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Moody's Talks - Inside Economics
Forecasting the Fed and Falling CRE
Mark, Cris and Marisa weigh whether or not to change the forecast for the Fed funds rate and dig deep to play the statistics game. Later they are joined by Professor Glenn Mueller of the University of Denver to talk all things commercial real estate. Professor Mueller ranks the segments of the CRE market from worst to best performing and explains why the legalization of marijuana has disrupted the retail market.
For more on Glenn Mueller, click here
Follow Mark Zandi @MarkZandi, Cris deRitis @MiddleWayEcon, and Marisa DiNatale on LinkedIn for additional insight.
Mark Zandi: Welcome to Inside Economics. I'm Mark Zandi, the Chief Economist of Moody's Analytics, and I'm joined by my two co-hosts, Marisa DiNatale and Cris deRitis. Hi, guys.
Cris deRitis: Hey, Mark.
Marisa DiNatale: Hey, Mark.
Mark Zandi: We had a very eventful week, did we not?
Cris deRitis: We did. I just saw you two days in a row, right?
Mark Zandi: I know, in person.
Cris deRitis: In person, yes, yes.
Mark Zandi: Yeah. Day one was we had our own conference in Wilmington. I thought that went well, and although having said that, we were talking to one of our other colleagues, and I asked her point blank what she thought. She goes, "Well, I thought Cris did a better job than you, Mark.
Marisa DiNatale: Ooh.
Mark Zandi: Yeah.
Cris deRitis: It's just an-
Marisa DiNatale: Who said that?
Cris deRitis: ... an objective opinion-
Mark Zandi: It's-
Cris deRitis: ... that's...
Mark Zandi: ... of course, she was much more... She phrased that a little less directly, but that's kind of sort of what she was saying, right, Cris?
Cris deRitis: But that's what you heard.
Mark Zandi: Oh, that's what I heard. I heard-
Marisa DiNatale: That's what matters.
Mark Zandi: ... [inaudible 00:01:07]-
Cris deRitis: You're very gracious-
Mark Zandi: ... though, but yeah.
Cris deRitis: ... but that's what you heard.
Mark Zandi: Yeah, I view that as throwing down the gauntlet. I'm like, "I'm going to be number one again. I got to get back on my game."
Cris deRitis: Well, I did give out-
Mark Zandi: Then-
Cris deRitis: ... prizes.
Mark Zandi: ... it is about the... You were giving out prizes. That's really not-
Marisa DiNatale: Hmm.
Mark Zandi: ... I didn't have any [inaudible 00:01:26] to give out.
Marisa DiNatale: What did you give out?
Cris deRitis: I gave out decks of cards, Moody's Analytics branded cards.
Mark Zandi: Which we bought all that, those tchotchkes, 25 years ago.
Cris deRitis: Yeah. Well, I guess a benefit of closing our office is that we had to-
Mark Zandi: Yeah.
Cris deRitis: ... empty-
Marisa DiNatale: Get rid of all this stuff.
Cris deRitis: ... yeah, but people really liked the cards, so...
Mark Zandi: Yeah, I'd like some cards, if you've got any extra ones, definitely.
Cris deRitis: Oh, you have to... Well, let's see how you do on this.
Mark Zandi: Let's see how I do on the statistics game today [inaudible 00:01:56].
Cris deRitis: Okay.
Mark Zandi: Then, on day two, we had because we're now remote, we went fully remote six, eight weeks ago, we had a lot of the folks come into Wilmington, where we had the event, and had kind of an off-site. That, I thought, went pretty well.
Cris deRitis: Very well.
Mark Zandi: Carl, my brother, gave a... That was a great speech.
Cris deRitis: Inspirational.
Mark Zandi: It was. It was really very good. Marisa, you missed it. You weren't there.
Marisa DiNatale: I know. I was in Dallas with a client.
Mark Zandi: Oh, okay. Well, fair enough. Someone's got earn a living.
Cris deRitis: Yeah.
Marisa DiNatale: Someone's got to go out and do it, right?
Mark Zandi: Right, exactly, exactly.
Cris deRitis: Next time, next time.
Marisa DiNatale: Yeah.
Mark Zandi: Well, we have a guest that we're going to get to in just a minute, a guy named Glenn Mueller, a good friend of mine that I've known for, I don't know, we talk about it, I think 20, 30 years. He's been everywhere in the commercial real estate market, Head of Research for Prudential on the investment side. He's now a professor at the University of, excuse me, at the University of Denver. There's a lot of concern, angst around commercial real estate and what's going on there and what it might mean for the broader financial system and economy, and we'll come back to that.
Before we go there, I thought we'd spend a few minutes to talk about what's top of mind this week. We've got a lot of questions around monetary policy, Fed policy, interest rates. It was kind of a light week in terms of economic statistics, but we'll play the statistics game, but I thought we'd talk about monetary policy first. Maybe I'll turn to you, Cris, and you can kind of describe what our baseline outlook is for the Fed in monetary policy.
Cris deRitis: At present, at least in our current June forecast, we have the Fed pausing at this point. They stand pat at 5.25 percentage points on the Fed Funds Rate through the end of the year. Then, in, I think, early-to-mid 2024, we have them starting to cut as inflation is coming down.
Mark Zandi: Actually March, it's actually-
Cris deRitis: March.
Mark Zandi: ... to be precise at the-
Cris deRitis: [inaudible 00:04:00].
Mark Zandi: ... March meeting of 2024. Yeah.
Cris deRitis: Yeah, I think we were talking about perhaps pushing-
Mark Zandi: Yeah, talked about-
Cris deRitis: ... [inaudible 00:04:06].
Mark Zandi: ... pushing it out, which we should talk about now because-
Cris deRitis: Yeah.
Mark Zandi: ... I think we probably should, but anyway-
Cris deRitis: Yeah, I'd agree.
Mark Zandi: ... for now it's March of 2024.
Cris deRitis: Yeah, but the theory there is that inflation is coming down, things are moderating or we're moving in the right direction and, therefore, there's no need to be much more aggressive in terms of monetary policy. Then, in '24, the inflation rate is nearing the target, but the job market is weakening at that point. They become more concerned about really pushing the economy into recession and they start to cut, right?
Mark Zandi: Right.
Cris deRitis: That's the-
Mark Zandi: That's the date.
Cris deRitis: ... frame we have currently.
Mark Zandi: Yeah, and what's the market say? Do you know? I mean if you look at-
Cris deRitis: The market looks like it's-
Mark Zandi: ... [inaudible 00:04:48].
Cris deRitis: ... anticipating a hike in July, just one, though, throughout the rest of the year. Obviously, there's a distribution, but it seems as though that's the mode is for 5.25-
Mark Zandi: Just one more-
Cris deRitis: ... to 5 [inaudible 00:05:02]-
Mark Zandi: ... rate hike.
Cris deRitis: ... one more.
Mark Zandi: Well, and it felt like Jay Powell, the Chair of the Fed, he testified in Congress, both the Senate Banking and the House Financial Services this week. The other speakers seemed to be... and also the FOMC meeting, the-
Cris deRitis: Hmm.
Mark Zandi: ... Policy [inaudible 00:05:19]-
Cris deRitis: The minutes, yeah.
Mark Zandi: ... yeah, meeting last week. It seemed like they were intimating there might be more than one more rate hike, at least a couple more rate hikes, right?
Cris deRitis: Yeah. The Dot Plots-
Mark Zandi: The Dot Plots.
Cris deRitis: ... suggested two more.
Mark Zandi: Right.
Marisa DiNatale: Two more 25-point hikes.
Cris deRitis: Correct.
Mark Zandi: Right.
Cris deRitis: That's right, for precision, yeah.
Mark Zandi: Right. Yeah, so what do you think, Marisa? I mean, is that... That's the baseline and that's a no-recession baseline. We're not-
Marisa DiNatale: Right.
Mark Zandi: ... expecting a recession. Obviously, we're expecting inflation to continue to moderate, get back close to the Fed's target by this time next year. Does that sound like a reasonable forecast to you or outlook? Or would you cancel any change there?
Marisa DiNatale: I think I'd probably put another rate hike in there.
Mark Zandi: You would? Okay, because-
Marisa DiNatale: I think so. I think given the strength, they're really data-dependent here. Inflation expectations are very well-anchored. That's... You know, you could use that as an argument for them not hiking and just staying where they are, but I think the job market is just really strong. Yes, it's slowing down, but I think it's reasonable to expect we get at least another couple very good job reports. Core inflation is improving at a very marginal, slow pace. It's pretty sticky. Most of the inflation relief we're getting is energy and food prices.
I think they probably do at least one more here coming up. I think was we get past the summer, and if we really start seeing really relief on core inflation, particularly the shelter component, that's probably the point at which they stop. I don't think forecast is unreasonable, but I also think it would be very reasonable to add one more rate hike in there.
Mark Zandi: It's funny, generally you have to make a distinction in your mind, what should they do and what will they do?
Cris deRitis: Yeah.
Mark Zandi: Yeah, you know, I say 95% of the time for me, those are the same thing.
Marisa DiNatale: Mm-hmm.
Mark Zandi: What they should do and what they will do are one and the same. Recently in the last couple, three meetings, and certainly looking forward, what they will do is now different from in my mind what they should do. I mean, what they will do, yeah, they probably will raise rates a quarter point at the July meeting because they pretty much signaled that's what they're going to do. That's already embedded in market pricing and if they just simply follow through in theory nothing should change. I mean, it's already out there. It's in expectations, but what they should do just feels like to me they should just stop.
They stopped and just stay stopped until there's a reason not to, a reason to move one way or the other because it feels like to me inflation's coming in pretty gracefully. I mean, maybe not as gracefully as you'd like if you had a piece of paper, you drew the line, but it's pretty close. The outlook feels increasingly more certain there, and then on the growth front, growth is slowing. I mean, output GDP is below potential. You can feel the labor market easing up, and I increasingly am of the view that the job numbers are going to get revised down, that-
Marisa DiNatale: Yeah.
Mark Zandi: ... you saw what's happened with the household employment data that we all look at the payroll survey data, and that's been strong, 300K-plus per month. You look at the payroll survey, I mean, the household survey, the other survey of employment, and that's measurably weaker.
Then, you get the data from the quarterly census of employment and wages. That's the unemployment insurance record data, full count of employment, to which this survey data we're looking at now is ultimately revised and benchmarked to. That's been a lot weaker, so who knows? We're going to have to wait to see what the benchmark revisions are going to be, but I'd be surprised that after these revisions come in over the course of the next six, 12 months, we're going to realize, "Oh my gosh, yeah, job growth was actually meaningfully weaker than what it is now."
I don't think it's falling apart. I'm not saying that. The economy is still creating jobs, a good number of jobs, but not 300,000-plus a month. I just don't believe that's the case. Then, you've got the issues with the banking system, the financial system. Why would you keep pressing on the brakes at this point? Do you want to take the other side of that, Cris?
Cris deRitis: Surprisingly not.
Mark Zandi: Okay, fair enough.
Cris deRitis: I actually agree with you on the will versus should-
Mark Zandi: Yeah.
Cris deRitis: ... and I'm also concerned about the student loan repayments restarting. That's just one more thing. I don't think that's the end all, be all of a recession.
Mark Zandi: Yeah, good point.
Cris deRitis: That's one more thing that will... is going to slow down consumption in the broader economy as well, and so I think we need to be looking ahead at least a few months here, not just reacting to what we see in front of us, but I think you're right. They probably will hike one more time.
Mark Zandi: Yeah, and that student loan thing you just mentioned, it's the moratorium on student loan payments comes to an end in September, and that's going to happen because that's in legislation, that's the debt limit legislation. That, by our calculation, is about 70, $75 billion in additional payments on student loans. That's annualized over a period of a year, but that hits September, October, November. On an annualized basis, that's not inconsequential. That's going to take some steam out of consumer spending in the broader economy just when the Fed is thinking about we should be raising trade. Here's a theory, though. Maybe the Fed is taught to simply talking tough because-
Cris deRitis: Could be.
Mark Zandi: ... they need to keep inflation expectations down. Marisa, you pointed out that they seem relatively well-anchored and they don't want to give that up. They want that to continue because it makes it easier to get actual inflation back in. It gets wage growth back something that's more consistent with their inflation target, get inflation back in.
If I were them and I had my view now that they shouldn't raise, I'd still be talking tough like they are. I'd be saying the same things they are, so maybe what we're observing here is just kind of some strategic messaging that's going on to try keep inflation expectations in [inaudible 00:12:14]. What do you think about that theory?
Cris deRitis: Jawboning.
Mark Zandi: Just jaw... yeah, kind of a jawboning. In fact-
Cris deRitis: [inaudible 00:12:19]-
Mark Zandi: ... I'm not sure how... Now, everyone like me thinks it's jawboning, so I'm not sure how much it works, but that's kind of the theory behind it. Much better than if they came out and said, "Oh yeah, maybe we'll stop and we'll be much more relaxed about that 2% inflation target we've been talking about."
Marisa DiNatale: Mm-hmm.
Mark Zandi: Probably doesn't make sense to do that.
Marisa DiNatale: I
Cris deRitis: Yeah, and I-
Marisa DiNatale: ... wondered-
Cris deRitis: ... [inaudible 00:12:42] oh, go ahead. Go ahead, Marisa.
Marisa DiNatale: Sorry, I was just going to say if we go back to the meeting that happened after the SVB collapse, we kind of thought they should pause then. There's turmoil in financial markets. That would have been a good time to pause and not put further upward pressure on interest rates across the economy. They didn't, and just like you're talking about, the jawboning kind of to try to anchor things. I wonder if that was a strategic hike to say, "We really aren't worried about this. We're really not worried about the banking system."
Had they paused at that point, that could have been a signal that they're really worried that there's more stress out there in financial systems than people thought, so just like... It seems to me if you were going to pause, that would have been the time to do it and they didn't do it and now they pause. I think everything they're doing is strategic to keep markets in line and expectations in line.
Mark Zandi: Right. Okay, so I... I mean, because we think they will, not because we think they should. We're going to-
Marisa DiNatale: Right.
Mark Zandi: ... it seems like we should put another quarter point rate hike in for the month of July. Then, let's look at quickly into 2024. Right now in the baseline we have the first rate cut in March of 2024. Feels like that might be... The one reason why you might stick with that is the election. You got this thing called the election next year, and do you really want to be moving rates around when you're in the middle of the election process, which kind of goes into full swing a few months later as you move into the summer? Maybe you move a little earlier, you do it in March. Otherwise, you might have done it a little later in the summer.
Having said that, maybe we should push it off a little bit further because they'll want to make sure that inflation is actually back within spitting distance of their target before they actually cut interest rates. Again, with the underlying assumption that we're not going into recession, that's kind of our baseline. There's no recession. What do you think about what we should do there, Cris?
Cris deRitis: Yeah, given that it's set that assumption, I would think they would wait a bit longer.
Mark Zandi: Wait, you think so?
Cris deRitis: Yeah.
Mark Zandi: When does it cut? In like-
Cris deRitis: May [inaudible 00:15:11].
Mark Zandi: ... oh, you think in May? They're still not going to... In the middle of the election process, they can still say, "Hey-
Cris deRitis: Yeah, they're still kind of-
Mark Zandi: ... okay. All right.
Cris deRitis: Well, I guess that's the primary, right? Is that?
Mark Zandi: Yeah.
Cris deRitis: My God.
Mark Zandi: [inaudible 00:15:24] yeah [inaudible 00:15:24]-
Cris deRitis: I just realized the primary's-
Mark Zandi: Yeah, the [inaudible 00:15:27].
Cris deRitis: ... less than a year away. Whoa. I'm not ready.
Mark Zandi: Yeah, so you think we should push it off a couple of months, though?
Cris deRitis: I think so. That's my-
Mark Zandi: Yeah.
Cris deRitis: ... again, given the other assumptions in the... that we're not going into recession and that inflation is still chugging along here for a while.
Mark Zandi: Okay. Okay. Well, the listener is seeing how we make these assumptions. We have these... Now, of course, we're going to have to bring in the rest of the group and they're going to disagree for sure. Somebody's going to disagree, so we're going to have some kind of discussion, debate over this, but it does feel like we'll probably add one more quarter point hike in July, and then extend out the first rate hike until we're probably May, June... Is May the meeting next... We'll have to see when the meetings are.
Cris deRitis: Oh yeah, we should check.
Mark Zandi: I can't quite remember when the meetings are, but sometime in that period, kind of the May-June period. Yes, in that period. Yeah. Okay. All right. Very good. Let's play the statistics game. Just to remind everyone, the game is we each put forward a statistic, The rest of the group tries to figure that out with questions, clues, deductive reasoning. The best statistic is one that's not so easy we get it immediately, one that's not so hard that we never get it. Again, this week was pretty light on the data, about as light as it gets, so I'll be curious what kind of statistics people come up with. As per tradition, we're going to start with Marisa. Will you go first, Marisa?
Marisa DiNatale: Okay. This is going to be very hard and so I probably need to tell you where the data's from for you to get it, okay?
Mark Zandi: Whoa, okay.
Marisa DiNatale: But I'm going to... This is what I'll say about it. It was released by the BLS this week.
Mark Zandi: Okay.
Marisa DiNatale: It is something they release every year, so it's not high frequency. The statistic is that I'm going to give is for the whole year of 2022.
Mark Zandi: This is the poverty statistics?
Marisa DiNatale: No. It is germane to the topic that we're going to talk to Glenn about.
Mark Zandi: Which is CRE.
Marisa DiNatale: Commercial real estate, and in particular-
Mark Zandi: [inaudible 00:17:34].
Marisa DiNatale: ... sort of the office market.
Cris deRitis: Is it construction employment?
Marisa DiNatale: Okay, hold on. I haven't even given the statistic yet. Okay, so the statistic is that is 34% in 2022.
Mark Zandi: Okay.
Marisa DiNatale: That was down from 38% in 2021, but up from 23.7% in 2019.
Mark Zandi: Okay. This is labor market-oriented?
Marisa DiNatale: Yes.
Mark Zandi: Right, and it has something to do with the way people work?
Cris deRitis: Remote work?
Mark Zandi: Remote work?
Cris deRitis: Work from home?
Marisa DiNatale: Yes. Yeah, you got it. Okay, so this is-
Mark Zandi: Oh.
Marisa DiNatale: ... and then-
Mark Zandi: Oh.
Marisa DiNatale: ... but then I have two other statistics. I'm going to-
Mark Zandi: Oh.
Cris deRitis: Wait, did I get it-
Marisa DiNatale: [inaudible 00:18:23].
Cris deRitis: ... or did Mark get it? Did I get it or did Mark get it? Who gets the-
Mark Zandi: So-
Cris deRitis: ... cowbell here?
Mark Zandi: ... hold up, wait, so-
Marisa DiNatale: One of you said remote work.
Mark Zandi: Oh, that was him.
Cris deRitis: [inaudible 00:18:30]. That was-
Mark Zandi: [inaudible 00:18:30] I... Oh, oh, geez.
Marisa DiNatale: Okay. Cris gets it.
Mark Zandi: Okay, Chris gets it-
Marisa DiNatale: By a second.
Mark Zandi: ... but hold on. Is that 34% of what [inaudible 00:18:41]-
Marisa DiNatale: I'm going to tell you what it is, yeah.
Mark Zandi: Yeah, go ahead.
Marisa DiNatale: In 2022, 34% of employed people did some or all of their work-
Mark Zandi: Okay.
Marisa DiNatale: ... from home-
Mark Zandi: Yeah. Okay.
Marisa DiNatale: ... which was down from 38% in 2021, but prior to the pandemic it was 23.7%.
Mark Zandi: Did [inaudible 00:18:59]-
Marisa DiNatale: This can include people that only work from home. It can include people that do a little bit of both. They might work in an office and then bring work home, but yeah, 34% work from home in 2022.
Mark Zandi: Okay.
Marisa DiNatale: Now, this is obviously interesting to the office market because this is-
Mark Zandi: Sure.
Marisa DiNatale: ... sort of the trend that is determining the direction of what's happening with office-
Mark Zandi: Right.
Marisa DiNatale: ... space and take-up. Let me give you these statistics. 7.9 hours versus 5.4 hours.
Mark Zandi: Commute times [inaudible 00:19:38]?
Marisa DiNatale: No.
Mark Zandi: This is something to do with amount of time, doing time. Oh, you said hours, so it is time.
Cris deRitis: Yes, yes.
Mark Zandi: [inaudible 00:19:53].
Cris deRitis: Time is-
Mark Zandi: It has something to do with time.
Cris deRitis: Time spent online?
Mark Zandi: Something in their workday? Some proportion, some hours of their workday they're doing this. No? Work week I should say. No? I'm asking you, Marisa, you know?
Marisa DiNatale: Yeah, I know. I'm thinking about how to answer it. Yeah-
Mark Zandi: Oh.
Marisa DiNatale: ... it is their workday, so people that worked in the office-
Mark Zandi: What?
Marisa DiNatale: ... on an-
Mark Zandi: [inaudible 00:20:22]-
Marisa DiNatale: ... average day-
Mark Zandi: ... oh.
Marisa DiNatale: ... worked 7.9 hours. People that usually worked from home only worked 5.4 hours a day.
Mark Zandi: What?
Cris deRitis: What?
Mark Zandi: Oh, is that because... Is that just compositional, you know, different types of work that are at home versus in the office? I mean, like you need to see the time series of that to make-
Marisa DiNatale: Yeah, so I mean-
Mark Zandi: ... a judgment.
Marisa DiNatale: ... the work done at home is much... That 5.4 hours back in 2019, it was 3.3 hours if you did-
Mark Zandi: Oh-
Marisa DiNatale: ... any work-
Mark Zandi: ... okay.
Marisa DiNatale: ... from home, okay?
Mark Zandi: Oh. Mm-hmm.
Marisa DiNatale: This really varies by the type of work you do, the profession you're in, your educational attainment level.
Mark Zandi: Right, right.
Marisa DiNatale: Generally, when people work from home, they're working fewer hours than if they work in an office.
Mark Zandi: Okay, but I mean, you got to correct for the composition of work, right? Don't you? I mean-
Marisa DiNatale: Yeah, but even when you correct-
Mark Zandi: If I'm an office-
Marisa DiNatale: ... for-
Mark Zandi: ... worker and I work in the office, am I working less if I work at home?
Marisa DiNatale: That is the implication here because even if you look at full-time people in the same industry, the people working at home are working fewer hours.
Mark Zandi: Oh really?
Marisa DiNatale: Yeah.
Mark Zandi: Wow, but... Wow, that's-
Cris deRitis: That's not me, Mark. I'll just-
Mark Zandi: Yeah, I know.
Marisa DiNatale: Yeah, it's not us.
Mark Zandi: It's almost the opposite, right?
Cris deRitis: Yeah, yeah.
Mark Zandi: It is definitely the opposite, right?
Marisa DiNatale: It's definitely not us.
Mark Zandi: People actually take some of their commute time that they're not-
Marisa DiNatale: Yeah, right.
Mark Zandi: ... commuting and actually work during that period. That's weird. I got to... That's interesting data, though.
Cris deRitis: Yeah.
Mark Zandi: I got to take a closer look at that. That's a good one, though. Very, very good, and you did nicely because you knew there's like zero probability-
Marisa DiNatale: Right, that-
Mark Zandi: ... that we would have gotten that. Yeah, but that was good. Okay, Cris, you're up.
Cris deRitis: All right. I also looked a little farther afield. This is from a government source. Came out yesterday. I'm going to give you three numbers.
Mark Zandi: You won't tell us which agency or anything? It's [inaudible 00:22:18]?
Cris deRitis: Census.
Mark Zandi: Okay. Okay. That's okay. Very helpful.
Cris deRitis: It helps, right?
Mark Zandi: Well, Census. Okay.
Cris deRitis: Okay. 38-
Mark Zandi: [inaudible 00:22:28].
Cris deRitis: ... 38.9, 44.8, 31.9.
Marisa DiNatale: Those are ages?
Cris deRitis: Yes.
Marisa DiNatale: Oh, 38.9 is now the median age of the population.
Cris deRitis: Yes. Very good. Ding, ding, ding.
Mark Zandi: Oh, wow.
Cris deRitis: Cowbell. Yep.
Mark Zandi: What are the other two ages?
Cris deRitis: 44.8 and 31.9. I will help you and tell you that these are state-
Mark Zandi: Oh.
Cris deRitis: ... ages.
Marisa DiNatale: Aah.
Mark Zandi: Well, the youngest is Utah.
Cris deRitis: Yeah. Very good. Excellent.
Mark Zandi: The oldest is
Marisa DiNatale: That's the 31.9.
Mark Zandi: ... I want to say Florida, but-
Marisa DiNatale: Florida.
Mark Zandi: ... [inaudible 00:23:06]-
Cris deRitis: Nope.
Mark Zandi: Pennsylvania?
Cris deRitis: Nope.
Mark Zandi: Arizona?
Marisa DiNatale: Michigan?
Cris deRitis: No, it is in the Northeast.
Mark Zandi: Okay, Rhode Island?
Cris deRitis: Keep going in that direction.
Marisa DiNatale: Maine?
Mark Zandi: Rhode Island?
Cris deRitis: Maine, exactly.
Mark Zandi: Maine.
Cris deRitis: Exactly.
Mark Zandi: Maine, Maine, Maine.
Cris deRitis: Maine, 44.8 median age. Yeah.
Mark Zandi: Yeah. That's-
Cris deRitis: [inaudible 00:23:20].
Mark Zandi: ... good. That's really cool. What's the... You said overall median age is what?
Cris deRitis: 38.9.
Mark Zandi: Yeah, I'm in that cohort.
Cris deRitis: You are contributing to that number, yes.
Mark Zandi: Great.
Cris deRitis: Yeah, so definitely-
Mark Zandi: [inaudible 00:23:34].
Cris deRitis: ... aging as a population here, so with all sorts of implications for housing and productivity, labor markets, so...
Mark Zandi: Well, that's very good. That's very, very good. Okay, my statistics don't stack up to your statistics, I'm afraid. I've got... All right, I'm going to give you two that are unrelated. First one is... I'm afraid the first one is not any good, so if it's not any good, I'll give you the second one. $1.4 trillion, 1.4 trillion, and it's related to the topic that we're now going to turn to in just a minute, and that's commercial real estate. What is 1.4 trillion? Given the conversations we've been having, you may be able to figure this one out.
Marisa DiNatale: Yeah, I think-
Mark Zandi: I might even say it's-
Marisa DiNatale: ... it's-
Mark Zandi: ... [inaudible 00:24:21]-
Marisa DiNatale: ... office loans held by banks?
Mark Zandi: No, that's a hundred billion. That hundred billion is the amount of office mortgages that on bank balance sheets that will mature-
Marisa DiNatale: Oh, trillion, trillion.
Mark Zandi: ... yeah, that will mature by the end of 2025.
Marisa DiNatale: It sounds like excess saving.
Mark Zandi: It does. You're right. I think it is excess saving.
Cris deRitis: I think it [inaudible 00:24:50]-
Mark Zandi: I didn't-
Cris deRitis: ... yeah.
Mark Zandi: ... that's not what I had in mind. That's-
Cris deRitis: Latest.
Mark Zandi: ... that's a good one. That's our latest estimate of excess saving. That's the extra saving done during the pandemic that's sitting in bank-
Marisa DiNatale: By household-
Mark Zandi: ... those accounts. Yeah. Go back to CRE, though.
Marisa DiNatale: Okay.
Mark Zandi: You were on the right track. 1.4 trillion is?
Marisa DiNatale: The office market?
Mark Zandi: No, you said that. Well-
Marisa DiNatale: Well, yeah.
Mark Zandi: It's the total amount of CRE debt across all providers of that debt, banks, REITs, CMBS, everything that is coming due that needs to be refinanced or rolled over between now and the end of 2025, 1.4 trillion. Okay. I'm not sure how good that was. I'll give you one more. You should be able to get this. -7.2 and 0.1. It's a statistic that came out this week.
Marisa DiNatale: Is it from the conference board's leading economic indicators?
Cris deRitis: Yes.
Mark Zandi: Ding, ding, ding, ding, ding, ding, ding. Yeah. What's the -0.7?
Marisa DiNatale: That was the decline over the month in the index.
Mark Zandi: In the leading indicator?
Marisa DiNatale: Yeah-
Cris deRitis: Yeah.
Marisa DiNatale: ... in the leading and then one's probably-
Mark Zandi: 0.2 is coincident-
Marisa DiNatale: Coincident.
Mark Zandi: ... and 0.1 is-
Cris deRitis: Lagging.
Mark Zandi: Lagging. Lagging. Very good, very good. You know, there's a interesting phenomena. The leading indicators have been falling now for quite some time.
Cris deRitis: Yeah.
Mark Zandi: The coincident indicator is not going anywhere. It's still positive, so it's happened before in the past. It's not like it's never happened before, but it's unusual that you see these leading indicators signaling recession. The actual measures of coincident economic activity which determine whether you're going to be in a recession now or not, are the things that kind of the National Bureau of Economic Research looks at when trying to date recession. Doesn't show it. It's just a very interesting phenomenon.
Anyway, okay. Well, very good. I think because we do have a guest and a conversation around CRE, I think we're going to call this part of the podcast to a close and we're going to move on to the next part of the podcast. Thanks so much, and I'd like to introduce my good friend, Glenn Mueller to Inside Economics. Hi, Glenn, good to see you.
Glenn Mueller: Hi. How are you?
Mark Zandi: Good, good. You told me you're in White Bear Lake, Minnesota, today.
Glenn Mueller: Correct.
Mark Zandi: Yeah, and I recounted this story that I, believe it or not, when I was growing up, my Dad was professor at Penn and he had a good friend, an engineer at 3M. We had a home on White Bear and we'd go up every summer, and then we'd go from there up to Lake Superior to a little town called Two Harbors. The thing about those trips was that was that for a kid that grew up in a big city on the East Coast, that was the first time I actually really ever saw the sky, believe it or not. Yeah. Do you see the sky often there in White Bear?
Glenn Mueller: All the time, looking out at it right now, and the water-
Mark Zandi: And the water.
Glenn Mueller: ... [inaudible 00:28:12].
Mark Zandi: Oh, and that's the thing because Glenn is a master water skier, right?
Glenn Mueller: Right.
Mark Zandi: You're still doing that-
Marisa DiNatale: Master.
Mark Zandi: ... [inaudible 00:28:20].
Glenn Mueller: Yeah.
Mark Zandi: Yeah.
Glenn Mueller: I skied... I ski every morning here. Skied this morning. I actually... Lifetime goal is to go to Nationals, which I did in 2019-
Mark Zandi: Wow.
Glenn Mueller: ... and I was ranked 30th, but took ninth.
Mark Zandi: Wow.
Marisa DiNatale: Oh, wow.
Mark Zandi: Congratulations.
Glenn Mueller: Top 10, yeah.
Mark Zandi: Well, how come not number one, Glenn? I'm just, you know?
Glenn Mueller: Because I don't live in Florida where you can ski all the time.
Mark Zandi: That makes a lot of sense.
Glenn Mueller: I grew up in Wisconsin, and the other thing about the Midwest is I grew up racing sailboats and had a summer home in New Hampshire for 38 years and then moved here to be near my grandkids. Now, I sailed. I race sailboats.
Mark Zandi: Oh.
Marisa DiNatale: Oh.
Glenn Mueller: As a matter of fact, I had my trifecta week. I sailed Monday, Tuesday, and Wednesday nights, raced all three nights this week, so-
Mark Zandi: Wow, that sounds like fun.
Glenn Mueller: Yeah.
Mark Zandi: You are in impeccable shape. I remember... How many years... We go decades back, don't we? Like-
Glenn Mueller: Yes, like 30-
Mark Zandi: ... I think we do-
Glenn Mueller: ... plus, easily-
Mark Zandi: ... 30-plus years.
Glenn Mueller: ... the early '90s.
Mark Zandi: Yeah.
Glenn Mueller: That's when we first met, and we keep bumping into each other at real estate conferences around the country, and also Homer Hoyt Institute down in Florida, which is a bunch of PhDs chatting it up on real estate for the last, you know, like I say, I joined in '96, so yeah. You're much broader in your exposure than I am, but it's been a good ride.
Mark Zandi: I think each one-inch deep and six miles wide, is that the phrase? Something like that, so-
Glenn Mueller: There we go, yeah.
Mark Zandi: ... but I'm fortunate enough to have good friends like you who really know stuff and I can call on you and say, "Hey, what the heck is going on?"
Glenn Mueller: Right.
Mark Zandi: Of course, you're now at the University of Delaware, Professor of Real Estate, and you were telling me Denver is the second oldest?
Glenn Mueller: Yeah, yeah. University of Wisconsin's the oldest-
Mark Zandi: Oh.
Glenn Mueller: ... University of Denver started their real estate program in 1938, and we're the only program in the country that has both real estate and construction management in a school of business-
Cris deRitis: Hmm.
Mark Zandi: Aah.
Glenn Mueller: ... and we just two years ago started an executive PhD program for everybody that just can't take a couple of years out of their life to go get their PhD. You can do it online mainly and come to the University for two weeks a year and do a PhD that's applied to whatever business you're in, whatever-
Mark Zandi: Wow.
Glenn Mueller: ... specialty you're doing, so that's kind of cool.
Mark Zandi: That is very cool, that is very cool, and of course, we're here, we're going to talk about commercial real estate. That's top-
Glenn Mueller: Perfect.
Mark Zandi: ... of line for anyone focused on what's going on in the broader economy, banking system, financial system. Before we do that, though, as I recall, you've been at different stops in the CRE world on your way to becoming a professor at the University of Denver.
Glenn Mueller: Yeah, yeah.
Mark Zandi: Do you want to... We could just give a little-
Glenn Mueller: Sure.
Mark Zandi: ... certain sense of that?
Glenn Mueller: Sure. Actually started out as a home builder in the late '70s.
Mark Zandi: Oh.
Glenn Mueller: Went back to school, got my PhD in real estate at Georgia State University. Ended up back at University of Denver teaching for four years and then got hired by Prudential as a VP of research when that was a brand new thing. Charlie Wurzbach, if you remember Charlie-
Mark Zandi: I sure do, yeah.
Glenn Mueller: .., and then I moved to a company called ABKB, Alex.Brown Kleinwort Benson. After two years we merged with Jones Lang LaSalle.
Mark Zandi: Hmm.
Glenn Mueller: I moved on to Pricewaterhouse as their national director of real estate research for a couple of years. Then, Legg Mason, I ran a REIT group there for a decade and helped take 22 REITs public. Then, moved to one of our clients called Black Creek Group as their head of research, and they did non-traded REITs and actually there for 17 years until Ares Capital Management bought them two years ago. Ares Capital Management is the largest debt lender in the world now. They're like $325 billion.
Mark Zandi: I didn't know that.
Glenn Mueller: Yeah, and they had some direct real estate stuff going on before that, but they're like 50 billion of that's in direct real estate funds-
Cris deRitis: Wow.
Glenn Mueller: ... so-
Mark Zandi: Geez.
Glenn Mueller: ... and, of course, my.... At the same time, I've worked at Johns Hopkins. I'm still guest lecturing every year at Harvard and Wharton and been at University of Denver now a total of 21 years.
Mark Zandi: Wow. You've seen commercial real estate, housing, all of it from-
Glenn Mueller: Everything.
Mark Zandi: ... from a lot of different angles. Yeah.
Glenn Mueller: Everything.
Mark Zandi: Just so you know, Cris is a Johns Hopkins PhD.
Cris deRitis: Economics PhD.
Glenn Mueller: Okay. Yeah. No, I [inaudible 00:33:05]-
Mark Zandi: Did you ever have Glenn? Did you remember Glenn, Cris? No?
Glenn Mueller: Right. We had a Master's in real estate there. I started there in '92 and left in 2005.
Mark Zandi: Oh, very good. Very good. Well, it is obviously great to have you here and talk about CRE. Let's begin the discussion this way. It feels like hair on fire out there when it comes to commercial real estate.
Glenn Mueller: Right.
Mark Zandi: Everywhere I go, every conference I speak to, every policymaker I have a conversation with, "How worried should I be about commercial real estate?" I'm sure you're getting that all the time.
Glenn Mueller: Right.
Mark Zandi: How do you answer that question?
Glenn Mueller: Right, and the answer is kind of funny. I say, "Well, yes and no." Yes, you should be really worried if it's office. No, you should have no worry whatsoever if it's industrial and/or multifamily. Retail has been just doing really well and we can talk about why, and then hotels, it's sort of the have and have nots. The resort stuff and leisure is great. The business hotels are kind of up in the air still, although there's more coming back than now, but really, as I say, office is the one big jump ball out there. You can literally bifurcate that into brand new stuff coming out of the ground or that's just finishing off that they started four or five years ago is actually leasing up very well because everybody wants new, really nice attractive space to get people into.
I just came from the meetings in New York and listened to Boston Properties, you know, the big high-end Class A, and they said, "You know, a lot of Class A isn't doing well," he said, "but we went back and looked at it and we're like 95% occupied and there's demand and we're getting people. They're about to come out of the ground with a new building in New York right next to the Yale Club," he said, "and it's because we asked our brokers at CBRE to go in and look at our stuff and find comp building. They said what we have is prime or A+ real estate, and that's what everybody wants, the best location and it's not that it's brand new and that kind of stuff. Like the General Motors Building, we own it. It's doing great and we've got people who just like, 'If you have any open space, let us know. We want it."
Because they... People want that really good space, and it's not tech companies right now, it's the service providers. It's accountants, lawyers, and financial advisors and wealth managers that... They want really nice, attractive space for their clients to come to, so that top... They call it like 10% of Class A is actually doing really, really well.
Mark Zandi: Even in the big urban centers-
Glenn Mueller: Yeah, I mean, in New York, and I'm on the board of Arden Group out of Philadelphia and our prime Class A stuff is actually doing very well. Suburban and B&C, really, really tough times, really tough times. I think we're going to see a lot more of handing the keys back on those buildings and what the banks end up doing with those is up in the air, but I think that's the biggest risk in the real estate world right now is, what do we do with all these non-prime office buildings that probably aren't going to refill? Just reading somebody else's report this morning, as you know, as economists, the idea is to forecast often. Some people are saying we aren't going to be back till 2040. It's going to take that long for the-
Mark Zandi: What... You mean vacancy rates back in by 2040?
Glenn Mueller: Right-
Mark Zandi: [inaudible 00:37:03].
Glenn Mueller: ... right. It's going to be that long before the general overall office market comes back.
Mark Zandi: Yeah. I mean, by my... Tell me if I got the numbers wrong, this is in my mind's eye and I might not have it right, but there's roughly $400 billion in office mortgages that are coming due that need to be refinanced rolled over between now and the end of 2025-
Glenn Mueller: Yeah.
Mark Zandi: ... so 400 billion and about a hundred billion is the banks are on the hook for, so-
Glenn Mueller: Correct.
Mark Zandi: ... does that sound about right to you?
Glenn Mueller: Yep.
Mark Zandi: All right [inaudible 00:37:44]-
Glenn Mueller: So-
Mark Zandi: ... [inaudible 00:37:44] go ahead.
Glenn Mueller: There's going to be some pain.
Mark Zandi: Right, right, but at that a hundred billion in the grand kind of scheme of things, if you look at a commercial bank, the commercial banking system as a whole, that's really not much to worry about.
Glenn Mueller: Yeah.
Mark Zandi: I mean, it's really maybe some institution on the tail of the distribution is going to get caught because they have too much CRE and they get caught with the wrong CRE-
Glenn Mueller: Correct.
Mark Zandi: ... have to default, and they might choke on that and fail.
Glenn Mueller: Right.
Mark Zandi: Yeah, okay.
Glenn Mueller: Right. Yeah, so industrial on the other hand is just off the charts fantastic. Things are going well. It's become a lot more expensive to build-
Mark Zandi: Can you go [inaudible 00:38:32] before you go into-
Glenn Mueller: ... [inaudible 00:38:32]-
Mark Zandi: ... industrial though, let me just... let's explore the office a little bit because that's the-
Glenn Mueller: Sure.
Mark Zandi: ... soft spot, right?
Glenn Mueller: Yeah.
Mark Zandi: [inaudible 00:38:36].
Glenn Mueller: Yeah, yeah.
Mark Zandi: Do you... There's a number of kind of significant headwinds to the office market. Curious to get your take on how big a deal they are and whether they're going to continue. The first one is, obviously, remote work and the remote dynamic. That clearly has had an impact on kind of the large office towers in big urban centers in the Northeast, Chicago on the-
Glenn Mueller: Yeah.
Mark Zandi: ... [inaudible 00:39:01].
Glenn Mueller: Yeah.
Mark Zandi: Do you think that's a dynamic that's here to stay? We're going to continue on with that, that's going to play a role going forward?
Glenn Mueller: Yes. Yeah, and, I mean, because everybody wants to work at home on Mondays and Fridays and be in the office three days a week, and so you need less space per person. The historic average was 200 square feet per person, and I think it is going to.... When we started doing more work at home and virtual stuff, some people are cramming down to like 120 square feet per person. If you can figure out how to spread the peanut butter out over the bread during the week, maybe eat... It's down to half that in the long run, but older people like you and I, I'm happy working from home. It's no problem. I'm not worried about my next promotion. Most of my undergrad and grad students, my grad students who are Master students who are working are like, "If I'm not in the office, I'm going to get overlooked for the next promotion or this or that or the other thing."
They want to be in the office, and if they're living downtown, they don't want to be working from their 500-square-foot efficiency apartment. They like going in the office and the socialization and stuff like that, so it'll be really interesting to see how everything kind of filters out as we go through all of this. Like I say, I think we're coming up with a new trend that's going to take a decade-plus to sort itself out.
Mark Zandi: What about conversions? There's some chatter about converting office into-
Glenn Mueller: Multifamily.
Mark Zandi: ... space we need, multifamily being the most obvious.
Glenn Mueller: Right, and-
Mark Zandi: Think that really has any legs? Is that viable?
Glenn Mueller: There is some and not that many unique buildings that you can do that with because one of my good friends, Tom Toomey at United Dominion Realty, that REIT, they'd done a couple conversions. He said, "When you take a normal office building that's got a big floor plate to it, what you end up with is little shotgun narrow, 10 or 15-foot-wide by 80-to-a-hundred-foot-deep units, so you get one window," right?
Mark Zandi: Right.
Glenn Mueller: There's only so many people that want something that small and unique. The cost of conversion is so high that economically it's not viable, so we're going to see some of that, but it's not the be all and end all of it. I had a student in my development class do a project where they converted an older office building in Denver into self-storage-
Mark Zandi: Hmm.
Glenn Mueller: ... and it worked financially, which was amazing. The one thing was it had concrete columns supporting the floors, and with storage, the floor load went up and they came up with the coolest solution. This guy was an engineer. They wrapped the columns in graphite to give them the strength needed to-
Mark Zandi: Huh.
Glenn Mueller: ... do it, so it was a really inexpensive way to do that conversion. Also, self-storage... self-storage, close in warehouse is another potential because if it's got a parking garage underneath, the truck can come and go. The Amazon trucks can come and go. They can bring stuff up and down in the elevators, that kind of stuff, so that's another potential.
Mark Zandi: Cris, can you imagine turning 7 World Trade, that's Moody's HQ, into a big warehouse space?
Cris deRitis: Right [inaudible 00:42:39].
Mark Zandi: Actually, it's a very secure building. I mean, I'm sure you can figure out... You've got... That's the main thing about commercial real estate. It's always amazed me. CRE developers, they're so creative. You know, how are they going to get out of this box? Somehow they do every single time, they get out of the box. They figure it out.
Glenn Mueller: Right, yeah, and maybe some of the suburban office buildings can be converted to other things like that, too, because they got plenty of parking and everything else. Yeah, it's like you say, yeah, we're waiting for the next creative thing to come along.
Mark Zandi: Yeah, well, you know, Glenn, the economics unit within Moody's, that's us. We just went remote, fully remote, what, six, eight weeks ago? Something like that, and-
Glenn Mueller: Nice.
Mark Zandi: ... our office building in Malvern, or excuse me, Westchester, PA, is now-
Glenn Mueller: Now empty.
Mark Zandi: ... pretty empty.
Glenn Mueller: Right, and why not?
Mark Zandi: Yeah.
Glenn Mueller: Life is easier. The amount of time, if we think back over our careers, the amount of time that we spent commuting, if you had that to do something else with-
Mark Zandi: Yeah. Could have written another couple of books maybe.
Glenn Mueller: Yeah, exactly.
Mark Zandi: Hey, Cris, let me ask you. I mean, when we collect all the transactions and create these repeat sales, commercial real estate price indices and model them and forecast them. A lot of our clients use them for stress testing and all kinds of different risk management, that kind of thing. Cris, what are we expecting prices to be down peak-to-trough in the office market?
Cris deRitis: For office, 25%.
Mark Zandi: 25. Does that sound right to you, Glenn? I know you don't do explicit forecasting and-
Glenn Mueller: Right, right. Well, you know, in the Great Recession we dropped prices by 40-
Mark Zandi: Yeah.
Glenn Mueller: ... and then they bounced back within four years, and we're up... Multifamily was up like 240 over the previous peak. Actually, mobile home parks was the highest up over that timeframe, so I think 25 is conservative. That could be the number, but I'm kind of guessing a little bit worse.
Mark Zandi: Worse.
Cris deRitis: Worse.
Mark Zandi: That's what I've heard. What do you think, Cris? That's what I've heard.
Cris deRitis: Yeah. Mm-hmm.
Mark Zandi: Yeah.
Cris deRitis: That's what I've heard, although I... Yeah, that number has real implications, right?
Glenn Mueller: Right.
Cris deRitis: For folks-
Glenn Mueller: Although-
Cris deRitis: ... [inaudible 00:45:14].
Glenn Mueller: ... remember that after the Great Recession, banking went from 75% loan-to-value loans down to 60 in most cases, so you can have a 40% value drop before you're out of the money. Think of this, that in essence, anyone that has a loan on a building, they basically have a put option, right? Or a call option-
Mark Zandi: Exactly.
Glenn Mueller: ... if you will, that if the price drops below the mortgage value-
Mark Zandi: Yep.
Glenn Mueller: ... I walk away. If it doesn't, I just keep collect... As long as I'm collecting enough rent to pay the mortgage, I don't need to walk away. If I'm not collecting enough rent or if I've calculated that in the next year or two, I've got enough leases coming due that don't pay, then I also walk away.
As you probably know the subleasing situation, we've almost tripled the amount of sublease space on the market, so you've got somebody like Moody's who I assume is on the hook on a 10-year lease and maybe you only have a year or so left on it. If you guys are now working from home, they probably put it on the sublease market. Will someone take it for a year?
Mark Zandi: Mm-hmm.
Glenn Mueller: Maybe not, so that's the forerunner of where vacancy rates are going is the amount of sublease space tells you that vacancy is about to rise.
Mark Zandi: Hmm.
Cris deRitis: Do you see this playing out over time? Or it a-
Glenn Mueller: Yeah.
Cris deRitis: ... one-time shock?
Glenn Mueller: I think because you've got... Like I say, with average five-to-10-year leases over the next five to eight years, we're going to see all this stuff come due.
Mark Zandi: Right, so that's office. Anything else on office you want to bring up, Marisa or Chris, that I missed?
Marisa DiNatale: Well-
Mark Zandi: [inaudible 00:47:00].
Marisa DiNatale: ... I imagine that 25% price drop, as Glenn was saying, probably varies quite a bit depending on the type of office space you're talking about, right? Like-
Glenn Mueller: Right.
Marisa DiNatale: ... you were, and I heard this before that now Class A doesn't really mean much because it's got to be top of the line Class A, so-
Glenn Mueller: Right-
Marisa DiNatale: ... that stuff-
Glenn Mueller: ... [inaudible 00:47:20].
Marisa DiNatale: ... probably does better than some of the more suburban Class B, Class C office buildings.
Glenn Mueller: Right, so in Denver we have two iconic buildings, the Wells Fargo Building, which looks like a cash register on the top.
Marisa DiNatale: Mm-hmm.
Glenn Mueller: Right across the street, Republic Plaza, Blackstone, Post 50% owners of both of those and they handed the keys back to the bank here a couple of months ago and just said-
Mark Zandi: Right, yeah.
Glenn Mueller: ... "We have leases coming due and everything else. By our numbers, we're not going to make any money, so it's yours." They're older, they're 20 to 30-year-old buildings, so they are the right location. Had they been remodeled and stuff like that, they could probably be premier A's, but they're old A's, at which didn't work. Also, what you have to do is, as my market cycle work, I look at the 54 top cities in the marketplace. There are some that are doing really well. Others where you had a lot of new space coming online.
Denver just had the new Tabor Center Two come online, and the firm that bought mine is Ares Capital Management, they took the three top floors and then asked any of their other people in New York, San Francisco, "Anybody want to move to Denver?" They got a whole bunch of people coming in. They started with two floors and went to three, so all of a sudden, the newest brand new Class A in Denver, the top three floors are taken kind of thing. The Boston Properties in their presentation, they said, "We have three clients who are looking for a hundred thousand square feet or more in New York City right now."
Mark Zandi: Really?
Glenn Mueller: Yeah-
Mark Zandi: Hmm.
Glenn Mueller: ... and that's in a premier building and it's not available.
Mark Zandi: Yep, so I guess the question is... Sort of my thought process is that for these issues we're talking about in the office market, which is kind of the poster child for the concerns because as you point out-
Glenn Mueller: Right.
Mark Zandi: ... and come back to it in a second, and these other property types, the issues aren't nearly as serious. Doesn't [inaudible 00:49:26]-
Glenn Mueller: Yeah, yeah. They're almost I'm going to say non-serious.
Mark Zandi: Not a problem, not a problem.
Glenn Mueller: Yeah, and so if you want, let's go ahead and run through what's-
Mark Zandi: But I want to-
Glenn Mueller: ... going on.
Mark Zandi: ... I just want to kind of-
Glenn Mueller: What was that?
Mark Zandi: ... do one more thing there, and that is the kind of link back to the broader economy would be if the default... Say prices fall, more Blackstones hand back the keys to the bank. A bank then chokes on that and the losses overwhelm their capital base and-
Glenn Mueller: Right.
Mark Zandi: ... the regulator says, "Look, you're insolvent. You're no longer viable. I'm shutting you down or you're going to merge with somebody or you're going to be acquired by somebody. Then, that could... If it were widespread enough be a problem for the availability of credit more broadly and, therefore, the macroeconomy.
In this case, it doesn't feel like that's at all possible because we're not talking about numbers that are big enough. A hundred billion over the next three years, it doesn't feel like that's big enough. The other way, I guess, it could have an impact broadly on the economy is if a smaller bank or mid-sized bank choked, failed, and that reignited kind of the deposit runs that we saw back a few months ago. You got folks out there, depositors, got a lot of cash in the bank, very kind of skittish, nervous-
Glenn Mueller: Right.
Mark Zandi: ... and even if a small bank that's not by itself systemically important, by itself if it fails, no big deal. If it kind of ignites another run, people say, "Oh, I'm out of it. I'm pulling all of my money out and going into money funds or I'm putting all my money into these big guys. Maybe I... That's the only way I can see this thing metastasizing into a broader kind of macroeconomic issue.
Glenn Mueller: Right. Well-
Mark Zandi: Is that your view? Is that how you think about it?
Glenn Mueller: Yeah, and I guess I'm going to ask you then a question because this is something I've never studied. How much capital is in the large banks that are too big to fail that the federal government would obviously come in and just bail out like a Wells Fargo, US Bank, whatever, versus all these smaller banks? Is it like 50% of all the money is in small banks and 50% in big banks? Or is it 80? I don't know the magnitude size between those. That would be a good thing to look at to say, "Hey, if 20% of all this money is in the smaller banks and that's what's going away, 20% isn't so bad, right?"
Mark Zandi: Yeah, I think for the big [inaudible 00:52:04]-
Glenn Mueller: If it's 50%, then it's a big problem.
Mark Zandi: Yeah. Of course, I'm curious if you have a different view, but for the big guys, the big guys that take the stress test every year, they have to stress their balance sheet, including the CRE portfolio against that 40% decline you mentioned and peak drop decline. That's what's used generally. In fact, in this last stress test, it was more than that, wasn't it, Cris? I think it was 45 or 50% down, and that's across all CRE, right? That's not just-
Glenn Mueller: Right.
Mark Zandi: ... office. That's the whole shooting match, so that's a pretty severe financial crisis-esque-plus kind of decline. They got to have enough capital to digest that, and they do. The big guys that take the stress test, I don't... They're bulletproof.
Glenn Mueller: Right.
Mark Zandi: Smaller guys, they don't take... If you're below... Before SVB, it was 250 billion and below. That's going to change now because of what happened with SVB, but 250 below, you don't have the same kind of stress testing demands the big guys have, so they're could be failures there, but again, unless it creates a deposit run for some reason, people lose their minds irrationally, which could happen, for sure. My mother-in-law, 93-year-old Mom has [inaudible 00:53:25] K and I probably shouldn't say that, but [inaudible 00:53:27] crazy, some cash in [inaudible 00:53:30] bank well below the deposit insurance limits. She goes, "Should I be worried about that?"
This was back in March/April when things were very unnerving. I said, "Mom, don't worry. No problem. You're below the deposit insurance limit," and she seemed okay. A few minutes later, she came back and she said, "Honey, what do you do again for a living? Can you remind me?"
Glenn Mueller: Nice.
Mark Zandi: Yeah, yeah, just to see if I have standing. Cris, do I have that right? I mean, Marisa, am I missing anything? What else... How else could this thing, the problems in the office market kind of metastasize more broadly in the economy? No?
Cris deRitis: Yeah. No, I think that's a competence-
Mark Zandi: [inaudible 00:54:15].
Cris deRitis: ... issue more than anything, right? That-
Mark Zandi: Okay.
Cris deRitis: ... but if there are these bank runs and then we have a repeat of what happened in the spring.
Glenn Mueller: Right, and remember the balancing act here. The stock market's up 17% and doing okay and people typically feel all right.
Mark Zandi: Yeah.
Glenn Mueller: So-
Mark Zandi: Right.
Glenn Mueller: ... and the worry about a recession actually interested... You're the guy I wanted to ask this question to is when I look back to the '60s, every time we had a "recession," both employment and GDP go negative, right?
Mark Zandi: Yeah.
Glenn Mueller: This time, while I can easily see GDP going negative later this year potentially, I don't see employment growth going negative because we got so many jobs out there that are unfilled and everything else. Anybody that wants a job can certainly go and get one. Now, that the COVID money's gone and everything else, people can't live on nothing, can't live off the government. Is it really a recession if employment growth is positive and GDP is negative?
Mark Zandi: No, no. I... You're speaking my language, Glenn. Yeah.
Glenn Mueller: [inaudible 00:55:28].
Mark Zandi: Yeah, exactly. I totally agree with you. I mean, I think businesses are very, very reluctant to lay off workers because on the other side of whatever it is we're experiencing now, they now we're going to have a boatload of difficulty of hiring people and retaining people. Just the given demographics, it's going to be very difficult.
Glenn Mueller: Right.
Mark Zandi: This is actually a statistic. We have a statistics game. We won't play the game, but I'll throw it out there and see if people know the answer. The average monthly job growth over the past decade has been 170K. You know, that-
Glenn Mueller: Yeah.
Mark Zandi: ... go back to 2013-
Glenn Mueller: Right.
Mark Zandi: ... 10 years, pandemic, everything, 170K. Guess what it's going to be over the next 10 years according to our forecast and most others, CBO, everyone that does this forecasting just given demographics and what it means for the growth in the supply [inaudible 00:56:23]?
Glenn Mueller: This is net you and me retiring with other people coming-
Mark Zandi: Yeah.
Glenn Mueller: ... to take our place, right? It's going to be-
Mark Zandi: Yeah.
Glenn Mueller: ... I'm going to say probably just slightly less than that, maybe 150.
Mark Zandi: 75K at best.
Glenn Mueller: Half-
Mark Zandi: Half-
Glenn Mueller: ... [inaudible 00:56:35].
Mark Zandi: Well, it's 170, 170 now, 175, now it's 75. You know, something like that.
Glenn Mueller: Wow. Okay, yeah.
Mark Zandi: It gives you a sense of magnitude.
Glenn Mueller: I know it was a lot less.
Mark Zandi: Yeah, a lot less, a lot less, a lot less. By the way, these forecasts were done well before the pandemic. If you go back and look at our forecasts 10, 15 years ago, because you... We knew the Boomers are... you and I are going to retire right at some, well, you'll never retire, and these guys are going to have to kick me out. I'm not retiring.
Cris deRitis: You're not retiring.
Glenn Mueller: Right. Right.
Mark Zandi: Anyway, okay, so all right. We just focused on the weak link in the CRE market-
Glenn Mueller: Right.
Mark Zandi: ... poster child for all the concerned office, and we came to the conclusion that this ain't great. It's going to be an adjustment. Certainly there's going to be a lot of losers in all of this, but it's not existential for the financial system or the broader economy.
Glenn Mueller: Correct.
Mark Zandi: I mean, we kind of came to that conclusion.
Glenn Mueller: Correct.
Mark Zandi: Okay, fine. Okay. What... Then, the rest of the CRE market what else out there... Is there anything because I'm looking for things that could kind of hurt the economy, undo the economy? Is there anything else out there scouring? I know you scour the physical markets, you scour the capital markets, you look at the private market, you look at the public market. Anything else out there that is making you nervous about-
Glenn Mueller: Not only no, but absolutely no and-
Mark Zandi: Absolutely no.
Glenn Mueller: ... and I'll tell you why, and I can start from worst and go to best or best and go to worst. You pick.
Mark Zandi: Marisa, your choice. Yeah.
Marisa DiNatale: Let's go worst to best.
Glenn Mueller: Okay.
Marisa DiNatale: Let's end on a high note.
Mark Zandi: Let's end on a high note.
Glenn Mueller: Okay, good. All right, so I think the worst out there is hotel-
Mark Zandi: Okay.
Glenn Mueller: ... and the reason for that is bifurcate between the resort and leisure and off and business hotel. Business hotels, we've closed a number of them in New York. Things are kind of bad there. The one thing that happened, the little detail that a lot of people don't understand about hotels is when... I own a hotel that's flagged by Marriott. Marriott requires me every 10 years to completely remodel the place at about a hundred thousand dollars a key, so I am escrowing it every year to be able to do my hundred-thousand-dollar room remodel at the end of 10 years. Marriott doesn't pay for that.
In the pandemic, they said, "Okay, you can use that escrow money to make your mortgage payment, to keep things going, all that kind of stuff. Now, it's like, 'Okay, now things are back. By the way, your remodel's going to be due again anyway." I think from a... We're going to see a number of owners who don't have the capital put those properties up for sale. We have, if you will, I've used this term now for a couple of years, we've got the COVID have and the COVID have not properties. They're going to do it.
Now, everybody's raising their rates like crazy as well, and everybody used the COVID money they couldn't spend to go out and do leisure travel. That's starting to fall off. With the high dollar value, international travelers weren't coming into the U.S. either, so that kind of... The U.S. people coming in kind of balanced that out. I think now that especially if you have a recession, people back off here in the U.S. and the international traveler still aren't coming, so to me, hotel is the number one most risky of the property types after office.
Mark Zandi: The business travelers, I haven't been following, are they making their way back into it?
Glenn Mueller: Yeah, but you're no longer in your office. Someone is not coming to see you-
Mark Zandi: That's true.
Glenn Mueller: ... anymore. As a matter of fact, I just read a new little report about the fact that now most people are at the office Tuesday, Wednesday, Thursday, so Tuesday, Wednesday, Thursday travel has picked up, but Monday-Friday is getting worse, not better, too. Now, you got a hotel and hotels normally live off of... The historic number used to be a... 62% was break-even occupancy. We've got the leisure hotels up in the 80s and the business hotels still in the pick the city 50s, 60s type of thing. Hotel to me is the next riskiest thing, but there have been dozens of hotel opportunity funds started and that kind of stuff. I'm actually invested with some of the Marriott lineage in a little opportunity fund in that area to try and pick up some great deals.
Mark Zandi: Well, this might be a good spot to do a little bit of a deviation and we'll come back to your list of worst to best-
Glenn Mueller: Right.
Mark Zandi: ... and that is in these large urban centers where people are leaving, remote work is playing a role. These office towers are going empty. That's also affecting retail, and some of these like... San Francisco's now the poster child for this. You got things kind of feeding on themselves, so property prices are down. That's affecting tax revenue and the ability for local government to provide public services, including safety, so crime is becoming more of an issue. Homeless is more of an issue, and you're getting into this kind of self-reinforcing, very negative dynamic.
Glenn Mueller: Right.
Mark Zandi: What's your sense of that? Is that... How big a deal is that? Is there any turning that around?
Glenn Mueller: I think it's potentially a big deal. The younger generation has loved living downtown, working downtown, doing all the things they're doing, and as this crime goes up and stuff like that and restaurants aren't open every day and all those kinds of things, they're thinking about moving out to the suburbs. One of the neighbors over here, a young couple, newly married, living the life downtown, both working downtown for big firms, and she walked out to her car one day and got robbed by gunpoint. She says, "We're out of here." Bought a house... actually bought his grandmother's house here on the lake, and now they're living here.
Right now, the biggest demand out there is for single family home rentals out in the submarkets. If they don't have the down payment to buy the house they're renting, so that's [inaudible 01:03:29] yeah, and you're right. Cities have a major financial problem with the fact that the revenues, and I saw a number recently like tax revenue down almost a trillion dollars in major cities without the taxes and the rental income and the sales taxes from people going out to lunch and shopping and everything else. Yeah, that's the other big risk-
Mark Zandi: Yeah.
Glenn Mueller: ... that's there.
Mark Zandi: Yeah. Okay, let's go back to the worst to the best. Can I take a crack at guessing what the next one is?
Glenn Mueller: Sure.
Mark Zandi: Warehouse?
Glenn Mueller: No.
Mark Zandi: Oh.
Glenn Mueller: I would say retail.
Mark Zandi: Oh, you'd say retail. Okay-
Glenn Mueller: Yeah.
Mark Zandi: ... interesting.
Glenn Mueller: Right, and the big reason for that is retail got hurt after the Great Recession and the Amazon effect and all that kind of stuff. We slowed down new supply substantially and we converted a lot of retail. As a matter of fact, the best thing that happened to retail was marijuana. You took all of the old crappy retail and you turned into a marijuana dispensary. My first job when I graduated because I was in... There was a big recession in 1974 and I couldn't find a job, so I just turned around and applied to and got into grad school. I worked as a mechanic at the Ferrari dealer in Denver-
Mark Zandi: Wow.
Glenn Mueller: ... that like a mile from the DU campus, and it's now a medical... it's now a marijuana dispensary.
Mark Zandi: Oh, amazing, amazing.
Glenn Mueller: Retail has been really restricted in supply. You have the COVID haves and COVID have nots. The COVID have, if you were deemed a necessary retailer, which was building materials, obviously grocery stores, all that kind of stuff, your sales went up and when your sales go up, it's like, "Hey, I'm doing something right. I need more stores." They are Home Depot, Lowe's building new stores, doing that kind of stuff. Hardware stores doing well, and so last year 80% of all new retail built was pre-leased, fast food chains, all that kind of stuff. All doing really well. We also converted a lot of stuff over a decade ago from retail into some office, into now close-in warehouse, other things like that, so retail is in kind of a balancing act. I put that next only because if we do have a recession, their sales go down. Some of them can't afford to pay their rent kind of thing-
Mark Zandi: But then-
Glenn Mueller: ... [inaudible 01:06:15].
Mark Zandi: ... it's going from worst to best and that sounded pretty good to me, so it's going from best to bester to bestest.
Glenn Mueller: Right, right-
Mark Zandi: Yeah.
Glenn Mueller: ... so next in line is industrial-
Cris deRitis: Industrial.
Glenn Mueller: ... and industrial, the Amazon effect created huge, huge benefits as you know, and every retailer if they're going to survive, or big retailer if they're going to survive, needs internet presence, so they need warehouse space. Amazon was gobbling up so much of it. In 2019, Amazon leased 25% of all space leased in the United States. Think about this, we're going along at over five years, 8 to 9 to 10 to 11 to 12% of retail sales were online, right?
Mark Zandi: Mm-hmm.
Glenn Mueller: Then, COVID hits and it goes to 18.
Mark Zandi: Mm-hmm.
Glenn Mueller: That's a 50% increase. What did Amazon do? Well, demand's up 50%. They went out and just started leasing everything under the sun, building stuff themselves, everything else, and then COVID ends and it drops back to 12.5%, so we're back on the old trajectory. They go, "Oops, we took too much."
Mark Zandi: Well, that's why I say-
Glenn Mueller: Now-
Mark Zandi: ... that's why I said warehouse. That's what I was thinking-
Glenn Mueller: Right-
Mark Zandi: ... when I said warehouse.
Glenn Mueller: ... and so they said, "Oops, we took too much," and they put it up for sublease or walked away from the lease and stuff like that, but then, all the retailers who weren't able to beat Amazon out-
Mark Zandi: Got them?
Glenn Mueller: ... got them-
Mark Zandi: Oh [inaudible 01:07:34].
Glenn Mueller: ... and by the way, every time a state legalizes marijuana-
Mark Zandi: Yeah.
Glenn Mueller: ... it immediately takes care of the warehouse problem, right?
Mark Zandi: I'm sensing a theme here, yeah-
Glenn Mueller: Yeah, so-
Mark Zandi: ... and maybe they can turn those office properties into something, you know-
Glenn Mueller: Right, right.
Mark Zandi: ... marijuana.
Glenn Mueller: Wow, you... Bingo, Mark.
Mark Zandi: Bingo. T
Glenn Mueller: You could be the icon savior of office with that idea. I love that, right?
Mark Zandi: Maybe could marry the two somehow.
Glenn Mueller: Maybe we could make... Take the windows out and make them greenhouse grow spaces.
Mark Zandi: Exactly.
Glenn Mueller: Yeah, I agree. That'd be perfect. Yeah-
Mark Zandi: Yeah.
Glenn Mueller: ... so warehouse... In Denver, when we in Colorado legalized marijuana over a decade ago, rents were three bucks a square foot. They went to six. The break-even cost to build new was about 450 a square foot.
Mark Zandi: Uh-huh.
Glenn Mueller: We went to a hundred percent occupancy and we grew, grew, grew, grew, grew. Everything was great, and then other states started to legalize, so we were having a lot of marijuana tourism, so it started to fall off. We've now had marijuana companies actually go out of business-
Mark Zandi: Yeah.
Glenn Mueller: ... so all of a sudden we have a... We were building warehouse. We're now at... National average, we're at 11 bucks a square foot for warehouse space. Now, costs have gone up, too, but all these retailers are needing that. One of the things we're really short on is a cold storage warehouse. The average cold storage warehouse for food and stuff like that, 40 years old in this country-
Mark Zandi: Hmm.
Glenn Mueller: ... and so we need a lot of new refrigerated warehouse space. The demand there is like off the charts actually because Amazon's delivering and it has to come from a refrigerated warehouse, right?
Mark Zandi: Right, yeah.
Glenn Mueller: I think industrial does well, and then the number one best property type over the next minimum of a decade is apartments, and it's because, and you probably-
Mark Zandi: I'm sorry, what? [inaudible 01:09:31]-
Glenn Mueller: Apartments, number one.
Mark Zandi: ... apartments. Oh, apartments. Yeah, okay.
Glenn Mueller: We are 6.5 million housing units short in this country according to the latest National Association of Realtors number, and that's living units, whether it's ownership or rental.
Mark Zandi: Yeah.
Glenn Mueller: Okay, because... I used to be a home builder back in the '70s and '80s and we had a saying back then, "Carry kills." If I built a spec house, and back then this is when interest rates were high, if you remember 10-year Treasury hit 15% in 1980, right? '81.
Mark Zandi: Yeah.
Glenn Mueller: If I finished a house and I didn't sell it in nine months, the interest on my construction loan ate up all my profit. All of the major home builders in the Great Recession when they were sitting on inventory that wasn't selling, they went, "Okay, we're not going to put a hundred houses up in the Denver market hoping that they sell. We're going to only start the next house once one sells." Our product went from 2 million a year to 1 million a year, to half, so over a decade we were short a million units a year almost. We had the big growth in the Millennial generation that soaked up some of that, and we built a lot of apartments downtown. There were almost... When I was... My first job was at United Bank of Denver in Downtown Denver.
There was nobody living downtown. You could have laid down on 16th Street, the main street. That's the mall now at 6:00 at night and not gotten run over. Everybody... You stopped working right at 5:00. You had a drink at a bar, and you were back home at 6:00. That was it. Now, they built thousands and thousands and thousands of apartments in downtown and it's thriving. It's a 18-hour, not 24-hour, so there, whether it's apartment or ownership, it's there. Really simple math, my students say, "Should I buy a house now?" I go, because I'm going to wait for interest rates to come back down and then I can afford more, I go, "Let's do some simple math here." For a round number, you make a hundred thousand dollars a year. 30% of that can go towards your mortgage, so 30 grand a year towards a mortgage. When mortgage rates were 3%, 30 grand divided by 0.03 means you can afford a million-dollar mortgage. Now, rates are 6%, right?
Mark Zandi: Mm-hmm.
Glenn Mueller: 30 grand divided by 0.06 is a $500,000 mortgage. That's half, and yet housing prices really haven't come down much. Why? We are short and all the young people that my grad students who have bought homes, they're like, "I'd like to move to another home, but if I buy a home of the same price I sell for, my mortgage payment's going to double. I'm not going to move." We've just shut down or slowed that transition move up or to a different place or whatever. I think we've slowed housing mobility with these higher interest rates.
Mark Zandi: Yeah, the only thing on apartments is in the near term, there's some adjusting to do, right? You've got-
Glenn Mueller: Always.
Mark Zandi: ... about a million... We got a data point this week from Census, so there's about a million, a record number, a million apartment units in the pipeline going to completion. They got all bottled up because of the pandemic and supply chain labor market issues.
Glenn Mueller: Right, yeah.
Mark Zandi: They're coming to completion in the next 12, 18 months and you got demand that's weak because rents so high given the surge back a year ago that you got demand destruction and households haven't been forming. I agree with you about apartments over the next 10 years, and that's how you couched it, but it feels like in the next year or two there's some adjusting to do.
Glenn Mueller: Oh, I absolutely agree there, and I'll give you the fun example. One of the young people that worked for me, she was in a 500-square-foot apartment in Denver in the newest building with every amenity under the sun, full LA Fitness-sized gym, swimming pools, commercial kitchen with a guest chef that came once a week for a cooking class. She's in 500 square fee, two grand a month. COVID hits and she's like working on her bed every day, and so she and three other friends rent a house out in the suburbs for a year. Then, COVID's over and so she comes back, goes back to the same building. "I want my apartment back." Great, but now the rent's 2500 bucks. She goes, "Wow, 25% increase. I can't afford that." She doubles up with another friend and gets a two-bedroom for three grand, and so we just took demand for two housing units and turned it into one.
Mark Zandi: Right.
Glenn Mueller: I think that big increase in the major high-growth cities, there... They had a 12 to 25% increase in rents. Rents are going to fall there. In the Midwest, as you've probably looked at those numbers, too, they had like a 5 to 6% rent increase, and they're still getting that because they didn't go crazy from that standpoint. I agree that we got a correction in rent growth happening, but the demands are enough that if the rate comes down enough-
Mark Zandi: Be back.
Glenn Mueller: ... no problem. You know-
Mark Zandi: [inaudible 01:14:41].
Glenn Mueller: ... my youngest son's an airline pilot. He bought a house to remodel and rehab and then sell and flip. I don't know where he got those ideas in his head.
Mark Zandi: [inaudible 01:14:55].
Glenn Mueller: Then, he knew that it was going to be worth literally a million and a half dollars when he finished. Then, the whole rate increase started and everything else, and you're going, "You know what? I'm just going to try the market for the heck of it." He puts it on the market for what he thought it would be worthy at the peak a year ago. Sells it in four days-
Mark Zandi: Wow.
Glenn Mueller: ... for full [inaudible 01:15:20]-
Marisa DiNatale: Wow.
Glenn Mueller: ... in Denver because the demand it... He was in the right neighborhood. He was in the right place. I don't know where he learned that, either, other than he got his undergraduate degree in real estate-
Mark Zandi: [inaudible 01:15:32].
Glenn Mueller: ... with me. You know, he was in the right place at the right time, and now he's out there looking and having a hard time finding something. Fortunately, he's got a duplex that he can live in while he's-
Mark Zandi: Well, that was a great tour around the CRE market, and I have to say I feel actually a lot better after this conversation. Cris, what do... Cris is the is the lugubrious one of the bunch. Any pushback, Cris? I mean, you must be feeling better, too. No?
Cris deRitis: Yeah, a little better.
Mark Zandi: A little better. Okay. All right. Very good.
Cris deRitis: Except for office.
Glenn Mueller: Price [inaudible 01:16:08]-
Cris deRitis: Price pessimistic of office.
Glenn Mueller: Right, price corrections, like I say, I think that outside of office, all the other property types are going to be generating enough rent that they can pay their mortgages. Although we'll see a few unique things happening here and there where somebody bought at the highest price and now their mortgage is coming due. With a price correction, let's say it's 10% in apartments and industrial and maybe 15 in retail, and all of a sudden they can't afford the higher mortgage rate, but outside of office, I think we're going to do fine.
Mark Zandi: Okay. Well, with that, I'm going to take it. That's good news. I'm going to run with it because it makes me feel better. I want to thank you, Glenn, for taking time with us today. It was very helpful and it's good to see you. I hope to have you back on-
Glenn Mueller: Absolutely, yeah.
Mark Zandi: ... to get you back on.
Glenn Mueller: Yeah.
Mark Zandi: That'd be great.
Glenn Mueller: Great. Yep.
Mark Zandi: Well, dear listener, with that we're going to call this a-
Glenn Mueller: Oh, ooh-
Mark Zandi: ... a podcast.
Glenn Mueller: ... actually one last really quick thing.
Mark Zandi: Yeah.
Glenn Mueller: Tell me whether you agree with this. The world is still just awash in cash. I'm dealing with... If you look at the institutions, they've all got funds, opportunity funds to go in and do things with. I've been working in the family office, wealthy family thing. They've all got cash and they're all trying to do opportunity stuff, et cetera, that anytime there's a deal, it's going to... that's going to sell, and that I think will keep a little bit of a floor under too much of a price drop [inaudible 01:17:47]-
Mark Zandi: Yeah, the only thing I worry about-
Glenn Mueller: ... [inaudible 01:17:48].
Mark Zandi: ... there is in terms of credit. The banks are tightening and they are going to be more cautious in extending out credit, so-
Glenn Mueller: But, I mean, a lot of stuff is selling. It's amazing. My son sold his house, million and a half cash buyer.
Mark Zandi: Is that right? Cash buyer.
Glenn Mueller: Yeah.
Mark Zandi: Really? Wow.
Glenn Mueller: Yeah.
Mark Zandi: Okay. All right, but I think that's where there is cash, but I think in terms of the availability of credit, at least-
Glenn Mueller: Is it enough for on leverage purchases is the question.
Mark Zandi: Exactly, and that suggests some price adjustment here. I can't imagine we're not going to see some-
Glenn Mueller: Oh yeah, no.
Mark Zandi: ... estimate price. Some increase in cap rate, but yeah, to your point, I'm onboard. I think your optimism is well justified, but before anyone dashes my optimism, I'm going to call this a podcast. Thanks, Glenn. We'll talk to you-
Glenn Mueller: All right.
Mark Zandi: ... soon. Dear listener-
Glenn Mueller: Thank you, guys,
Mark Zandi: ... we'll catch you at the next podcast. Take care now.
