Steve Peacher: Welcome, and thanks for tuning in I’m Steve Peacher, President of SLC Management, this is the first and what we expect to be an ongoing series of short podcast we're calling “Three in Five.” Three relevant investment questions posed to our experts across SLC Management and our affiliate managers – BentallGreenOak, Infrared and Crescent Capital. All inside of five minutes.
I'm joined today by Sonny Kalsi the CEO of our global real estate manager BentallGreenOak. Sonny thanks for taking the time today.
Sonny Kalsi: Thank you very much for having me.
Steve: Sonny first question: as we emerged from the pandemic the consensus economic outlook increasingly calls for rapid GDP growth, accelerating inflation and rising interest rates. What does that mean for the outlook for commercial real estate?
Sonny: Well Steve if we indeed are an inflationary environment that's actually generally pretty good for real assets. Especially those which have an ability to pass through increases in rent. So, what are some good examples. Probably the most obvious is multifamily you know we're generally rents are one year in duration and so you have a real ability to index there. A lot of industrial properties also have CPI adjustments and sometimes with a CAP, but they have an ability to increase with adjustments to CPI. So, those also do generally pretty well. The asset classes, which are tougher are ones which are more bond like in their nature, so true long term triple net leases, those don’t do as well, just like bonds don't do as well in the inflationary environment. Office is tougher offices, tougher and a lot of ways, but office is tougher just because you've got different lease durations. And you know your ability to index leases and increase them are going to be very much dependent upon the help with that lease term is underneath them. But overall, I would say it's good for inflation is good for real estate.
Steve: Thanks Sonny. Second question you just mentioned office and every day, it seems we hear of another large company moving more of its workforce to a hybrid model requiring less office space. Examples include JP Morgan IBM, Ford, a number of large tech companies. As an investor, are you a better buyer or a better seller of office properties in this environment?
Sonny: Office is a definitely a tricky asset class, is what I’d say. And I'd say for every JP Morgan there's an Apple, which just recently announced a big new billion dollar campus in the Raleigh Durham area. So, I think, look at the reality is if we're going to - the future of office is going to be adjudicated over the next three to five years. That's not what most people want to hear, we want an answer now, right we're used to the 24 hour news cycle, but that's not where we are.
I would say our general view is we see core office demand across the board coming down about 10% from a combination of people taking less space, people giving employees more flexibility to work from home, etc. But that's going to be very uneven – It's going to be uneven by company, it's going to be on the even by geography, etc. And so I would say, to answer your question, we're a seller of some stuff, we're definitely going to be a buyer of other stuff.
But we're going have to move slowly here, because this, this is the future is going to be murky for a while. But I will tell you I'm really happy to be sitting back to my office today.
Steve: Great. Okay third question: industrial properties or warehouses have been the best performing sector within commercial real estate over the past few years. But CAP rates for good industrial properties and now are now around 4%. So, is now the time to underweight the industrial sector?
Sonny: It's a really fair question right, you get worried whenever you see so much money going in on one side of the trade, right. I would say our view, right now, at least in the near term, which is probably the next three to five years is the demand side is just too strong, meaning there's just such huge demand for industrial property. Whether it's dry logistics, cold storage, etc. As we see this big, you know, seismic shift going on from basically you know physical retail to online. The CAP rates are low, but we expect rents, are going to grow pretty significantly. Above CPI and so, you know, I think our view is that the near term things look good, especially so in Europe and Asia, for example, is certainly relative to the U.S. But I would say, even in the U.S., you know, if you look at secondary and tertiary markets, a lot of where the demographic shift is happening, those are very underserved from a logistics/industrial perspective. So, our view is that some of those other markets might outperform the primary kind of gateway markets for industrial. So from our perspective it's definitely not the right time to underweight, we’re still kind of fully locked and loaded.
Steve: Okay, one final bonus question: I know you're a big music fan and I've seen that picture of Biggie Smalls on the wall of your office. So my question is who is your favorite rapper?
Sonny: My favorite rapper is definitely Biggie Smalls you know, unfortunately, he was he met an untimely demise in 1997. So, I do listen to a lot of Biggie. I also listened to a lot of Snoop Dogg. Snoop’s still alive and I had the pleasure of meeting him a few years ago. And the thing I’d say both of them generally is they’re both generally happy rappers. They rapper about happy things. You know, like having your mind on your money and your money on your mind. All good things.
Steve: Well that's definitely what we all need after the past year, some happy rapping. Thanks Sonny for your insights and thanks everybody for listening in to our first episode of “Three in Five”.
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