Reflections on the Market with Mark Zandi

Please note this automated transcription may contain errors.

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Richard Green: my name is Richard green I'm director of the USC Lusk center for real estate. This is a Lusk perspectives podcast.

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Richard Green: And our guest today is Mark Zandi who runs Moody's analytics and founded its various predecessor entities before that.

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Richard Green: Very well known macro economist and a very well known what I'll call it a real time macro economist, which is to say

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Richard Green: That he focuses on actually bringing analytics to bear to current business and policy issues.

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Richard Green: He has relied on by people in both public and private sector. He is one of the few genuinely bipartisan people I know.

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Richard Green: In that he has worked on campaigns for or advised candidates on both sides of the political divide

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Richard Green: And I think there's a whole host of reasons why he is looked at this way is he's a very much down the line, kind of guy. And so

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Richard Green: We need that kind of thing right now is we try to navigate this pandemic. So Mark welcome and thanks for being here and I'm just going to start by opening up by asking what are you seeing out there right now. And how is your thinking evolving as we've been moving through this pandemic.

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Mark Zandi: Thank you Richard thanks for the opportunity. I really appreciate it and I you know obviously respect your work and your center and very happy to be able to participate in the podcast with you.

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Mark Zandi: To answer your question.

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Mark Zandi: I think the good news is that we are now passing through the apex of the massive economic shock created by the crisis, the Kobe crisis and that shock is

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Mark Zandi: Unprecedented unemployment is going to peak in the month of May somewhere north of 20% we're going to lose.

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Mark Zandi: 25 million or so jobs peak to trough and that of course doesn't do justice to the financial suffering because you have a lot of people last hours and pay cuts, if you consider all those folks are talking at least 50 million workers.

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Mark Zandi: That's one third of the workforce that's been directly negatively impact this is off the charts in terms of the impacts. But the good news is that we're turning the corner.

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Mark Zandi: And I do think, between now and Labor Day conditions should improve will get some job growth unemployment will start to come in.

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Mark Zandi: And that's due to two factors. One businesses are reopening and I will say they are reopening faster than I thought they would just a few weeks ago, that is a change in my thinking.

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Mark Zandi: Now, of course, that raises the risk of re intensification of the virus. A second wave but barring that, which is a bit big thing to consider him, we should consider it. I do think we'll see

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Mark Zandi: Activity pick up pretty quickly here unemployment start to come in. My guess is by labor day it'll settle in somewhere around 10% ish just for context that's going to feel a lot better than 20% but just for context.

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Mark Zandi: 10% was the peak unemployment rate we touched briefly in the financial crisis. So that gives you a sense of magnitude here.

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Mark Zandi: The other thing I'd say is that on the other side of the business reopens ON THE OTHER SIDE OF LABOR DAY.

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Mark Zandi: Oh, I should mention, I just said, there are two reasons. First is business reopens the second is fiscal monetary policy. You know, it's been very aggressive, the feds been so far successful in creating a firewall between the economy, the mess in the economy.

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Mark Zandi: And that's been very helpful. And of course lawmakers congress and administration to pass to multiple rounds of fiscal rescue

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Mark Zandi: And that's coming into the economy supporting people and businesses and that that's also going to help with the next few months now ON THE OTHER SIDE OF LABOR DAY. I do think the economy is going to effectively flatline until we have a vaccine and, you know,

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Mark Zandi: unclear what that's going to be, but until then I think the uncertainty around the virus. It's epidemiology. Are we going to have a second wave I'll virulent how disruptive.

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Mark Zandi: Are we going to get a vaccine how effective. How quickly will it be adopted, all those things are going away on the willingness and ability of businesses to expand their

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Mark Zandi: Of course, it's going to make

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Mark Zandi: Consumers nervous as well. You're going to be more cautious.

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Mark Zandi: Also there's gonna be a lot of business failure, between now and then a lot of smaller, we have a lot of midsize companies that are going to fail because they levered up too much and the good times.

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Mark Zandi: And rose can have a lot of business failure micro companies that are going to fail in the leisure hospitality restaurant.

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Mark Zandi: Retail travel industries transportation industries manufacturing and that that means when even when businesses reopen a lot of businesses won't so many people

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Mark Zandi: Who think they're on furlough and get rehired just won't they'll be on permanently off. And then the other thing I'll point out is you know historically became has gotten the boost.

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Mark Zandi: Because somewhere in the world. Some economy navigated the recession, the previous the typical recession and lead the way out.

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Mark Zandi: China did that for example in the financial crisis, there's no of course, no one's going to do that. This go around, you know, everyone across the globe is then engulfed by this pandemic.

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Mark Zandi: And so it's no obvious engine of growth. And that's going to be a problem. So I would be cautious, you know, things are going to feel better. The next two, three months, but

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Mark Zandi: Again on the other side of this, I think we've got a lot of her work to do the economy's not going to recover quickly it's going to take time and we're really not going to kick the entity kind of gear until we have a vaccine that is out there and people are using competent with

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Richard Green: So let's talk a little bit about the permanence of the job last year to any sense of how many of these temporary layoffs. In fact, will not be temporary.

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Richard Green: How many people are really are going to, I mean this is disrupted, as you said 50 million people's lives as it is, but give a sense of how many are going to be disrupted for quite some time. As a result of this

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Mark Zandi: Yeah i think that i don't know i mean if you listen to you one data point, encouraging data point is that when the Bureau of Labor Statistics the keeper of the employment data.

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Mark Zandi: Asked workers who lost their jobs, whether they thought they were being furloughed meaning they would get back to work with the same employer or they were on permanent lay off.

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Mark Zandi: Three quarters or more said, I'm on furlough, you know, I'm not going to be permanently love. I'm going to go back to the employer that I just left.

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Mark Zandi: That is clearly on the high side of of who's coming back. I mean, I, as I mentioned earlier, I think there's going to be a lot of businesses that do fail. So if you told me

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Mark Zandi: Half of the workers who lost their jobs got back to work as businesses reopened over the next two to three months.

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Mark Zandi: I say that sounds about right to me. So that's how I get from a you know a 20% unemployment rate down to backup back down to 10% win rate.

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Mark Zandi: And then after that, I think there are sectors here of the industries that are

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Mark Zandi: Or fundamentally disrupted and those jobs aren't coming back either. These people are going to get work elsewhere like one

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Mark Zandi: obvious example brick and mortar retail right we, you know, this was a sector that was

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Mark Zandi: losing jobs restructuring transforming even before the crisis online retailers were killing the brick and mortar guys and brick and mortar was losing jobs, but that wasn't a big deal because

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Mark Zandi: There were so many job openings record open job position so people could move I lost my job and reselling can move somewhere else.

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Mark Zandi: But that's not going to be the case on the other side of that. So that's an obvious place but leisure hospitality restaurants got asked yourself.

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Mark Zandi: You know, will the restaurant industry come back in the way it was before. I mean, are people going to be eating out as much. And even when they can will social distancing rules affect the way you know restaurants operate.

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Mark Zandi: Manufacturing, you know, global supply chains are been severely disrupted. I don't think they're going to be put back together. The same way they were before the crisis, just because

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Mark Zandi: We're pulling back from globalization, the process of globalization business going to reevaluate just exactly how extended they are globally.

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Mark Zandi: Work from home that's going to change things. So I think there's a lot of deeper, more fundamental structural changes that will result from

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Mark Zandi: The crisis. That means that a lot of the people were losing their jobs are going to have a very difficult time getting back to work. And if you get if you told me

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Mark Zandi: That it's going to take till middle of this decade to get back to something stumbling resembling full employment look an unemployment rate around four or 5% and it sounds about right to me. It's gonna be, it's gonna be a long road.

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Richard Green: So a number of things that you said I want to. So the jobless claims number that came out today that 2.1 million. That's a prize. Where was that sort of in your baked into

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Richard Green: How you been, forecasting. Thanks. So when you try to go the apex. I mean, sort of, we would expect them new claims to be zero. Right. Well, they don't go to zero but you know to be something horrible.

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Mark Zandi: Yeah, no, that was right to script, actually, interestingly enough, you can get a good grip on you. I claim this is just a

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Mark Zandi: factoid, if you look for Google searches for unemployment insurance or keywords that are similar and use that you could come up with a very

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Mark Zandi: accurate estimate of what you I claims, you're going to be during the week so to 2,000,002.1 million is what we got this week was right on the nose.

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Mark Zandi: You're right. We still have a high level of claims. So that means there's still a large number of people getting left. Oh, that although that's overstating the case.

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Mark Zandi: Because a lot of states are just late in processing claims for layoffs that occurred week ago, two weeks ago, a month ago. They're just catching up.

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Mark Zandi: The other thing is that doesn't give you a window into hiring and hiring has picked up. So if you look at continuing claims that is now actually, it actually declined last week.

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Mark Zandi: It's actually, two weeks ago because it's one week lag and so that suggesting that you're getting a lot of layoffs for your answer any more hires in the number of continuing claims are starting to decline.

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Mark Zandi: So I would expect, you know, in next couple, three weeks you I claims, get down to two 300,000 per week, which would be consistent with a

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Mark Zandi: You know, no fruit no significant amount of layoffs will get more hiring and then we'll go from job to job game. So in the June employment report which, you know, the survey for that is going to be done in a few weeks that report will show positive job growth.

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Richard Green: Yes, I was going to ask. So if we were to look at the decline in continuing claims and add it to the new claims. What kind of numbers that right now since

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Mark Zandi: I don't know. I think continuing claims came in at

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Mark Zandi: I want to say they came in and like 18 million in. So if you throw in the 2 million. That's probably a

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Mark Zandi: 20 million. But again, that's just as it's not even considering the hiring that occurred during that week so

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Mark Zandi: My guess is it's less than 18 million, you know, now you know headed headed towards 15 probably closer to 1617 million continuing claim, something like that.

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Richard Green: So a lot of what you were talking about feeds into real estate markets, which of course is what a lot of our audiences are interested in

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Richard Green: So let's work through all of these. So I'm going to start with something interesting you said about the supply chain being disrupted and does that imply more on shoring of stuff and do does that have the kind of positive implications for industrial real estate that I would assume

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Mark Zandi: Yeah, I think it means some on shoring yeah I think

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Mark Zandi: Supply chains got very extended prior to all this

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Mark Zandi: You know, before the crisis and I do think even before the crisis, there was some reevaluation going on because I think businesses are getting nervous about the geopolitical environment.

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Mark Zandi: Which has been eroding since the financial crisis, and particularly with President Trump and the terror for that he was pursuing

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Mark Zandi: Just it's hard to hard to believe that was, you know, not long ago, but a year ago, we were involved in you. No worries about the trading.

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Mark Zandi: And so I think business people were growing very nervous about their extended supply chains and we're starting to rethink them bring them in, we

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Mark Zandi: move them around a bit, but this this crisis is going to cause them to reevaluate. And I think it means they'll bring them in. So there will be some on ensuring

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Mark Zandi: Of activity. I'm not sure though. I think it directly translates into. Oh, that's good for warehouse industrial space, you know, particularly around

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Mark Zandi: Ports in airports, because there's other dynamics that suggests there's just going to be less trade. I think there's going to be less international trade.

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Mark Zandi: At least for a while. I mean, because every country's put up the proverbial border wall, you know, at least figuratively. We're doing it literally and figuratively, but figuratively.

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Mark Zandi: And it's going to be very difficult to get that wall back down. Just because until certainly that's not happening until we have a vaccine that's widely distributed. But even after that, I think it's going to take some time.

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Mark Zandi: And and then. Moreover, the supply chains are busted or broken or disrupted to reconfigure them is going to take time. And so I think the next several years means this lot less global trade.

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Mark Zandi: In that doesn't auger well for demand for space warehouse industrial space around ports seaports other ports of entry.

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Mark Zandi: It, you know, at least for a while. I think it's going to take a while. The other thing I'd say is I'm not particularly optimistic about the process of globalization either postcode. You know, I think.

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Mark Zandi: There's good because people been all over the world, there's gonna be a lot of unemployed people were pretty upset and mad.

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Mark Zandi: Is judging by what happened after the financial crisis that's going to translate into increased populism nationalism anti immigration sentiment anti trade anti investment sentiment.

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Mark Zandi: So I think, you know, we are in store for a period of D globalization that doesn't again doesn't order well for you know global gateway cities or doesn't, you know, all else being equal, or for

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Mark Zandi: Industrial space sitting, sitting next to La Porte or New York Harbor.

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Richard Green: So despite these attitudes do you think Americans are going to be willing to pay twice or three times as much for an undershirt Mr customer pain right

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Mark Zandi: Now it's a great point. I mean,

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Mark Zandi: They're gonna have to pay more. Yeah, no doubt. I mean, you know, obviously, that that goes to the heart of the matter. I mean, globalization was a boon to the US economy. Yeah, yeah. There were winners and the other were losers.

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Mark Zandi: Yeah, yeah, the glue the winners didn't take care of the losers. And that's part of the problem here, but the net benefit of globalization was

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Mark Zandi: Slam Dunk positive and the best representation of that is what you just said I could buy

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Mark Zandi: Pretty much anything that I put on my body or anything. I put in my mouth, much more cheaply because of globalization, you know, the computer, you're looking at the cell phone. I'm using, you know, the furniture that sitting back you know

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Mark Zandi: Back of you all of it you knows cheaper because of globalization, but you're going to see if we take a step back from it, then that means. Yeah, we're going to be paying for more for it or senior living is going to be lower. And we're going to be diminished by no doubt about it.

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Richard Green: The other thing I wonder about is, you know, one of the things you're hearing is that our operations are going to keep more inventory going forward, which again would be good for warehouse space.

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Richard Green: And I think people are very focused on the idea of resilience right now. And so if your supply chains are just too thin.

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Richard Green: It takes very little to disrupt them on. But how long are we going to keep that discipline because inventory is expensive quarterly earnings are going to be hurt by it.

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Richard Green: You avoid catastrophe by doing it, but it's like nobody likes buying insurance, maybe that's where I will put it so you have a

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Richard Green: Set up. Do you think we will learn this time around, and we will see corporations keeping more inventory in place so that they can withstand disruptions, or you see two, three years down the line. We're back to where we were a couple of years.

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Mark Zandi: Yeah, good, good, great point. Wait, I think it's a really good way of looking at it's insurance and it yeah for sure they're going to all else being equal, hold more inventory relative to sales, just because of what we went through then

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Mark Zandi: You know. Everyone's scared. This is scaring the heebie jeebies out of everybody. And that's what events do, just like the

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Mark Zandi: You know the mortgage crisis caused insurance premium mortgage insurance premiums to go up right i mean

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Mark Zandi: But I have to say in the mortgage insurance. I'm on the board of mortgage ensure

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Mark Zandi: You know premiums are now 10 years after the financial crisis are all the way back in right and falling. So same dynamic hear you.

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Mark Zandi: Because people are scared they're going to build those inventory and then they'll start over time, being more comfortable about situation, presumably

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Mark Zandi: Nothing else goes wrong and you know there's inventories will come come down the other factor that drives inventories. Oh, that I think maybe play a bigger role.

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Mark Zandi: Is just simply interest rates, right, because if interest rates remain very love for a long time, your cost of financing as low. So I think a lot depends on what you think about the

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Mark Zandi: prospect for interest rates are going forward that that may be made may have a bigger play a bigger role in terms of how much inventory hold relatives, the sale, then you know the insurance premium that you're talking about.

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Richard Green: So, well, I don't see any reason why interest rates are going to go up anytime soon. So that's

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Mark Zandi: That's. Well, I'll tell you the only thing I worry about is, you know, on the other side of the pandemic. You know, when

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Mark Zandi: Feels like the coast is clear and we all come to realize, two things. One, that are long run growth potential has been significantly diminished by this

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Mark Zandi: That we're not going to grow a 2% per annum. We're going to grow. And I'm not saying one but they say 1819

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Mark Zandi: And then we realize our debt loads globally or sovereign debt loans are globally are much higher than they were before all of this that you know at that at that juncture, we may see

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Mark Zandi: You know, interest rates rise to more to a greater degree than people anticipate kind of sorta like

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Mark Zandi: European debt crisis after the financial crisis, you know, when we thought the coast was clear.

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Mark Zandi: And people said, Oh my goodness, you know, we've got a problem here. And in this case it's a global problem because every country on the planet.

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Mark Zandi: Is using all of its fiscal resources to kind of try to navigate through as gracefully as possible this crisis. And so there's a lot of debt and death in depth deficits and dead so

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Mark Zandi: You know, it's possible that the interest rate environment postcode is very different than the street vironment post financial crisis.

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Richard Green: The one that the encouraging thing though is if you look at that service and god knows what it's going to be after we

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Richard Green: Hold up everything we're doing right now but deserts, the GDP in the US is pretty low. And you know, I think it's in Japan, they're floating hundred year bonds basically zero percent.

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Mark Zandi: You know,

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Richard Green: Interest a. So, so long as we lock in at these low interest rates. I don't see how it has there's going to be

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Richard Green: excessive pressure on that market and of course this is one of the big questions is how much debt, can the economy take on it and service it comfortably.

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Richard Green: You know, the US economy, you know, if we look at net worth. It's like 100 and $5 trillion. And so if the federal government as 2030 trillion of debt outstanding. Is that right, and I don't know. You know that

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Mark Zandi: No, no, it's a good point.

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Richard Green: Yeah, the metaphor I think about is, you know, whether a building as an LTV of 1525 or 35% doesn't matter. It's going to get the best financing available.

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Richard Green: Yeah, when you move from say 65 to 75

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Mark Zandi: Right.

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Richard Green: Then it's just a matter a lot. And so, you know, thinking about where these tipping points might happen.

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Mark Zandi: You know, are hard to know. I guess the other question is,

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Mark Zandi: What was our fiscal stands after all this. I mean, because, you know, even before coven under current policy.

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Mark Zandi: That trajectory lines didn't look all that good if you bought into Congressional Budget Office, you know. So what does it mean on the other side of this particular you buy into the idea that it's not 2% per annum. It's 1.8% per annum, which

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Mark Zandi: Yeah sound like a lot of people's ears. But when you, you know, you do the arithmetic out

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Richard Green: Of compounding. Yeah.

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Mark Zandi: There you go. I mean, it's a big deal. So I just throw that out there. I don't you know I'm strong views I just wonder though for

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Mark Zandi: Because we've all we're all buying into the idea. Oh, yeah. Rachel, can remain low for a long time. Know maybe maybe that we should be at least examining them were carefully that, you know, that kind of working assumption that we have. Okay.

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Richard Green: But let's move on to the next part of it. Let's talk about retail, which is been getting slaughtered the last three months stores have been ordered closed, which means that they have no source of

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Richard Green: Cash flow to pay rent, although my understanding is right collections in May. We're pretty good at, which suggests that the PPP has actually done its job pretty well. But, as you noted, there are

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Richard Green: The trajectory of retail was not good before this crisis came along. So how do you see the shaking out over the next couple, three years, how we do leave the world and retail space per capita.

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Richard Green: We have about 23 square feet candidates 16 Australia is 11 and then I think you go to the UK at like four and a half or something like that. How much space do you think is just going to be converted to something else. The next couple of years.

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Mark Zandi: Yeah i mean i i don't. I'd like to hear the bull case for retail. I just conjure it up I you know I can't. I mean, this feels like it's existential for brick and mortar retail. Not that it's going to go. Go away. I'm not you know that's that's

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Mark Zandi: Yeah, but, you know, it just feels like it's going to be a shadow of what it is. It's today. It's a shadow of what it was five years ago in it's going to be, you know, even a smaller shout out five years from now.

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Mark Zandi: I just don't see how that gets reversing the other thing is happening here is that retails going to become very concentrated, you're going to have some big winners and some big losers. Right. I mean, Walmart, Target, Home Depot, Lowes, I mean, these guys are just consolidating like mad.

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Mark Zandi: Costco. Costco their booming and they're just taking market share the pie is getting smaller and then share that's going to these big guys's rising and they're getting a bigger share of the pie. So that means for these

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Mark Zandi: Retailers I you know I don't know I don't see how that works. You know, for them, and then you brought up the point about the cost of goods.

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Mark Zandi: You know, if we're going to cost more to bring an important product. You know, I think people are going to be looking for the best deal much more cost price sensitive

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Mark Zandi: And it's the big guys that can be able to, you know, they can use their, their market power in their pricing power to get, get the market share. So I think that

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Mark Zandi: The thing that's going to happen here is that there's going to be a massive consolidation retail sector and that that means less less space, different kinds of space but but but let's face it, I just really don't see the bookcase. I mean, in on the demand side of retail

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Mark Zandi: Think consumers are going to be, you know, there's gonna be some preliminary period where they're spending aggressively because there's a lot of pent up demand developing during all this

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Mark Zandi: Now, if you're only buying 10 million cars. That's 10 on an annualized rate that's 10 million below what you normally. So there's going to be a pop here.

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Mark Zandi: But on the other side of that pent up demand pop. I think retail is going to be struggling because, you know, half the population lower income.

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Mark Zandi: middle income households are going to be struggling just with their

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Mark Zandi: You know, living paycheck to paycheck. If they have a paycheck and the top half is going to be struggling with diminished wealth because of equity prices and everything else. So I just, I just can't see a way to argue that you know that it's going to be anything but

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Mark Zandi: bleak for brick and mortar retailers.

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Richard Green: Yeah. And let me throw one other thing out there are two wishes. We have a lot of people entering their retirement years and one thing we know is that when people retire, even if they're pensioners.

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Richard Green: So they have a decent income they just spend less on it because if you don't have to go to work.

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Richard Green: Yeah, you don't have to dress up, you don't, there's

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Richard Green: Just all kinds of stuff. You don't need to buy anymore.

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Mark Zandi: What do you think work at work from home has implications for retail as well. Then

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Richard Green: Well, you know, I've been thinking about that because, uh, you know, I have a couple of beautiful suits hanging in my closet that I haven't

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Richard Green: even looked at in about

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Richard Green: March 10 or so.

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Richard Green: Right hand.

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Richard Green: Man never need to buy a suit. Again, I don't think that many guys were buying suits anymore. Anyway, um, you know, blue cheese.

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Mark Zandi: Stopped exercising, Richard, do you

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Richard Green: Exercise I do get exercise. Yeah.

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Mark Zandi: There you go. I am in

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Richard Green: The best condition. I've been in a long

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Mark Zandi: Okay, perfect. You're good.

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Richard Green: Because you get so bored right you have to go through something, uh, but one thing I have noticed bluejeans last a really, really long time.

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Mark Zandi: Yeah, right.

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Richard Green: Oh, no.

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Mark Zandi: Point.

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Mark Zandi: So,

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Richard Green: You know,

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Mark Zandi: I think you know you forget about that because when I was a kid. I'm maybe for you to. I used to wear blue jeans, all the time. And then I stopped wearing them for some reason, but

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Mark Zandi: There's such a great you know apparel that

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Richard Green: They are great apparel, and unlike like khakis. Yeah, unless forever so yeah I I do wonder about the impact of this on the apparel sector, I take that. I think one of the things though that hasn't gotten enough attention that get this over covered. It's just how older people don't buy stuff.

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Richard Green: You know, and the country is getting very old, very quickly.

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Mark Zandi: Yeah, yeah. The other, the other aspect of that I think is mobility, right, because we know mobility as sharply declined in recent years. And last year, I think, was the lowest on record.

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Mark Zandi: And I probably goes to the aging of the population as well and coven probably fix that to at least for a while. I mean, people

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Mark Zandi: kind of stuck in place for for a little bit here. So, you know, that might have implications for me. Obviously home sales, but also for a lot of consumption as well. Makes it more makes it put some put some weight on it least

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Richard Green: So let's talk about you know that so the company class that's must tied to employment, which is what you started your remarks on the office sector and, and it seems to me that there are three things going on here. First of all,

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Richard Green: I'm reading your stuff. One has reason to believe that employment, the office sector will recover more rapidly than other parts of the economy. So that's good for office.

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Richard Green: Office Space is going to require more space per person than before. As we socially distance. That's good. But again,

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Richard Green: If people really do work from home if everyone from Twitter decides to stay home or Facebook a less demand for office. So have you thought about how all of those factors are going to come together.

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Mark Zandi: Yeah, I'm also I'm bearish on office space to. I mean, to me, and I mean I think you're right you have office space. You've got to have more per square foot.

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Mark Zandi: Because of the social distancing rules, at least for a while.

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Mark Zandi: But that to me means as an employer and I you know I employee and I people might after my payroll rents my second largest expense.

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Mark Zandi: That means I'm going to just lot more people work at home. It's just an it's costly. So, you know, I'm not going to, if I can. I've got the technology and the ability. I'm not going to use as much space and I really now I speaking sort of my experience here.

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Mark Zandi: The crisis has changed our dynamics in the office space dramatically that the zoom technology and similar technologies has really changed the dynamic and

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Mark Zandi: Most importantly, it's changed the dynamic for senior leadership of major corporations across the country because most senior

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Mark Zandi: CEO, CFO, the human resource, had they were they're generally older, you know, like me, I'm a boomer

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Mark Zandi: You know they grew up in a time when you went to the office, everyone had to be there. I was key. You went home after work, and that was vital that interaction.

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Mark Zandi: And there was a lot of resistance to work at home, even though that that was another trend that was starting was underway. Definitely before all this

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Mark Zandi: But this event has changed the behavior work behavior and work environment for those senior leaders for the CEO, CFO human resources and it's working very well for them.

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Mark Zandi: And they can see the cost savings and I think it's going to change dynamic the dynamic here dramatically. So for major US. CORPORATIONS in in in many industries.

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Mark Zandi: Financial Services and of course finished sources, a huge consumer of office space. We're going to be consuming a lot less of it.

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Mark Zandi: Just because we can. And it's particularly effective. I mean, I was on a zoom calls all day first call was with folks in Asia and I talking from folks in Tokyo Shanghai, Hong Kong, Singapore, Sydney Kuala Lumpur.

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Mark Zandi: All on the same call and we all could see each other. It was like we're in the same room together. And so I'm asking myself why and I'm talking to people that would not normally talk to

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Mark Zandi: You know, they're not as less senior further down on the totem pole and I normally would even

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Mark Zandi: Talk to them and what they have no interaction with them, but now they're in the conversation. And that is, you know, from my perspective, you know, a fantastic thing.

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Mark Zandi: And then my dealings with clients like you know my client do my relationship with clients dramatically shifted and I don't need to be an often say under a look at my background here and they're

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Mark Zandi: Perfectly happy they feel like we're closer. So I think this is going to dramatically change the use of office space and I'd be surprised if we don't see a lot less space usage, you know, going forward.

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Richard Green: You know, you hit a really important point that hadn't occurred to me, which is about you interacting with the more junior people

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Richard Green: Because it occurred to me that one of the reasons that young people might want office space to remain a way that they work is it's a way to get the attention of bosses like just showing up.

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Mark Zandi: They accidentally one

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Mark Zandi: That's interesting. Yeah, we see that you're there and why I think that is an important way.

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Richard Green: To get ahead. Now, if they see you and they ask you a question. And you say something stupid than that's not going to help you at all but but the opportunity to interact with the more senior people I think is critical to young people's professional development, but

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Richard Green: What you just said is something that didn't occur to me.

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Richard Green: Is via zoom. You're seeing young people that you otherwise wouldn't have seen so it's not clear which direction it goes in terms of the benefits to young people. I'm trying to

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Richard Green: Have their career move along. The other thing going to crispy for young people is, of course, the workplaces, a place to meet a

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Mark Zandi: Potential. Yeah, sure. Yeah.

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Richard Green: And I, you know, so for those of us who've been married a long time. We don't need

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Richard Green: That interaction anymore but you know your 20 somethings

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Richard Green: What's going to substitute for that. It's not entirely clear to me because you can't go to Mars, either.

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Mark Zandi: Well, that's a good point you make you make a great point is we have an office in prod so Moody's policy is

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Mark Zandi: You don't need to. You don't need to reopen an office if you don't want to, you know, the folks that are running that office make make a decision, even when they open the office, the employees can come or not come. It's up to them.

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Mark Zandi: But each office around the world is making their own decision with regard to whether they're going to open or not.

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Mark Zandi: So I have an office in Prague in the Prague office wants to open the reason is because they're young, you know, and also they're not they're not from Czech Republic, you know, they're from, you know, Poland there from

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Mark Zandi: Greece there from Russia, and they don't they don't have a family there. They don't know. Anyway, there's this is this is their social life to right so

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Mark Zandi: Again, so we are opening the prog office that the Westchester offices and I don't worry about it. You know, we're good. You know, so it depends, but I, that's a good point. I think young people are I need that social interaction and what that solution.

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Richard Green: So I'm going to finish up. I asked you about housing. But before we get there, I just give a brief thoughts on hospitality.

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Mark Zandi: Well, you know, as you can tell, I'm pretty

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Mark Zandi: I'm sorry. I'm sorry, I think, actually, here's the overarching point I think care commercial real estate is in the crosshairs of this crisis. I mean,

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Mark Zandi: You know there are a lot of trends in place this this supercharged, IS ALL OF THEM IN THE WRONG. Most there's cross currents, as you point out, but the net is you

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Mark Zandi: Know for care and hospitality. Same deal. Again, I'm speaking my experience, but I can feel it all over you know all my business interactions with people travel. We're just not traveling as much. Not happening. You know, it's just not happening, you know,

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Mark Zandi: It's expensive and it's not clear. It's particularly effective in again zooming technology and similar technologies.

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Mark Zandi: Allow you to interface with clients in a very effective way. And you know, I just don't say like

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Mark Zandi: Again I go back to Moody's. I mean, it used to be the case that Moody's sales people had a quota for meetings they had to get a certain number of meetings face to face meetings to

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Mark Zandi: hit one of their benchmarks for getting a bonus right that's gone. You know, there's nothing like that anymore. So I, I just don't see us going back, you know, and also there's a lot of legal issue liability, you know,

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Mark Zandi: People don't want to travel partly and then there's a lot of legal liability issues as well that we're probably gonna have to figure out, and iron out here as we go for so moody says oh yeah go travel, you have to travel and someone gets sick, then, well, you know, what does that

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Richard Green: Well, I will tell you every time I see some idiot on an airplane refuse to wear a mask because of the quote unquote freedom. That's like another week that I don't want to get on an airplane.

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Mark Zandi: Yeah, exactly.

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Mark Zandi: So, though. No, I agree, like I have a briefcase city here. So that's 30 years old. My wife has been at almost bought me a brand new one until the crisis and now that's it I'm not getting the briefcase.

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Richard Green: Though I said let me recommend you that. So my favorite

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Richard Green: Comfort TV watching is reruns of Colombo

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Mark Zandi: Oh, is that right

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Richard Green: And there's one where his wife buys them at new red coat

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Mark Zandi: Oh, I forgot.

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Richard Green: Yeah, so I get check that one out.

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Richard Green: It probably given your briefcase, he'll

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Mark Zandi: he'll realize I'm learning a lot about you and your, your coven time you're you're exercising and you're watching Colombo

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Richard Green: Yep. Yeah, that's right.

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Richard Green: And I'm reading Toni Morrison so

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Richard Green: There we go. A little bit of

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Richard Green: Improving my mind a little bit as well.

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Richard Green: Okay, let's finish up by talking about a topic, you and I like to talk about a lot, which is housing and and let me just ask you to think about things in two dimensions but curious as to your thoughts. One is sort of multi family versus single family.

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Richard Green: Are people going to want to be back and detached houses with backyards because of all of this, and the other is sort of cities in general. Does this put and you refer to gateway cities losing some of their bed and already earlier.

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Richard Green: Will the Seattle, San Francisco's LA is New York's Boston's Washington's not be the outliers relative to the rest of the country that they were until three or four months ago.

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Mark Zandi: Yeah, I'll begin with

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Mark Zandi: The second

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Mark Zandi: Question. First, I do think

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Mark Zandi: Global gateway urban centers.

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Mark Zandi: Will be diminished by this that we will see

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Mark Zandi: And by the way, I think that was a dynamic that to some degree was already beginning for demographic reasons. I mean, one of the key.

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Mark Zandi: demographic trends supporting urban centers was millennials in their 20s AND EARLY 30s and boomers in their 50s and 60s, you know you had multi million is one of the city and then empty nester boomers wanting to be in the city.

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Mark Zandi: That they're both those age groups are now aging to a place where that's no longer going to be the case. So the mullet. The the

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Mark Zandi: The teeth of the Boomer generation now is in their early 60s and the teeth of the millennial generation is now in their early 30s. So over the next five to 10 years

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Mark Zandi: The Millennials are going to get married. They're going to have a they want to, we're going to want a family.

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Mark Zandi: And they're going to own a home and it's more likely going to be in the suburbs and it's going to be in Center City, particularly if they're working at home, you know, they don't have to be in the city to get to a job.

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Mark Zandi: And then for the boomers, they have you know the next start getting late 60s, early 70s, you know, living in the city is not going to be ideal given

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Mark Zandi: You know, got lots of stairs. Generally, it's just not going to be as easy. So I think, you know, that's going to start changing as well so that dynamic

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Mark Zandi: Was already on the cusp. We're already in customer that dynamic already. And that's just going to that was gonna that's gonna play out anyway. But I do think all these other things we've been talking about the pullback and globalization.

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Mark Zandi: Work from home, all these dynamics mean urban centers and also perhaps just nervousness around

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Mark Zandi: Things like the coven Christ now that that may fade over time. If there's no other pandemics or other concerns, but certainly for the next few years. So I think urban

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Mark Zandi: Centers like New York, Boston, Chicago, Miami Houston, you know, LA, San Francisco, Seattle, they're all going to be there star is still going to be fine. But on the margin. They're going to be diminished by all by all of this and I do think

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Mark Zandi: We will see

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Mark Zandi: Significant demand for single family housing out in the suburbs for lower and mid price point homes, you know, poems that are, you know, more competitive against you know that are I priced

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Mark Zandi: But are affordable to folks in the lower middle parts of the distribution which are going to, you know, obviously they're going to be

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Mark Zandi: A bit here on the other side of this crisis for a while to her back to full employment, so I think single family low, mid price point housing should do just fine. I think there's a lot of reasons to be in the suburbs relatively optimistic about that.

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Mark Zandi: And then on the apartment side. You know, I don't have strong feelings, one way or the other. I mean, except to say that the high end of the market.

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Mark Zandi: Came into this a bit overbuilt and so there might be some bit of a shakeout there, you know,

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Mark Zandi: During this period, but you know I don't feel strongly about. So in terms of the homeownership rate, which kind of encapsulates

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Mark Zandi: My thinking around single family versus rental. I don't see that changing to a significant degree if anything homeownership might continue to rise a little bit going forward.

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Mark Zandi: Now, given that dynamic the dynamic around people millennials going back in the suburbs low interest rates Apple mortgage credit. And I think if you told me the homeownership rate was, you know, a couple, three points higher five years from now, I'd say, That sounds about right to me.

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Mark Zandi: What you think is that sound. Is that consistent with your thinking or is that, how would you, how would you, how would you answer that question.

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Richard Green: Ah, well I'm supposed to be answering I'm

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Mark Zandi: Just curious.

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Richard Green: Park today.

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Mark Zandi: Because this is the one I feel less

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Richard Green: Strong about it. Right. I think that

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Richard Green: First of all, global cities have long been resilient and they move on to the next big thing. I mean, London. Spend the largest city in Europe for eight years.

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Richard Green: New York's been the largest city in the United States since our birth is a country. Now that's a little bit this Philadelphia was Philadelphia was several cities are initially. So, if you would.

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Richard Green: put them all together, Philadelphia, would have been a little bit of the New York and 79 you but I i do think that these cities. I mean, Tokyo got completely destroyed and during World War Two. And now, Tokyo is the only place that's growing and all of Japan. So I guess I would never short

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Richard Green: A world class city.

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Richard Green: Um, long run. So

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Richard Green: 10 years from now, I think New York is going to New York and San Francisco is gonna be safe. I mean, they'll be different places, but they will have their

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Richard Green: Places in the pecking order that they do now. Um, you know, for the next five years. I think are going to be very tough for New York City. Soon as specifically because

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Richard Green: It got me so hard by the crisis. Um, and I think it's controversial. How much transit contributes to the spread

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Richard Green: But whether the scientists. It's a controversy. People are going to think it did.

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Richard Green: You have to be afraid to get on the subway and you think about New York's operations and city. It can't survive without people taking transit.

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Richard Green: And so, fear, I think will hold back. New York for some years, but only for some years, not my guess is really 10 years from now, unless again, there's another pandemic.

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Richard Green: York will continue to be a place that young people want to go and learn and when they're 35 retired and move somewhere else.

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Richard Green: I think one of the things, Mike, my colleague or hadler UK has a wonderful paper on this about how much learning happens in great cities.

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Richard Green: I that I don't mean school learning. I mean, people who go to work and in

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Richard Green: Hong Kong in Tokyo and London and New York and San Francisco. If you watch people who've spent time in those places, and then decide I want to live in Kansas City.

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Richard Green: In better in Kansas State and the people never went to this.

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Mark Zandi: City. Oh, that's interesting.

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Richard Green: Yeah, so, uh,

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Mark Zandi: Huh.

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Richard Green: I think I agree with you, short run.

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Richard Green: A long run. I'm not so sure.

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Richard Green: Right, I'm single family multifamily, I think, yeah, the coasts, you're absolutely right. Why, I mean, again, I am grateful that when I am stuck at home. I do have a backyard.

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Mark Zandi: Mm hmm.

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Richard Green: I think that's going to be really

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Richard Green: appealing to people for a while of course coastal city still it's so damn expensive.

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Richard Green: My a single family house I

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Richard Green: I don't know if there's going to be the opportunity

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Richard Green: Apartments what what I think about is when I talked to some of our board members is garden apartments, where you don't have an elevator, they're going to do great.

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Richard Green: I rise apartments, not so sure.

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Um,

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Mark Zandi: You know,

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Richard Green: So anyway, marks Andy Moody's analytics. Thank you so much. It's always a pleasure to talk to you.

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Richard Green: Thank you Richard and great having you unless perspectives hope we can do it again sometime

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Mark Zandi: Yeah. I hope I'm half right. That's what I'm shooting for. So

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Richard Green: No you'll do better.

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Mark Zandi: Okay, thank you.