That.
Let's jump right in on inflation, deflation
and some of the things that Danielle was talking about.
Where are you? Where do you think we're headed?
Well, you know, people ask all the time, you know, we're going to have inflation.
Are we going to have deflation? And I say yes.
I think we're going to have both.
And I think we can have both at the same time.
And people have a hard time getting their mind around that
because they only know how to think of numbers in terms of the dollar.
And yet, you know, if you look at things like real interest
rates versus nominal rates, where you look at real wages versus nominal wages and,
you know, not to get wonky or anything, but basically nominal is just a number.
So it's a number.
You know, you and I are old enough to remember where if you made 50,000
or $100,000 a year, you were upper middle class, That was a good income.
Well, it's not that way anymore.
I read an article
the other day that you lower middle class just to scrape by in San Francisco.
$300,000 a year.
Well, it's not it's not that the lifestyle got so much better.
The work became so much more valuable.
It's that the dollar that you're paying for, it all went down.
So in terms of your lifestyle, in terms of your purchasing power, you deflate it.
You lost the ability to purchase.
And yet in terms of the nominal, the amount of dollars actually
coming in, flowing through your hands, the numbers went up
and you see that with your tenants.
Your tenants might be paying more rent and earning more wages,
but they're getting smaller places
and they're having to pay more for their cost of living.
They're struggling.
I mean, it's really I mean, you
probably know a lot more about it than me just managing your portfolio of tenants.
But, you know, gas and food and health care, everything is gone up.
And college tuition, you know, when you get to that stage in life
raising children, I mean, just everything costs more.
And even though your wages are up, your cost of living is up more.
So can you break it down for me? What?
So we understand inflation and deflation as But what is stagflation?
Because that's where I start to get confused. Yeah, that's perfect.
So stagflation is where you have nominal growth,
where the numbers get bigger, but the the actual productivity goes down.
And the way I explain it is if you had,
say, an economy that was producing or a business that was producing
a million widgets at $100 a widget,
then you'd have $100 million company.
And let's say you needed 10,000 employees to do that.
And that means each employee creates, what, 100 widgets,
you know, a year or whatever the number is, whatever their productivity is.
But now, because of inflation, you actually have to sell those widgets
at $108 or $120.
I'm sorry, $120.
So now you'd say, well, if I sold $1,000,000 widgets and $20
million company, but I lose some market share when I raise the price,
some people can't afford the 120, so now I'm only selling 900.
Well, if you do the math and this is tell me right out of the presentation
I did on the summit, if you do the math, the 900 times
120 is 108 million.
So in other words, your company has grown nominally
by 8% because of 20% inflation.
Your price went up from $100 a widget to 120.
You sold 10% less widgets.
But when you do the math, your sales
in terms of numbers, nominal dollars went up 8%.
So you look like you grew.
But based on the same level of productivity, you need 10% less people.
So you lay off 100 or 1000 people.
Now you only need 9000 employees instead of 10,000.
And so and instead of selling a million
widgets, you're only selling 900,000 widgets.
So what the world got in the real in the real world, what the real world
got was less jobs and less products.
And yet it looks like the business grew that stagflation when the numbers go up,
but the supply goes down and the economic activity goes down.
And that's how inflation distorts what's going on.
It's very hard as an investor, it's very hard
as a business person to know what to do in that kind of an impact.
What are you guys seeing and where's all this gauze, all this madness going,
you know, is these markets and these these real estate classes, they're all
of course, they're all very different independent of each other.
But, you know, what do you what do you see?
What are the
what are some of the bigger trends you're seeing right now with your data?
Because you guys are you guys are rolling out this quarter right now, right?
Yeah, we just rolled out actually
are the most recent quarter data and our forecasts have just been updated.
And realistically, you know, it really is you know, we're seeing so many different
storylines depending on the specific asset type in terms of
obviously just the big headline, industrial
was kind of the darling.
Throughout the pandemic, we saw record levels of absorption,
leasing, construction.
Amazon alone here in Dallas, Fort
Worth is the largest industrial user of space in the
in the Metroplex with over 18 million square feet.
Just to put that into perspective, I like big companies,
like FedEx has like four and a half billion.
So they definitely dominated the market.
But the latest headlines I've seen in a in a few publications is The Sun.
You know, they might have overextended themselves a little bit.
But in terms of where the market is, in terms of industrial, I think we're just
we're going to see as long as demographics is destiny,
kind of like the multifamily market as well.
You know, when you take these high growth Sunbelt,
you know, non gateway markets and just the number of people
moving, Dallas Fort Worth is adding 120,000 people a year.
In terms of the office, I think there's a lot more question marks
with the office market than we have in the we anticipated.
Obviously, the hybrid return to work,
you know,
just has really caused a lot of uncertainty.
One area I'm looking at really closely is the amount of sublease
space on the market.
We continue to see just a groundswell
of sublease space just really affecting rent growth.
Very few metropolitan areas are experiencing any any true rent growth
in the office space.
Multifamily, I think, you know, there's been a lot of it's definitely
we're seeing the the strong markets I think are getting stronger.
Those Dallas, the Nashville, Charlotte, Phenix,
they're in a strong position and the retail
you know what everyone thought retail was dead
I call retail the Lazarus of asset classes.
You know, every time you write it off, it just seems to reinvent itself.
You know, we got a lot of obviously, e-commerce, total retail
sales, eight e-commerce accounted for 18% during the peak of the pandemic.
Now, that is kind of gone back down to a normal about 14%
kind of where we were heading into pre-pandemic levels.
So for those people, you know, we get this question all the time, right?
I'm waiting for the crash and waiting to buy for the crash or for the adjustment.
What do you tell them?
You know, I got a client who's been waiting on a crash now for nine years.
It's it's it's really interesting.
You know, it's like we don't have a crystal ball.
Nobody does.
It's whether you're buying crypto,
whether you're buying or whether you're buying where the state.
Nobody has the crystal ball, right?
We all look at the same fundamentals.
We're all listening to the same analysts, experts, professionals.
I often say to people suddenly when they're looking for their family home.
So I'm not referring to investment, I'm looking to family,
which is also an investment.
You have to look at the next 20, 30 years.
And then if I go back to 2008, when we had the economic subprime crisis,
most people that lost their homes back in 2008 had very toxic debt.
So the way I see it is if you can buy a home now,
even if you're going to pay 10% over what you think it might be worth or 20% over
what you might think, it's what if you're holding it for the next ten, 15, 20 years
and you have great debt and you can weather a storm no matter
what happens, buy now on hold because sales of real estate, it's all cyclical.
We go up, we go down, we go through market cycles.
And as long as you can buy, hold
and you're not going to end up giving the keys back to the bank,
put your family first and don't think about the crash
because you're never going to time it. Right.
And when it does crash, you're probably not going to want to buy any either
because then you're going to be trying to find a bottom of the market and it's
just a bad cycle and you can't time anything perfectly.
I'd love to hear where you think things are heading
so people can kind of wrap their head around that.
So as long as you don't hold me to it now.
So I'm a very, very half full class kind of guy.
My door is always awful.
So I'm a realist, but I'm always very optimistic.
So if I were to give you my $0.02, I think we're going to see the rates rise
three times between now and the end of the year.
I reckon we see a three quarter point raise between now
and again the end of 2022.
I think inventory will become a little more available as the year goes on.
I think that if we see rates go up, we hope that we see
prices come down a little so that it somewhat evens out.
I don't want to see the market keep going up.
I want to see the market level off.
I think we're already starting to see that.
And I just want, you know, the market to continue to remain steady
by the end of this year.
I think we're going to see,
again, rates up probably around at point inventory more available.
But I do believe the buyer demand will remain in place and I do believe
the market will remain strong.
Most people do think about the interest rate,
but really they're thinking about how much can they afford it?
Yeah, what's their monthly payment method? Yeah.
So is that that must be going on right now, huh.
It is. It's going up quite a bit.
So even for us where we are, if we sold our house and let's, let's
call it for a million in our neighborhood, then at that point,
if we want to
laterally move to a similar home or maybe want to upgrade
a little bit to a better home,
you can't find another one of my houses for the same price to get a similar house.
Right.
I'm either paying are going to buy another million to $1.4 million home.
And I also have a higher interest rate.
So if I'm at a 3% rate now, interest rates are refinanced or something
over the last couple of years, I'm going to sell my home.
Sure, I'm going to scoop all that equity out
that a lot of people have built up over the last two years.
But I won't have
to put it right back into the next house, but have a higher payment event
just because my rates jumped another
almost two points depending on where you're at, including another couple
hundred grand extra and purchase the purchase price.
So my payment might go from, you know, 4000 a month
to $7,000 a month that quick to get us.
So not that much better of a house depending on where you're at.
And that's a big number
just because some people might live in areas where homes are 2 to 3 or 400,000.
But in the Seattle market, the median home price thinking, Charlie, is almost
right around a billion.
You know, in a normal housing market where you can, you know,
upgrade over time, that's such a big difference in the payment.
It's going to it's going to reduce the number of listings, I would guess.
And it's also it's going to keep people in place.
So it's going to reduce the migration
because they literally they probably have to move out of the area.
All right.
Yeah.
Yeah, right. And find a cheaper area. Yeah.
Like in some of those cheaper areas are becoming cheaper.
So maybe you were moving from a better location to a worse
our location just to get just because of affordability purposes.
Also, there's some people that are selling their home, scooping that equity,
and then maybe they're going to go rent and go see what the market does too, which
I think that might also not be the best play depending on what your beliefs are,
what's going to happen in the market.