Top of Mind: Forecasts from Economists Panel

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Ben Fraser: Hello, Future Billionaires! Welcome back to another episode of the Invest Like a Billionaire podcast, coming at you with another top of mind episode. If you’re just new to the podcast, these are shorter episodes where we talk about things we’re reading, either conversations we’ve just spoken at, or things that are interesting that we’re already having conversations offline.

So just recently, as a week or two ago, Bob was speaking on a virtual panel with the best ever conference. And they do a great job, by the way, if you haven’t been to their conference. And there were some big heavy hitters on there that are bigger names in the real estate space. And the big question was, what do we do right now?

What, where is the real estate market going? Is real estate headed for a complete demise? multifamily over is office over, are we all just done? And so really trying to understand with these interest rates, where they’re at right now, what does that impact have on the industry?

And where do we go from here? So Bob, you had some great things that you came to bring to the table, maybe share a couple of those, but then also, what were some of the takeaways you took from that? Cause there’s some really high level people on this panel that we respect a lot. This is the invest like a billionaire podcast, where we uncover the alternative investments and strategies that billionaires use to grow wealth.

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Bob Fraser: today. It was great. A bunch of heavy hitters and of course no one ever sees 100 percent eye to eye, but a lot of consensus as well.

So a couple of the main topics we talked about first were interest rates. Interest rates, of course, everybody’s favorite topic. Are interest rates going up or down, are they going to keep going up? Are they going to, when are they going to come down? When are they going to come down?

Everybody’s waiting for some kind of interest rate relief. The consensus of the panel was higher for longer. And this is, this was my view. And my view is based on it because it is a hundred percent driven by inflation numbers. And Powell has said, we’re going to, we’re going to get 2 percent core PCE inflation.

Their measure is PZE and core PCE. And right now core PCE is four and a quarter percent. So it’s a long way to go. And my, in my view, that’s going to be very difficult to get to 2 percent PCE because of two main drivers. One is wages. Continue to be strong. So wages continue to grow.

And they’re still, so right now we still have twice as many job openings as unemployed. Even, in spite of, people coming back to the workforce and 

Ben Fraser: We just did an episode on this a week or two ago, so you can check that out on top of mind, is the job boom over? Because some people are saying it is, but we don’t think it is.

Bob Fraser: It’s not yet. And then the other is energy. And because we have a systemic issue with energy, and both of these are not cyclical. The job shortage and the energy crisis, they are not cyclical. They are systemic issues and they’re not easily solved by simply supply and demand issues.

And so I, so basically my, my, my contention is that inflation is going to be higher. And therefore interest rates are going to be higher. So that would, that was interesting. And everyone pretty much agreed with that now, but now not everyone agreed with me on inflation.

So Neil Bawa basically said it’s because of AI. We’re going to see massive disinflation across the entire globe. It’s going to completely gut the economy, which I think is extreme. And he said, I was wrong and I said, you’re wrong. And so we’ll see who’s right.

Ben Fraser: To that point though, and we’ve talked a little bit about it. If you forecast out long term, we actually have a pretty big. Deflationary challenges ahead of us because of productivity and technology. But in the short term, it seems hard to believe that would all of a sudden take hold of jobs and disrupt Right.

And I 

Bob Fraser: don’t, I actually don’t disagree with him that it does discern me anyway, but I’m like, okay, when is AI going to mow your lawn? When is it going to fix your plumbing? When is it going to build a house for you? If this, it’s not going to do those things. It’s going to take some jobs.

I think, okay, marketing copywriters? Maybe, right? And other things. Even he was pointing out analysis and other things. But if you look at it, the internet really hit in the 90s, right? Really took off. And everybody was saying the same thing. It’s going to destroy the entire job market.

It certainly changed. Think about the way you purchase stuff. How many? People, do you call and place an order on the phone now? Now it’s all internet. And what about customer service? A lot of it’s self service and it’s internet. It has replaced a lot of customer service jobs and it has definitely disintermediated the internet, but it’s also taken, we’re at now, 35 years in from the internet and it’s still disintermediating and it took decades to do.

It isn’t instantaneous and same with AI. AI is going to take a long time to do massive, that level of disruption. 

Ben Fraser: And we’ve talked about before in other presentations where sure, it’s going to create loss of jobs and turnover and disintermediation in certain parts of the market, but it’s really skilled versus unskilled labor, right?

The unskilled labor are probably the most at risk of losing jobs to technology. One example I can think of is You know, there’s a McDonald’s, which is a guilty pleasure of mine, that you drive through and now the attendant that takes your order is a robot. It’s AI and it’s actually pretty dang good, right?

But, they still need programmers to create AI. And to your point with the internet, it created a whole new set of jobs, right? That didn’t even exist before. That has now become a huge part of the growth of our economy, being service based and technology based. And it’s, we’ll probably do the same thing.

It creates negative job rates in certain areas, but actually positive growth in others. 

Bob Fraser: And a lot of these low income jobs are protected. Is AI gonna pick lettuce? You’re kidding me. Or pick apples. Is it going to? Yeah. Plant a crop? Is it going to plumb a house?

Is it going to Yeah. Become a licensed electrician? Yeah. Or a farmer. It’s never going to do these things, right? We’re 

Ben Fraser: Yeah, even in anything in trade related is, you can’t replace that with AI. And then I was thinking too much about oil and gas, like boots on the ground jobs in the field of the oil industry.

They can’t find people to go work for them and they’re paying easy salaries right out of school. And it’s just You know, they’re not going to be able to replace that with, maybe 

Bob Fraser: It’ll replace us. Maybe podcasters will AI bait, but somebody is going to have to, doesn’t it just develop the nonsense at some point if you don’t, there’s not anybody pulling the strings behind there, even if you got some AI puppets and what about doing deal analysis?

Really? AI. Can it assist? Yeah, it’s hard to imagine, possibly. What about, all the functions of accounting and all the functions of back office and asset management and, you pick a hundred jobs. Three of them are going to be affected by AI, yeah, I don’t know.

I think it’s all over, overdone. Now they did mention, okay, we had the, we had a great guest on Jay Parson with RealPage, right? And… And he was actually predicting that we’re going to see inflation drop and it was because rents are dropping and rents are a very big part of the CPI.

Interest rents are roughly 30 percent of the CPI, the consumer price index. But only 15 percent of the PCE which is what the Fed uses. So it’s gonna have less impact, but it is going to have an impact. 

Ben Fraser: So there’s a lot of questions on the lag between when the rents are reported versus when they’re actually being realized in the market.

So what was, give us one other takeaway because we’re talking about is the. The world over for real estate. What were some of the other things? 

Bob Fraser: So I’ll hit a couple other points. So one was cap rates and what’s happening to cap rates while officially according to, so I think it was which was the, I think it was Newmark that said we’re seeing cap rates drop about 90 basis points.

So roughly 15 percent say so. But, I made the point that a lot of our deals, we’ve not seen cap rates decline in storage or in industry. We’re not seeing any changes. And Ryan Smith said the same thing. He said in well located projects that are class A.

They’re not seeing, they haven’t seen, they haven’t seen cap rates move. Now, in multifamily, cap rates have moved. And, Neal Bawa said it’s actually more than 90 basis points they’re seeing generally. You see this general cap rate idea. The idea is that for storage and industrial, they haven’t moved.

But for multifamily, they’ve moved more than the average. And for office they’ve doubled. You’re seeing, and which means values have doubled. So for those that aren’t 100 percent sure on what a cap rate is, it’s your cash on cash return, which really goes to the pricing. What are these things priced at?

And a five cap means, you’re getting basically five times the five, sorry, a 5 percent return on cash. 

Ben Fraser: Yeah. Uncashable cash. Unbudgeted return. And you think, I think about it too, obviously the office is the outlier because that’s got massive systemic issues that no other real estate class is facing with the hybrid work and return to home, all these kinds of things going on.

But, I also think multifamily, it’s traded at some of the lowest cap rates of any asset class, historically, in years. And so it’s the most susceptible to any reversion, especially with the higher interest rates. It’s the most negative leverage asset class of all of them. And it inherently has to move the most because of these interest rates.

And the more movement there is, with the lower cap rate you go the more movement. The basis point standpoint has a higher impact on values, the lower those are. And so it’s actually I think partly driven by how low the cap rates were trading out 

Bob Fraser: before. I think everyone was surprised at why, and expressed surprise at why cap rates haven’t moved more, because as you point out, it’s negative leverage.

But if your cap rate is below your interest rate, sorry, above your interest rate higher than your cap rate, then leverage doesn’t help you. And, it’s actually negative. It actually reduces your returns. And we’re in the past, leverage is supposed to enhance your returns, right?

So we’re seeing negative leverage in multifamily and in most asset classes and everybody was expressing surprise, but so why is that? Because my view was that real estate is the perfect asset class. It’s the high growth asset class in an inflationary scenario, right?

It’s one place you want to be. It’s the, whatever the. The rocket ship stock investment you could make, Tesla or Amazon in the 90s. This is real estate in an inflationary scenario. So I think that was interesting. Two more points. One was construction costs. Now we and the industry have not seen a lot of change in construction costs.

And but a lot of folks expressed pretty much, pretty massive changes in construction costs across the industry. So I think in storage and in multifamily, and I’m thinking about, there’s a lot of, a lot more trades there, right? So the electricians, the plumbers, a lot more finishing work, framers and all that.

I think about the industry. This is. Our industrial builds are mostly air, right? It’s or some concrete, lay some rebar and put up a little structure and pour concrete and tap up the walls and you’re done. So it’s a much simpler build. And so we’ve not seen construction costs, but a lot of deals are being nixed right now because of construction costs.

Yeah. Interesting. The final point was, BTR and they were making a point that several of the investors and several of the economists were making a point that build to rent, which we haven’t done a lot of and we haven’t talked about a lot of, actually pencil better.

They’re cheaper on a, on a square foot basis or, resulting basis to construct and they have, they actually pencil better. So very interesting for the build to run a lot of options there. So again, an area we want to dive into a little more on the podcast.

Ben Fraser: Awesome. Thanks for sharing the takeaways and it’s always interesting to see where some of these people diverge, but also have some similarities of thought of where we go from here. If you enjoyed the podcast, we always appreciate you listening and sharing your thoughts with us.

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