Please note this automated transcription may contain errors.

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Richard Green: So a very pleasant. Good morning to everybody. My name is Richard Green I'm director of the USC Lusk Center for Real Estate.

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Richard Green: And I'd like to welcome you to what I believe is the 23rd installment of lusk perspective so webinar series on

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Richard Green: Current events and the real estate business.

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Richard Green: Just rules of the road. If you have a question for our speaker please type them into the Q AMP a box.

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Richard Green: And today, our, our speaker who I will introduce in a

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Richard Green: Moment will be handling those on his own. That's his preference, although I will be interjecting some questions.

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Richard Green: Of

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Richard Green: My own as well. It is my great pleasure.

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Christopher Mayer: To welcome.

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Richard Green: Chris Mayer from the Columbia Business

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School

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Richard Green: To our program today.

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Richard Green: Chris is one of my very oldest friends.

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Richard Green: In the academic real estate.

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Richard Green: Business

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Richard Green: A remarkably accomplished scholar. He has written two of

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Richard Green: My all time favorite papers and real estate economics. When had to

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Richard Green: Do with

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Richard Green: A number loss aversion and home sales, which was a really important

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Richard Green: Behavioral economics paper and the other was on

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Richard Green: Airlines use of airports and how

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Richard Green: It's not that

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Richard Green: Runway runways are a public good, that are not being used properly but airlines just

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Richard Green: Shoot chose to bunch

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Richard Green: Their schedules in order to have a better hub and spoke system, which is one of the things that led to delays and he actually changed. I believe the behavior at least

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Richard Green: One airline as a

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Richard Green: Result of that work. It's

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Richard Green: So he's done terrific work that's mattered but he's also an entrepreneur, he has his own

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Richard Green: mortgage company that specializes in reverse.

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Richard Green: Mortgages and

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Richard Green: He's part of a group that I meet with on Monday mornings, talking about the mortgage market and

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Christopher Mayer: There's

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Richard Green: Almost thoughtful commentators

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Christopher Mayer: In that group. So

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Richard Green: I just thought it would be great to virtually bring him to California to speak.

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Richard Green: To our group today and we'll be talking about covered in commercial real estate. So Chris, Mayor, thank you very much for being here.

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Christopher Mayer: Great. Thanks a lot, Richard. Richard, you're one of my long standing and great friends in this business as well. And so it's a real honor, I also had the pleasure of being

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Christopher Mayer: Being on campus last fall as part of a, you know, the programs periodical academic programs periodically bring in outside experts and I was one of the folks that was brought in.

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Christopher Mayer: To do some work with the Marshall school was very impressed. And, you know, I've been impressed for a long time with what you've done with the with the loss center.

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Christopher Mayer: Etc. So it's great to. It's an honor to be here. It's, I always find this weird because it's much more fun to do presentations, where there are people who are

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Christopher Mayer: You know, putting in questions commenting etc in real time. I will, having done some teaching with this already with zoom

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Christopher Mayer: If you put questions in I will try and I will try and answer them in real time, to the extent I can, we can certainly do that afterwards as well.

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Christopher Mayer: And I should sort of say that this is an interesting opportunity.

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Christopher Mayer: To try and think about what's going on in the world, first I should start by saying I realized that in California, along with you know people who may be dialed in, in the South, that we're seeing a resurgence or maybe just a continued spread of coded

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Christopher Mayer: You know, being in New York City and knowing how hard it was for us here.

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Christopher Mayer: I certainly wish my best for all of you and for, you know, your family and relatives, I have known. Many people who were sick with coven and people whose relatives have passed away.

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Christopher Mayer: So I understand that this is hard for all of us. And you know, I certainly wish everybody you know my very best.

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Christopher Mayer: As well so

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Christopher Mayer: One of the things you know this is just kind of cut from the Wall Street Journal. One of the things I found. I've been doing some teaching this summer.

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Christopher Mayer: And, you know, I've gone from the point where you know you can cut a couple articles out of the press.

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Christopher Mayer: To talk about what's going on real estate for real estate being something that showing up, you know, in articles in major publications every single day.

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Christopher Mayer: And my experience from the last financial crisis where I was heavily involved in doing policy work I testified six times that House and Senate committees wrote a paper for the financial crisis think right Commission.

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Christopher Mayer: There's a little bit of a sense of when the newspapers are reporting on real estate when I'm getting calls to do lots of interviews about real estate. It's not a good thing.

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Christopher Mayer: So my kind of comment is, in a sense, I've told my family. I'm a bad a big negative indicator for the world. So when you read about me. It's almost never good news.

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Christopher Mayer: In the world in general. And I think unfortunately in real estate. We like it to be the case that we're not showing up in the papers and in the headlines.

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Christopher Mayer: But obviously, the question of how to think about real estate. There's been to my mind, no industry.

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Christopher Mayer: more affected than what's happened. Obviously airlines have been crushed. But you know, that's showed up in hotels and just, you know, for a while. I think the future of real estate was

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Christopher Mayer: Uncertain I've for several years told my students that I think this is as interesting, a time to think about real estate is there's been in my career, given the impact of technology, the idea of spaces, a service.

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Christopher Mayer: How do you, how to efficiently use real estate, etc. It's not just financing innovations which we've seen in the past, but it's real, you know, transforming how we think about and use the asset.

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Christopher Mayer: And cove. It is just multiplied that in some cases accelerating trends is and you know retail and malls things that were already happening. Got accelerated.

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Christopher Mayer: And in other cases things which just hadn't happened at all. You know, certainly in including you know office space and apartments seem to suddenly fundamentally change and even housing.

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Christopher Mayer: So what are we going to do, I want to talk a little bit about valuation first as a finance professor and try and use some data from public markets.

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Christopher Mayer: Then I'm going to say something about the economy, put my economist tab on talk a little bit about how that links back to real estate.

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Christopher Mayer: And then combine those things to think about where we think real estate prices are going there are a lot of mixed signals.

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Christopher Mayer: And then two things that I think are particularly relevant for where we're sitting now, one is obviously the future of cities.

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Christopher Mayer: Of which there's a lot of ongoing commentary and the second which may seem a little more technical note is just to think about CBS securitisation legal structure.

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Christopher Mayer: Because I think a lot of what's happening and going to happen in real estate is going to play out in the courts.

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Christopher Mayer: And in the hands of special servicers and I want at least say something about that before I before I add to it will definitely have time for questions and you should type those in

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Christopher Mayer: So the first thing is, for those of you who follow them Green Street advisors, which is at this point, not only read shop but you know does more

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Christopher Mayer: General analytics since February 21 has been tracking

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Christopher Mayer: How commercial real estate prices have locked in Green Street has a lot of careful analytics where what they're trying to do is look at the share price of breeds.

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Christopher Mayer: And disentangle from that both elaborate and on levered returns. And so what you can see in this chart is sort of what they're talking about is equity value. That's the change. For example,

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Christopher Mayer: In mall companies, small companies since February 21 have fallen 50% but their estimate on an undiscovered basis is that malls themselves have fallen 27%

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Christopher Mayer: And the difference. For example, between malls and strip centers is that regional malls came into the crisis, a lot more levered or the region of all companies relative district companies.

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Christopher Mayer: And as a result, while the strip centers of the chairs have fallen last from a property value perspective.

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Christopher Mayer: Strip centers appear to have or, you know, if you back them out from read prices strip centers appear to have fallen almost as much. And you know what's particularly striking in this picture.

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Christopher Mayer: Is how much office and apartment prices seem to fall and 21 22% and this is as of last week and we know the overall stock market has actually

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Christopher Mayer: Close to fully recovered to where we were in its previous peak.

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Christopher Mayer: And so I don't think that these prices are just a matter of, you know, investors didn't pay attention or they didn't know or you know they haven't thought about it. People are thinking hard about real estate.

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Christopher Mayer: And so these the clients and prices reflect investors trading every day billions of dollars.

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Christopher Mayer: Of shares of companies where they thought hard and if decided that real estate is fallen, much more in value.

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Christopher Mayer: Now, as a result of this, there's some actual private equity investors Blackstone Starwood, for example, have both said that they bought billions of dollars of REACH shares

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Christopher Mayer: Their view is, if I can, you know, if I was going to buy a property at a 20% discount. Why not buy shares

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Christopher Mayer: Underlying those properties at the same 20% discount and maybe in the future.

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Christopher Mayer: You know, I'll be able to do more with us. And so there are some real estate investors have looked at this and said, You know what, this is an opportunity for me to buy because I think the public markets are

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Christopher Mayer: Are overdone. But I want at least spend a little bit of time thinking about that and going through that calculus. Um, the other thing that's interesting is the housing market is seemingly on fire.

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Christopher Mayer: According to Redfin over half of home offers were a bidding war in June.

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Christopher Mayer: I have friends and colleagues from

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Christopher Mayer: Columbia, who were living in New York City, who just immediately picked up and you know took their kids into the suburbs and they're like, you know what, I have this great deal on a Columbia Business School on a Columbia University apartment. I'm out of here.

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Christopher Mayer: I'm not going to be in New York City anymore. And I'm moving to Westchester

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Christopher Mayer: And they are bidding. And if you want to buy a home in Westchester out in you know out in further Hudson Valley or other places further away you know you're going to be bidding against lots of people to buy properties. And so, in a sense, the stuff that selling is selling

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Christopher Mayer: With many offers homebuilders saw the strongest June, since the last housing boom.

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Christopher Mayer: As people have moved and homebuilder sentiment has really been back to covert highs.

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Christopher Mayer: And actually if I show you the picture here, one of the sectors that has kind of done the best if you, look all the way in the left is a single family rentals sector.

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Christopher Mayer: Where it suggests prices have fallen only I quote, only about 6% on a non levered basis for the underlying properties. So the housing market seems to be doing well, and according to Zillow etc. Things are good.

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Christopher Mayer: It's odd, because we have record numbers of borrowers who are not making mortgage payments about 7.7% of Mark mortgage borrowers today aren't making payments that's down a little bit.

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Christopher Mayer: But according to core logic. If you compared this to the last recession we saw a bigger spike and people not making their mortgage payments and in forbearance now so we did in 2008 in 2009

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Christopher Mayer: So on one hand home prices are doing great. On the other hand, we have large numbers of buyer of homeowners who are not even making their mortgage payments.

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Christopher Mayer: So how do we understand these phenomena and what does it say about real estate.

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Christopher Mayer: So the first thing. All of us have seen you know the numbers were the huge spike or historic spike.

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Christopher Mayer: In unemployment in the US that just happened at a speed and Elavil that really people hadn't seen before. I MEAN NOBODY'S SEEN ANYTHING LIKE, WHAT'S HAPPENED WITH cove. And I think you have to go back to 1918

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Christopher Mayer: To have anything you know where the world. And, you know, and, you know, the US economy responded this quickly.

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Christopher Mayer: The unemployment rates spiked it's come down a little bit. But if you sort of said we're sitting in a at a point where the unemployment rates 11% that's about where it was in the depths of the, the great recession.

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Christopher Mayer: In 2009 2010. And so, you know, kind of improvements to get to 11% seem really hard to even fathom as an economist, despite this news over 90% native has an a, you know, unfortunate i can't i can't directly show you the data and they creep is, you know, kept this

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Christopher Mayer: Is kind of keeping this behind a closed door natives is National Council of real estate investment fiduciaries think of them as reporting on large instance you know properties owned by large institutional owners.

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Christopher Mayer: Office industrial apartment tenants are all paying over 90% of them are paying rent.

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Christopher Mayer: Obviously I didn't mention retail, you know, their, their numbers for retail show under 50%

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Christopher Mayer: And depending on who you talk to, whether you know you're looking at shopping balls or I think the numbers are lower, or you're looking at strip centers were certainly they're doing a little bit better.

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Christopher Mayer: You know, there's still large numbers of tenants who continue to make their rent payments in the face of historic shocks.

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Christopher Mayer: Them I'll focus for a second on apartments national multi housing Council.

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Christopher Mayer: Has data that the reports over 95% of apartment tenants paid the rent in April, May and June. And if you look against year ago numbers in April, for example, they ended up in 94.6 versus 97.7 so basically

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Christopher Mayer: A reduction in rent payment of about 3% of all apartments owners. That's stunning, given the incredibly sharp increase in unemployment.

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Christopher Mayer: And as we've gone along, we've actually seen you know from April to May to June the percentage of people paying rent has actually gone up.

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Christopher Mayer: You know, knocked down. Now these are not the perfect data and many people have kind of talked about this, because again, these are

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Christopher Mayer: You know, these are on 11 to 11 and a half million apartment units. But as many of you know the majority of

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Christopher Mayer: Rental Housing in the United States is not owned by large institutional investors, it's mom and pop investors.

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Christopher Mayer: And the kinds of tenants and the mom and pop investor owned properties are much more likely to be sort of lower end tenants less high quality units.

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Christopher Mayer: Which are less well maintained and those are the kinds of things that the people who have gotten hit by coven disproportionately are living it. And so these data, surely overstate um you know rental payments in the country. I'm

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Christopher Mayer: A second source of data, the US Census pulse data which some people have talked about

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Christopher Mayer: Um, they don't, they're not exactly reporting kind of the rent, although they do have some rental data they suggest much lower rental payment numbers and it's kind of hard to reconcile the pulse data.

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Christopher Mayer: With the enemy HC data. But when you look at them. The data are much more striking in a particular they report geographically, a question which I think is, you know, troubling.

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Christopher Mayer: Which is they're asking for the percentage of people who either Miss last month's rent, which we know isn't a huge number or mortgage, which again on a percentage basis or not huge numbers.

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Christopher Mayer: Or those who have slight or no confidence that their household can pay next month's rent or mortgage on time.

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Christopher Mayer: And what you can see is the color, the darkest colors which represent between 27 and 37% of respondents reflect the parts of the country, which have been hardest hit by car.

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Christopher Mayer: And you see now places in the south and places in the Northeast, where the crisis hit

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Christopher Mayer: And wall. Certainly, New York. And, you know, New Jersey and Connecticut are coming back a little bit in terms of opening up

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Christopher Mayer: We're not coming back like people had bought or hoped we would when I was out this morning, you know, people are still wearing masks on the street.

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Christopher Mayer: They're not really going into restaurants Broadway is closed, till January at the earliest all the things that really make New York, New York, just doesn't exist for people living here.

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Christopher Mayer: And you can sort of see other parts of the country is coated of head have left large numbers of Americans.

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Christopher Mayer: Showing that they are really, really concerned about their ability to make their rent or mortgage payments.

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Christopher Mayer: And you know, I, suffice it to say, you know, with all of the things associated with the Black Lives Matter movement and the recognition that you know underrepresented minorities in this country have much harder lives and have had much harder lives have less wealth.

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Christopher Mayer: And less ability in our end jobs were there on the front lines and gotten hit harder by the disease and have higher death rates from covert

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Christopher Mayer: And so we know the impact of this was worse on minority communities and on smaller landlords and I think it's important

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Christopher Mayer: You know sometimes we think about real estate and kind of have this sort of disconnected, you know, view of this, and what's going on in the broader world. I think it's just important to recognize

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Christopher Mayer: How much this impact has hit on these communities. The, the reason I think and I think many analysts think that we're seeing the economy and rent payments do so much better than the unemployment data is the federal government stepped in, in enormous way.

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Christopher Mayer: In April, and beyond, with the cares act so disposable personal income in April actually rose 13% it's well higher in May, than it was in February. How is it possible that people actually have higher disposable personal income.

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Christopher Mayer: With the record changes we're seeing, um, and the answer is under the cares act people got several appreciable large benefits.

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Christopher Mayer: The typical person filing for unemployment insurance, not only got the normal unemployment insurance but also got a $600 a month. A $600 a week check that that left those households actually earning more money on unemployment.

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Christopher Mayer: Then they would have earned if they're working now this is shown up as a political issue and I don't want to, you know, one of the things I don't want to do is get involved in the politics.

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Christopher Mayer: Of what's happening. But I do want to with my economist have on kind of look and understand this and this is a fascinating chart.

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Christopher Mayer: That you know if you kind of asked me where do I look for data what's going on. One of the places I would really strongly recommend those anybody who's

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Christopher Mayer: Kind of, certainly in housing, you know, doing housing. Housing Finance even apartments, but people in general want to think about the economy. The JP Morgan Chase Institute.

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Christopher Mayer: Has fascinating data that they've linked between credit cards and accounts and all these different sources of data for people who bank with GPM Chase.

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Christopher Mayer: And, you know, they've, you know, tried to install protections, etc. But they know a lot about the people and they've been publishing really fascinating work Deanna feral

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Christopher Mayer: Runs the group. She was a senior person, the Obama administration Council of Economic Advisers, and the National Economic Council and they do really fascinating research.

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Christopher Mayer: If you look at what they did, they were able to isolate people who started receiving unemployment in April, under the cares act and they looked at their spending relative to people who remained employed.

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Christopher Mayer: And the chart is actually striking which is people who are unemployed actually have a higher spending than baseline.

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Christopher Mayer: Relative to where they were relative to where they were before. If you look at the 12 weeks before they went on unemployment and also relative to people who are employed.

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Christopher Mayer: And this suggests this is consistent with the chart I showed you about disposable personal income and, you know, is a proxy for expenditures in the sensitive suggests that

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Christopher Mayer: The kinds of supports that the federal government put in not only people are unemployed, but the 1200 dollar checks.

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Christopher Mayer: And there's been another paper written by economist at the Federal Reserve who sort of found that some of that 1200 dollar check more than you would have expected actually went into savings. So to some extent or to a big extent.

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Christopher Mayer: The, the steps that the federal government took in March when we didn't know what was happening.

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Christopher Mayer: Have really led to the economy living what I think of is kind of an unreal existence and I say unreal, in the sense that people are all suffering from coded with their jobs and their livelihoods and their health.

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Christopher Mayer: But the economy. Doesn't look like what's happening. Underlying this because of the federal spending.

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Christopher Mayer: If the question is going to be what happens when the cares business payments. And so this isn't just about unemployment, the airlines were paid a lot of money to keep people employed in the airline sector.

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Christopher Mayer: They've said, you know, airline travel isn't picking up anything like we expected.

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Christopher Mayer: We are either going to expect on, you know, more pilots and flight attendants and other people, you know, to be out of work, hotels, who got money through the PPP program.

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Christopher Mayer: That are paying employees because they needed to do it to qualify for PPP, um, these are all people who are likely to eventually lose their jobs in the near term.

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Christopher Mayer: Unless the federal government steps in again and don't take this as an observation. I think they should

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Christopher Mayer: Because if we think that this is going to be a long lasting crisis if I put my economist at down again. I think what we want the government to do is to provide a safety net, which is critical.

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Christopher Mayer: But it's also important to have some incentives in the economy so that the kinds of businesses that are hiring and adding people can start to add people and we know that the market.

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Christopher Mayer: Um, you know that one of the important things about the market is it provides signals.

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Christopher Mayer: To move the economy in a direction that's sustainable at the same time, I think, none of us are proposing.

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Christopher Mayer: Or none of us would think about proposing the idea of leaving people homeless and without the ability to feed themselves and get medical care. So this is a very hard problem.

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Christopher Mayer: And when you look in the papers and look at the commentary on the political side, it's just going to be a huge issue. I don't know where it's going to end up

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Christopher Mayer: I cannot imagine we are going to continue with $600 a month more for unemployment, the question is how much

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Christopher Mayer: But there's a recognition that is this is going to go on longer, um, you know, and even the most optimistic estimates, even if we have a vaccine quickly.

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Christopher Mayer: You know, have us into 2021 at the earliest. And, you know, probably q1 q2 of this you know vaccines and treatments being widespread enough to fix things.

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Christopher Mayer: You know the carnage between now and then is likely to be really significant and terrible for many people. So I don't know what the federal government's going to do. Um, but it's tough times.

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Richard Green: So Chris, can I

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Richard Green: Just a clarifying question. Can you go

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Richard Green: Back to your spending graph for a moment, please.

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Christopher Mayer: Yeah.

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Richard Green: So this doesn't necessarily say that unemployed people are spending more than employed people what it's saying is relative to baseline.

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Richard Green: They're spending.

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Christopher Mayer: Correct relative to what they were spending before

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Richard Green: Relative to what they were spending with, I just want to make sure the audience.

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Richard Green: Understood that

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Richard Green: Because the graph could

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Richard Green: Read incorrectly correctly imply that they're spending.

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Christopher Mayer: More

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Richard Green: And what it is they're spending more relative to what they were spending before. Not that they're spending more than employed people

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Christopher Mayer: Yes that's that's that's a, that's an excellent point. Richard, it's an important clarification.

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Christopher Mayer: Because people who are employed on average are hiring calm.

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Christopher Mayer: Higher net worth people so their baseline spending was surely higher than the unemployed people because we know this was hit towards the bottom of the income spectrum. Yeah.

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Richard Green: Thank you.

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Christopher Mayer: And retail conversions to market rate. Let me come back to let me come back to, um, I will say more on the apartment side of things, and I will also say more, a little more on the retail side, James.

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Christopher Mayer: So,

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Whoops.

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Christopher Mayer: Okay, so the next question is, I don't know why that happened. What do we expect about real estate prices. How does this affect the market.

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Christopher Mayer: And what are the implications and I'm going to talk about prices. I'm going to talk about rents, um, the first thing is I think the housing market.

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Christopher Mayer: You know, analysts are looking at this and saying, sooner or later, if you've got 8% of people who aren't making their mortgage payments forbearance programs are going

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Christopher Mayer: To disappear, and sooner or later. You've got to see some problems in the market.

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Christopher Mayer: Particularly in places where you know you've had large widespread, you know, unemployment issues.

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Christopher Mayer: And so those the initial forbearance programs were six months, they can be extended up for a year. But at some point, um, if people don't have jobs and are earning income, sooner or later, we're going to have problems.

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Christopher Mayer: For people who are going to be, you know, living in homes and for people buying homes, you're obviously going to be hard pressed to buy homes.

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Christopher Mayer: You know, in this circumstance. The flip side is that as we all know there's been a real dearth of housing and affordable housing in this country.

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Christopher Mayer: And we haven't been building enough housing relative to the needs of people

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Christopher Mayer: And so there is a support there are supply constraints. But the core logic estimate is that as the government supports diminish.

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Christopher Mayer: That they expect over the next year to start to see I'm home prices decline on the order of 6.6%. And this, by the way, is their baseline scenario, if you look at core logic. They have negative scenarios where

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Christopher Mayer: The recession becomes deeper and things are more significant there. They have negative scenarios, they're worse. And of course they have positive scenarios which you know show more like a couple percent decline.

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Christopher Mayer: And you know Mark sandy from Moody's analytics is kind of in the slightly more positive camp, but I think most people think the housing market isn't going to do well forever.

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Christopher Mayer: But if it's obviously going to depend on where you are. So people who are in places where folks are, you know, heading away from cities into the suburbs.

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Christopher Mayer: Are obviously going to benefit and people living in or, you know, downtown condos or urban areas, almost surely the forecast particularly places like New York or worse than that, um,

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Christopher Mayer: This morning FHA reported on their may data, they actually showed home prices falling point 3% in May economists had predicted an increase and the biggest declines were in the Pacific.

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Christopher Mayer: We're in the Pacific and the New England New England regions of the country. And so it may be that we're starting to see a little bit of this.

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Christopher Mayer: But I don't know that this is going to happen right away. I think what we're going to first see

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Christopher Mayer: Is some of the changes on the income side and then we're going to start to see housing suffer more if there's income. You know, when we start to see income issues.

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Christopher Mayer: As well. And for many places, it's still very hard to even list or show your apartment or house. So I think we're in the very, very early stages of seeing what's going to happen in housing.

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Christopher Mayer: What about commercial real estate. I want to run through a kind of a simple spreadsheet example, and this is going to be the professor in me.

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Christopher Mayer: And and i will i see Mario's your comment about forbearance about the, about the moratorium on evictions, I'll come back to that issue.

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Christopher Mayer: For both commercial and for apartments. What about commercial real estate prices. One of the first things is, it's actually hard

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Christopher Mayer: To get commercial real estate prices to fall a lot when there are near term changes that happen. The reason is the properties are very, very long lived assets and even if you significantly reducing come

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Christopher Mayer: In a commercial property for couples are several years the bulk of the value of that property is not over the next three or four years. The bulk of the value of that property is over the next 1020 3040 plus years in the future.

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Christopher Mayer: And so I just run through a simple example, buy an apartment building with a 4.7% going in cap rate 1.8% rental growth for 10 years and exit cap of 5.2

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Christopher Mayer: And I'm just doing it on levered NPV at six and a half percent and these are numbers roughly consistent with Green Street. And again, you know, for, for, you know, those of you, you know, as you got to teach

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Christopher Mayer: Just kind of think about what we teach. One of the first things is do everything on on on levered basis and just realized library exacerbates it

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Christopher Mayer: Whatever that is. So I like to look at real estate on a non labor basis. First, so take the NPV of that property, kind of a standard property, you know that you might have bought you know a part multifamily building

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Christopher Mayer: You know conservatively underwritten if you, you know, a few months or a few years ago.

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Christopher Mayer: I'm suppose rental collection falls so that cash flows fall 50% for the next four years, and the property comes right back to where it was before.

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Christopher Mayer: So that's obviously a much darker comparison than most people who are owning commercial real estate. If you're not in retail or hotels or CA.

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Christopher Mayer: And even if you take that 50% decline in revenue for four years if everything else stays the same. The net present value falls by about 8% so really stark near term, loss of revenue doesn't have that big an effect on the NPV of that property.

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Christopher Mayer: By comparison, if I do the same for year decline, but I also hold the base. The same. So in other words, when I come back four years from now, I'm starting at 100 as opposed to starting at, you know, 106

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Christopher Mayer: So keep the base. The same. So four years from now, we have the same base rental level. And for that, for, for the next four years. We actually got 50% of brands, the NPV false 14%

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Christopher Mayer: That's again a significant number and particularly on a leveraged basis. But again, it's not catastrophic to the value of the property.

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Christopher Mayer: where things start to get worse is even small declines in rental growth. So if I took that 1.8% rental growth and I turned it into 1.4% rental growth. So not a very big decline.

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Christopher Mayer: And I changed the going out cap rate by four tenths of a percent. So the thought experiment is opposed word is slow growing economy or what I want to think about is a slow growing location.

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Christopher Mayer: And Robert asked a question, what about the future of urban office and residential. Well, that's exactly where this example comes in.

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Christopher Mayer: Suppose you think that cities are going to grow less quickly rental growth is going to be smaller because people are going to spread out, go to other places, etc.

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Christopher Mayer: Those are the kind. These are the kinds of shocks you have to put together.

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Christopher Mayer: To get a decline in commercial real estate prices of 20 plus percent which is what Greenstreet is reporting for example for apartment reads. So in order to see the kinds of 20% declines, you really need to have a pretty significant near term decline and rent.

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Christopher Mayer: You need things not to recover very quickly to where they were before. And again, that of concessions and you need slower growth in the future.

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Christopher Mayer: So if you want to think about what the market is saying, for example, about office or apartment, what the future is what the market is saying is that it thinks that it's going to be a combination of all three of those things happening.

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Christopher Mayer: For many of the properties that are owned by the reeds that are traded. So it's a combination of short term rent problems, a new price level when things stabilize and

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Christopher Mayer: A lower long term growth rate of rents.

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Christopher Mayer: And that's a pessimistic kind of scenario for owners of real estate but it's not one that is impossible to write a story about so

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Christopher Mayer: So come it. Yes.

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Richard Green: I can't. So your analysis is dead on. But there's the issue of surviving those four years. So if your debt coverage ratio is one three or one for on your mortgage and your rent collections fall 50% you're not making your mortgage payments. Right.

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Christopher Mayer: So the left so leverage is where people will start to get into trouble. And then it depends on who you're getting your leverage from

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Christopher Mayer: So I'm going to come back a little bit for people who are you know the worst hit sectors where things are really been in office apartment. I'm and I'm and industrial

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Christopher Mayer: You're not really seeing declines. And you know rental payments are 90 plus percent of what they were.

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Christopher Mayer: So in those sectors, the price declines are probably not driven by cash flow, they're driven more about expectations of the future.

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Christopher Mayer: The places that are the worst head to your point, are going to be hotels and retail properties, particularly malls.

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Christopher Mayer: And those places, you're going to be negotiating with your lender for many of those because of the leverage and we've seen CBL preparing for a bankruptcy and I'll show you some data from the CBS

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Christopher Mayer: Sector shortly. And we'll talk about whether we how we think that's going to affect and how lenders are going to be able to respond to those changes. But you're exactly right. Um,

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Christopher Mayer: The interesting thing about this calculation is one of the things people are sort of looked at it. If you look to green streets analytics.

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Sorry.

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Christopher Mayer: Go back to my chart at the beginning, um,

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Christopher Mayer: Early on in the crisis greens three put a buy on apartments.

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Christopher Mayer: And if you were to just read the press today and sort of say, How is it that they're saying apartment prices are down 22 and hotels are down 28 on levered

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Christopher Mayer: That's really hard to think about, given how many apartment tenants are paying relative to hotels. How could hotels, not be that much worse, and even malls, not be that much worse.

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Christopher Mayer: On the mall side part of the answer is that in February of

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Christopher Mayer: You know, in February of 2020 malls had already fallen in the public markets quite a bit. So this is not a peak to trough decline malls had already declined a lot

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Christopher Mayer: And as a result of those previous declines. They came into the crisis with a lot of leverage and that kind of gets to your point, Richard.

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Christopher Mayer: But interestingly, if you look at lodging um it's fallen, just a little bit more than other things. And I think it's because of this point.

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Christopher Mayer: That it's not just about the near term. It's about what the future is going to be. And a lot of the value is going to be about the future.

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Christopher Mayer: Not just the next couple of years. But, you know, people are going to continue to travel and they are going to continue to use hotels.

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Christopher Mayer: And so the short term impact on hotels has been much more devastating. But if they can survive the crisis and leverage

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Christopher Mayer: There may be an opportunity on the other side. And the last thing I'll say is none of these things. Talk about cap x

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Christopher Mayer: And cap X requirements if people are living and working differently, are going to be really significant, particularly for office properties. For example, but also you know for other things as well. So none of this considers the cap X, which might be quite significant to improve properties.

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Christopher Mayer: What about the few

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Minutes.

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Richard Green: Before you leave this point, though, the one thing though that is striking

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Richard Green: Is you did not change your

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Richard Green: Discount evaluating things

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Richard Green: Yes No world of 10 year Treasury is being sub

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Richard Green: 1% you think there's a case to be made that the return the unleavened return, people are going to require will fall.

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Christopher Mayer: Yes. And there's some people are arguing they think cap rates should go down.

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Christopher Mayer: I think it's premature to say that for two reasons. But

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Richard Green: Yeah, yeah, the cap rate things different. I'm sorry. Go ahead. Chris, I'm sorry.

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Christopher Mayer: Yeah, you know, it's but it's it ties in in the sense that if I think about what I'm discounting real estate out, um,

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Christopher Mayer: If you have the you have kind of the risk premium offsetting the lower long term expected yields people who bought multifamily did not think that multifamily could get hit.

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Christopher Mayer: The way multifamily has been hit in this crisis. And so, people thought that multifamily was an incredibly safe asset.

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Christopher Mayer: I think they're really have to revisit their view as to how safe multifamily really is. It might be

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Christopher Mayer: But the data is not suggesting that it was a safe haven. People thought

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Christopher Mayer: And so I think for some of these kinds of property types. The lower expected yield is going to be offset by higher risk premiums potentially from investors, but that's still to be determined. We don't know. That's a great question.

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Christopher Mayer: Um, what about the future of cities.

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Christopher Mayer: I think there's a question I've written on. And I think, you know, matters a lot. If you want to be really optimistic, you basically say, look, the

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Christopher Mayer: Flu and, you know, a history of, you know, centuries of horrible, terrible, you know, diseases that have be fallen cities and cities have continued to come back through centuries of declines like this.

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Christopher Mayer: And even if you look at the, you know, rents and prices in the US, there are these long term patterns that have been really favorable to what we saw I call superstar cities.

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Christopher Mayer: So if we look, for example, Nate cream. Go back 40 years and look at the growth rate of price per square foot and office markets.

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Christopher Mayer: These are 40 year compounded decline in, you know, changes in price per square foot.

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Christopher Mayer: And you have markets, which are you know seven. Seven and a half percent annualized growth over a 40 year period, relative to markets that have seen two and three and 4% annualized increases.

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Christopher Mayer: And then a creek data aren't perfect. There are a lot of issues, but it's hard to find commercial data to go back over this time horizon and

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Christopher Mayer: You know when when you look at that the numbers really suggest that office, particularly in these superstar markets has just substantially grown over long periods of time.

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Christopher Mayer: It's not only an office. You can look at it and housing. I went back to 1950 in a paper superstar cities. And if you look at the density of houses and um you know in 1950

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Christopher Mayer: The most expensive metropolitan areas were twice as expensive as the median.

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Christopher Mayer: Income by 2008 124 4.5 times. And a lot of that is San Francisco LA, you know, Boston, New York, but the most expensive places were for four and a half times more expensive than the median.

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Christopher Mayer: And by 2020 if you look at the data for San Francisco. It's just gotten even bigger. So the green is the US.

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Christopher Mayer: The blue is San Francisco and the blue is high tier properties. The router are all properties in San Francisco. So we just continued to see the spread that these real estate prices office residential housing have all grown substantially faster over

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Richard Green: Decades.

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Christopher Mayer: And in many cases have grown faster than the economy.

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Christopher Mayer: And have grown faster than GDP and incomes in the country. And the question is, How sustainable is this um

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Christopher Mayer: The key has been that these places are tied to the attractiveness to high income households.

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Christopher Mayer: That's what's driven. This is the fact that you have increasing concentration of wealth and income.

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Christopher Mayer: And those people have wanted to live in the highest price cities and it wanted to work in the highest price cities and that's driven these price increases.

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Christopher Mayer: And so a lot of this is going to depend critically on the question of whether we're going to actually see um people continue to want to live. Sorry about that. In in these markets.

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Christopher Mayer: And I think that's an open question because that is what is driving big firms to want to pay rent premiums to be in these locations.

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Christopher Mayer: And I wish as a New Yorker. I'm not a lifelong New Yorker. I grew up outside of Chicago, but as a New Yorker for decades now.

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Christopher Mayer: I wish I could be more optimistic about where things are in the near term. I think these New York, New Jersey, Connecticut, Illinois also other places are really facing significant structural problems.

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Christopher Mayer: They were harmed by the salt, which is the ability to deduct state and local income taxes and also by the caps on deductibility so with California hit by that.

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Christopher Mayer: But even if you repeal salt today i don't i think salt was just one of a number of things which were starting to hit these markets. And again, particularly New York City.

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Christopher Mayer: That is going to present enormous headwinds inequality high housing costs aging infrastructure inefficiency inefficiencies in government. We spent $7 billion extending a subway three stops in Manhattan.

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Christopher Mayer: We can't rebuild our infrastructure spending at those levels.

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Christopher Mayer: There just isn't enough money 100 billion dollar infrastructure program, which sounds really big if three stops on the subway or the amount of money that some of the California projects run

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Christopher Mayer: Continue to be as high as they are, it becomes very, very difficult to rebuild infrastructure but California is infrastructure is not as aging as it is elsewhere.

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Christopher Mayer: But the issues of inequality and affordable housing as you guys know more than me sitting in California are going to become huge issues and, you know, adding deductibility is just not going to fix this problem alone.

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Christopher Mayer: And there's just no question that Sun Belt and rural locations are just better situated, no matter what we learned about working from home.

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Christopher Mayer: If you look at companies, banks and other more price conscious, you know, wage conscious companies have been more willing to say we're going to do work for home more permanently.

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Christopher Mayer: Tech companies in New York have actually indicated willingness to sign leases for all that Mark Zuckerberg said

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Christopher Mayer: About you know everybody at Facebook and work at home, etc. You know, Facebook is repeatedly reportedly in negotiations to sign additional Elise on additional space in Hudson Yards.

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Christopher Mayer: That was formerly retail space that was Neiman Marcus. It opened space and closed it within a year, and they're potentially looking at taking some of that.

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Christopher Mayer: So tech companies are still willing to do stuff in New York and some of these bigger cities, but the reason is, and what they're saying is, they're doing it because they think their workers want to live there.

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Christopher Mayer: And particularly younger workers and if that isn't the case, then all bets are off.

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Christopher Mayer: I'm going to say one more thing and then we're going to then I'm going to come to some of the questions, um,

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Christopher Mayer: You know, a number of you have talked about availability financing, Richard. You asked about it earlier. Matthew sort of acids, the short term availability of financing sectors, you know,

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Christopher Mayer: The reach chairs are partly because sectors or lenders withdrawing reach actually have accessed have better access to capital.

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Christopher Mayer: Than most private owners of real estate because reads can still float bonds and bonds among other things are things that the fat you know that have received some help from the Federal Reserve programs.

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Christopher Mayer: And so, if anything, read, sir, in a better place from a leveraged perspective, relative to most owners of private real estate and other than the hotel sector.

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Christopher Mayer: And retail where there was a little more leverage reads generally have much less leverage than private owners of real estate do

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Christopher Mayer: So I don't think I don't think rates are getting harmed by the cost of capital nearly as much as owners of private real estate are getting harmed.

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Christopher Mayer: And that puts a real question on how our lenders going to manage this.

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Christopher Mayer: You know, I think banks and insurance companies kind of the traditional sort of lenders, you know, they may not have all the people involved, but they do have a playbook that they know how to manage in terms of what to do when things are in trouble.

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Christopher Mayer: I still really worry about CBS and I worry about it for a couple things. Um, that's where a lot of the kinds of hotel and retail loans got put into CBS issuance

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Christopher Mayer: And so that's where a lot of the higher leverage was for those kinds of property types and traditional lenders were less willing to lend

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Christopher Mayer: And make risky loans in those sectors. As a result, the sharp run up in delinquencies is a lot of that's going to show up in the CBS sector in the CBS world.

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Christopher Mayer: And I'm I worry about special servicers I'll have a slide on this in the second. So let me sort of finish up the public markets signal declines.

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Christopher Mayer: The economy is doing well. But really, because of federal government spending and I think rent and mortgage payments are likely decline as federal support starts to diminish.

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Christopher Mayer: There are a lot of wild cards. Is there going to be a vaccine is there going to be a treatment. How much are people going to come back out.

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Christopher Mayer: And then is as we had another question from somebody who had owned a commercial building Mario's, you know, what about these foreclosure and eviction moratoria

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Christopher Mayer: The flip side is people are saying, Are we going to evict millions of people from their homes in the middle of a global pandemic.

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Christopher Mayer: Are we going to further harm small businesses which are the lifeblood of our cities and economies by making it easy for them to be kicked out.

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Christopher Mayer: Um, I understand both sides of this. I completely understand how owners of real estate have to make their mortgage payments.

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Christopher Mayer: And nobody's giving them forbearance, although there are some I take, you know, some who have Fannie and Freddie loans get some of that.

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Christopher Mayer: But it's a really hard problem. And if you think about it from a societal perspective, you know, these are going to be very hard issues. And I just think we are going to continue to see

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Christopher Mayer: states and the federal government and others, particularly if we, you know, depending on how the election turns in November. I think we are just going to see on programs and other things, they're going to make it harder to evict tenants.

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Christopher Mayer: And the arguments are going to be both humanitarian as well as financial and political and those are going to be very hard. Um,

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Christopher Mayer: You know the distributional impact of CO that I've talked about this, you know, what do we think for real estate. Well, what is going to be 2020 to look like our office are people going to come back to work.

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Christopher Mayer: And our city is going to be attractive and for the questions on retail. I think the honest assessment on retail is the best we can hope for.

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Christopher Mayer: Is that people are going to continue to be sort of retail is going to be able to return to being about experiences as opposed to being just about selling goods.

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Christopher Mayer: Malls like American dream Mall of America, some of the big malls that have been trying to reposition themselves to be about experiences.

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Christopher Mayer: If coded changes and people are again living in cities and concentrated areas and they're able to participate in these things and to go out to dinner and interesting restaurants. I think there's things that could help retail

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Christopher Mayer: But the fundamentals of shopping, you know, online, etc. It's not like you know Co. The just accelerated, you know, by a couple of years trends that were already happening. Unfortunately,

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Christopher Mayer: I believe in cities. I love cities. I love living in New York. I love living in places where there's density in the advantages of density

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Christopher Mayer: But New York and you know other major cities have gone through significant periods where despite those advantages, they've had real problems.

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Christopher Mayer: And in addition, if you look at the data I showed you on pricing, given how low cap rates are even small decreases in growth rates have really big effects on prices.

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Christopher Mayer: In a low cap rate environment and given the really big run ups and prices in some of these gateway markets. We had seen red green streets analysis has kind of shown this, among others, we had already seen rental growth slowing

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Christopher Mayer: In some of these big gateway markets.

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Christopher Mayer: And that slow and rental growth is hard to imagine that these things aren't going to continue to lead to slower growth in the future.

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Christopher Mayer: And we know reach you know own more institutional gateway high quality assets so rates are definitely not a, you know, an indicator of the average ownership of commercial property in the country, but for institutional kinds of properties.

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Christopher Mayer: I think they're, you know, there's a fair bit of you know there's certainly a fair bit of understanding of what could drive those price changes.

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Christopher Mayer: And, you know, the last thing is just the lending market and securitization, and here's a place where I'm really a pessimist.

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Christopher Mayer: We had all these reforms to securitizations it with within days or weeks, whether was in the housing market or CBS we just watch a total collapse of securitization markets that literally collapse within days.

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Christopher Mayer: And in some cases, it was a collapse of trading in bonds with full faith and credit of the US government Fannie, Freddie Jenny bonds.

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Christopher Mayer: securitization is just not the be all and end all it was. And if we go back to the crisis and realize how many problems special servicers had in managing things

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Christopher Mayer: There's going to be a lot of pressure on them and the special services have already come out of the gate even reportedly asking borrowers to pay them to consider.

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Christopher Mayer: Offers of forbearance, or to renegotiate loans.

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Christopher Mayer: Those kinds of things don't bode well for how we think that some of these sectors and again retail and hotels these highly leveraged sectors are really going to come out.

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Christopher Mayer: And the idea that bankruptcy judges and special servicers bankruptcy judges in some places that may be sympathetic to tenants and owners who themselves have not been receiving payments and may use some discretion here.

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Christopher Mayer: I think there's, you know, there's kind of a question of what this is going to be and how it's going to work. There has been a lot of money raised to manage distressed real estate and distressed real estate funds, but I don't think just rolling out the you know the playbook.

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Christopher Mayer: You know, is, you know, the old playbook and buying a bunch of distressed stuff, you know, and calling it a day is going to kind of get us and manage where we are today. I think it's going to be a more complex scenario.

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Christopher Mayer: So we have a couple of minutes left. I'm just want to look through and see if

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Christopher Mayer: Questions I saw somebody who's a commercial building where tenants are paying and Wells Fargo isn't working with you.

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Christopher Mayer: Some of it may be staffing, but some of it is lenders looking and saying, you know, if they think you're able to pay and if they think that loan is still money. Good. The question is, they're making strategic decisions.

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Christopher Mayer: And I think these are really hard negotiations, some artists, I feel I'm quite sympathetic to the problems associated

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Christopher Mayer: With this but shorter people who have Jesse Fannie Mae, Freddie Mac apartment financing where there's been some stuff on forbearance. I think there's portends what's going to be a really hard set of conversations

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Christopher Mayer: So Chris, I think property conversion. We just hit James's point. I absolutely think we are going to see conversion

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Christopher Mayer: Whether retail mall to mixed use and other things. But frankly, that was happening before this.

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Christopher Mayer: Simon properties was already starting to, you know, start to put residential tab and other you know mall companies were starting to do residential and mixed use before this, and I think covert is just, if anything, accelerating on that front. What we're pre existing trends.

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Richard Green: So I do want to. So there are a couple of questions about the the Sun Belt. And I do want and we're coming up at the top of the hour. But I do want to also underscore a point you made about an efficiency.

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Richard Green: That New York spent $7 billion to extend the subway three stops. Now actually, you can make a cost benefit point that it was still worth it for 7 billion, but it didn't.

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Richard Green: Need to be 7,000,000,001 of the ways the sun bell is at an advantage is, it seems more efficient the delivery of infrastructure projects I've just I've started working on a project.

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Richard Green: To look at induce traffic demands. I've been looking at points were three ways or expanded in different cities around the country.

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Richard Green: And one of the things when you're in the Sun Belt and you read the press releases the freeways are done before the expansions are early

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Richard Green: They finished before they're scheduled to finish and for those of us living out here in California.

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Richard Green: It's a minimum of two, three years after the initial downstate for when completion is supposed to happen.

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Richard Green: The things actually happen. We had the the 405 nightmare. We know of the five freeway being expanded into taking a very long time.

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Richard Green: So, you know, thinking about what is it about the Sun Belt that they're able to deliver these projects in a more timely, which of course means less expensive manner.

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Richard Green: Than mean

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Richard Green: The coastal cities.

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Christopher Mayer: Right, there's no question that regulation just plays a role and all sorts of areas and it's it plays in many ways, you know, when you think about the cost of housing.

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Christopher Mayer: Workers there get paid less in part because it costs less to live and people can make a good, you know, you just don't have the same homeless problems.

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Christopher Mayer: That you do in California Cities and it's not a political that I don't view that as a political statement that's an economic statement.

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Christopher Mayer: It's not saying how people should vote or what they should say it's just an observation that when housing is less expensive, you need to pay workers last

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Christopher Mayer: And when you don't have the same environmental regulations to do things, things can happen. One really, you know, years ago I wrote a paper on it was looking at housing, but I think it applies across the real estate spectrum, you know, was looking at

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Christopher Mayer: You know what kinds of regulations of fact the returns and the decisions to build. And it turns out builders are okay paying fees to do stuff.

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Christopher Mayer: What is deadly is something that causes you to delay a year, two years, three years, four years to do projects. Your financing falls apart.

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Christopher Mayer: You know, the market changes what you need to make to build changes and all these regulations that cause all these delays, not only as time money.

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Christopher Mayer: But time fundamentally changes your ability to take on projects.

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Christopher Mayer: And so projects that last years and decades, you know, not yours but 510 15 2025 years to get accomplished, which are what some of the projects in New York, the redevelopment works.

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Christopher Mayer: Those just don't work for people who are trying to produce affordable housing.

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Christopher Mayer: And affordable, you know, offices and other things. And so all of the kinds of regulations that lead to delays not only raise the price of what you have to pay workers.

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Christopher Mayer: And they create homelessness. They also create problems for your ability to execute and do things. And so I think the cities are going to have to figure out how can we work and function.

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Christopher Mayer: And serve some of the social goals we want and value, while at the same time being able to do that productively and those are very hard questions.

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Christopher Mayer: For people to think through, and I, I just don't hear that conversation, taking place. When I listen to local, you know, state and local politicians in

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Christopher Mayer: You know, in places like this. And I think the kinds of responses. They may have, you know, for some of these kinds of issues are going to be really hard from as an economist to address these issues.

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Christopher Mayer: So hard

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Richard Green: So we would we need to wrap up, Krista to just quick things. One is, Will you share your slides with the group.

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Richard Green: That we put. Absolutely. Great, thank you. And second, I do want to combine a bunch of questions and just have this as an exit. Are there are cities somewhere that you're particularly optimistic about right now.

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Um,

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Christopher Mayer: I mean, I think we're going to continue. Look, I believe in cities in general, as I said before, I think people like to live near other people and density and the idea of having places.

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Christopher Mayer: Where people can, you know, have larger markets and exchanges greater amenities access to services, you know, the ability for firms to find people, you know, a broad variety of workers.

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Christopher Mayer: Etc. I think there are many, many advantages to city. So I don't think they're going to be lots of people go into rural parts of this country. And if they can. The internet is terrible, having come from a place up in Maine.

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Christopher Mayer: Not long ago, so you're not gonna be able to work at home very easily until we get a much better satellite system that exists today.

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Christopher Mayer: So I don't think it's going to be so much rural. I do think it's going to be some of the same kinds of cities where we've seen growth.

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Christopher Mayer: And their growth is just going to happen more quickly. They're going to sprawl out a little bit further and the question of whether they can build a greater density

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Christopher Mayer: Is going to depend a lot on you know how people perceive health issues and other things about living you know more densely and are they going to start to be able to produce public transportation or other things.

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Christopher Mayer: That allow them to operate with more density and obviously there are many Texas cities where that doesn't happen. So I think it's going to be some of the same places in the near term, and there may be some, you know, small winners on the other side.

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Christopher Mayer: And, you know, to a greater extent what a millennial say I will say my kids and some of their friends.

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Christopher Mayer: Even now, it's still like the idea of living in New York. So I don't want to sell them New York short

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Christopher Mayer: You know they still think in some of these tech firms still think and even some financial services that they're going to be people living in, you know, they want to live in some of these places. So it's hard, so

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Richard Green: With that Chris Mayor. Thank you very, very much for joining us this afternoon, your time this morning, our time great presentation.

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Richard Green: To the group. Our next lusk perspectives will be actually tomorrow it will be a fireside chat with the leadership of the lusk team Emile Haddad, the CEO of five point

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Richard Green: Of Bill Witte, the CEO of related California and me 11am tomorrow morning, hope you can join us. That should be a great conversation again, Chris. Thank you so much for spending some time with us today.

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Christopher Mayer: Thanks and good luck everybody stay safe.

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Richard Green: All right, stay safe. Everybody see I hope most of you tomorrow. Take care.