The Weekly Take from CBRE

In this bonus episode, a group of CBRE summer interns had some terrific questions to ask our guests.

We take a 360-degree look at real estate investing and the capital markets from the perspectives of a pair of influential executives, each with decades of experience in the debt capital markets business. Tom Rugg, Vice Chairman and Co-Head of U.S. Large Loans and Debt and structured finance at CBRE, and Bob Ricci, Senior Managing Director of Lone Star Funds, a player with nearly $90 billion of assets across nearly two dozen funds in its portfolio. 

The real estate capital markets can be complex in the best of times and vexing in the worst of times. Lone Star Funds’ Bob Ricci and CBRE’s Tom Rugg share some insights on succeeding in a sluggish time, finding opportunity amid headwinds and where those headwinds have started to ease.

Insights to Share:

• As challenges in the capital markets persist, properties that were financed with heavy leverage may present opportunities.
• Higher interest rates will make rolling over debt a pervasive issue for several years.
• Distress is unlikely to reach the levels of the post-Great Financial Crisis years.

San Francisco has been facing extraordinarily high office vacancy rates since the pandemic. But more recently, the rise of artificial intelligence (AI) has stimulated demand for space and an influx of capital. Real estate investor Glenn Gilmore and CBRE’s Mike Taquino discuss the city’s history of resilience, culture of innovation and greatest opportunities.

Insights to Share:

• Venture capital firms, particularly those focused on AI, are increasingly establishing offices in San Francisco, which is driving demand for office space.

• San Francisco’s well-known headwinds have caused investors to shy away from what could be  generational buying opportunities.

• AI is driving significant changes in San Francisco's real estate market, in terms of the types of offices needed and the locations most in demand. AI is also encouraging shorter lease terms, reflecting the fast-moving nature of tech companies.

• San Francisco’s tenants are showing a preference for high-end and creative office space, as well as a preference for sustainability and adaptive reuse.

Belinda Román, 2023’s most accurate forecaster, according to The Wall Street Journal, and CBRE Econometric Advisors’ Dennis Schoenmaker opine on the art, science and technology involved in predicting the ebbs and flows of the global economy.

Insights to Share:

• Belinda Román, Associate Professor of Economics at St. Mary’s University, expects GDP growth of 3% this year.
• CBRE EA’s Dennis Schoenmaker expects GDP to hover around 2%.
• Even with slower economic growth, there will be opportunities in commercial real estate.
• Regional, national and global forecasting requires a deep understanding of the available data.
• In commercial real estate, where information has historically been opaque, future forecasting can be enhanced by  AI.

Industrial remains a highly desirable asset class despite a cooling of demand and softened market fundamentals. Prologis’ Melinda McLaughlin and CBRE’s Chris Riley offer insights on the long-term prospects for the sector.

Insights to Share:

• While the last 24 months have seen a slowdown of transaction activity in industrial markets, the long-term prospects remain solid.

• Conversions to industrial are typically viable where land comprises most of the total development costs, which usually are close to densely populated urban centers.

• Manufacturing and warehouse facilities have increased automation, adding technology that enables machinery to adapt to changes in the business.

CBRE Capital Markets specialists offer insights on debt availability, capital flows, sector fundamentals and deal pricing, while our Chief Economist comments on the economic outlook.

Insights to Share:

• Uncertainty about the direction of interest rates continues to hamper commercial real estate investment activity.
• Industrial and multifamily are facing softening fundamentals, but remain historically solid.
• Office continues to be split between the best assets and most of the rest and retail is growing in importance to institutional investors.
• Maintaining strong relationships with lenders is always critical, but especially so now.

Julia Coronado, keen-eyed observer of the economic landscape, shares wide-ranging insights on the economy, monetary policy, commercial real estate and more.

“The macro economy is a lot more resilient to the headlines than what you read every day."

-Julia Coronado

President and Founder, Macro Policy Perspectives &

University of Texas Finance Professor

Insights from the episode:

1. Inflation should continue to cool in most countries around the world.

2. The neutral interest rate is expected to be higher than the last cycle due to a healthier household balance sheets, supportive fiscal policy and improved productivity.

3. Challenged multifamily developers should see some relief in the next few years, as interest rates drop, demand for housing increases and financing conditions improve.

GUEST BIO:

Julia Coronado

President and Founder, Macro Policy Perspectives

Julia Coronado founded MPP because she believes independent research can provide the most objective and relevant analysis to inform decision making in an uncertain world. Julia is a Clinical Associate Professor of Finance at the McCombs School of Business at the University of Texas at Austin. She has more than a decade of experience as a financial market economist including serving as Chief Economist for Graham Capital Management and BNP Paribas, and as a Senior Economist at Barclays Capital. After receiving her Ph.D. in Economics from the University of Texas at Austin, Julia worked for the Federal Reserve Board of Governors in Washington D.C. for eight years where she regularly briefed the Board and contributed to the FOMC forecasts. She is a regular commentator in financial media, including CNBC, Bloomberg, Marketplace, and the Wall Street Journal. 

How do you get the most out of a global real estate portfolio? Siemens Real Estate CEO Stephanie Dorsey offers insights on everything from the cost of capital, the flight to green, site selection criteria and return-to-office strategies that benefit everyone.

Insights to Share:

·      Siemens is on the leading edge when it comes to attracting talent, sustainability and technology manufacturing.

·      Power is becoming an increasingly important consideration in companies’ site location strategies.

·      Sustainability is quickly becoming a must-have for occupiers and some, like Siemens, will not lease space from landlords that don’t support their carbon-reduction goals.

Mexico’s industrial real estate market is benefiting from the need for more resilient supply chains. PGIM’s Enrique Lavín, DHL’s Guillermo Espinosa Armendáriz and CBRE’s Yadira Torres-Romero explain the advantages and challenges of nearshoring.

Insights to Share:

• Nearshoring is spurring industrial activity beyond Mexico’s border cities as companies seek inland nearshoring opportunities.
• The lower cost and availability of labor explains why companies have relocated or expanded manufacturing operations in Mexico.
• The cost of capital, even for transactions denominated in U.S. dollars, is lower than in the U.S.

Fried Frank’s Jon Mechanic and Michael Werner—attorneys steeped in the in’s and out’s of New York City dealmaking—share thoughts on the office market, affordable housing, recent legislative changes and much more.

Insights to Share:

• Despite the headlines, there is budding optimism in some New York commercial real estate sectors, particularly Class A office.
• Legislative efforts to promote affordable housing and sustainability are both incredibly important and challenging.
• New York City provides a nexus of talent, amenities and capital that is hard to replicate.