Speaker 0: Welcome to a special edition of the Weekly Take.
Speaker 0: Twenty twenty six is still young, but after an eventful first quarter in terms
Speaker 0: of global current events, it's time to check-in on the state of the economy
Speaker 0: and update our outlook on commercial real estate.
Speaker 0: On this weekly Take Extra, we're joined by CBRE's global head of
Speaker 0: research, doctor Henry Chin, to share up to the moment insights
Speaker 0: across the business.
Speaker 0: My good friend, Henry Chin, welcome back to the show.
Speaker 0: Great to see you.
Speaker 1: Good to see you, Spencer.
Speaker 1: It's always good to be back to the show.
Speaker 0: Always great to have you back, and these are some of our most popular
Speaker 0: recordings.
Speaker 0: Let's just start big picture.
Speaker 0: We're recording this at the end of April.
Speaker 0: We have a lot of macro noise going on today.
Speaker 0: Interest rates are up.
Speaker 0: We're feeling uncertainty from investors.
Speaker 0: Inflation is staying sticky.
Speaker 0: Before we get into the individual asset type, just give me the big picture.
Speaker 1: I have to say, Spencer, global real estate market and the US
Speaker 1: commercial real estate market continue to perform very, very well
Speaker 1: in the first quarter of twenty twenty six.
Speaker 1: It's not only coming from the investor capital market side that these in
Speaker 1: performance has been so strong.
Speaker 1: And that even when we are looking at global macro pictures,
Speaker 1: yes, we do see some slowdown, revising down a bit, but nevertheless,
Speaker 1: I think the recovery continue in our space.
Speaker 0: Well, that's great to hear, Henry.
Speaker 0: The way that I try to frame it is that you have the news
Speaker 0: of the day on one hand, and then you have what I call the
Speaker 0: math on the other.
Speaker 0: And I think what you're saying here is, Henry, is that notwithstanding the fact
Speaker 0: there's some scary news out there, we talked about inflation, interest rates, obviously, the
Speaker 0: wars, the math as measured by fundamentals
Speaker 0: in terms of people leasing, people selling, those are still going strong.
Speaker 0: Fair statement?
Speaker 1: That's a fair statement.
Speaker 1: Real estate is all about demand and supply.
Speaker 1: Right?
Speaker 1: So therefore, we look at a fact, as you say, the scientific methods.
Speaker 1: Real estate still doing really good.
Speaker 1: This asset class is really resilient.
Speaker 0: A couple of the stars of the show of real estate in the last
Speaker 0: couple of years, of course, have been industrial and multifamily.
Speaker 1: Mhmm.
Speaker 0: But we have seen a little bit of softness in the last few quarters
Speaker 0: in these sectors.
Speaker 0: What are we seeing today?
Speaker 1: Industrial.
Speaker 1: From the second half of last year, the leasing activity has
Speaker 1: picked up, and picked up particularly good quality of
Speaker 1: asset and the mega centers.
Speaker 1: I think the momentum has continued in first quarter of
Speaker 1: this year.
Speaker 1: We see the fourteen percent uptick for the leasing activities
Speaker 1: for the logistics basis, okay, which is the strongest for the
Speaker 1: first quarter for a number of years.
Speaker 1: The second one I want to highlight here, we are upgrading our whole year
Speaker 1: leasing activities by to to eight percent, which means
Speaker 1: we are going to see over a billion square footage of leasing
Speaker 1: transactions in twenty twenty six, which also means twenty
Speaker 1: twenty six is the strongest leasing activity on record.
Speaker 1: So, therefore, this is real.
Speaker 1: I think that industrial leasing is coming back.
Speaker 1: It's largely driven by three p l and the manufacturing activities.
Speaker 0: Let's dig into that in two ways, both macro and micro.
Speaker 0: Mhmm.
Speaker 0: One, I wanna go back to something you said earlier that we're seeing a
Speaker 0: disproportionate amount of this leasing in new facilities.
Speaker 0: Yes.
Speaker 0: So what's what's happening with the old facilities?
Speaker 0: That's that's question a.
Speaker 0: Uh-huh.
Speaker 0: And question b is, how how real is this manufacturing reshoring, and
Speaker 0: how much is it driving industrial demand?
Speaker 1: It's very interesting.
Speaker 1: I think the flight to quality also happen in the industrial spaces.
Speaker 1: So all the facilities, the landlords are offering more incentive
Speaker 1: to keep the occupiers.
Speaker 1: That's the reality.
Speaker 1: So flight quality is is happening in this space.
Speaker 1: For the manufacturing segment, I think we do see first quarter of
Speaker 1: lease share, the share of leasing is in the lower double
Speaker 1: digit.
Speaker 1: Within those manufacturing segments, tech, power,
Speaker 1: defense are the major, major drivers to take up
Speaker 1: more leasing spaces.
Speaker 1: We also did our first occupier survey for industrial spaces
Speaker 1: here in the US.
Speaker 1: We can see forty percent of our manufacturers.
Speaker 1: They are telling us that we're going to expect even more.
Speaker 1: So therefore, the share of our manufacturing, I think, is going to increase
Speaker 1: even further because of reshowing, nearshowing is really happening here
Speaker 1: in the US.
Speaker 0: I'm glad you said that, Henry.
Speaker 0: This is not the manufacturing show, but one of the things I say over
Speaker 0: and over and over again and is that I think our traditional real
Speaker 0: estate investors should look at not only investing near
Speaker 0: manufacturing facilities and warehouses and multifamily and other users, but the facilities
Speaker 0: themselves.
Speaker 0: And I think we're increasingly seeing that in part because of this huge uptick
Speaker 0: in demand.
Speaker 1: Hundred percent agree.
Speaker 1: And, Spencer, one thing to wrap up the industrial spaces I want to highlight,
Speaker 1: Los Angeles was a top manufacturing demand
Speaker 1: in the first quarter of twenty twenty six.
Speaker 1: If you're thinking about twelve months ago, people talking about the tariff,
Speaker 1: there's no much of demand.
Speaker 1: Greater LA had a tough challenges.
Speaker 1: But look at this a twelve months after, they're at the top of leasing
Speaker 1: demand for these spaces.
Speaker 0: Well, I'm pleased to hear that because we heard some negative stories about the
Speaker 0: Southern California market, particularly the inland empire, which is not LA, but it's close.
Speaker 0: Mhmm.
Speaker 0: But I'm glad to see it's turned the corner.
Speaker 0: And I'm not surprised at all.
Speaker 0: And I think the reason is is that the supply spigot shut off
Speaker 1: a little bit.
Speaker 0: And once the supply spigot shuts off, existing products are gonna get absorbed.
Speaker 1: Yeah.
Speaker 1: Supply issue is quite interesting.
Speaker 1: I think over the past few years, we got tons of a supply coming
Speaker 1: to the market for logistics spaces.
Speaker 1: Spaces.
Speaker 1: But going forward, probably, we are going back to the historical average,
Speaker 1: and that compared to COVID time, it's only a third.
Speaker 1: So, therefore, I think the balance of the demand supply is coming to the
Speaker 1: market before too long.
Speaker 0: But, Henry, let's talk about multifamily Sure.
Speaker 0: For just a moment.
Speaker 0: Yeah.
Speaker 0: And, we have seen some softness in the multifamily sector, particularly in the southeast
Speaker 0: and Texas where there was some overbuilding.
Speaker 0: Notwithstanding that, I'm optimistic that much like we've absorbed the
Speaker 0: industrial faster than we thought, I think we're gonna absorb the multi faster than
Speaker 0: we thought because of the population growth.
Speaker 0: What do you think, Henry?
Speaker 1: Well, as I said, multifamily is always quite hard to
Speaker 1: generalize.
Speaker 1: Clearly, they are divergent in multifamily markets.
Speaker 1: You're highlighting that part.
Speaker 1: But if you're thinking about the US as a whole, q one number
Speaker 1: for rental growth is up by zero point two percent.
Speaker 1: Okay?
Speaker 1: Spencer is not a flat.
Speaker 1: It's a flat, basically.
Speaker 1: And then there's a divergence.
Speaker 1: Right?
Speaker 1: So to my surprise, Bay Area and San Francisco,
Speaker 1: we are seeing closer to ten percent of rental growth
Speaker 1: in q one.
Speaker 0: Well, Henry, I gotta tell you, and I well, this is not the pat
Speaker 0: myself on the back moment.
Speaker 0: But on this show, I've said multiple times three years ago that San Francisco
Speaker 0: was the most undervalued market in the US.
Speaker 0: And lo and behold, multifamily is killing it there, and the reason is there's
Speaker 0: no new supply.
Speaker 1: Exactly.
Speaker 1: And, also, the fact is San Francisco has regained all
Speaker 1: the rental losses during COVID as of now.
Speaker 1: So going forward, if you're a small investors and you you don't know that
Speaker 1: if they listen to you three years ago, they probably answer, I got this
Speaker 1: thing, they are going to make a decent profit.
Speaker 1: And to our surprise, I think the mountain region also rebound
Speaker 1: around five percent rental gross, which is fascinating to see that.
Speaker 1: And as you highlight the Southeast Texas area, we do see
Speaker 1: some rental decline, but the level of decline has slowed,
Speaker 1: which is again the good sign.
Speaker 1: When we pivot to the supply pictures, q one supply hit
Speaker 1: the lowest quarterly deliveries since twenty twenty one.
Speaker 1: So the situation might happen to multifamily that
Speaker 1: this asset class might reach the bottom.
Speaker 1: We are going to see the stronger recovery probably into twenty
Speaker 1: twenty seven.
Speaker 1: We still got an overhang supply to go through, but, overall, I think twenty
Speaker 1: twenty seven, we are looking to see the bottling out.
Speaker 0: The office sector seems to be getting a lot more interest today.
Speaker 0: And the office sector, we don't have to go back to where we were
Speaker 0: three years ago, but we aren't three years ago.
Speaker 0: We are now.
Speaker 0: And one of the comments I've made is, you know what the best time
Speaker 0: to buy office was?
Speaker 0: Last year.
Speaker 0: You know what another good time is?
Speaker 0: This year.
Speaker 0: You buy the best office in the best located submarkets.
Speaker 0: You're seeing great demand for new product.
Speaker 0: What are you seeing, Henry?
Speaker 1: Hundred hundred percent agree with you, Spencer.
Speaker 1: You know I am the office board for such a long time, and probably
Speaker 1: because I do believe a future of office return to work is going to
Speaker 1: be a new normal for us.
Speaker 1: And I want to highlight for q one, the office rental
Speaker 1: growth in the US as a whole is up by two point two
Speaker 1: percent.
Speaker 0: Up by two point two percent year over year?
Speaker 1: Year over year.
Speaker 1: That means we are returning to the long term average.
Speaker 1: The long term average is the thirty per thirty years average.
Speaker 1: And the the second one I want to highlight, this is the strongest rental
Speaker 1: growth since the q one twenty twenty.
Speaker 1: So, Spencer, that's a fantastic good news.
Speaker 1: So really office market has already bottling out, moving into
Speaker 1: a recovery stories.
Speaker 0: Well, it sounds like industrial where the new normal is like the old normal.
Speaker 0: Maybe that'll be the title of today's episode.
Speaker 1: Yeah.
Speaker 1: Exactly.
Speaker 1: And, also, of course, we see that good quality of asset versus
Speaker 1: a non so good quality.
Speaker 1: If you look at lots of prime segments, Spencer, the rental growth is
Speaker 1: closer to five percent.
Speaker 1: So, therefore, the top end of segment of office market is
Speaker 1: definitely driving the growth going forward.
Speaker 1: Every indicators we are seeing is actually the market
Speaker 1: is continue to recover.
Speaker 0: Quick comment on retail.
Speaker 0: We just did a terrific show with Jackson Shea, the CEO of Macerich,
Speaker 0: talking about how his leasing activity is picking up, how they're transforming
Speaker 0: some of their malls, doing a little bit more outdoor leasing, changing the tenant
Speaker 0: mix.
Speaker 0: What are you seeing in retail?
Speaker 1: Retail has an interesting stories.
Speaker 1: I think fundamental remain largely stable, and the asking rent
Speaker 1: is also going up by two point four percent year over
Speaker 1: year.
Speaker 1: I think lack of supply is still going to be a feature for the
Speaker 1: retail spaces.
Speaker 1: And we haven't seen much constructions, but new construction is largely concentrated,
Speaker 1: funny enough, in the Sunbelt market.
Speaker 1: The strongest deliverables is actually coming in Dallas
Speaker 1: and Phoenix.
Speaker 1: I think that is the that's the fundamental side.
Speaker 1: But when we are looking at retailers' sentiment, I think the retailers
Speaker 1: become a little bit cautious because their margin has not been expanded.
Speaker 1: So, therefore, they become very, very selective to choose the the
Speaker 1: the location they want to operate.
Speaker 1: They want to open a store.
Speaker 1: From a consumer point of view, unfortunately, petrol prices
Speaker 1: are so high, even I am Dallas, so consumer sentiment
Speaker 1: is a little bit weakening due to the higher inflation and higher oil
Speaker 1: price.
Speaker 0: I'm with you.
Speaker 0: But let's talk about smaller asset classes, the sub asset types.
Speaker 0: One of the best one is industrial outdoor storage.
Speaker 0: The asset class that I hesitate to mention, but now dog gone, I'm gonna
Speaker 0: mention is life sciences, which has gotten hit really, really hard.
Speaker 0: What do you see in some of these subasset classes?
Speaker 1: It's very interesting talking about iOS because I was with some investors
Speaker 1: here in Dallas, you know, two weekend ago, and the people talk about iOS.
Speaker 1: I think the iOS is definitely emerging as alternative asset classes,
Speaker 1: giving the re showing, near showing.
Speaker 1: I think that creates a demand for us.
Speaker 1: And the second component you highlight for life sciences it's a similar
Speaker 1: story we heard about offices, you know, about retails
Speaker 1: a few years ago.
Speaker 1: I think life sciences has been through the tough patch over the last eighteen
Speaker 1: months.
Speaker 1: The market is very, very closer to the bottom.
Speaker 1: And I have to say, if you are the small investors, pick on the
Speaker 1: life sciences, now is a good time to to negotiate how to get a
Speaker 1: big bargain, and the market will recover.
Speaker 1: Once we recover, it's going to be fast and furious.
Speaker 0: And I believe it's gonna be in places like La Jolla.
Speaker 0: It's gonna be in San Francisco.
Speaker 0: It's gonna be in Cambridge.
Speaker 0: I think it's also gonna be on or pertinent to large research university campuses.
Speaker 0: I think there's life sciences is a niche industry, but if you get the
Speaker 0: right location, you get the right demand drivers, now is an unbelievably
Speaker 0: great buy for that subsegment.
Speaker 1: You just nailed it.
Speaker 1: I think during the COVID time, people every single city, they want
Speaker 1: to call themselves after life sciences hub.
Speaker 1: But come on.
Speaker 1: You're just being realistic.
Speaker 1: And how many life sciences hub we have in the US?
Speaker 1: You're talking about San Diego area, Bay Area, probably, otherwise,
Speaker 1: Boston.
Speaker 1: All the others might take a longer time to recover, but also major harbor
Speaker 1: will recover first.
Speaker 0: Henry, we've been speaking a lot about what investors are thinking, and the news
Speaker 0: is generally good to very good and, to some degree, getting
Speaker 0: back to more of a normal environment, a pre COVID type of environment.
Speaker 0: But we've got a lot of occupiers listening to this.
Speaker 0: What is their perspective?
Speaker 0: And let's just keep it simple.
Speaker 0: Let's do industrial and an office.
Speaker 0: What are they thinking today?
Speaker 0: Where is value?
Speaker 0: What are the types of decisions they should be making?
Speaker 1: I think number one, flight to quality is across every
Speaker 1: single segment.
Speaker 1: Everyone knows about it.
Speaker 1: Think about that.
Speaker 1: It's a flight to quality.
Speaker 1: Number two is a plan for future spaces.
Speaker 1: I think you need to start thinking about your composition of your labor
Speaker 1: forces because the AI does have a drastic impact
Speaker 1: on the way we work.
Speaker 1: So I think Occupy should be thinking about what's the composition of labor.
Speaker 1: The third one, I want everyone to know that vacancy rate for prime
Speaker 1: assets in ideal locations are trending down.
Speaker 1: So if you put all of those three points together, I think the occupiers
Speaker 1: should take advantage to sign up the leases for those suitable spaces
Speaker 1: as soon as possible because they still have the in a window to get
Speaker 1: a better deal before the market switch to their no favorite site.
Speaker 0: What are your final thoughts for our listeners for the first quarter of
Speaker 0: twenty twenty six?
Speaker 1: Six?
Speaker 1: Well, I think, Spencer, we've been highlighting throughout the conversation.
Speaker 1: I think we just try not to be overclouded,
Speaker 1: and by lots of news headlines because the news headline does have a sensational
Speaker 1: assumptions when it comes to real estate.
Speaker 1: Do remember, real estate is a function of demand and supply.
Speaker 1: Lack of supply will be a feature, and demand, we haven't
Speaker 1: seen any slowdown based on the pipeline we are seeing, based
Speaker 1: on the macro forecast we are seeing.
Speaker 1: So so it's still relatively solid.
Speaker 1: And and now, also, people looking about the oil prices versus real
Speaker 1: estate value.
Speaker 1: Spencer, I want to highlight.
Speaker 1: We did so many analysis.
Speaker 1: There are significant correlations between real estate value
Speaker 1: cap rate and the oil prices.
Speaker 1: And the the biggest uncertainty we are facing is how long
Speaker 1: the duration of a conflict.
Speaker 1: Even we were looking at the the previous geopolitical issue,
Speaker 1: even the conflict is getting so drastically longer, we're gonna see the
Speaker 1: dip in a quarter or two maximum before we recover back.
Speaker 1: And then that's another big thesis that we are subscribing to.
Speaker 1: So, therefore, we, you know, always thinking about fundamentals,
Speaker 1: demand, and supply.
Speaker 1: Let it play out and stick with the math.
Speaker 1: I think you're going to get a decent returns going forward.
Speaker 0: Well, on behalf of the Weekly Take, thanks again to you, Henry, to everyone
Speaker 0: in the audience.
Speaker 1: Thank you, Spencer, and goodbye, everyone.
Speaker 0: Henry will return to the show to keep you up to date on the
Speaker 0: best insights and information, and we'll return with regularly scheduled
Speaker 0: programming next week.
Speaker 0: And as always, you can find more on our website, c b r e
Speaker 0: dot com slash the weekly take.
Speaker 0: Thanks for listening.
Speaker 0: I'm Spencer Levy.
Speaker 0: Be smart.
Speaker 0: Be safe.
Speaker 0: Be well.