00:00It's interesting because what we saw in the U.S., particularly in the REIT market, was that since the beginning
00:03of the year, you came in with REITs with a strong relative valuation versus the S&P 500.
00:09Maybe the rate cycle looking a little different after, you know, several years of raises since 2022 or rate increases.
00:16Then, you know, you had the war and that sort of all changed and you had the 10 year go
00:20up from 4.2 to 5.2.
00:22What's interesting, though, is REITs have sort of disconnected a little bit from that narrative, meaning they're up 13 percent.
00:28They're sort of in line with the S&P 500 this year.
00:31And so sort of ask, why is that in that rising rate environment?
00:34I think a few things.
00:35Number one, you have a rotation out of growth to value.
00:39So I think at the beginning of the year, people were looking at their MAG-7 and saying, maybe we're
00:43getting a little bit sort of long in the tooth in terms of growth.
00:47Let's take some risk off the table.
00:48But I think more importantly, too, is when you look at the net income of the S&P 500 and
00:55you look at the ratio of the cash return to net income,
00:57it's at recessionary levels.
00:59And what that means is that the S&P 500, they're spending so much CapEx, the MAG-7, that the
01:05real cash return is low and their scarcity value to real cash.
01:09So REITs fit that narrative really well for investors who are looking for that real cash return.
01:13Well, yeah, looking at the ETF flows so far this quarter and the third quarter, around $22 billion has gone
01:19into technology-related funds.
01:21But only like a little under $5 billion has gone to the rest of the sectors in the S&P
01:26500.
01:27There has been $2 billion into real estate, though.
01:30And so what are you seeing there when it comes to those types of flows?
01:33And what are your top questions from your clients?
01:35Yeah, we are seeing strong flows year to date.
01:38So this, when you add up our sort of retail and institutional investment flows into REITs this year, it's the
01:44best that we've seen in about 10 years.
01:46So we're pretty excited about that.
01:48And, you know, what is the narrative in terms of what are the CIOs saying?
01:51Why are we allocating to REITs right now?
01:54I think part of it is that, you know, moving from growth to value, looking for hard assets, looking for
01:58real cash, but also looking at fundamentals.
02:00You know, when we think about earnings growth here for REITs, 8% earnings growth this year.
02:05If you look at senior housing and data centers, they're growing at 15%, 11%.
02:10And the, you know, you talk about interest rates at 5.2, but when you look at the cash yield
02:15of real estate REITs, they're at 5.8, 5.9.
02:18So you have a spread over the 10-year.
02:20You've got pretty good earnings growth.
02:22And you have a supply picture that looks really sort of benign relative to what we've seen over the past
02:28few years.
02:29So that's sort of the conversations that we've been having with investors that's driving some of these flows.
02:34Talk to us about data centers because, boy, we started out thinking, boy, this is going to be the gift
02:38that's just going to keep giving forever.
02:40But then it's become this backlash from folks around the country.
02:45It's become a little bit of a political issue as well.
02:47How do you guys think about investing in data centers?
02:49Yeah, I was just down in Ashburn, Virginia, which is sort of the hub of data centers globally.
02:55And that market, there's still a lot under construction.
02:58It's 99% occupied.
03:00Quarter-over-quarter rent growth, there's been 18%.
03:03And leases that were signed there five years ago, they're getting marked up 100%.
03:08So it's alive and well in Tier 1 markets for sure.
03:12And Tier 1 markets, you know, you have barriers to entry to build.
03:15Like a Tier 1 market, is that just, it's Tier 1 because it's on or close to a grid?
03:19It's fiber, yeah, high-speed fiber.
03:21So Ashburn sits really at the crossroads of not only sort of domestic fiber, but fiber coming in from overseas.
03:28So what, you know, people want, what tenants want is low latency.
03:32And so if you buy fiber, you know, you're not going to have any buffering when you're streaming.
03:36It's going to come down very quickly.
03:37So tenants will pay a premium for that.
03:39So Tier 1 markets are very strong.
03:41You are seeing a lot of pushback in terms of, you know, municipalities and legislation.
03:47So I think when you look at the REIT portfolios, they've got a lot of stuff that's already entitled under
03:53development that they're going to put into production.
03:56And then behind that, they have land banks.
03:58So it's really for us, it's how do you value that land bank if permitting access to power, all that's
04:02getting harder.
04:03We need to be more conservative as to how we value the land bank versus the development pipeline.
04:07But we think there's still tremendous growth in there.
04:09There's demand is growing, and there's scarcity of sort of good areas to build.
04:15So where are the best opportunities right now?
04:18So I think there's, you know, two areas.
04:20We mentioned data centers.
04:21We still think that's a really attractive area within commercial real estate.
04:2411% earnings growth, very tight markets, limited access to power, et cetera.
04:30Senior housing is another area where we saw 15% earnings growth.
04:32Why are you looking at me?
04:35It wasn't for you, Paul.
04:38So 15% earnings growth.
04:41You're at a point where you're seeing just a demographic wave of demand.
04:46The 80-year-old population is growing at 5%, whereas supply in that space is growing at 1%.
04:52So you have a real mismatch of supply and demand there, which means really strong rent growth.
04:56Some of the pressures that we saw over the past few years, like wage inflation for health care workers, has
05:01started to subside a bit.
05:02So that just helps, you know, boost NOIs for those properties.
05:05But then on the flip side, we have some areas that, you know, they are sort of maybe bottoming out,
05:11and we're seeing some green shoots of the revenue line.
05:13So one that has not worked well that we're starting to get constructive on is cold storage.
05:18So that's an area that's been...
05:20What's cold storage?
05:20Yeah, what is that?
05:21What are we storing?
05:21So that's food, frozen food.
05:23Oh, okay.
05:24Yeah, so it's industrial.
05:25Yeah, me either.
05:26Me too.
05:26I was like, what is that?
05:27That's true, yeah.
05:28So it's, yeah, it's just really food storage and frozen foods in particular.
05:33And that business hasn't been growing.
05:35Like food consumption has been flat to down.
05:36Part of that's like GLP-1 impact.
05:39But supply is very limited there right now, and the valuations are very attractive.
05:44They're trading at, you know, 9% implied cap rates, and one of the large companies listed at a joint
05:49venture deal to 7% implied cap rates.
05:52So you sort of have proof of real estate value there, plus a revenue line that's sort of bottoming, flattening,
05:57and starting to inflect a little bit.
05:58So those are sort of the types of things that we're looking for.
06:00What's the consensus these days on office?
06:02Yeah, so office is really bifurcated.
06:05It's a mixed bag, but New York City, San Francisco, Class A properties are extremely strong.
06:11So, you know, when you look at leasing volume, rent growth there in those top areas in the top markets,
06:17it's really robust.
06:18You're getting, you know, record rents in certain areas of New York City and San Francisco.
06:25San Francisco is driven more by AI, but, you know, New York is back to work, right?
06:29And we've taken some space offline.
06:31We've converted some of that to apartments.
06:32We haven't built that much, or what's built's been, you know, purpose-built with tenants.
06:38So, you know, the question is, does that spread out to some other markets around the country, and do we
06:43start to see some growth in other areas?
06:44I mean, do you drive around anywhere, USA, suburbia?
06:48Any office park has got that sign in the ground saying office space for rent, 10,000 square feet, 20
06:55,000?
06:56I mean, that's still a thing, right?
06:57Yeah, suburban office is still challenging, especially, you know, out in tertiary markets.
07:01A lot of that was overbuilt.
07:03That's not owned by the REITs, though.
07:05The REITs are really in the urban and infill markets, so that stuff remains to be challenged here.
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