Rockey on Real Estate

Episode Summary

Executive Summary: The episode centers on Moody’s Analytics and Cushman & Wakefield’s view that the U.S. economy remains resilient despite geopolitical shocks and sticky inflation, while commercial real estate appears to be nearing a bottom in many sectors. Office remains the key weak link, but retail, industrial, and data centers are strong, and multifamily is cooling as construction slows. The group also debates Fed timing, long rates, and whether CRE stress becomes a slow-burn adjustment or a broader doom loop.

Main Topics: U.S. economic resilience and market data (Priority: 5/5): The hosts and guest agree that recent data on retail sales, claims, manufacturing, and industrial output point to a resilient U.S. economy even after the Iran-Israel escalation and a hotter-than-expected CPI report. Fed policy timing and interest rates (Priority: 5/5): They discuss how the stronger data and hot inflation likely pushed the first Fed cut from June to September or later, with some concern that September could be politically sensitive ahead of the election. Long rates are expected to settle near 4% over the medium term. CRE pricing and capital markets bottoming (Priority: 5/5): Rebecca Rocky argues commercial real estate pricing is broadly near a trough, with stabilization likely in 2024 and value growth possible in 2025, though office makes the cycle uneven. Volatility in Treasury yields is a major obstacle to transactions. Office market structural reset (Priority: 5/5): Office is framed as the hardest-hit sector due to remote work, higher vacancy, and obsolescence. Rebecca argues the market is bifurcated: top-tier buildings are fine, obsolete stock is distressed, and a middle segment will need to reinvent itself over time. Retail, industrial, and data centers as bright spots (Priority: 4/5): Retail is benefiting from underbuilding, limited new supply, and resilient consumption; industrial remains structurally favored despite normalization from pandemic extremes; data centers are booming but constrained by power availability. Multifamily slowdown and construction pipeline (Priority: 4/5): Multifamily faces weakening starts, rising vacancy, and softer rents, suggesting the supply wave is easing. The panel sees construction pipelines thinning more broadly across sectors. CRE credit stress and the 'doom loop' question (Priority: 5/5): The discussion concludes that CRE distress is real but likely a slow-burn cycle rather than a macro-financial doom loop. Bank exposure is manageable overall, though office and gateway-city distress could pressure local budgets and lenders over time.

Key Arguments: The economy remains resilient: consumers keep spending, jobless claims are low, manufacturing is stabilizing, and industrial production is positive despite geopolitical tension and hotter inflation. Hot CPI data essentially killed the June Fed cut scenario; September is still possible, but only if inflation cools consistently and the Fed can avoid appearing politicized before the election. Long-term Treasury yields are expected to hover in the low-4% range over the medium term, consistent with nominal potential GDP growth and anchored inflation expectations. CRE pricing is likely near a trough in the first half of the year, but stability in rates matters more than the exact level; volatility discourages transactions. Office is not uniformly dead, but it is structurally weaker than other sectors; vacancy is concentrated in obsolete assets and gateway markets, while smaller and secondary markets are more resilient. Retail’s strength reflects years of underbuilding, competition from e-commerce, and a post-pandemic shakeout that left survivors with little available space and improving absorption. Industrial remains a favored asset class because e-commerce and supply-chain needs create durable demand, and many leases still have below-market rents that support NOI growth. Data center demand is expanding rapidly, but the main bottleneck is power infrastructure, not land or investor appetite. Multifamily is showing signs of a downshift in new starts, consistent with softer rents and tighter lending conditions. CRE stress is real but likely to unfold slowly through extensions, modifications, and selective defaults rather than a sudden systemic collapse; the biggest risks are a sustained rate spike or broader bank stress.

Data Points: Remote work share: 27.4% - Census Bureau Pulse Survey measure of workers doing any remote work; down from 30% a year earlier. Retail sales: Robust / still spending - Referenced as evidence that consumers remain strong and the economy is resilient. Jobless claims: Around 210,000-212,000 - Claims have been stuck in a very low range for a long time, signaling labor-market stability. Median weekly earnings growth: 3.5% year over year - BLS data cited as favorable for disinflation. 10-year Treasury yield: Around 4.5% recently - Used to discuss CRE financing conditions and the likelihood of a medium-term move toward 4%. Moody's / consensus long-rate outlook: 4.0%-4.2% - Expected range for the 10-year over the medium term. Cushman & Wakefield global revenue: About $9.5 billion - Company scale and market position. Cushman & Wakefield headcount: About 50,000 employees - Global firm size. Cushman & Wakefield office count: Around 400 offices - Global geographic footprint. CRE vacancy rate: 20.2% - Overall office vacancy first time above 20% in the firm’s data. Estimated obsolete office share: About 30% of current vacant space - Rebecca estimates a large share of vacancy reflects obsolete stock needing removal or reuse. Class A office vacancy: 22.8% - Even high-quality office stock is under pressure, though less so than obsolete B/C stock. Buildings with 50%+ vacancy: About 12% of office inventory - A concentrated bottom segment is driving headline weakness. Adjusted office vacancy excluding worst stock: 15.5% - Illustrates how concentration in a small share of buildings distorts sectorwide stats. Average office lease term: 8.5 years - Weighted average lease term across the office stock delays full market adjustment. Retail vacancy rate: 5.3%-5.4% - Retail is near a 40-year low in vacancy. Retail space under construction: 12 million square feet - Very limited new supply across 83 cities and 4.3 billion square feet of existing stock. Industrial vacancy: Below 3% at the trough; mid-5% range now - Industrial saw extreme tightness during the pandemic and is now normalizing. Industrial rent growth: 22% YoY in 2022 - Fastest growth year during the pandemic boom. Industrial weighted average lease term: 6.7-6.8 years - Supports continued NOI growth despite slowing rent growth. Data center pipeline growth: 250% increase - Future data center capacity underway would raise current supply by about two and a half times. March multifamily starts: About 300,000 annualized units - Used to show construction is slowing and better aligned with firm data. Multifamily starts decline: 44.3% - Year-over-year drop discussed in the stats game; reflects weakening supply pipeline. Total units under construction: 940,000 - Chris’s stat for the multifamily pipeline. Non-store retail share of total retail sales: 17% - Used to show e-commerce remains important but has stabilized below its pandemic peak. Peak non-store retail share: 19% - Hit in April 2020 during the pandemic. Census remote-work pulse peak context: 30% last year - Remote work share has eased but remains elevated. CMBS delinquency, multifamily: About 1.5% - Jumped due to a single student-housing property in San Francisco. CMBS delinquency, office: About 7.5% and rising - Office remains the standout distressed sector. Big-bank CRE exposure: $2.9 trillion - Used to argue exposure is diversified and manageable overall. CBD office share of big-bank CRE portfolios: About 5% - Office exposure is important but not dominant within bank CRE books.

Pivotal Quotes: "I think the word comes to mind is resilient, incredibly resilient, right?" — Chris Dorides: Assessment of the U.S. economy after a week of geopolitical tension and key data releases. "I think in that way, the jury's still out over the longer run. You know, when you look back at literature on technology disruption... I tend to have a glass half-full view of creative destruction and the ingenuity of the American economy." — Rebecca Rocky: Her view on artificial intelligence and its eventual effect on office-using jobs and CRE demand. "It's just going to take time to materialize. And usually, it's in years two, three, four where you start to see the preponderance of distress start to pick up." — Rebecca Rocky: Her explanation of why CRE stress is real but still early in the credit cycle.

Implications: Listeners should expect a resilient macro backdrop, delayed Fed easing, and continued CRE bifurcation: office distress will linger, but retail, industrial, and data centers should stay healthy while multifamily and transactions adjust to rate volatility.