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May 9, 2022

Geopolitics, Monetary Policy and Real Estate


Richard K. Green
Richard K. Green | Director, USC Lusk Center for Real Estate

Richard Green (Director, USC Lusk Center for Real Estate) delivers a presentation on how the ongoing conflict in Ukraine could impact the global economic trajectory as many countries, including the United States, attempt to cool inflation without triggering a recession.

Green dives into more specific factors contributing to the USA’s resiliency or vulnerability to global economic shocks. He shares data on why Cap Rates are likely to increase in the future, the trends economists look for with the revitalization of goods and services spending, how real estate impacts inflation, and which US states boast more robust infrastructure to weather any potential global economic downturns. Green also fields questions on affordable housing, the global aging workforce, commercial mortgage rates, and more.

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Richard Green: Good morning, everyone. My name is Richard Green. I am director of the USC Lusk Center for Real Estate. And for the first time we're doing a Lusk Perspectives where I'm just gonna talk for a while and I would like to invite the audience to submit questions whenever they want. I welcome interruptions and you can do that through the Q&A. So again, please use the Q&A to ask questions and I will try my best to keep track of your questions as we go along. I'm planning to talk for about 20, 25 minutes and then we'll have it open for general Q&A, but again, please feel free to interrupt. And with that, let me start. So let's talk about what we're gonna talk about today is we're gonna start by talking about something that's front of mind I think from most of us, which is Ukraine. And I wanna talk specifically on how it might matter to the economy going forward from here. We're gonna talk about something else that I think is on top of many people's mind is the state of labor markets. I found something that I found a little surprising, we'll see if it surprises you. Third thing, inflation. Something else, very much top of mind for people. And finally, a couple of things that may not be top of mind, but how office rents contribute to business expenses and how muted they have been as a source of business expenses over time and then a little bit on infrastructure. So what are the implications of what's happening in Europe to the broader economy? And I'm gonna thank my longtime friend and coauthor, Steve Malpezzi for helping me clarify some thoughts on this. First of all, oil and gas shops to Europe are profound. I'm gonna show you something on that in a moment and that presents a real problem that could leak over to us. Second, Russian, Ukraine are major commodity exporters, wheat in both, iron ore, steel from the Ukraine, strategic metals from Russia. Now, again, this doesn't matter much directly to us. We import directly very little from Russia and Ukraine, but it does matter to Europe and the rest of the world, particularly with respect to food. And so that's gonna have an influence on food prices which are set in a global market. Energy price shocks that raise inflation and complicate central bank actions, cyber attacks on infrastructure, financial institutions. We know that there's been a lot of attempts to do this. I know it may be an instrument that we use as we tried to mute what Russia is doing in Ukraine. But does recession in Europe happen? There certainly is or will soon be recession in Europe. And does that spill over? Does that create stagflation? And so we have the central banker's nightmare, which is that energy shocks are aggravating inflation while other demand supply shocks from Europe suggest that we need more expansionary policies. And so it's tough to know what to do right now. The inflation numbers are so bad at the moment that it's not surprising that the Fed is doing what it's doing with interest rates, but that's going to have an influence on asset prices and one of the interesting things from a real estate perspective is given this world of heightened uncertainty, we expect risk premia to be higher and we are seeing widening of spreads which will lead to a drop in asset values, including real estate. On the other hand, hard assets look more attractive relative to other assets, including real estates. We'll come back to this. And then the long running position of sanctions. What does that mean about the influence of other countries? I'm gonna talk a little bit about this. And there's already a question. Yeah, so I'm gonna talk about interest rates, Michael. So just gimme a few minutes and I'll get to that. So let's start by talking about SWIFT and the importance of cutting off Russian access to SWIFT. So this is basically the mechanism by which it is difficult for Russia to get the assets that have been frozen. Is if SWIFT cuts you off, you can't get money into your institution in Russia. Now there has not been a complete elimination of Russian's access to the SWIFT system, but fairly large institutions are now cut off. And what's particularly interesting is the Russian central bank hold reserves, dollar denominated reserves and Euro denominated reserves in other banks around the world and they can't get to that right now. And so what that means is their only source of cash at the moment is oil. I'm gonna talk about oil energy and I'm gonna talk about that in a little bit. And of course, Europe made an announcement about no longer importing Russian oil. So that clearly is gonna have about implications for Europe, but the unintended consequence of this could be in the long run that other countries set up their own SWIFT systems. Actually that's even an understatement. China already has its own payment system in place. It's nowhere near as universal or robust as the SWIFT system, but if you shut down Russia's access to SWIFT long enough, does that bring about the rise of a competing ubiquitous system? And does that have an impact on dollar as a reserve currency? And those are things to think about longer term. Now, again, it's hard to imagine the RMB being a reserve currency because it's still not a convertible currency. And by the way, this is not in any way to suggest that the cutoff to SWIFT was not the correct thing to do. I am, if you look at the color of my slides, it's pretty clear where my sympathies lie, but nevertheless, this is a long term thing to think about.

Richard Green: So Brian Jones asked about inflation, how it is compared to the '70s. I'm gonna show you that in a bit. Let's talk very specifically about what's happening is having an influence on Europe vis-à-vis us. So the red line is natural gas prices in Europe and the blue line is natural gas prices in the US. Now, have we had a price shop in the US for natural gas? Absolutely. There are about three times higher, natural gas prices are about three times higher than they were just roughly 24 months ago. And even if you look at recent history over the last 10 years, they're quite high, although relative to inflation, they're still not that high. But look at what's happened in Europe with natural gas prices. Levels not seen ever before, at least in nominal terms and if you look, there hasn't been that much inflation. So in real terms, this is higher too. Now there is some easing, but this is putting a lot of pressure on the European economies because money spent on natural gas is money not spent on other things and it's problematic. The other interesting thing that's happening in Europe we're seeing, because of greater militarization, we're starting to see tax increases in part of Europe, like the UK has had a recent tax increase and that of course has a anti-expansionary effect or recessionary effect in those places. If we look at the price of oil-- Oops, sorry about that. What happened? Sorry about that. There we go. This may surprise people, but if we look at like oil, which is much more of a world market and you look at the disruption to oil, it's very real. We can see what's happened in the price of oil, but it's coming off in an astonishing low. Basically the inflation adjusted price of oil was at its lowest level since before the Arab oil, the first Arab oil in embargo from the mid 1970s. And while it is now high by historic standards and by the way, this graph is out of date and it's actually about seven, 8% lower than depicted in this graph. The reason that I have this, this is through March, the reason that this is not an updated graph is because we don't have a new CPI figure that allows me to deflate the nominal price by the real price of oil, but the nominal price of oil is down about 10% from this peak. So it is, think of it as being about I don't know here right now, so it's high, but it's not inordinately high by historical standards and at the same time, oil as a share of GDP continues to shrink for a variety of reasons, one of the most important of which is that cars of course are much more fuel efficient than they used to be, but the other thing is we've replaced oil to some extent with renewables, but to a large extent with natural gas. Now, that's why we're feeling the impact of the natural gas in prices, but oil is less important to the broader economy than I think a lot of people think.

Richard Green: What's happening with total employment? I'm sure you saw the headline number the other day that shows that total employment again, rose by, payrolls rose by about 400,000 in April which is a very strong number. One way to look at it is we are not quite back to the peak where we were before the pandemic. But on the other hand, if you look at relative to trend, we're still well below the most recent trend or even if you look at the long term historical trend, but there's a reason for this, which is-- Did it again. Which is the number of working age population, people in the working age population, is basically flat. And this jump here is a result of a data anomaly that comes from re-benchmarking. And what you'll notice is before the re-benchmark actually the working age population was falling, then we decided we got all the levels wrong, but we didn't make an adjustment or the Commerce Department didn't make an adjustment for the entire time period. So there's this jump, but you could see we're back to the small fall in the working age population. So basically one of the reasons I think it unlikely we will see a return to trend is because the available people to work has gotten smaller. Now, this is the surprise to me is in light of that, we would think that labor costs would rise. And I think we're all thinking labor costs are rising because we talk about a labor shortage and we talk about how expensive it is to hire people. But when we look at the employment cost indexes is total compensation. So this is both wages and fringe benefits like health insurance, like retirement, like workers' comp, like payroll taxes and so on. The real cost of labor has actually fallen by about 4% since the beginning of the pandemic. And I needed to make sure that this was correct and it is correct. Now in nominal terms, if you think you're paying more, you're right. You're paying more, but relative to that eight and a half percent CPI growth rate, which I'm gonna show you when it did, it's actually fallen. Now that said, if we dig down inside of that and look at what's happened to wages, real wages, depending on occupation, there we have a different story. So this is work from Franch and Regmi at the Roosevelt Institute where they look at what's happened to wages based on occupational wage percent off. So a way to think about it is on the left side of the graph, these are low income occupations, on the right side of the graph, these are high income occupations. And if you look, this is again taking into account inflation, if you look at mean hourly real wage, low income people are getting paid more. So do you have to pay say, restaurant workers more to work than before? Yes, in real terms. But if you look at the higher income occupations overall and I know those who are trying to hire people like supervisors on construction sites or cost estimators, this may be surprising to you, but it's actually falling relative to inflation. So to the extent that we have inflation, again, clearly we do it's not being driven by labor. Overall labor costs are falling. They are not keeping up with inflation which means that while they are a result of inflation, they are not a driver pushing inflation. So, what is? Well, this is a graph that I think I've shown some of you before, but not perhaps not all of you have seen it which looks at what's happening to the goods and services sectors of the economy. So if you look at goods, that's the blue line. First of all, goods consumption is about half of services consumption. And you look at goods consumption and we are not only well above where we were pre-pandemic, but we are well above the trend. So think of this is the tread line. And so if we were a trend, we would be here and instead we're here. Now we have a reduction from the peak, so what's going on here? Well, people are getting their stimulus checks. People are by and large keeping their jobs. People have no place to go. They're sitting at home bored in their pajamas and they're clicking. But the other thing is they're not going out. They're not going to the dentist. They're not traveling. They're not going to restaurants. And so they're spending a lot less on services than they were before. So they're taking some of that income that's not being spent on services and spending it on goods. Where are we now? Services have recovered somewhat. But again, look at the trend line on services. We should be here and instead we're here. If we look at the goods line, we should be about here, instead we're here. Well, this is the stuff that the supply chain really influences. This is making stuff. Whereas this stuff is, it still has some reliance on the supply chain, but much less than this. You're not trucking stuff here. You are trucking stuff here or putting stuff on rail carts, cars, et cetera. And so taking that into account, it's not surprising we're seeing upward pressure on prices and we're seeing shortages in some things like appliances and so on. So the question is, the big question for me I think going forward on the future of inflation is does this go back to normal? Does good spending come back to here and the service spending returned here? If that happens, I think you see a lot of downward pressure on inflation. But if it doesn't, if people keep buying stuff and other things you wonder, where can people put things? You may have a different story. So, what is happening with CPI? This comes to Brian's question, is it's really bad. Levels not seen since the early 1980s, nowhere near where we were yet in the 1980s. What was really striking is we went through a nearly 10 year period where inflation was above seven and a half percent with a small, there was a recession here, the small change. We're waiting with breath held to see what happens here. Now, one of the things people ask about is when is the Fed gonna stop raising rates? And the answer is when the headline CPI number falls below say 3%. And until then, they'll keep raising rates. So people have tried to predict these things. You may remember a few years back in 2018, 2019, the Fed started raising rates and they raised rates until we were right on the edge of a recession. We didn't quite get into a recession. It actually annoyed me a little bit 'cause I was forecasting a recession at the time, assuming the Fed would keep raising rates, but then they turned around and we didn't go into a recession. So I think they're going to be very attuned to what's happening in the broader economy and that will determine their rate. People think steady state, maybe three and a half percent federal funds rate, but if inflation goes back down to zero again or near zero, then they'll drop it below that. But it's all about, I think CPI will depend largely on consumer behavior. So consumer behavior will lead to CPI which will lead to federal reserve policy.

Richard Green: I see another question which have-- How much pressure is being caused by healthcare care cost changes? That's a great question. My recollection, the last time I looked at it is healthcare is not a key element of CPI growth. That it's in fact, healthcare costs at the moment and I wanna emphasize at the moment, are growing less rapidly than overall CPI, but let me make sure I am right about that. So this is being recorded so I'm not going to say I'm absolutely sure because I wasn't particularly prepared to answer that question. I'm working on memory though. When I'm looking at the composition of CPI, my memory is for the last year, healthcare has actually been less important contributor. And do I think supply chain issues are here to stay? Let me hold off on that question for a bit 'cause I'm gonna get into it when I talk about infrastructure in a bit. So yes. So, is inflation viewed as transitory? I think nobody thinks of it as transitory and that it's been with us now for a year. And so that's not transitory. The issue is are we gonna have something like what we had? I keep doing, see I can't click on my presentation 'cause it leads me to the original source when I do that. So let me come back to that. So, all right.

Richard Green: Other thing that's going on is the markets are starting to think of some inflation is baked in and this is I think one of the most important benchmarks that not a lot of people look at, particularly for real estate, which is TIPS or the Treasury Inflation-Protected tenure treasury. And so the way this works is basically you get paid a yield plus whatever CPI growth is in the last year. And by the way, there's a consumer version of this called the I bond and I recommend this for anybody at the moment. The current I bond is paying something like seven and half, 8% guaranteed for a year. It's a 10-year bond and the rate moves with inflation, but this is one that particularly is for consumers. People can buy up to $10,000 a year of it. I think it is a very smart hedging position. The other smart hedge was when you could get a mortgage rate at 3.5% or less, that was a great hedge as well. It's why, by the way, inflation is not affecting about two thirds of the country by as much as it's affecting the other third. If you're a renter, you're really getting killed by inflation. If you're a homeowner and you locked into a low interest rate loan, an awful lot of your consumer spending is basically locked in. And particularly if you're here in California where you have Proposition 13, now your mortgage payment is constant and you have only a 2% increase in property taxes a year. Your housing costs are pretty well laid in stone. If you have to do of course a remodeling, that's another thing because it's expensive to remodel now. But anyway, I've used the TIP as a benchmark for capitalization rates because if you think of what a cap rate is it's some rate of return, some risk for your rate of return plus to risk premium minus expected rent growth. And so here you can look at rent growth as being more or less in line with inflation. Now, if you look at residential stuff, it's been growing more rapidly than inflation since about the 1980s here in Southern California as I'm gonna show you growing even more rapidly than that. But the point is, this is the benchmark, that underlying rate of CPI growth determines how everything else grows. So this takes into account inflation and what this implies to me is you should be seeing cap rates go up. If I like 1% over the course of the next couple of quarters, which I know is not very welcome news. It's good that people have lots of equity in their property right now, but the problem in particular is when you start at a very low base, let's say you have 4% cap rates. Even if cap rates go up by only 50 basis points, that means your value is gonna fall by more than 10%. So that really worries me. Now, the other side of it is if rents are rising rapidly, is the denominator is increasing more rapidly than the numerator, maybe you're all right, but I don't expect these very low cap rates to remain over the course of the next year because the benchmark against which investors compare them, either subconsciously or consciously, suggest that they need to go up. This is the 10-year breakeven inflation rate. So this is what investors think inflation is gonna be. Reflecting the following is if you look at the 10-year treasury and subtract from at the TIP rate, this is your breakeven inflation rate. And as you could see in the midst of the beginning of the pandemic, investors thought inflation was gonna be less than 1% a year. And I think a lot of us thought we were gonna go into a much more serious recession than we actually did and it would last much longer. We recovered remarkably quickly, but you could see there's been continual growth in this. And so to the point, what are investors thinking? They're thinking inflation is here in a way that they haven't thought about it since, well, really since the beginning of the TIP era which goes back to 2003. So getting at the point about transitory versus permanent.

Richard Green: Yeah, so there's a question about, so Zach asked, if we take into account how much capital is chasing limited deals? Yeah, the idea that capital has to go somewhere. I should stop clicking on my presentation. And Peter Linneman has a much more experience, which says a lot 'cause I've been around for a while and probably a wiser personal than I am. But at the end of the day, there are alternative investments available. And if you don't get a spread taking into account risk and I think real estate is less risky relative to a lot of things, but not relative to Treasury. At the end of the day, investors can decide, you know what? These cap rates are just too low. And one of the reasons there is so much capital is people are not executing on deals. And I do hear people say that a lot of deals that look like they were going forward are not going forward at the moment. I'm gonna stick with it. I think cap rates are gonna go up in the next six months to a year. And by that, I don't mean six, 7%. But four and a half percent? Yeah and there's another thing that's happening that I'm gonna talk about when I talk about industrial real estate. Let's move on. Let's not click. So I can only use my cursors. Think I would learn.

Richard Green: So I thought it'd be interesting, looking at some of the underlying causes of inflation, I thought you might be interested in seeing how real estate is contributing on the producer side. Now on the consumer side, it absolutely is. Apartment rents are a really important component of CPI and they are rising very rapidly and that is where a lot of people's pain is coming from. If you look at what's happened though to office rents and this reflects, I think the weakness in the office market that we saw in the early part of the last decade. See, look, producer price index rose much more rapidly than office trends did over this period of time. And then we got strength in the office market and it started rising more than PPI and so it's similar. And then we had real strength, as you all know, in the office market, but since the pandemic basically, it's a lug and that's not surprising, right? Because as space has become empty, less of it is being occupied and so on and we're seeing some absorption, but in order to get the absorption, you needed to give people a better deal on rent. So probably not surprising that office rents are not a major contributor to the supply chain issue. In fact, they're helping with it. They're reducing the cost of producing stuff. But what I found really interesting is when we look at industrial rents I was expecting them to rise much more rapidly than the PPI. Now, to some extent, this graph is misleading because we had in the recession that the global financial crisis is a big drop in industrial rent. So if you wanna look at growth, you have to compare this line here. So shift this whole thing up to here. If you wanna look at growth since 2020 and if you look at that, it does look like PPI, but what's going on here and this is an issue for cap rates in the industrial market is industrial leases, as an industrial person pointed out to me are long term leases. And they often are not hedged against inflation. And so even though newly leased industrial space may be quite expensive, when we look at the PPI and industrial space's contribution to inflation, that includes all of the leases, both the new ones and the ones that are in place. So if you have somebody with a 20-year lease, suppose you have Amazon 20-year lease that was signed in 2018, that's not going anywhere. And this is an issue while industrial is very hot and we need more of it and vacancy is very low and so on, the leases, the way they're set up means that you don't have the hedge against inflation that you do with say, apartments and that I think is putting upward pressure on cap rates in the industrial space, despite how and by that, I mean existing industrial, not necessarily new development, but that is I think, going to put upward pressure in that space on cap rates for the quarters to come.

Richard Green: Let's talk a little bit about infrastructure and the key part of this part, do we have enough of it? And we can talk briefly about air, roads and the sea. So one of the things the United States really is a leader in is having high capacity airports. Now, everybody loves to hate on LAX, but LAX is an amazing asset for Southern California. It is the only world airport that is and I'm going back to 2019, although LAX is getting pretty close to where it was before, is the only top five airport for both passengers and cargo in the world. That is a powerful tool of economic development. So let me just start with that. And the reason LA on the passenger side hasn't returned to normal is domestic traffic is back, past normal. China was particularly important to passenger traffic in LA and of course that still basically doesn't exist. So that is diminished LA's passenger traffic throughput. Presumably it will be back at some point. Certainly domestic market is back. But the key is four parallel runways allow two planes to simultaneously take off and land at the same time, which is key to keeping airports operating smoothly even when weather is a problem. And you were seeing a list of the only airports in the United States that have four parallel runways. There are a few others around the world, Frankfurt does, Singapore is working on it, Seoul is working on it, but this is actually rare. And so this is a plus for us. I'm very hopeful in the supply chain. Now, the interesting thing, our two major cargo airports are Memphis, which is the FedEx hub and Louisville, which is the UPS hub. They have only three and two runways respectively, but they have very little passenger traffic so they have sufficient capacity. But this is a graph that fascinates me and I know I've with you previously, but I keep coming back to it. When we look at our infrastructure for logistics, when we look at road infrastructure, California's road infrastructure is important not just to the region, but to the country because the ports are so important to the country. They are by far, if you put San Pedro and Long Beach together, by far the largest container port in North America. In fact, the only what I would call world class port in terms of throughput in North America. And you need to get stuff out of that and there are two ways to do it, roads and rail. And if you look at California's road capacity relative to its population, it's actually very small. And people, when they think of California, they think freeways everywhere and there are freeways everywhere, but the other thing is we have people everywhere and we have way more people than freeways. So as you're thinking about this, some of these, of course, North Dakota, South Dakota, if you have interstates going across places that have no people and are really big, you're gonna get this. So that's not particularly enlightening. But I think about Texas and Illinois and Ohio are places with a fair number of people, a lot of economic activity going on and they have far more road capacity in California. So our road system is a bottleneck. Now there are enormous problems with trying to do something to alleviate that bottleneck. But nevertheless, it's hard to deny, particularly from a trucking standpoint, that California is a bottleneck. And if you look at the states that have less roads than we do, New Jersey, Hawaii district, Columbia relative population, well, this is just a city so that's not surprising. There's no rural area. Hawaii is largely urbanized and New Jersey is heavily urbanized. So whereas we in California, we have a lot of people, we have big cities, but we have a lot of empty space too. And despite that we are, we look like these states that have basically no rural areas in terms of our road capacity. The other thing that, from an infrastructure standpoint is the US is absolutely world class in terms of its freight rail. And we tend to think of the US as being bad at rail. Where we're bad is passenger rail and anyone who's taken a vacation in Europe or Asia, bemoans how bad our passenger rail is here. And it is. But one of the reasons for that is we give priority to freight and we use freight more than anybody else. You look at the left, you say, well, does Russia use freight more than anyone else? And the answer is no because this North American, so then you see Canada is separate, Mexico is separate, North America is basically stuff that goes from the US to Mexico and the US to Canada. So if you sum and it's overwhelmingly, the origin or destination is the US. So if we sum these two, we have far more freight rail tonnage going through our system than Russia does. And so an issue with bottlenecks again, is do we have sufficient capacity? Could we move more stuff or are we limited in terms of like the number of freight cars that we have available? The answer is by the way, yes. And engines and so on to get the stuff through. So that's again where the goods, if we spend less on goods, this becomes less of an issue. This doesn't have a big impact on haircuts although people need to buy shampoo and so on and scissors. And then when we look at the Port of Los Angeles, we are moving more stuff through it and this graph is a little outta date. I just looked it up is through this fiscal year today. So 2021 was the all time biggest year for tonnage going through the Port of Los Angeles. This fiscal year is essentially the same, 2022 is essentially the same as 2021. It's down just a smidge and what that reflects is capacity issues. And it's not the cranes. So Jaime Lee, who is the chairman of the Port of Los Angeles, chairperson of the Port of Los Angeles has said there are enough cranes, there are enough bays for the ships to come in. The problem is getting stuff out of the port. And that again, that's the trucks and the rail system. And so this is again a great asset for the region, but we need to figure out how to get stuff off of ships and onto trucks and get the trucks out faster than it's been in the case or alternatively, people would just buy less stuff and go back to spending money on experiences, well, then you would see some relief here.

Richard Green: So final thing, again, I've shared this with some of you before is if you look at rent growth, so this is where, bad for consumers, good for investors. We look for rent growth by metropolitan area. I've just picked some of the largest ones in the US. LA on an annual rent basis has the highest apartment rent growth of any market in the country. And what's remarkable about this is, this is CPI growth so this includes people in rent-stabilized units. So we have lots of people who are in depressed rent places and I've seen examples of when people move out of rent-stabilized places and they're re-let, they'll be re-let at 50, 60% rents above the rent stabilized prices. So the rent stabilization is pushing rents down and yet LA has the highest rent growth over a long period of time of any metropolitan area, any large metropolitan area in the United States. San Francisco is way up there too despite its rents stabilization. But at the same time, if we look at the more volatility of rent in LA, well, it's higher than say Chicago. Chicago is basically your bond, apartment bond goes up about the same amount every year, but not very much. There are places that have much more volatility like Atlanta and Dallas, which interestingly have much less rent growth and that reflects of course, the lack of barriers to entry in those markets. So from the standpoint of and past results, past performance doesn't predict future results, from the standpoint of where should the lowest cap rates be for apartments, you wanna look at these places that have the lowest ratio of rent growth to the volatility of rent growth and those places are, actually Chicago is very good that way, it's a lowest risk place, Houston is good, but LA is quite good.

Richard Green: So those are my prepared remarks and I would welcome any questions that anyone else has. I think I answered all the questions that came in during the-- Oh, here's one. Yeah, so given the at low vacancy in industrial, do you know what affordability is for industrial users? That's a great question. We don't have a particular measure of that. For many industrial users, industrial rent is still a tiny fraction of their overall costs. So when you ask people from Target, they will say they don't like paying more, but it's not a big deal relative to everything else. But if you're talking about small users, I've heard a lot of anecdotes about large users trying to get small users in the industrial market. I don't know of good data on answering Zach's a very good question. I guess one could start, this could be a research project, one could start by looking at like Trepp data which I think has lease information on CMBS all CMBS, but CMBS that back industrial properties, one could see if there's been an evolution in the users of industrial space that at least get institutional loans behind them. I don't have an answer for you right now. I think it's actually a good research question. We should work on it. If you want to ping me with an email on that, we could get going on that as a project, but don't expect an answer for a while 'cause it wouldn't be easy to answer.

Richard Green: Kari Wilfong adds will LA rent growth impact potential threat to Costa Hawkins? Yeah. We have voted down now through the ballot initiative twice by a substantial margin modification of cost of Costa Hawkins. That said, what was really striking to me, I was at a conference in Salt Lake City where they're having some housing issues I think last November and people in Utah were talking about rent control. Now I don't think you'll ever see rent control in Utah, but that they were even talking about it, I found interesting. So yeah, all else being equal, does it mean it more likely that Costa Hawkins goes away? Yes, but you would need to move an awful lot of people who have voted twice now and it wasn't a close vote in order to get it repealed. So that's the best answer I have. Patrick Simmons asks, what do you think is the likelihood of the commercial mortgage rates to come back down before the end of 2022? I don't see how they come down. I just don't. For starters and the construction side of the business that's attached to SOFR and that which is attached to federal funds rate and the Fed will certainly not reduce the federal funds rate this year. And on the long term side, again, I would look at spreads may come down, but tenure treasuries are now up, what? More than a hundred basis points from where they were six months ago, far more than that. Could they come down a little bit from where they are now? Yeah. Will they'd be like that where they were a year ago this year? Unless we go into a serious recession, I don't see how they come back down.

Richard Green: Brian Jones asks, you have not mentioned anything about retail prospects going forward. Well, I've been gloomy about retail for a while. I continue to be gloomy about retail and the most important thing is we have an aging population and old people just don't spend money. And the reason they don't spend money is because they're worried about running out of money. And the other thing is we know when people stop working, there's just stuff involved with going to work that once you stop going to work, you have to spend money on it, like the kind of clothes that you buy and how frequent will you buy them and that kind of thing. So beyond the e-tail effect, I think there's REITs and Sears and Penney's and Kohl's have largely gone away. Part of it was mismanagement, there's no question about that, but part of it is they just provided stuff that people didn't-- And so what you have is the successful guys, basically three successful retailers in the US right now, big ones. So there's grocery stores, drug stores, Costco, Walmart, Target. And then the very high end stuff, but that's almost trivial. They're all low margin businesses. And so from the real estate perspective, you want high margin people and you want anchors that draw and I think that model is largely gone and I don't see it coming back.

Richard Green: Stanley asked, what trend of the percentage of the workforce that is employed. Maybe I didn't show that graph. I have that graph. Hang on a second, let me if I can find it. So the answer is, it is yeah, the employment population ratio, so let me just show you this real quick. So you can see, so this is the employment to population ratio. So this is look at 25 and 54 as being the prime, prime age population because 25 is when people generally stop going to school, 54 is when some people start to retire. There are occupations where 55 is a very typical retirement age, like if you work in the police department or a fire department or a series of that or work as a lineman, I don't mean a football lineman, I mean somebody who strings wires. And as you can see, basically we had a downward drift even before the GFC. The GFC really killed it. We came back, but never came back to where we were toward the end of the Clinton administration which was the best employment period in the post World War II era. But we're back pretty close to where we were. One of the big questions right now, you might have seen a story in the Wall Street Journal about it is after years when people were extending their retirement age, we saw people start retiring earlier. And again, this happened before pandemic, but now we're starting to see people who decided to retire, un-retire. And so how many of those people we will actually see come back, that's a really interesting thing to look at and I have no particular forecast for that. Yes and thank you Chase, pointing out for Brian is you should look at Rachel Wein's Lusk Perspectives from last year on this issue.

Richard Green: So any insight on lumber prices? I just don't do commodity price forecasting and I know that's very helpful, but when I spent time at the Feds, there was this guy there who was the oil price forecaster for the Fed and he probably had more depth of knowledge about oil markets than anyone I know. He knew who all the people were, he knew who all the companies were, he knew what tanker was where at any given moment in time and he couldn't forecast oil prices. But I think the question Hardy asks about, will higher cap rate expectations, combined with insane materials cost chill the construction market into-- I don't know if I would go so far as recession, but yes, I think it will and we're seeing it. You look up at San Francisco, for example, housing stats are down 80, 90% from a year ago. And last year wasn't that great a year up there. So I wish I could say otherwise, but I think-- And the other thing, at higher cap rate and cost of financing, right? So it's not just the construction loan, is interest rates get more expensive, equity people are gonna expect the same spread they had before. So your cost of equity is gonna get higher. So when you buy land, those holding costs are gonna be higher. And so that might make people think, yeah, I'm not gonna buy land right now. I'm not gonna do development right now.

Richard Green: So Jason asked, does negative GDP growth concern you that doesn't seem to make many headlines? Well, the answer to this is, I don't know. And there's an debate about the reason for GDP growth turning negative was lack of exports. And that's true and so the view is if you look at the domestic economy, it did fine and that's true, but then this gets to the point where, yeah, but if exports are an important part of our economy and they are and nobody in Europe is buying our exports anymore and people in China aren't buying our exports anymore and Japan isn't buying our exports anymore, that stuff we make that we are selling to somebody. So now in general, I am pleased that a one quarter number did not create a lot of havoc because one of the things that bothers me about financial reporting is I think people make too much of one month and one quarter data because among other things, these things are measured with a lot of error. And so is it a good sign that we had negative GDP for a quarter because of exports being low? No, it's not a good sign. Can we really know what it means until we wait another quarter or two? Not particularly. And one of the things, Claudia Sahm developed something called the Sahm index and what she looks at is changes in unemployment as an indicator over recession. And of course, labor markets. I didn't show you an unemployment number, but unemployment is sub 4%, which is incredibly low. We are still seeing payrolls increase. So it's really hard to reconcile that and that's more current data than the GDP data, but it's really hard to reconcile that with the idea that we're in recession at this point. But yeah, a positive number is always better than a negative number and so it is give a warning and it comes back to what I was arguing before about how well, what's happening in Russia and Ukraine doesn't affect our economy directly very much 'cause we really don't interact with them much economically. And if you compare Russia's economy to Germany's or France's or UK, it's not that big, but the indirect effect if those high energy costs, European stop spending many on other things then that affects us. So I worry about that.

Richard Green: So Zach, I'm gonna skip over your question because I've answered a lot of yours and go to John Menne who says, as a follow up to Peter Linneman's view, that heavy capital flows are pushing yields lower, do you believe the Fed's effort to shrink the balance sheet will be significant enough to reduce the heavy capital supplies and increasing yield requirements? Yeah, I actually do. That's one of the tools they're looking at and I don't see them doing a lot of active withdrawal from stuff, I don't see them doing a lot of selling, but just by running off their balance sheet, that has a big effect. So by not doing new stuff, but as stuff amortizes, they're not basically refunding it, that's really big. And I think that's one of the reasons we're seeing, by the way, things like TIPS go up from negative one to negative one and half percent to slightly above zero. So, excellent question. So I have three minutes left. So Michael, I think I've answered one of your questions. I'm gonna go to Scarlet and Gabriel really quickly. Scarlet asked, Scarlet also had a question about affordable housing, I think so. So yes, it's getting harder. Every affordable housing developer I'm talking to has been telling me it was hard to make things pencil before and now it's harder to make things pencil. And in particular, again, on the construction side, given the nature of the tax credits in particular, stuff that worked before is not working anymore and it's flowing through the market like anything else. On the other hand, say raising rates doesn't solve capacity issues. Well, I think it does for the reasons we just mentioned is if people stop building less stuff that start building less stuff, then at the end of the day, that's gonna reduce price pressures on things like commodities, which will allow us to come back to something more like the equilibrium we were in in 2019. So I do think they have to do this. I think they took a long time to start doing it. I think they were extraordinarily patient in doing it. I was a big supporter of their policy until it was basically last fall. I actually think they're a little late, but we'll see.

Richard Green: And finally because we're about at a time Gabriel asked the impact of immigration trends on this workforce discussion. We need more immigrants or else. Now, I guess people could argue that because the lack of immigration explains why wages are going up at the low end of the income distribution and there are people who might like that, but yeah, particularly things like construction labor, talk to any developer. The issue of immigration is enormous. And part of it, it's not just policy. It's more Mexicans are returning to Mexico than are coming in from Mexico now. And the reason for that is economic opportunities in Mexico are much better than they were 20 years ago and people like being close to their families. And that was a very unsatisfying answer to a final question, but we have come to the top of the hour. Thank you everybody for being with us today and we'll look forward to seeing you at our next Lusk Perspectives.