We have 12 of us, and we're pulling in data from all kinds of different data sources, right, from about 40 different data sources globally. I'm gonna start real macro because interest rates matter to real estate and because interest rates matter, inflation matters. So let's take a look at this metric. I want to show here how precipitously we're seeing inflation come down around the world. 

We had interest rates spike at 11.5% in Europe less than a year and a half ago. At 2.6% today, France and Germany, the April data came in at 2.2%, are seeing significant decreases in this. Sorry, I frogged my throat. Sorry. Thank you very much. So we’re seeing significant decreases in inflation. If you think about the US, two-thirds of what’s driving inflation today is housing. So it’s one-third of the index, but two-thirds of what’s driving the data or driving the inflation. On this metric, we see rents are much softer than the official measures. So when you actually put in sort of the private market data series, we see significantly less inflation almost at target. 

You flip to the next slide. Apologies again. Hold on. Just need to sneeze. Sorry, a little bit of a disaster today this morning. On the interest rate side, I think what we've seen because we've seen this global precipitous disinflation, central banks have had to do a lot less work. We get real hung up on week-to-week inflation or week-to-week interest rate moves, day-to-day, month-to-month. It's worth taking a step back to recognize we've seen very little movement relatively over the last two years. 

So if you went back to 22, within the year, and frankly, within half a year, we saw interest rates in the US go up 236 basis points. Through today, actually, the numbers have come in a little bit since I updated this last week, interest rates have gone up. The US 10-year has gone up 59 basis points over the course of two years. So that's 2023 through today. That's helpful, right? Private real estate values lag a little bit. This has given us some time to frankly catch our breath as an industry so that we can sort of catch up on the value side of things for there to be some sort of sense in the market and sensibility come back. You flip to the next slide. 

The one thing I think is kind of wild though, right, is the wide range of dispersion in terms of expectations for the 10-year from now, from here going forward. This shows maybe 50 Wall Street banks' top analysts' expectations for interest rates. What's interesting to me is two things: one, how diverse the expectations are and then two, that not one analyst expects to see interest rates get back to where we were over the last decade. I think this creates some challenges, right? This does create some challenges for real estate bought over the last few years where these folks will be refinancing at higher rates. But on the flip side of that, that does also create some opportunities where maybe those investors need some helpful takeout capital or there may be good acquisitions opportunities on this. 

I'm happy to chat more about it if helpful, if any questions come up. The talks around the regional and local banks have been, at least the concerns there have been a little bit overblown in terms of their exposure to real estate, what that means for the market, etc. So we can provide more color on that later, if of interest. You flip to the next slide. 

We've seen significant value losses around the world. The US is maybe fourth or fifth on this list, down 16.5% through Q4. Values fell a little bit further in Q1. This is the Naree Odyssey. Well, actually, this isn't Naree Odyssey. This is MSCI. Here we're using this data because it's the one data set that we can get kind of across the world. At this point, the data that we're starting to see in Q1, we're seeing some moderation in value losses within the US. For example, the decline that we saw in Q1 was less than half of what we saw in Q4. It feels like we're getting closer to a turning point. I want to talk a little bit more about that. So if you'll flip to the next slide. 

The big picture, I think one reason investors like private real estate in the first place is that you don't experience the same volatility that you do in private market investments. This is why I think one of the many reasons why it's important to put publicly traded REITs and private real estate in sort of two separate buckets. We've seen very many fewer drawdowns over time. And when you have, you tend to see a rebound here a little bit, post the rebound of equities. This is an obviously great correlation here between these, but I think it would suggest, hey, maybe there's a little bit of a rebound here coming for private real estate. So again, to dial down into that a little bit deeper, next slide for me, please. 

We're seeing value losses reset at a much more moderate level. So to be clear, everything below the index, we still have seen year-over-year losses, but retail barely. Retail, you're actually almost getting to year-over-year gains probably within the next few months. Apartments, office, still seeing some year-over-year challenges, but flipping in the right direction. It's really CBD office where you're seeing the most significant challenges in terms of values, in terms of occupancies. This is what makes up the bulk of the headlines. 

So when you read the financial news and they talk about the challenges within real estate, it centers on office. But most of the investments that groups like us are making these days haven't been in office. So I think what you'll find here is that there's real nuance in the market and you can't just turn away from real estate overall. You've got to look through sector by sector. And even once you get sector by sector, Sean's going to chat a little bit about the fundamentals and show the wide dispersion across markets. 

We're finding even within challenged sectors, opportunities when you go market by market, sub-market by sub-market. So there are exciting things to do within each of these. Industrial, you'll see actually just on that chart, we've actually seen year-over-year gains. Now for a few months in a row, it seems that pricing in the transaction market has actually bottomed for industrial, which is an encouraging sign. We'll flip to the next slide as well. 

This is showing the same sort of concept except just throwing a line through the middle, a long-term average. Generally, you'll find when you're looking at pricing metrics, so price per square foot or price per unit, that a market doesn't stay too far above that long-term trend or too far below it for that long. That's a pretty unscientific explanation of it, but it's one of about a gazillion variables I like to look at. And when you look at the market this way, you recognize pricing is starting to feel pretty fair. 

I'd suggest US office, you've got 20% below long-term trend. That's probably fair. It probably should be below long-term trend. It has some significant headwinds here in the medium term. Apartment, you went from values which were significantly above long-term trend, called 15% or so above long-term trend to now slightly below. And when we're looking at deals and seeing what's coming through an investment committee and through our deal teams, they're starting to feel pretty fairly priced. Retail at fair value here. Industrial, a little bit above long-term trend, but I don't think that suggests to me or that doesn't suggest to me that industrial is overvalued at this point. 

When you have, you also have to think through the history. And if you, when you look back at the history of industrial, you had rent growth that was 12-13% per year. We've had 8, 9, 10, 11% rent growth in industrial depending on market over the past few years. So when you're bidding on an asset, you're actually bidding on an asset that current tenants are paying significantly below today's market rent, which would cause you to pay a higher price. So it makes sense that that price per square foot is actually a little bit elevated above that long-term trend. You flip to the next one for me. 

 Lastly, I want to talk a little bit about investment volume. There has been very little going on anywhere in terms of the transaction market, but that's in terms of deals getting done. I'd suggest that we're starting to see a lot more deals. And Sean, maybe you can provide some color on that as well, but it feels like things are turning around. I'll throw out a couple of different thoughts on that. One being allocations. 

 So within private wealth investors, most don't have a specific allocation by asset class. Some do. But if they are, if you do, it's not a strict guideline, we're going to an committee to change. Institutions, which make up a lot of the market, so pensions, funds, life insurance companies, et cetera, generally have really strict guidelines about what they're allocating to private real estate, what they're allocating to equities, what they're allocated to private equity to fixed income, et cetera. And so I'll just walk you through some quick math on that. If you took a 60-30-10 portfolio of equities, fixed income, private real estate and you just took the major indices for each, say in 21 Q4 as an institution, you were right at your target of 10% allocation. 

 Over the next three quarters, all of a sudden, you would have been 370 basis points overweight real estate because through the beginning of 22, the stock market, fixed income, those values fell, private real estate continued to do well for a little while. And all of a sudden you were in a situation where the institutions had to put in redemption requests across the market to get back within their guidelines. 

 Since then, there's been a role reversal. Equities have been on a tear, private real estate values have been coming down fast. Fast forward today, if you carry forward and just again, the simplified portfolio, that same investor would be 120 basis points underweight to real estate. And anecdotally, I know I'm having a lot more conversations with institutional investors telling me they're now underweight, they're looking at what sectors they want to come back into, starting to think about coming back into the market. 

 I think that probably means that we see more transaction volumes in the second half of the year and actually raises the floor on values from here. So it's tough to call a specific turning point, but I think things are looking up here in the second half of the year. But Sean, I'd love to hear your thoughts on that as well. 

Yeah, absolutely. Well, thanks, Donald. A couple of thoughts on what you just mentioned before we kick it over to Sean on fundamentals. Your comments, I'd say that we're seeing similar effects to the extent that transaction volume is still muted. Although despite that fact, we are starting to see an uptick in the discussion of deal flow, the deals coming to market, right? 

Things are starting to begin to break loose and we're starting to see for the example of some portfolios that are out there that they are coming to market right now. So that would suggest to us that in the second half of the year, we begin to see a bit of an uptick in transaction volume, nothing on the horizon that suggests that it's gonna be major or substantive, but it would effectively be an uptick over the currently depressed levels of volume that we're seeing right now. 

I also agree with you, Donald, that the institutional capital, its participation or currently lack thereof right now. I mean, it does in our minds create a bit of a stampede effect. And so as private investors, we’re looking to try to get ahead of that curve a little bit because once it does come in, my experience suggested that if you look at the last major cycle coming out of the GFC, once institutional capital moved in, in force, it did move the markets fairly quickly and did drive up, it closed the bid-ask spread and started to create some cap rate compression. So right now in the current environment, it does still feel like a higher for longer. We don’t exactly know when rate cuts are coming, we think they’re still coming perhaps at some point in 24. 

When you look at how that's playing out in the market, Green Street will show you that it is literally kicking the can sideways right now in the market, numbers are just kind of flat month over month. So it does feel like the market is kind of just waiting for that next shoe to drop being a change of pivot in the Fed strategy. But it is becoming to be an interesting time where valuations are coming into a level that makes the deal coming in the door actually start to make a lot more sense than it did five or six months ago. So with that, Sean, I'll kick it over to you any other further thoughts and then we'll get into your fundamental conversation of which your dot plot is one of my favorites and I know it's coming up. Thank you.

Well, before we jump into that, let me just add my two cents worth. If we're talking about transaction volumes, because I think the transaction volumes and the dynamics that happen are really kind of like the canary in the coal mine to what's gonna be going on with real estate going forward, right? So when Donald just talked about all of the things relating to interest rates and valuation changes, he's talking about the capital markets dynamics that exist, right? And what we've seen is to summarize, values are down, right. Values are down kind of 20%. And what I'm gonna get to here in a second is talk about the operational fundamentals. And you know, what does that mean? Can we fill up the space? Can we get a tenant to move in? Can we increase rents? Right. And what's the income that's gonna be coming off of those properties? And those are both places where you can make or lose money in real estate. 

But while we're on the topic of transaction volumes, you saw in the earlier slide, something like in Q1 $75 billion of transactions happened. That's not a lot, right? You noticed it was like at a really low point in the history of volumes. But the other thing you need to think about is that volume level. So that sounds pretty dire, right? But that volume is something that's reflective of what happened, say three quarters earlier because a seller at that point needs to make a decision to go ahead and sell their property. They need to say, OK, market is what it is. I'm gonna go forward and move forward and sell this property. And then they've got to go out do a full marketing process. Investors are gonna come in, they're gonna do their due diligence, they're gonna come, they're gonna bid, there's gonna be multiple rounds of bidding and then there's gonna be the final negotiation and closing of that. That can take a couple of months, but it can also take several quarters to do from really the beginning part to the end. 

One of the first steps that you do when you're selling something is you go to the brokers, right? And you go to one of the big brokers or to local specialists. And you say, hey, Mr. Broker, I would love a broker's opinion of value and we might have an asset. You can see I'm sitting here in 801 Brickell, we just sold this property about six months ago or so. It's a beautiful property and what you need to do is you go to the local specialists who are good at office buildings in Miami and you'd say give me a broker's opinion of value. And so they'll write up a little valuation. They'll give you how we're gonna go market this thing and then select those brokers based on how we feel like they're gonna execute for us. And when we talked to brokers last year, they weren't very busy at all. 

When you talk to brokers this year, they're doing a lot more BOVs than they have been in the past. So then that that's sort of a Q1 2024 phenomenon, right? Sort of started off with a very, very active pipeline of deals coming through. And then the second thing I would say is, and by the way, what's that reflective of? That's reflective of there are a lot of people sitting back owning their properties, not in a distressed situation who basically said, I don't need to sell, let me just wait for interest rates to fall a little bit further and let me go hit the market. 

That mindset on the seller is changing a little bit. They're basically saying, ok, you know what interest rates are where they are. You saw Donald's like his spaghetti chart that he showed where you had, 20 or 30 different forecast masters of interest rates. And they're all kind of like saying, hey, the next several years, there's not gonna be much movement. It's gonna be sort of 3, 3.5 to 4, 4.5. That's just where the 10-year treasury is gonna be and that's where people are finally saying, ok, we're at this higher level for longer. Let's just accept that as reality and start selling. 

So I think we're seeing sellers now willing to step up and actually sell. Donald talked about the fact that institutional investors are definitely coming back to the market. But there's also something like a quarter of a trillion dollars of dry powder waiting on the sides to buy and in order to do that, they're waiting to buy, they're only gonna pay a certain price for it, but the sellers need to come and meet them in the market and the thing that's kind of interesting now is I think we're seeing sellers stepping up and basically saying, let's get into the market. 

And so, for example, and this is anecdotal information. I don't have any data because we don't have this aggregated. But this is just like literally anecdotal information kind of hot off the press. We've got three deals, multifamily deals that we've decided to bring to the market in and around the area. We are heard down in Southeast Florida. And what I can tell you is we had tested the markets last year for these kinds of deals and, you know, you'd have five people that would show up and they weren't the highest quality buyers, right? 

So there's execution risk associated with that as well. And you know, for any kind of deal when you're bringing a market, you want some demand tension, right? You wanna make sure that everybody is putting their best foot forward and having as sharp of pencils as possible so that they can put the highest bid in. And last year when we would test the market, we actually pulled back a lot of the deals and just said, you know what, now is just not the time to do it. We're not going to accept that kind of pricing. I don't like the dynamics that exist this time around. It's a different story. It feels like the good old days are back for the deals that we brought forward. 

And what I mean by that is we're talking about, you know, not five people showing up but 150 people showing up signing NDAs. You know, you still have a lot of those lower quality investors with a lower probability of actually getting to a closing. But we also have, you know, a lot of the really, really, really good ones coming back as well. And so you're talking about, you know, 150 NDAs being signed, you're talking about 40 to 50 tours being given on the properties, you know, over the course of two weeks. So really concentrated in there. You're talking about, you know, 15 to 20 really high quality bids coming in when the first bids are called. And then you're talking about multiple rounds of bidding, right? This is good stuff if you want to talk about having a robust market for real estate. But what it also means is sellers are coming back, but the buyers are there too, right? 

And so you've got this sense that I feel a little bit here where people are kind of, you know, the fear is dissipating, right? And then you kind of move getting to the point where FOMO is starting to come into play a little bit. Now, the one dynamic that I'll put into the mix as well, that's pertinent is what is happening with real estate, right? Because we had a very high CPI or above expected CPI reading, right? And then you had the treasury kind of pop that put a little bit of a, let's say a little bumpy road in the narrative I've just described, but you can't look at it just on a week-to-week basis, right? Because like, OK, maybe you bumped up 20 basis points, you know, the 10-year treasury is coming back down another 20 basis points as you saw from what Donald talked about, you know, being only up 59 basis points since the beginning of the year, right? So the point I'm trying to make here is simply we're getting to the point where the transactional market is starting to come back. 

And I gave you some anecdotes on the multifamily side. But when we're out there and thinking about either buying or selling industrial properties, we're seeing a similar kind of a dynamic, right? You saw the valuations were actually up for industrial. Believe it or not, retail, which has been lambasted for the past eight years when the great apocalypse started, if you're talking about something like grocery anchored shopping centers, you're actually starting to see cap rate compression in grocery anchored shopping centers because we haven't built any of them. And the demand is pretty strong. OK, we'll come on to that in a second. 

But one quick comment, I wanted to jump in because we're getting a couple of comments in the Q&A suggesting that we're being a little optimistic. And so I think from, you know, I want a caveat to suggest that there will still be real pain in real estate. There will be some assets that have significant challenges about refinance, you know, when they come up for refinancing. I think where we are optimistic is because we see those as opportunities, right? As an investor, those are opportunities for us to make a good new investment or to come in in a pref equity position and rescue somebody. So it's not, we're not trying to suggest that in our seemingly optimistic language that there are challenges in the market, we're suggesting that those create some opportunities, I think.

Oh Donald, I completely agree. And if you would note the sectors that I'm talking about, these are the bright lights. So we're talking about multifamily, which has always been of interest, very well located multifamily, right? We're talking about industrial, which everybody still seeks to get increasingly investors are seeking to get exposure to retail. I'm not talking about offices, right? Offices continue to be very, very unsought after let's just put it that way. And the other thing I would say is that you need to look through each of the different real estate sectors. And when I'm talking about transactions, what I would say is this is different than it was last year. This is a marked change in feeling that exists in Q1 and going forward, at least hopefully continuing to go forward compared to what existed last year. 

Last year, there was no high-quality process that you could run and it's this process that creates the demand. I'm just here basically saying I'm seeing this now. It's real and you’re probably not going to see it manifest itself because a deal that we might have brought at the end of Q1 and that's like going through bidding processes now in Q2 probably isn't going to close until Q3 and that's going to be Q3 or Q4 when you're gonna see transaction volumes actually picked up. And I would also stipulate or comment that as mentioned, the ones that are gonna be highly sought after are gonna be the best assets of the class. And it doesn't mean that there aren't gonna be lots of dogs for which there're still gonna continue to be no bids, right? Whether it's a different sector or a different location. 

With that though, maybe let's jump into what we're seeing in the fundamental side. This is the bubble chart, I'm not gonna claim credit for it. This is something Donald created and I think it does a really phenomenal job of trying to summarize what the operational fundamentals are for real estate across different sectors. And what this shows you is that you do need to pick your sectors, right? So if you had taken, for example, just investments in multifamily industrial say over the past three years and compare that to maybe any investments you maybe had in retail and offices over that time, you may have a return experience that could be as wide as 50%, right. So massive differential in performance based on the sectors that you're picking at. And the reason for that is sort of demonstrated here, right? 

And what this is basically showing, I'll just take a couple of seconds to describe this. If you take a look at that black line that kind of runs right down the middle at zero, that's sort of the equilibrium point. And what that basically means, that's the long-term average vacancy in any of the given markets that you see listed here, right? So in other words, in the upper left-hand corner, you can see a bubble that represents Detroit that's hanging out at basically about a negative 5.5 in the industrial sector. And so in other words, let's say that the long-term average vacancy rate in Detroit is 8%. Well, that means today, Detroit is hanging out at about vacancy of 3.5% right? And that's a good thing because the lower the vacancy, the more pricing power that the landlord has, the owner of the property has to fill up the property and increase rents because it means with lower vacancy, there's not as much property available for tenants to choose where to come. So they can't play landlords off each other to try and get lower and lower rents. 

And so what we continue describing what we see here. So the black line, that's the long-term equilibrium. Each of the individual dots represents one of the top 50 markets for that sector. And so when you look at the left-hand side, you can see industrial, apartments, retail, offices, and those are in real estate, what we call the main four food groups, right? So the reality is that's historically been the four sectors that people want to invest in. The reality is there's a whole another branch of alternatives as we call them or niche sectors. And those are actually becoming increasingly important. And I would even argue more important than the main four food groups, right? These are things like healthcare related, right? So it could be life sciences, medical office building, senior living, memory care. It could be technology related. 

So it could be data centers, could be cell towers, right? It could be things like self-storage or single-family rentals or student housing, right? Any kind of different manufactured housing kind of heads-on-beds sort of a strategy, right? But what we've got here just to keep it a little simpler is the four main food groups and again, industrial, apartments, retail, offices, and each of the bubbles represents for the 50 cities the vacancy relative to its long-term equilibrium average vacancy rate in that city, right? So again, to the extent that the bubbles are to the left, that reflects a tight market, to the extent that it's to the right means it's kind of loose and that vacancies are rising or have risen in that market. 

The size of the bubble reflects the size of the market on a relative basis. So you can get a good sense of, you know, while Sacramento may look like, oh, this is tremendous, like look at that. It's done at negative five for industrial. It's a small market. So you may have liquidity concerns when you go in there. So the size is also a very relevant consideration. And then you've got the triangle as well. The triangle just basically takes a weighted average over all of those cities.

You explain, it makes me feel like I need to simplify this chart a little bit, maybe. No, but I just want to make sure that you can almost see maybe a bit much. Well, no, I don't think it is. I don't think it is because I think what you can see here, then you can just very easily say let's go to industrial and what do we see? Industrial is still below the long-term average, right? And what we're seeing in the industrial marketplace is that the demand for industrial remains very strong. 

The supply of industrial is under control, right. It's not that hard to build an industrial property because it takes about nine months, maybe a year. Right. You're just pouring some concrete sides, putting it up. Probably the hardest thing is making sure that you can get enough power and get the power hookups. That's the thing that's been causing some delays recently. But the supply-demand dynamic is back in check. There was a lot of supply being delivered. It's back to the point now where the demand side remains pretty robust and it remains robust. Certainly e-commerce, e-commerce continues to grow as a percentage, retail spending continues to grow. So the growth of e-commerce is something that's on the upward slope and there's a direct correlation between e-commerce spend and how many square feet of distribution facilities is required. So that's one of the factors that we think is a pretty strong tailwind for industrial. 

There is, let's chit chat about that one a little bit because I think it's worth a lot of people talk about in e-commerce and why it's a demand tailwind for industrial. But I think it's worth fleshing out a bit. You require 2 to 3 times as much space to fulfill a dollar of e-commerce sales than you do to fulfill a dollar of traditional retail sales. And that's because it's fundamentally more efficient. Take a forklift and pick up a pallet and put that pallet on a truck and send it to me than it is to send me a new pair of sneakers and you a new watch strap and send Ian a new wallet, right? And then Ian doesn't like the wallet and he sends it back and the whole thing is just so regardless of how many robots you throw at it, so space intensive. The other bit that so a lot of people get that comment. 

The other part I think folks don't recognize is the demographic tailwinds for e-commerce penetration. So if you look at your largest five-year cohort in the country, they're between 29 and 33 years old. So 29, 30, 31, 32, 33, that's your largest cohort. When you look at e-commerce sales on one axis and you look at median and you look at household income on another. You see that your youngest cohort already spends twice as much on e-commerce despite making half as much. So put another way, you've got this large young cohort who's already spending a ton online who's just starting to enter their prime earning years and their household formation years and the years where you buy all kinds of crap. And you've got that as a demographic tailwind for e-commerce spend going forward and your point on it not being hard to build industrial is, right? 

But what's hard also to get is the zoning because nobody wants more trucks in their backyard. So you have long-term pressures on the supply side as well. And so that's why even as you go through these short-term changes where maybe demand softens for a little bit or supplies elevated for a short bit. It's a thesis I still believe in long term. So anyway, I wanted to call some of those pipes out. 

No, thanks a lot for unpacking just the e-commerce component of it a lot. You do have the on-shoring, which is very real as well. We are trying to bring industry back to this country. Everybody is aware of the fact that we're doing that with respect to chips. We're also doing that with respect to drugs. Pharmaceuticals, right? 88% of the drugs that we buy in this country are manufactured outside the country. We had an insulin shortage during the COVID period, right? Which just seems completely absurd. So there's also other things that are surrounding that, that we're trying to bring back. And so there's a very strong increase as well in demand for space just to make things back in this country, right? 

Which uses a little... go ahead Donald. Some of that because I think it's fun for this to become back and forth. But some of that I think is changing where we see some of the demand and where we see some of the opportunities. You mentioned chips, right? Intel is spending 22 billion in Ohio on those plants, right? Columbus right now has been on fire within the apartment market. That's one of the bubbles on the left. It's a place where you see vacancies long-term average where rents have been really strong. Traditionally, maybe that's not a market you would have been excited about, but fundamentals are there and now you've got chip manufacturing coming there and you have some real growth relative to some of the Sunbelt markets that have been really on fire, right? 

You've seen a little bit more softness there due to oversupply and that gets back to my comment before and sort of ties together your comments on manufacturing and industrial production with my comment on, look, there's always something to do somewhere. That's thank you Donald. And we should just keep track of time here, let's move on to the apartment side and keep on the bubble page if you can. The thing about apartments and taking a look here, right? You can see what the triangle is to the right of the equilibrium line. What does that mean? There's softness in the apartment market. And why is that the case? This is actually where if you can move forward real quick, that's not so much a demand factor, it's actually a supply factor, right? 

So if you take a look on the left side, the blue line, the kind of straight blue line is basically the percentage of existing stock that's under construction. And what can you see? Well, you can see we hit a peak fairly recently of about 6% across the whole country. Take all the apartments that exist, there's a whole another 6% that's being developed and that's great for new apartments and that's great because of the rental growth that we've seen and, you know, we're fulfilling kind of a supply-demand capitalist system here, but that does create softness in the market. Now, the good news is you've got that 6% it's falling down. If you look at the new starts, right? So those are the gray lines that kind of go up. You know, the starts are dramatically off. And that's long-term, you might think of a market as being relatively stable if they've got something like 1%, 2%, maybe 3% being delivered in the market depending upon the strength of demand in that particular market. 

Could we go back to the bubble chart for a second? And so let's take a look at the individual cities though. So what do we see? Because here's where again, back to Donald's point, pick your location, figure out where you've got the opportunities. I don't know if investing in Austin or investing in Nashville today makes the most sense unless you're getting a very, very strong deal. Well, why is that the case? Well, take a look at the vacancies in those markets. While the vacancies in those markets are up at 6% above their long-term average. Why is that the case? Well, in Nashville, you've got 14% of the existing stock being delivered 14%. That's a lot of apartments that need to be filled up. That translates directly into the fact that the landlords aren't gonna have very significant pricing power. 

Now, will Nashville fall off the cliff? Is that gonna be a devastating market? I don't really think so. I think we're gonna characterize that as seeing operational softness weakness for a while, but you still have 200 people moving to Nashville every day. You still have big corporations coming and moving their headquarters and dropping them down and creating 5,000 new jobs, you know, in the case of Oracle, for example, you know, that are pretty high paying jobs. But that also means you've got to figure out which cities do you want to invest in. And so, you know, I don't think too many people had been looking at New York City or been looking at Chicago during the COVID years. But guess what? There's been limited amount of construction in those locations and you know, believe it or not, rents are now at an all-time high in New York City. Donald, anything else, any other pearls of wisdom on the multifamily side?

One more quick point just to tie it back to slide one. Is that because vacancies are above long-term average, you've now had nine months in a row where your apartment rent growth has been between 0.1 and 0.3% on a year-over-year basis. Meanwhile, in the federal measures, it's still showing up as 5.7%. So you pull out the different measures within inflation. The two big ones that are above target are rent and owner equivalent rent. And again, when you flip through to what's actually happening today in private market data series, whether it's single-family rental, which is holding up actually ok, at like 3.5% rent growth. 

An apartment at 0.1 and you replace

 that, you're at 2.1-2.3% rent. And that's why I think you can have some confidence in inflation going down because the main drivers have significant wins frankly in the bag as those lagged measures catch up. That doesn't mean that there aren't tripping hazards, that there aren't other potential causes for concern. But I think that's one that gets talked about a little but you don't always hear people do the math on it. 

Oh, that's great. Yeah, thanks. Now, that's an important factor for people to consider because that inflation number is really the most important thing to be looking at over the short term here. Tell me about retail though because this one looks sneaky, I think. 

Yeah, this one is the sneaky one, Donald. There's no question about that. Like take a look at that triangle. What is that triangle telling you? It's telling you from an operational perspective. Retail actually is the best one among all of these different kind of forming food groups that you've got here and there's a couple of explanations for that. And if we could go to the next page, come back to the supply page, right. Take a look on the far right-hand side here. What do you see? Well, you see basically, almost no retail has been delivered. And this is basically new starts throughout that period of time and it started about eight years ago. 

Not only has there been very limited delivery of new stock, but also a lot of it's actually been taken offline and converted into industrial or it's been converted into multi some higher and better use. Right. And so we've actually kind of lost retail space over this period of time. At the same time, a massive wave of bankruptcies existed among retailers back in 2017 and 2018 when e-commerce first came into being. And that's what we describe as the retail apocalypse. When you kind of dig into that, what you find is that really a huge amount of those were really middle-level apparel retailers, right? That went bankrupt and kind of as a result of all that, a whole bunch of new retailers were formed that were all just online. We call these the digitally native retailers and what those retailers are doing is they're basically saying, we've kind of penetrated as far as we possibly can just being an online seller. 

We need to have a brick and mortar store, we need to have a local place where people can come and touch and feel or pick up or deliver the goods. And so, there's this whole concept of omnichannel retailer that is coming into being and those retailers are basically coming back and picking up and looking for more space for retail sales continues to increase. These retailers are healthy. This is the first year, last year that we've had more openings and closings of shops in a long time and there's been no new supply. And so this is why particularly if you take a look at things that are defensive, like say grocery-anchored retail. 

So grocery-anchored shopping centers that are needs-based and insulated from the internet. You're finding that the in-line stores, if you're at the top one or two grocer in a catchment area, you're also gonna be able to push rents. And so this is why retail, let's go back to the bubble chart here. That's the sneaky one. Nobody's had their eye on retail for a long period of time. Cap rates had actually expanded in the retail space because there, by the way, there's plenty of retail that's obsolete and dead. And those are the older kind of enclosed sea malls. Those have already been wiped away. There's some that are limping along the more B-class malls, right? 

There's plenty of retail that's suffering, but there's opportunity because investors looked at retail and just said, I can't go to my investment committee for retail. So is what we hear quite frequently. The reality is the valuations are pretty attractive still in this space. And the operational fundamentals are looking pretty good and you can kind of see the operational side right here, Donald over to you. Anything to add there.

No, nothing to add. I was gonna start a few Q&A questions or a few questions have come in. I didn't know if maybe we wanted to start thinking through some of those or let, let's let, let me, let me finish with office though, just real quick because I think the thing that's really important to say about office is, if you're an investor and you're picking up the newspaper, what you're gonna see is you're gonna see, CRE is taking down the world, CRE is killing the banking system. CRE has got problems all over the place. Donald said it earlier that's largely concentrated within the office space and even within the office space, there are opportunities in areas of extreme stress, right? And basically what that comes down to is what's the age of your property, right? So if you've got a 2015 or newer property or it's been renovated, like highly renovated and made relevant during that period of time your vacancy rates are hanging out at 9%. Not terrible. 

If you are 2015 and older, your vacancy rate is above 20%. And those are the ones that are really gonna be in trouble. If you've got that newer type of office building, you're gonna be able to fill it up with tenants and guess what, you're actually gonna be able to get rents that are above, if it's a brand new building, people on the road, right. It's kind of surprising how strong the rentals are for the properties that are attractive. On the other hand, if you don't have the kind of building, the more modern building, and again, there are a couple of things that people think about what constitutes modern or not. The first thing they're gonna be looking at is, is there an amenity package in the building that's very strong and they're talking about things like, coffee shops, maybe bars, maybe really good food options, outdoor space, gyms. Believe it or not golf simulators, breakout space, a nice modern clean feel to the property, right? 

That's one of the things they're thinking about. They're also thinking about the latest health and wellness technology in the building. So for a lot of the older buildings, they had filtration systems or air conditioning systems, a track systems that would pick up the air from one corner would treat it, cool, it warm, it drop in another one, but it wouldn't filter it and take out viruses. So somebody could sneeze over in that corner and it might spread around the whole building. It's known as a sick building. Touchless entrance systems. These are things that are important as well as for a lot of tenants. The greenness of the building. So if you're a corporate organization that needs to report what its carbon footprint is, office buildings can account for something like 40% of a company's carbon footprint. You wanna make sure that footprint is as reduced as possible. So health and wellness, environmentally friendly and amenities. So I'll, that's, that's it. I'll leave it maybe let's turn to those questions.

Yeah. Sean quick, quick comment on the office as well since somebody had asked the question, you know, we definitely see we are at a point where some office trades are beginning to look interesting. I definitely concur with the bifurcation of the office market. You know, from our perspective, an A-class office that's relatively new and has been priced at, I call it a 40 to 50% discount from its peak valuation pre-COVID is far more attractive in our minds than something that might be priced at 80 to 90% off but looks like class B commoditized, not near transportation, and just doesn't simply provide the office experience that anybody is excited to go back to. 

I mean, like everything that Sean just described, I think kind of covers it in a nutshell as companies are looking to reboot office, in-person office experience, you can literally distill it down to. What is your experience when you go to the office? What am I showing up to? How good and useful is my space? Is it giving me a better overall experience than what I can get in my home office? And if you show up and say this is a great experience, I'm actually starting to interact with my coworkers. Again, I have that cafe in, in the lobby. I'm down the street from things I want to go out to see and do at lunch and it was relatively easy for me to commute. Final thing too, towards newer assets. What's my window line? Like how much light do I get in my space? 

You can't discount the overall feel of when you go into an office, how you feel when you leave it. Those are the things that everybody is highly sensitive to. It's what employers are looking at. It's how they're thinking about taking their new office experience, rebooting it and getting people back in the door. So we are at an overall place in the market where some of that stuff is starting to look like relative value. Generally speaking, when a sector feels like it's priced like it's going out of business, that's when you know that there's gonna be some opportunities while there's still definitely rife with risk in major pockets of it. So just our overall thoughts on that.

Yeah, let's go ahead. We got about 5, 10 minutes or so, let's get through some of the questions and I am going to, let's go ahead and start with a question earlier in the beginning of the presentation. So Adar asked, in terms of the now higher for longer. So I want to pass this around to Sean and Donald and then I'll add in some thoughts now that we're contemplating a more relatively flat 10-year, for example, interest rates not really substantively coming down, maybe 1 to 2 rate cuts. Now that we're looking at a neutral interest rate that might look more like 4%. Why in your minds, does that still suggest the possible rebound in commercial real estate over the next few years?

Yeah, I would say if you're talking about 4% for different, let's just say a 4% risk-free rate. So, in a world where a 3% risk-free rate is kind of easy if we're looking at a 4% risk-free rate. How does that landscape? How does that change the landscape for commercial real estate? Why would you still be at least moderately bullish over the next few years?

One of it comes down to what's the ability to grow the rent that you're gonna get off the property? And the second thing was one of the charts that Donald put up which is the discount to replacement cost, right? So if you can get a property and so if interest rates just stay at 4% forever, you'd want to get to a place where maybe it's like a 200 basis point premium to that 4% from a cap rate perspective. 

One of the ways you can do it is you can reduce the price or you can grow the income. So you gotta make sure you can grow the income off that property. The other thing too is just stuff has become more expensive and you need to think about what replacement costs are for a lot of properties as well, right. So that's gonna limit the supply and that's gonna come back to again, relate to how much you can grow the rent in the properties. I'll leave it there.

I thought those were great comments. I only mention on the supply side. I think that chart that showed how far starts have come down is meaningful and construction financing is really hard today. So as long as you're in markets where you at least have positive demand, you'll eat through that supply and time and all of a sudden be in a spot where fundamentals are tightening right back up.

Yeah, totally concur. And so yeah, and that was the point that I was gonna make, Donald was that this really does boil down to a supply-demand factor. Given the last, you know, what we saw was where we had some hyper supply. Now there's really quickly becoming no supply. So, you know, again, kind of shocker in the markets that had seen the most activity now that you're seeing, you know, vacancies and multifamily, for example, in Austin hit double digits, it's really, really difficult to get a new project out of the ground. 

So hence, you're going to see that new supply spigot drop off to Sean's point earlier, people still are moving to Austin's and Nashville's and so forth and we've actually seen that. So one data, for example, is that CBRE tracks 69 markets nationwide. The most recent report that I saw from them showed that 67 out of 69 actually saw positive absorption in the multifamily over the last four quarters. So absorption is occurring now, it's occurring in some markets that are currently oversupplied so that it's starting to suck up a little bit of that excess inventory. Some markets are still relatively stable. So you're going to see a little bit of a burgeoning demand in that market. 

And really what this boils to me in my mind down is its basis reset. So here's a really good example of how Blackstone came at its purchase of apartment income rate. I think typifies kind of like what you think is a reasonable expectation of how it's just how they looked at it. So when you take apartment income rate and then you kind of factor in the transaction cost and say what, what were they really buying it and you bump up the stock price because it did trade at a premium. 

What I heard from industry kind of the insights and what people are talking about is that Blackstone was relatively looking at, hey look, this is a mid five cap rate to potentially high five cap rate acquisition depending upon an asset by asset basis of a lot of high quality multifamily scattered around markets that are generally growth oriented. And if we can buy that and we can, if we put appropriate leverage on it. So for them, roughly maybe call it 50%. I don't know the exact number off the top of my head. 

They were looking at then to Sean's point. Now you have no I growth. If we think that now rents are fairly stable, they've come down in certain markets, they've trended sideways in some other markets and they've incrementally improved in third markets being for example, Midwest markets. But overall, from this point forward, in a market where supply is starting to taper, there is still absorption that's occurring, that gives you at least a reasonable probability of experiencing modest rent growth over the next few years. 

And if you look at data points providers like costar and the like, that's what they're projecting. So now if you take that apartment income re transaction and you say, hey, I can grow my NOI at call it 3% so on a on a Kegger basis over the next five or seven years. And if they think that cap rates are relatively stable, ultimately saying that, hey, I think my exit cap rates are not going to be materially different than where they are now, they might be a touch lower, but I don't think they're gonna be substantively higher. 

That's a scenario that if you take an underwriting and say go in at a mid to high five cap, grow your NOI 3% per year be leveraged at 50 ish percent. And that, and that's that, that, from our understanding, that is how Blackstone looked at it. That's why they thought that, that what they were picking up was a relatively good buy in their estimation and why they would want to allocate $10 billion of capital into that deal. 

So just word on the street, that's kind of what's happening right now. I think this all rolls up into, nobody's expectations are for, hey, we're going to have a quick return to massive asset inflation, we're gonna see fast. We're gonna rip the 10-year down and that's gonna have the stampede come in and we're gonna get back to a bidding frenzy, I think really what it looks like right now is that where asset base where assets have been set to reset to, you know, particularly in multifamily, you know, industrial looks, you know, on a good, you know, kind of fair value basis, right? 

Donald said fair value earlier. And I do think that is the operative term, all things considered right now. It gives you the ability even in a market where nothing materially gets better in terms of a tail end perspective, it gives you gives you the opportunity to come in, let buy an asset at an appropriate price, leverage it appropriately operate it, have confidence that you're gonna see marginal increases in net operating income and then look towards profitability five years out right towards the end of the cycle without expecting anything outrageous to occur. 

But it is a kind of what we would say is a steady as she goes, you know, kind of market for the next few years. And that we think that by the time you get to 26 or 27 you look back to the 24-25 vintages and say those are relatively good entry points in the current cycle. So with that, let's get on to a couple of other. Here's an interesting question because I know that Naveen invests in this. What are your thoughts on the self-storage sector?

Yeah, I'll hit on this one. And I'm gonna wrap it together with some of the questions about refinancing and about my promise before, about revisiting some of the questions on the local and regional banks. And so the self-storage sector I think is attractive. We're excited about it right now from a value add and opportunistic standpoint, you've seen rents reset pretty significantly in that sector. 

If you look at it at an inflation adjusted basis, rents in the storage sector are down to 2014 levels, they're about the lowest they've ever been relative to that long-term trend, but supply has sort of shrunk right back up. And occupancies are stabilizing. I think one of the places we've seen, even at the height of that market, we saw a lot of opportunity and continued to have good success with self-storage with the institutionalization of those assets. 

So buying from small mom and pop style investors who had managed the property for occupancy, who didn't have a website, didn't have sort of current leasing tools, etc. We were seeing a pretty significant uplands in rents and occupancies even kind of at the height. And if you think through today where we've actually had some softness, I think there's a good entry point because you can combine both of those factors together. 

I think it's a good go-forward basis and to loop that in with the local and regional banks, they have pulled back from real estate, but the average loan size is $9 million 9.3, right? It's not, they're not lending on huge office towers, they're lending on grocery-anchored retail, which we like to local to local investors, they're lending on self-storage to local investors. So that when you have the opportunity with a big balance sheet or a big line of credit to come in into those sectors that you like. Yeah, there will be some challenges with the refinances. Those are opportunities frankly for us. I'm bullish on self-storage.

I totally agree in terms of some of the stuff that we've seen, the number one opportunity was in the institutionalization of the sector. There still is just a tremendous amount of self-storage out there. That is that mom-and-pop operator. One case study that comes to mind is that a number of years ago, we worked with a group out of the Carolinas and they would go in and acquire a given location. It would have deferred capex, it would have the weeds outside. It would be kind of the place that you didn't want to go into. 

And that office might be open from 10 a.m. to 4 p.m. four or five days a week by taking that property, improving the feel of it, repainting it, new driveways, all the like creating a professional office and then also critically installing technology at the property that enabled the project to go from being open 30 or 40 hours a week to being open 24/7, booking online, and then creating a professional field that had cameras that they even had drones that can fly around the property and so forth. 

You were seeing scenarios where they would take one of those previous assets and in the course of 1 to 2 years grow NOI by 40%. They do that multiple times and across multiple assets they acquired. So that is part of the equation I think in self-storage. The other thing I think also that we look at is it is a market-by-market assessment. Some markets have seen a lot of self-storage development. We look at that per square feet per capita within the trade area. 

And when you see that number get below five, particularly if it gets to three, they're like, OK, there's definitely room for another project to come in here, particularly if it's climate controlled because there's also a big difference between putting your stuff in what is like a garage that can freeze, it can boil in the summer, and versus I'm gonna put my stuff in a place that sits at 57 to 65 degrees year round, kind of no matter what, that's a huge difference in terms of like, do am I actually literally just like cooking my stuff and I'm gonna show up and I'd have no value in what I'm storing there. 

So the climate controlled is a real big issue. It's there, the sector is gravitating more and more in that direction. So when we look at it also, it's like, hey, how much climate control it exists in that market? How much more do we think is there? It obviously gets a premium in rents, find a market that's relatively undersupplied in climate control. It sits in a good location. It's easy in and out has great tech that can get you easy, get you renting that unit, get you access to it. That's kind of where we think that the name of the game sits still today. 

Alright. Are we, how are we for time? Are we? Are we good? Let's go. Let's go one more. We're in overtime but we got le let's so like you, you guys choose one more question and then we will wrap it up, Donald, I'll let you do it, you get better access to it. They probably I'll just come in again because there again, there are a couple on refinancing. Look, I think I want to convey again. I think there will be some challenges. 

A couple of points I'd make there because some of the headlines that have gotten written have been really dramatic. And I think I just want to boil through that a little bit. Commercial real estate is not bringing down the banks, it's not bringing down the economy or anything like that. So, first one simple thing, which I think we all know is if a vendor was at 65% LTV, on an office building, if that office building fell, so they, that office building fell by 50%. Right? They didn't lose 50%. They lost the spread between, they lost 15, right, between the 65 and the 50 or lost 40, 45 then or 35 they're right there. 

So point being, I think there's some cushion there in terms of the pain. That's sort of simplistic, but I think that's helpful to point out. Two, I think the size of the refinancing issue is smaller than people recognize, once you adjust it for the size of the real estate market and the size of the economy. So everyone talks about a wall of maturities and a wave of maturities. And when you look at the peak of coming maturities relative to last cycle's peak. And then you compare that to the size of the overall real estate market today versus peak. The last cycle's peak. There's a big mismatch. 

This coming peak is 50% higher in terms of refinance. And you say, oh my God, 50% higher refinancing relative to last cycle's peak, the size of the commercial real estate market is 80% higher than it was at last cycle's peak. Why? Because rents have grown over the last 20 years, you've had more apartment buildings built, you've had more industrial buildings built, the physical, our population has grown. 

And so you say, OK, well, if the value of real estate has grown 80% over the last cycle peak, is that inflated GDP is up 80% from last cycle's peak. The S&P 500 is up 180% right? So when you back through it and you say, OK, this coming in refinancing peak which looks really scary at 50% higher at the last cycle. And then you index that to all other things you say, OK, relative to the size of the banks, the banks, relative to the size of the real estate market, relative to the size of the economy, relative to the size of the overall investable universe, this is a manageable issue particularly when you then boil it down and you say, where are the real concerns? Primarily office? Where the real, where there are some concerns, there will need to be some rescue capital and folks that went in at the peak and select department markets. I think those things we're gonna be able to work through. 

I think that's important because these doom and gloom headlines are a little bit too much. I want to suggest again that there won't be issues like there will be one-off issues, there will be one-off banks that have trouble. There will be some properties that go back but it's not a cataclysmic economic event. Donald, I'll also just throw just from just a pure, again, these are just anecdotes. The market for loans, if you've got a high-quality asset that's not office, you can get it financed and the spreads that you would have gotten are coming in, right. They're coming in 30 basis points. 

Now, anything that's got a little bit of a chewiness to it, anything that's got a complication or a story that's still gonna be, that's still gonna be pretty challenging, but you're gonna have a lender who's there, who's gonna work with you, right? And there's still value, in these assets. So don I agree with you what you're saying? But I'd also say, the lending market is improving, spreads are coming in, it's becoming marginally easier to borrow. There is no question of flight quality. 

If you've got a high-quality asset, you can get it financed. Not offices. And yeah, I'll leave it with that. Sean, I totally agree with you that when we think about the refinance landscape, it really does boil down to a case-by-case analysis because it's gonna really pivot off of a few things. One, when was the asset acquired? And also what kind of financing was put on it at the time? 

And so if you go straight to the most distressed market in terms of its refinance outlooks, you would go to the 21 and 22 vintages probably you would look at something that was levered at 65 or 70% and it would have been done. So with variable rate debt, it would have had a rate cap that would have been 2 to 3 years in duration. And so, hence, those rate caps are expiring today. 

Those assets, if you go, let's just talk about Austin, for example, right, super hot market that was on fire in 21 and 22. That would have been at that time, a spot cap rate market on multifamily that would have looked sub 4% you'd been buying in the threes. Maybe if you're buying a fully stabilized property, it would have been in the low fours, but it would have been above that and you would have been hoping to grow NOI at three or 4 to 5%. And then you would have expected to sell it into a modestly expanded cap rate market, but underwritings would have been in the mid force, for example, today, what does Austin look like? 

Well, to Sean's point occupancies are kind of 90 ish percent, maybe 91. The spot cap rate market right now in Austin on class B to a multi-family is now in the fives. And so there are assets that are coming up on renewals, and they're having their rate caps expire. They're seeing that their debt service coverage ratios are falling below one. Now that when you see what, where they were, you were buying when sofa was zero and now sofa is sitting here at five and a quarter. And so now their, their looking and we say, okay, asset values have come down. So if the deal was worth $100 back in 21 it's worth 75 today, 80 on a case-by-case basis, something like that hasn't fallen off a cliff, but it is now down. 

So really what that means is that now when the lender looks at it, they're gonna look at it one of two ways. Either A I can give you a new loan based upon a debt service coverage ratio. That makes sense, all things considered. So they're gonna de-lever the asset they're gonna give you instead of what was 65% of what you bought it at in 21 it's going to look closer to 45% of that number or what they think is reasonable today or they're gonna say we can agree to kick the can a little bit in terms of how much we are technically levered in the deal. But we're gonna make you buy a new rate cap, gets your debt service coverage ratio down to something that's sustainable. 

And then we can go from there. And that's that case-by-case scenario because when did I buy, what did I pay? What's my current asset really worth? What's the lender willing to do? Are they pushing me out? Are they willing to work with me? Provided that I come up with a new rate cap. Rate caps are expensive today. The last time I looked, if you look at a deal I saw for example, $100 million loan, a two-year rate cap from Chatham is gonna cost you a couple million bucks. 

You cut that in half, probably on average for multifamily deals because there are probably more $50 million loans. These are the things that they're grappling with what you can do in one sense is you can look at this on an un-levered yield on cost basis if we bought that deal in Austin in 21 and it was going in, it was like just called a 4% yield on cost, you've maybe gotten it up to a high 4% yield on cost now through some rent growth, but you've actually experienced in the last year rent degradation. You might be sitting in this more mid 4% you know, 4.5 4.6% yield on cost in a market that would price the asset today in the low five cap range. 

That's the scenario where you're saying look the asset today as it currently stands is underwater. We did talk about the fact that the supply spigot is really shut off in Austin gives you some confidence that if I can weather the storm, I think I can start to rebuild my occupancy. I think rent growth emerges. People are still moving to Austin, there will be some demand, you know, that will start to emerge for assets in the future. You put that in the backdrop of like now, do we have stable capital markets? Do we have cap rates that are more or less flattening out of the mid-fives? A smidge of potential cap rate compression in the years ahead. That's what every group is debating right now. And in some scenarios, you can justify putting capital into a project today to say we might not actually make a lot of money on this asset, but we can shore it up and we can get to materially returning most to all of the original capital in the deal inclusive of the new capital that we're contributing in some scenarios, the answer is no. 

So in some scenarios it's gonna like, yes, we put in a dollar today. All we're really doing is probably maybe getting most of that dollar back, but I think maybe the other, the other money we've put in the asset is now gone. That's the landscape. So yeah, it is definitely fair to say that this is case by case and there are a number of assets out there that are simply hit the wrong timing, wrong pricing, wrong capital structure and they will reconcile. But really what that then says is that, that is a 21 vintage problem. Absolutely. 

But at the same time when you come at it today in 24 going into 25 the price is lower, you are looking at a higher cap, you know, because you're looking at a higher cap rate, you are buying at 91% occupancy. You think you don't drop into the eighties, you think you actually get it back to the low to mid-nineties over the years ahead. We think, you think you basically are at a point to say, does a business plan make sense? All things considered today, even in a rate environment that we know is going to be higher for longer, if you can get to. Yes, that's how you get to say that deal. Now makes sense. I think that's the stuff, for example, that we're all looking for out there as we assess the commercial real estate landscape. 

So I guess with that we are well over time. So thank you for everyone for sticking with us. Sean and Donald, thank you so much for joining us. This is a huge opportunity, as I always say it is, it is a rare occasion that you get to hear directly from a top five world commercial real estate owner and operator in terms of what are they thinking? What are they doing? Where did they see the puck going and so forth? So a huge, just a huge opportunity for all of us to learn directly from you. Thanks so much for joining us. We really appreciate it. Thank you so much for having us, Ian. Thank you everybody for listening in. Thanks, everyone. Have a great day. We'll be back to you soon with our, with the next installment of our educational series. So have a great day.