Latest / Bloomberg Intelligence / Commercial Real Estate Market Is Sizzling: Lowenberg

Transcript

Commercial Real Estate Market Is Sizzling: Lowenberg · Bloomberg Intelligence

• 0:02
  Speaker 1: Welcome to the Bloomberg Penel podcast. I'm Paul Swinge you.
• 0:05
  Speaker 1: Along with my co host Lisa Brahma Waits, each day
• 0:07
  Speaker 1: we bring you the most noteworthy and useful interviews for
• 0:10
  Speaker 1: you and your money, whether at the grocery store or
• 0:12
  Speaker 1: the trading floor. Find a Bloomberg Penl podcast on Apple
• 0:15
  Speaker 1: podcast or wherever you listen to podcasts, as well as
• 0:17
  Speaker 1: at Bloomberg dot com. Our next guest is a great
• 0:23
  Speaker 1: person to talk about Bay Area real estate, Susan Loenberg.
• 0:26
  Speaker 1: She's president of Loenburg Corporation based in San Francisco. Susan,
• 0:30
  Speaker 1: thanks so much for joining us. When when when people
• 0:33
  Speaker 1: think about the San Francisco or Bay Area real estate
• 0:37
  Speaker 1: think they think about the residential side and people being
• 0:39
  Speaker 1: priced out of their homes and they can't move here
• 0:41
  Speaker 1: and the cost of living is maybe even worse than
• 0:43
  Speaker 1: New York. But you focused on the industrial side of
• 0:46
  Speaker 1: the market. Tell us about how that market is today.
• 0:49
  Speaker 1: Is that as perhaps overheated as a residential side, it
• 0:52
  Speaker 1: is amazingly overheated. Um, we are shocked at the rents
• 0:56
  Speaker 1: were getting. We're getting rents, you know, and higher in
• 1:01
  Speaker 1: industrial than we had underwritten deals for for years. Um.
• 1:05
  Speaker 1: It's part of the barrier we have here is there's
• 1:09
  Speaker 1: a huge demand and growth due to the Internet business
• 1:12
  Speaker 1: and new businesses developing that send out They don't need
• 1:15
  Speaker 1: the bricks and mortar of a retail, but they act
• 1:18
  Speaker 1: like one over the Internet. So that changed the business
• 1:21
  Speaker 1: greatly and caused a huge upsurge in demand. The other
• 1:25
  Speaker 1: thing we're really facing the barriers the cost of construction.
• 1:28
  Speaker 1: When you talk about it's not just the price of
• 1:30
  Speaker 1: land going up, it's every metal stud has gone up,
• 1:33
  Speaker 1: goes up two to three times a year, and cost
• 1:36
  Speaker 1: you know, all the things that go into building and
• 1:38
  Speaker 1: building rebar metal. Um. What municipalities are looking to developers
• 1:43
  Speaker 1: to balance their budgets. I mean, so, Susan, you're actually
• 1:46
  Speaker 1: in the hottest area of commercial real estate right now,
• 1:49
  Speaker 1: fulfilment centers, warehouse space. People are saying this is the
• 1:52
  Speaker 1: area to get into given how the Amazon, the amazon
• 1:55
  Speaker 1: ification of retail. Thank you, I have. Really it's struggled.
• 1:58
  Speaker 1: It's struggled my time. UM. I'm just wondering how much
• 2:02
  Speaker 1: competition you're seeing right now. And you know, with pricing,
• 2:05
  Speaker 1: do you think that you're getting good value right now
• 2:07
  Speaker 1: on a buy? No? I think the values are terrible.
• 2:10
  Speaker 1: We haven't bought anything since two thou because you've got
• 2:14
  Speaker 1: two things going on. You've got money being very cheap.
• 2:17
  Speaker 1: You've got rents being at their historical highs. I mean
• 2:21
  Speaker 1: beyond the beyond. We and um less than twenty years ago,
• 2:24
  Speaker 1: we underwrote a project here in San Francisco, and we
• 2:27
  Speaker 1: thought maybe we could get seventy eight cents square foot.
• 2:29
  Speaker 1: We're hitting it out of the bark. We we just
• 2:32
  Speaker 1: did a deal at two fifty two dollars and fifty cents.
• 2:34
  Speaker 1: I mean, that's true. So the cost of goods and
• 2:38
  Speaker 1: the cost of you are going up. How they say
• 2:40
  Speaker 1: there's no inflation, I don't personally get, but so so
• 2:44
  Speaker 1: that I'm wondering who's buying and you know they are
• 2:46
  Speaker 1: they at risk of some some pretty big losses. UM.
• 2:51
  Speaker 1: You know, here's the deal. I think. I think that
• 2:53
  Speaker 1: the difference for someone like me who I buy one off,
• 2:56
  Speaker 1: I buy one building, I go after I chase buildings.
• 2:59
  Speaker 1: When you're a real you're not that one building doesn't
• 3:02
  Speaker 1: have to stand on its own. It gets put into
• 3:04
  Speaker 1: a big portfolio and if it performs at two percent,
• 3:07
  Speaker 1: it gets absorbed in that great deal that you did
• 3:09
  Speaker 1: ten years ago. That's pumping out, you know, fift So
• 3:13
  Speaker 1: when you put those together, you get a good return.
• 3:16
  Speaker 1: You get a stock return, you don't get a real
• 3:18
  Speaker 1: estate return. And reads fundamentally changed the way people look
• 3:23
  Speaker 1: or way read people. They can buy things at a
• 3:26
  Speaker 1: lower cap right than we can. So if we ask
• 3:29
  Speaker 1: you to kind of look into your crystal ball a
• 3:30
  Speaker 1: little bit, how long can this Bay Area expansion continue?
• 3:35
  Speaker 1: Because it's just it's been ten years plus. I said
• 3:38
  Speaker 1: it was going to be seventeen. Okay, I said it was.
• 3:42
  Speaker 1: I said it was going to be nineteen. Um, you
• 3:45
  Speaker 1: know there's got to be a correction. We're not going
• 3:48
  Speaker 1: to see O eight again. We're just not going to
• 3:50
  Speaker 1: see two thousand and eight. It's a Bay Area losing business.
• 3:54
  Speaker 1: I mean, I'm not going to move my fulfillment center here.
• 3:57
  Speaker 1: If it's so so expensive, Why would't I go to Austin,
• 3:59
  Speaker 1: Texas or Salt Where are your customers? Right? Well, presently
• 4:03
  Speaker 1: I'm just kind of sending it everywhere, right, might not,
• 4:05
  Speaker 1: I don't know, I guess you would, but you know,
• 4:07
  Speaker 1: the look, people want to live here. You know, at
• 4:09
  Speaker 1: the end of the day, you know, I'm a native
• 4:11
  Speaker 1: San Francisco. I was born here, and it kills me
• 4:14
  Speaker 1: when people who have moved here ten fifteen, two years
• 4:17
  Speaker 1: ago say, oh, the city has changed, the city has changed.
• 4:22
  Speaker 1: And I say to them, Okay, here's the deal. If
• 4:25
  Speaker 1: you don't want to live in a dynamic, diverse, totally
• 4:30
  Speaker 1: exciting city, moved to with all due respect to Peka,
• 4:33
  Speaker 1: moved to a small town in the Midwest. It will
• 4:35
  Speaker 1: be fine, you'll enjoy it. It'll be great. Go with
• 4:39
  Speaker 1: the one sing. But if you want to be in
• 4:41
  Speaker 1: a dynamic city that you know, you've got food, you've
• 4:44
  Speaker 1: got arts, you've got you know, you can go skiing
• 4:46
  Speaker 1: into I was you know, this is it? People want
• 4:49
  Speaker 1: to live here? Yeah? Well, and I hear you and
• 4:51
  Speaker 1: and and you know, just to speak to what you're
• 4:53
  Speaker 1: talking about, Paul. As we were driving in and we
• 4:56
  Speaker 1: just saw all the cranes just coming up. I mean
• 4:58
  Speaker 1: every couple of feet you just see a crane, just
• 5:01
  Speaker 1: buildings coming up. I'm wondering. You're talking about how you
• 5:04
  Speaker 1: haven't bought anything since two thousand fourteen. Are you selling?
• 5:07
  Speaker 1: We have sold a couple of things. We have sold.
• 5:10
  Speaker 1: We're very good buyers and were terrible sellers. What do
• 5:14
  Speaker 1: you mean by that? I don't like to sell, but
• 5:16
  Speaker 1: I never met anything I didn't want to buy. But
• 5:18
  Speaker 1: but but I'm wondering, were you compelled to sell because
• 5:23
  Speaker 1: because the prices were just so high? No, that's not
• 5:27
  Speaker 1: my that would not be my motive. If that won't be,
• 5:30
  Speaker 1: then I'd be out. Then I would retire and just
• 5:31
  Speaker 1: play golf. That's why would just sell the business. Because
• 5:35
  Speaker 1: keep so keep in mind are the way we have
• 5:37
  Speaker 1: constructed our small business is it's all about cash flow.
• 5:40
  Speaker 1: People say to me, what's your portfolio worth? I have
• 5:42
  Speaker 1: no idea, and I could care less. It's worth what
• 5:45
  Speaker 1: someone's gonna buy it, but it's gonna pay me for.
• 5:47
  Speaker 1: The things we have sold have been like a single
• 5:49
  Speaker 1: tenant building that was sort of special purpose. The tenant
• 5:53
  Speaker 1: wanted to buy it, a user wanted to buy it.
• 5:55
  Speaker 1: They were more strategic sales than they were um aspirational sales.
• 6:00
  Speaker 1: Let's call it, you know, or taking advantage of this
• 6:02
  Speaker 1: heated market. Because our our whole thing is that we
• 6:05
  Speaker 1: would rather have met really good and healthy cash flows
• 6:09
  Speaker 1: to disperse to our partners and to ourselves than worry
• 6:12
  Speaker 1: about value. Because the rent is more important to us
• 6:16
  Speaker 1: are the are the lending Is the lending community here
• 6:19
  Speaker 1: concerned about the I would be, But the capital is
• 6:23
  Speaker 1: still available. It's still available because it's yes, the capital
• 6:27
  Speaker 1: is absolutely still available. We're speaking with Susan Loeenberg, president
• 6:31
  Speaker 1: of the Loenberg Corporation, who is speaking here at the
• 6:33
  Speaker 1: Eisneramper real Estate Summit in San Francisco. I'm curious you
• 6:37
  Speaker 1: said that we're not heading toward another two thousand and
• 6:40
  Speaker 1: eight collapse. Can you give us some analogy? What are
• 6:44
  Speaker 1: we heading towards a correction? So what does that look like?
• 6:48
  Speaker 1: I think it's I think it's I think it could
• 6:50
  Speaker 1: be twenty. I think it could be twenty depending on
• 6:53
  Speaker 1: what happens with trade. So now, okay, here's something in
• 6:56
  Speaker 1: verse that's gonna totally countersay what I'm doing. So now,
• 7:00
  Speaker 1: with China, my understanding is in the wine industry, where
• 7:02
  Speaker 1: we're very heavy, um wine is not they're putting the
• 7:06
  Speaker 1: brakes on exporting wine to China because China saying, oh, well,
• 7:09
  Speaker 1: you know you want they're playing that game, Well, they
• 7:12
  Speaker 1: gotta put it somewhere. Every year, that wine's got to
• 7:16
  Speaker 1: come off the vines. It can come out. I mean
• 7:19
  Speaker 1: we can arrange. Okay, well, I'm gonna put my single up.
• 7:25
  Speaker 1: We can easily have stiff delivered to you. You mentioned
• 7:27
  Speaker 1: the Wine country. How did the fires impact any of
• 7:30
  Speaker 1: your properties because there was such terrible news, such terrible loss. Yeah,
• 7:34
  Speaker 1: it didn't affect it at all. We had it virtually
• 7:37
  Speaker 1: had no effect other than my partner's calling me constantly saying,
• 7:39
  Speaker 1: have we burned down yet? And I'm saying no, we're fined.
• 7:41
  Speaker 1: But but but it does raise a question, especially as
• 7:43
  Speaker 1: we hear about climate change and some of the effects
• 7:46
  Speaker 1: with respect to drought, with respect to fires in California,
• 7:51
  Speaker 1: how how are your colleagues responding to that. I think
• 7:55
  Speaker 1: everybody's got their head in the sand. I don't think
• 7:57
  Speaker 1: people were really responding to it. All. That must stand
• 7:59
  Speaker 1: in high value since it sounds great. But yeah, this
• 8:01
  Speaker 1: sounds like it's not going to topple that much though,
• 8:05
  Speaker 1: because you just have there's too much demand to be here.
• 8:08
  Speaker 1: People want to live here. It's a great place. First
• 8:11
  Speaker 1: of all, if you're in I guess Austin, Texas would
• 8:14
  Speaker 1: be one. You could truck it in from Houston, you could,
• 8:16
  Speaker 1: you know, if that's where your markets. But so much product.
• 8:19
  Speaker 1: I have an apartment that overlooks the bay, and thank
• 8:23
  Speaker 1: you very much, and I'll probably lose it in the
• 8:25
  Speaker 1: downtown because but you see just containership after containership after
• 8:30
  Speaker 1: containership coming through the bay, and then you see these
• 8:35
  Speaker 1: ships leave half filled. I mean, there are so many
• 8:38
  Speaker 1: products coming in here that are being distributed from here. Yeah.
• 8:41
  Speaker 1: What about the tax changes. I mean, I know that
• 8:42
  Speaker 1: people have been talking about how, you know, this faut deductions,
• 8:45
  Speaker 1: how that's affecting property values and it's affecting where people
• 8:48
  Speaker 1: are deciding to live. I mean, I understand with industrial
• 8:51
  Speaker 1: properties is a lag time with respect to where people live,
• 8:54
  Speaker 1: and then how that affects into the commercial properties. But
• 8:56
  Speaker 1: I'm just wondering, you know, is that something that people
• 8:58
  Speaker 1: are talking a lot about. You know, I I would
• 9:00
  Speaker 1: be nervous, to be honest with you about if I
• 9:02
  Speaker 1: were a homebuilder, I'd be kind of I'd be a
• 9:05
  Speaker 1: little nervous right now. I'd be cautious about what I
• 9:07
  Speaker 1: were going to bring out of the ground because I'll
• 9:09
  Speaker 1: give you an example. Um, my assistant, I've got her
• 9:13
  Speaker 1: into a house. It was great, she she saved it
• 9:15
  Speaker 1: was you know, I showed her how it would all work,
• 9:17
  Speaker 1: and she could deduct the interest in the property tax
• 9:20
  Speaker 1: as well. Her deduction. She got back last year four
• 9:23
  Speaker 1: thousand dollars, she told me this year she got yeah. Right.
• 9:27
  Speaker 1: But she's in the house though, so she's not gonna
• 9:30
  Speaker 1: go She's not going to lose the house. She's just
• 9:33
  Speaker 1: not going to spend as much, right because she doesn't
• 9:36
  Speaker 1: have that extra whatever. The number is twenty one dollars
• 9:40
  Speaker 1: to go maybe buy some new clothes or buy a
• 9:42
  Speaker 1: washer dryer. So that's going to have some effect. And
• 9:46
  Speaker 1: that's we and we've seen that on the East Coast
• 9:48
  Speaker 1: as well in the metro New York area. Susan Loenburg,
• 9:51
  Speaker 1: thank you so much. Susan as president of Lohenburg Corporation,
• 9:53
  Speaker 1: joining us live here in San Francisco at the Eisener
• 9:56
  Speaker 1: Amper real Estate Conferences, and thank you so much. Well,
• 10:15
  Speaker 1: we're about halfway through the first quarter earning season. I
• 10:18
  Speaker 1: think by and large we're going into earnings people where
• 10:20
  Speaker 1: I think pretty bears looking for three to four decline
• 10:24
  Speaker 1: in SMP earnings numbers seem to have come in a
• 10:26
  Speaker 1: little bit better. To see how much better we welcome
• 10:29
  Speaker 1: our next guest, Gina Martin Adams. Gina is the chief
• 10:32
  Speaker 1: equity strategist for Bloomberg Intelligence. She is in the Bloomberg
• 10:35
  Speaker 1: eleven three oh studio. Gina, thanks so much for joining us.
• 10:39
  Speaker 1: What is your take here a little more than halfway
• 10:42
  Speaker 1: through the quarterly earning season? Um, thank you for having me, Paul.
• 10:45
  Speaker 1: So far, so good. As you alluded to, expectations were
• 10:49
  Speaker 1: pretty low, so you know, take it for what it's worth,
• 10:51
  Speaker 1: but companies are on track to print about a one
• 10:55
  Speaker 1: percent decline in earnings year over year. That assumes that
• 11:00
  Speaker 1: everyone who was reported, plus all of the expectations come
• 11:04
  Speaker 1: in as as expected, we'll get about a one percent
• 11:07
  Speaker 1: to client in earnings on a year of a year basis.
• 11:08
  Speaker 1: That's obviously substantially better than the four point one percent
• 11:12
  Speaker 1: to client that analysts were expecting at the start of
• 11:14
  Speaker 1: the season. So companies are beating what I would have
• 11:17
  Speaker 1: considered to be a very low bar. The big change
• 11:20
  Speaker 1: over the last week relative to prior weeks was actually
• 11:23
  Speaker 1: we had more companies even guide for better earnings for
• 11:28
  Speaker 1: as a whole than guided lower. And this is a
• 11:31
  Speaker 1: big shift because for months and months and months now
• 11:34
  Speaker 1: we've had companies, you know, kind of hammering down forward
• 11:36
  Speaker 1: expectations as a component of every earning season. If we
• 11:40
  Speaker 1: can continue to see this recovery and guidance emerge, and
• 11:45
  Speaker 1: then then over the next several weeks, that could really
• 11:47
  Speaker 1: start to shift expectations and change some people's opinions with
• 11:51
  Speaker 1: respect to the outlook for earnings. I I don't think
• 11:53
  Speaker 1: a lot of people are expecting a whole lot this year.
• 11:55
  Speaker 1: This is important. I want to just make sure we
• 11:57
  Speaker 1: get that right and kind of hammer at home or
• 11:59
  Speaker 1: the past week, more companies have upgraded guidance going forward
• 12:03
  Speaker 1: for the rest of the year. Uh than anything else.
• 12:06
  Speaker 1: That's really interesting to me. I'm wondering where is that
• 12:09
  Speaker 1: growth coming from. Well, it's unfortunately so what we find
• 12:12
  Speaker 1: is very few companies actually provide guidance anymore these days,
• 12:16
  Speaker 1: so we don't want to read too much into it.
• 12:18
  Speaker 1: But frankly, the biggest driver of the turnaround in growth
• 12:22
  Speaker 1: is a turnaround from earning suppression in the first half
• 12:26
  Speaker 1: to slightly better performance in the second half for more
• 12:30
  Speaker 1: cyclical industries, in particular those industries that are exposed to
• 12:33
  Speaker 1: overseas economic conditions. Tech and industrials really stand out. UH.
• 12:38
  Speaker 1: Groups that had a bigger compression and earnings expectations on
• 12:42
  Speaker 1: tougher comparisons in the first half of this year. Their
• 12:45
  Speaker 1: comparisons ease into the second half year. Some of that
• 12:47
  Speaker 1: is due to tax so it's uh, you know, it's
• 12:50
  Speaker 1: it's not one big story driving recovery. I think it's
• 12:54
  Speaker 1: different industries and sectors that are experiencing really strong decline
• 12:58
  Speaker 1: in the first half of this year, with a modest
• 13:00
  Speaker 1: bounce back expected in the second half. So, Jeanne, we
• 13:03
  Speaker 1: heard from the Fed and the chairman yesterday kind of
• 13:06
  Speaker 1: still on the sidelines, kind of status quo. So my
• 13:10
  Speaker 1: guess is that kind of brings the earnings picture or
• 13:12
  Speaker 1: keeps the earnings picture very much in focus for investors.
• 13:15
  Speaker 1: So how do you think about the back half of
• 13:17
  Speaker 1: the year. Clearly, I think the expectations were for a
• 13:19
  Speaker 1: better second half of the year. Uh does that still
• 13:22
  Speaker 1: hold for you? Yeah, it does. I think for the
• 13:24
  Speaker 1: market it's going to be a story of more give
• 13:27
  Speaker 1: and take. Right, the first part of this year has
• 13:29
  Speaker 1: been all about valuation expansion driven by much easier than
• 13:34
  Speaker 1: expected FED policy, at least much easier than expected back
• 13:37
  Speaker 1: in December, right, and that shift in FED policy has
• 13:40
  Speaker 1: allowed for rally and bonds, which has elevated valuations in
• 13:43
  Speaker 1: the equity market. Now, the FED seems to be pretty
• 13:48
  Speaker 1: you know, it was presenting a pretty persistent message of yes,
• 13:51
  Speaker 1: we're on hold. We don't know if that next move
• 13:54
  Speaker 1: is going to be up or down, so we're data dependent.
• 13:57
  Speaker 1: Now that creates a different environment for stocks, right. We've
• 13:59
  Speaker 1: alrea rerated to anticipate much easier monetary conditions going forward.
• 14:06
  Speaker 1: We have to contend with this whole is a Goldilocks
• 14:08
  Speaker 1: or is it not? Because if growth gets too hot,
• 14:11
  Speaker 1: that's great for earnings, but that's not great for bond
• 14:14
  Speaker 1: prices and multiples. It's not great for our anticipated FED
• 14:18
  Speaker 1: increase um. Right, So I think that you could have
• 14:21
  Speaker 1: tighter monetary policies slightly offset better growth into the second half,
• 14:26
  Speaker 1: which just creates a more volatile condition, a dicier situation
• 14:30
  Speaker 1: for stocks than that which existed in the first half.
• 14:32
  Speaker 1: It doesn't necessarily eliminate the overall bolt trend. So I
• 14:36
  Speaker 1: want to get your sense on the micro aspects of
• 14:40
  Speaker 1: the macro that we're seeing. We saw productivity jump the
• 14:42
  Speaker 1: most since two thousand fourteen in the first quarter. I'm
• 14:45
  Speaker 1: wondering how much of this is people are actually, uh,
• 14:48
  Speaker 1: you know, just working harder and then are going to
• 14:50
  Speaker 1: get paid for it. And how much is it that frankly,
• 14:53
  Speaker 1: companies don't have to pay people as much as perhaps
• 14:55
  Speaker 1: they would have otherwise had to pay them, and they're
• 14:57
  Speaker 1: just working harder. In other words, Uh, those margin part
• 15:00
  Speaker 1: where it's just aren't there to the degree that we
• 15:02
  Speaker 1: expected them to be. Right, Yeah, I think that that's
• 15:04
  Speaker 1: a really good point, Lisa, And it's um, you know,
• 15:06
  Speaker 1: the answer is very tbd. I think one of the
• 15:08
  Speaker 1: things we struggle with is economic data, you know, is
• 15:12
  Speaker 1: going to very accurately capture what we pay in a
• 15:15
  Speaker 1: monetary wage, but may not accurately accurately capture payments of
• 15:20
  Speaker 1: other forms. Right, increasingly, individuals um in the workforce are
• 15:25
  Speaker 1: getting paid via healthcare allowance, they're getting paid via other
• 15:29
  Speaker 1: forms of benefits, not necessarily through accelerating wages, which are
• 15:34
  Speaker 1: much easier to measure so as opposed to you know,
• 15:39
  Speaker 1: flash back to the nineteen fifties and nineteen sixties when
• 15:41
  Speaker 1: a lot of these measurements were developed. You could just
• 15:44
  Speaker 1: measure an average hourly wage. Now half of our workforce
• 15:48
  Speaker 1: is on a salary, not an average hourly wage UM.
• 15:51
  Speaker 1: Many of our much of our workforce has you know,
• 15:55
  Speaker 1: additional benefits that are paid through corporations. That was certainly
• 15:58
  Speaker 1: not the case fifty years ago. So I think part
• 16:02
  Speaker 1: of it is a measurement issue. What we see in
• 16:04
  Speaker 1: the SMP five hundred, frankly, is quite a bit of
• 16:08
  Speaker 1: evidence that suggests companies have a degree of pricing power
• 16:11
  Speaker 1: UM instead of recording sort of pressures with respect to
• 16:16
  Speaker 1: escalating payments to companies. The pressures on the margin lines
• 16:20
  Speaker 1: are more about companies spending a little bit too much
• 16:23
  Speaker 1: an environment of slower revenue growth. So there's a lot
• 16:25
  Speaker 1: of moving parts in this story. I'd say that the
• 16:27
  Speaker 1: biggest the biggest problem is the economic data doesn't always
• 16:31
  Speaker 1: match up with the experience of corporate America. So, Gina, we're,
• 16:36
  Speaker 1: you know, ten plus years into this economic cycle, we've
• 16:38
  Speaker 1: stock markets back are near all all time highs. What
• 16:42
  Speaker 1: sectors tend to perform better in such an environment? I mean,
• 16:46
  Speaker 1: work should investors kind of be thinking from a sector perspective? Yeah,
• 16:50
  Speaker 1: I think every cycle is different, UM. In terms of
• 16:53
  Speaker 1: our sector allocation model. Right now, it implies that you
• 16:58
  Speaker 1: probably want to approach the market with something of a
• 17:00
  Speaker 1: barbelled strategy where and it fits very well with this
• 17:04
  Speaker 1: notion that the easy gains are done. We're moving from
• 17:07
  Speaker 1: an environment in which the rising tide lifted all boats
• 17:10
  Speaker 1: to an environment where investors have to contend with Yes,
• 17:13
  Speaker 1: earnings growth is probably going to improve, but if it does,
• 17:17
  Speaker 1: it probably means that the economy is strengthening, and that
• 17:20
  Speaker 1: may mean tighter monetary policy going forward. So you balance
• 17:23
  Speaker 1: those two things, and I think the result of that
• 17:25
  Speaker 1: is you want to mix of cyclical and defensive industries
• 17:29
  Speaker 1: toward the top of your sector allocation. One thing we've
• 17:32
  Speaker 1: seen all cycle is growth stocks outperforming value stocks. I
• 17:37
  Speaker 1: don't think any evidence has a surface to suggest that
• 17:40
  Speaker 1: that strategy is suddenly going to flip on its head.
• 17:44
  Speaker 1: Growth is still very very much in demand, still continues
• 17:47
  Speaker 1: to outperform value, despite you know, investors that are pounding
• 17:51
  Speaker 1: the table on these valuations spreads widening. I think structurally,
• 17:55
  Speaker 1: when you're an environment of very very slow growth and
• 17:57
  Speaker 1: very little inflation pressure with a flat yield curve, it's
• 18:00
  Speaker 1: just it just promotes gross Gina Martin Adams, thank you
• 18:03
  Speaker 1: so much for taking the time out of your very
• 18:05
  Speaker 1: busy schedule. Gina Martin Adams, Chief Equities, try to just
• 18:08
  Speaker 1: for Bloomberg Intelligence, and when she talks about a flat
• 18:10
  Speaker 1: yield curve, indeed go and I think San Francisco most
• 18:32
  Speaker 1: people would agree as kind of the birthplace of the
• 18:34
  Speaker 1: gig economy. Start your own company, start your own website,
• 18:37
  Speaker 1: start your own app. But when you do that, you
• 18:39
  Speaker 1: need a place to work. And that is why shared
• 18:42
  Speaker 1: workplaces have become really commonplace in this new economy. Elton
• 18:46
  Speaker 1: Quas a general manager for the North California region for
• 18:50
  Speaker 1: we work on the largest shared workspace companies. He joins
• 18:52
  Speaker 1: us here live Alton. Thanks for joining us. Thank you
• 18:55
  Speaker 1: so much for having me. I mean, you've got to
• 18:57
  Speaker 1: have the easiest job in the world. I mean I
• 18:58
  Speaker 1: could rent space in the Northern California Bay Area market.
• 19:01
  Speaker 1: How hot is it. It's amazing. So we started off
• 19:04
  Speaker 1: here in the Bay Area in two thousand and eleven.
• 19:06
  Speaker 1: The company we work started in New York City in
• 19:09
  Speaker 1: two thousand ten, and since then we have thirty locations
• 19:12
  Speaker 1: here in the Bay Area over ten cities. Uh So
• 19:14
  Speaker 1: we go anywhere from San Jose all the way up
• 19:16
  Speaker 1: to Mill Valley, and then we just recently announced Sacramento
• 19:19
  Speaker 1: as well. So no matter where you live or work,
• 19:21
  Speaker 1: you have a place to be. So one thing that
• 19:23
  Speaker 1: I'm struggling to understand is what's the barrier to entry here,
• 19:27
  Speaker 1: especially as other community commercial real estate operators start to think,
• 19:31
  Speaker 1: you know what, the gig economy is here to stay.
• 19:33
  Speaker 1: We're gonna do cooperative workspace to definitely. So as a member,
• 19:37
  Speaker 1: there's actually no barrier to entry. What we do is
• 19:39
  Speaker 1: we provide flexible workspaces for any size of company. So
• 19:42
  Speaker 1: whether you're a fortune or you're entrepreneur, you could sign
• 19:45
  Speaker 1: up today and start working tomorrow. Actually um, and you
• 19:48
  Speaker 1: don't have to pay the capital expenses, you don't have
• 19:50
  Speaker 1: to design the offices, everything is done for you. Um.
• 19:53
  Speaker 1: If you are another I guess industry leader trying to
• 19:56
  Speaker 1: get into the coworking space, that might be a little
• 19:58
  Speaker 1: bit tough, just because we have foreigner locations around the
• 20:01
  Speaker 1: world and that is continually to grow. Every single day.
• 20:04
  Speaker 1: On average, we actually open two locations a day, which
• 20:07
  Speaker 1: is pretty exciting globally. And what what why that's important
• 20:11
  Speaker 1: is because a member at one location is a member
• 20:14
  Speaker 1: around the globe, and you really have membership anywhere, and
• 20:17
  Speaker 1: so you have a home in a place to work.
• 20:19
  Speaker 1: So what is kind of a typical We Work member
• 20:23
  Speaker 1: UM is it kind of a single purses and a
• 20:25
  Speaker 1: small company. What's a typical one looked like? Absolutely? So.
• 20:28
  Speaker 1: Our enterprise business is growing tremendously, and we started that
• 20:31
  Speaker 1: in two thousand seventeen. Really, UH overt of our member
• 20:35
  Speaker 1: base now is enterprise companies and they take full floors,
• 20:38
  Speaker 1: they take an entire building, and we do everything full
• 20:41
  Speaker 1: service for them, from designing building and then operating the
• 20:44
  Speaker 1: space with our community management teams. UH so that is
• 20:47
  Speaker 1: a growing segment. We also have an MLB segment where
• 20:49
  Speaker 1: if you're medium to large sized business, you can get
• 20:52
  Speaker 1: a full space a headquarters space for you, so no
• 20:54
  Speaker 1: longer you have to go through the hasshole of finding
• 20:57
  Speaker 1: your own real estate and then finding your own general
• 20:59
  Speaker 1: contractor and then arc texture firm. All that is provided
• 21:01
  Speaker 1: UH through us, which makes it really easy. And then
• 21:04
  Speaker 1: we have the creative community that is part of the
• 21:07
  Speaker 1: UH we Work community, and that is our heart and
• 21:09
  Speaker 1: bread and butter, and it keeps the energy alive in
• 21:12
  Speaker 1: our spaces and in every single We Work location that
• 21:14
  Speaker 1: you go to, you'll see a membership level such as
• 21:17
  Speaker 1: hot desk or dedicated desk or some private offices that
• 21:20
  Speaker 1: are for the smaller UH companies to allow them to groom,
• 21:24
  Speaker 1: and we also connect them with other community members to grow.
• 21:26
  Speaker 1: So we worked a file confidentially for an initial public offering,
• 21:30
  Speaker 1: and it raises a question about the growth opportunity. You're
• 21:33
  Speaker 1: talking about some of the growth areas, but the degree
• 21:35
  Speaker 1: to which growth and can accelerate given the fact that
• 21:37
  Speaker 1: we Work, I believe is the biggest commercial property user
• 21:41
  Speaker 1: in both San Francisco as well as in New York.
• 21:44
  Speaker 1: So already kind of saturated in those areas. Given that fact,
• 21:49
  Speaker 1: I mean, these are all sort of marginal sort of gains,
• 21:52
  Speaker 1: is there another sort of big acceleration in the growth
• 21:55
  Speaker 1: of We Work. So what I would say in terms
• 21:57
  Speaker 1: of we Work is where global platform and with our
• 21:59
  Speaker 1: member or base, we can do a lot with that.
• 22:01
  Speaker 1: UM the WE company as a whole now has different
• 22:04
  Speaker 1: avenues and business lines that UM we play a part in.
• 22:07
  Speaker 1: So we have we Work, which is the workspace mission,
• 22:10
  Speaker 1: and then we have we Live, which is our living mission,
• 22:12
  Speaker 1: and then we have we Grow, which is our education mission.
• 22:15
  Speaker 1: So through that we're building really communities outside the walls
• 22:18
  Speaker 1: of just we work. How much attraction have you gotten
• 22:20
  Speaker 1: with we Live and we Grow? So the two of
• 22:21
  Speaker 1: those are just beginning and they're really exciting. We're getting
• 22:24
  Speaker 1: a lot of demand. Both of them are in New
• 22:26
  Speaker 1: York City right now. Um, we're looking for expansion, but
• 22:30
  Speaker 1: those are just in the early stages and I think
• 22:31
  Speaker 1: there's a bright future ahead for us. So in this
• 22:34
  Speaker 1: Northern California Bay Area, we've heard all day how expensive
• 22:38
  Speaker 1: real estate it is, how new construction is expensive. What
• 22:41
  Speaker 1: are the economics for we work in this marketplace? Definitely?
• 22:45
  Speaker 1: So for we Work, I think the value add that
• 22:49
  Speaker 1: we're able to provide for companies coming into the Bay
• 22:51
  Speaker 1: area is a flexible workspace. And as you know, today,
• 22:54
  Speaker 1: companies are so agile, they're growing so fast, their headcount
• 22:57
  Speaker 1: projections are changing every single day, and the lexibility allows
• 23:00
  Speaker 1: them to really kind of take care of their business
• 23:02
  Speaker 1: and not have to work about the facilities management aspect
• 23:05
  Speaker 1: aspect or the office space management aspect. And if you're
• 23:08
  Speaker 1: adding another ten two hundred people tomorrow, you need the
• 23:11
  Speaker 1: flexible space to grow without adding a tenure lease, and
• 23:15
  Speaker 1: we Work allows you to do that on flexible terms
• 23:17
  Speaker 1: but costly for you to get the most for you
• 23:20
  Speaker 1: to get this space, it's very expensive, so you're bearing
• 23:22
  Speaker 1: that big cost, right. We have relationships with some of
• 23:24
  Speaker 1: the largest landlords and we continue to grow that presence
• 23:27
  Speaker 1: and the portfolio presence with landlords across the world. Really
• 23:30
  Speaker 1: uh So, definitely, it is expensive we work, and um
• 23:34
  Speaker 1: I would say the real estate market here is expensive.
• 23:36
  Speaker 1: But I think the beauty about we work is we're
• 23:39
  Speaker 1: able to go into any city around the world, and
• 23:41
  Speaker 1: our entrance into San Mateo or entrance into Palo Alto
• 23:44
  Speaker 1: or entrance into Sacramento are just a few examples where
• 23:46
  Speaker 1: we're able to connect the workforce to the places where
• 23:49
  Speaker 1: people want to work, which also decreases commute times for
• 23:51
  Speaker 1: a lot of people. So companies don't necessarily need to
• 23:54
  Speaker 1: be in San Francisco exactly. Yes, we know that a
• 23:56
  Speaker 1: lot of tech companies want to have presents, but they
• 23:58
  Speaker 1: don't need to have their entire headquarters here, and we
• 24:00
  Speaker 1: provide them with the agile warkspaceed solution to to provide
• 24:03
  Speaker 1: for that. But if they also want to have a
• 24:05
  Speaker 1: presence in San Jose as well as San Francisco, they
• 24:07
  Speaker 1: can do that and they don't have to work with
• 24:09
  Speaker 1: too many different operators to make that happen. Elton Quark,
• 24:11
  Speaker 1: thank you so much for spending the time. Elton Quacks,
• 24:14
  Speaker 1: general manager for the Northern California region at We were
• 24:17
  Speaker 1: joining us here from the Eisner amper A real estate
• 24:20
  Speaker 1: summit in San Francisco. Tesla is in the market with
• 24:40
  Speaker 1: an offering of stock and bonds a little over two
• 24:43
  Speaker 1: billion dollars as it tries to shore up its balance sheet.
• 24:45
  Speaker 1: To see get some deeper analysis of this, we welcome
• 24:48
  Speaker 1: Joel Levington. Joel is a senior credit analyst for Blueberg Intelligence.
• 24:52
  Speaker 1: He joins us on the phone. Joel, thanks so much
• 24:54
  Speaker 1: for joining us. Uh, it seems like a move in
• 24:56
  Speaker 1: the right direction for this company in terms of its
• 24:58
  Speaker 1: balance sheet. Is it enough? Paul, You're You're absolutely right,
• 25:02
  Speaker 1: and uh, I think it is enough, certainly for if
• 25:07
  Speaker 1: you assume that the company should be at least re
• 25:09
  Speaker 1: cash flow break even, and I think it should be
• 25:11
  Speaker 1: a little bit better than that. It should be able
• 25:14
  Speaker 1: to pay down all of its deep maturities over the
• 25:16
  Speaker 1: timeframe and also keep a decent amount of liquidity on
• 25:19
  Speaker 1: the balance sheet. So Joel, can we just talk about
• 25:22
  Speaker 1: the capitulation here, because This really is capitulation. And basically
• 25:26
  Speaker 1: Elon Mosk have been coming out and saying we don't
• 25:27
  Speaker 1: need more capital, We're doing great. Now it comes out
• 25:31
  Speaker 1: we need more capital. We need it from the equity markets.
• 25:33
  Speaker 1: We needed for the depth markets. I mean, what what
• 25:36
  Speaker 1: caused this this sort of turnaround here? Well, I think
• 25:39
  Speaker 1: it boils down to Lisa is operational execution. You know,
• 25:42
  Speaker 1: if you look at what he was saying on the
• 25:45
  Speaker 1: earning skulls just a week ago, is that he really
• 25:48
  Speaker 1: wanted to hold capital tight and force his company to
• 25:51
  Speaker 1: perform better. That hasn't worked out the way that he
• 25:54
  Speaker 1: had hoped for and as a result needs additional liquidity.
• 25:58
  Speaker 1: So I would say, you know, he on his company,
• 26:00
  Speaker 1: the company hasn't performed the way it needs to and
• 26:03
  Speaker 1: hence needs the band aid of additional liquidity right now.
• 26:06
  Speaker 1: So Joel Health has uh testlas bonds performed. It's I mean,
• 26:10
  Speaker 1: if you're if you're a bond investoris company, you're really
• 26:12
  Speaker 1: taking some risk here. The company, as you know that
• 26:15
  Speaker 1: really hasn't had any They've been free cash flow negative.
• 26:18
  Speaker 1: So how have the bonds performed and kind of what's
• 26:19
  Speaker 1: the expectation here? Sure, that's a great question. Uh, the
• 26:23
  Speaker 1: bonds actually traded in a pretty narrow range between eighty
• 26:26
  Speaker 1: four and eighty eight dollars. Uh, you know over the
• 26:28
  Speaker 1: past year or so, and today they're up about a
• 26:31
  Speaker 1: point and a half, so at about eighty six and
• 26:33
  Speaker 1: a half, so the rate in the range that they
• 26:34
  Speaker 1: have been. That said, the auto sector has performed very
• 26:38
  Speaker 1: well this year on on risk adjusted returns, and so
• 26:42
  Speaker 1: it has been a major laggard. So you know, like,
• 26:44
  Speaker 1: where do you go from here? I don't really think
• 26:46
  Speaker 1: it breaks out of its range until it can show
• 26:49
  Speaker 1: some operational improvement. If that's shown, I do think that
• 26:52
  Speaker 1: you could see the bonds, um, you know, see more
• 26:55
  Speaker 1: mean reversion than what's already happened today. So I'm struggling
• 26:59
  Speaker 1: a great You did put this in a perspective in
• 27:01
  Speaker 1: a really great way tool, which is basically, yeah, there's
• 27:03
  Speaker 1: a rally, but it's pretty tepid. Right, We're not talking
• 27:06
  Speaker 1: about massive gains here in the bonds. I'm trying to
• 27:09
  Speaker 1: figure out why investors are constructive at all on this
• 27:12
  Speaker 1: capital ray has given the fact that Tesla seems to
• 27:14
  Speaker 1: be burning through the through, burning through their cash and frankly,
• 27:17
  Speaker 1: the capitulation does speak to execution issues. You're totally right, Lisa.
• 27:22
  Speaker 1: I think we have a lot of deals that are
• 27:24
  Speaker 1: going on, particularly in autos, which you know as an example, Addie,
• 27:27
  Speaker 1: and it's the same thing a couple of weeks ago.
• 27:29
  Speaker 1: It's really on the hope or promise for stronger tomorrow
• 27:32
  Speaker 1: is what you're banking on if you're an investor right now,
• 27:35
  Speaker 1: and that you know, at least with that with with
• 27:38
  Speaker 1: both companies actually hasn't turned out to be the right call. Eventually,
• 27:42
  Speaker 1: I think that will be for Tesla, but um, you know,
• 27:45
  Speaker 1: again you kind of wonder how long it will be
• 27:47
  Speaker 1: given that they've repeatedly missed expectations to me, I guess
• 27:51
  Speaker 1: the key catalyst here after the liquidity event would be
• 27:54
  Speaker 1: to get a CEO in place that would be a
• 27:57
  Speaker 1: strong operator. How about a in your management team that
• 28:00
  Speaker 1: actually stays um the yes right. So the question I
• 28:06
  Speaker 1: have so if you're an equity or or bond investor here,
• 28:09
  Speaker 1: what is what's kind of the metrics the one or
• 28:11
  Speaker 1: two metrics that you're looking at that from an operational
• 28:13
  Speaker 1: perspective that tells you, hey, I think they've really got
• 28:16
  Speaker 1: this thing going. That's a great question, Paul. I would
• 28:19
  Speaker 1: say the two things that people really look to are
• 28:22
  Speaker 1: the volume of production that comes out, and that's really
• 28:24
  Speaker 1: on the model three. And I think what what people
• 28:27
  Speaker 1: are really focused on is getting volume at seven thousand
• 28:31
  Speaker 1: a week or higher. And then I think the other
• 28:33
  Speaker 1: things you have to look at is operating margins UH
• 28:35
  Speaker 1: and moving those towards peer like levels, which would be
• 28:38
  Speaker 1: an even a margin somewhere and kind of like the
• 28:41
  Speaker 1: nine to eleven percent range. If you could do that,
• 28:43
  Speaker 1: you'd have a much stronger profile here at a certain point.
• 28:47
  Speaker 1: Could the positive sort of movement that we're seeing in
• 28:49
  Speaker 1: the bonds and the stocks the stock is up two
• 28:52
  Speaker 1: also come from the fact that Elon Musk is sort
• 28:55
  Speaker 1: of being realistic. I think so, and you know, I
• 28:59
  Speaker 1: think really what's what's embedded into the stock are two issues.
• 29:03
  Speaker 1: One was liquidity concern that would that continue to grow,
• 29:07
  Speaker 1: and the other is the execution issue. Today, what you're
• 29:10
  Speaker 1: seeing is an alleviation of the financial risk side. Right.
• 29:13
  Speaker 1: The liquidity will be fine, it'll be sound, and it's
• 29:16
  Speaker 1: a reminder that a fifty billion dollar company can go
• 29:18
  Speaker 1: back into the capital markets and get more money if
• 29:20
  Speaker 1: it needs to. The other side remains a wide open
• 29:23
  Speaker 1: question and UM and unfortunately today you won't resolve that
• 29:26
  Speaker 1: answer right but right now people are interested in the
• 29:29
  Speaker 1: immedia and not necessarily the long term. Joel Lovington, thank
• 29:33
  Speaker 1: you so much for being with us. Joe Lovington, Senior
• 29:35
  Speaker 1: credit analyst for Bloomberg Intelligence. Thanks for listening to the
• 29:39
  Speaker 1: Bloomberg PANL podcast. You can subscribe and listen to interviews
• 29:42
  Speaker 1: at Apple Podcasts or whatever podcast platform you prefer. Paul Sweeney,
• 29:46
  Speaker 1: I'm on Twitter at pt Sweeney. I'm Lisa abram Woit's
• 29:48
  Speaker 1: I'm on Twitter at Lisa A. Bramwo. WIT's one before
• 29:51
  Speaker 1: the podcast. You can always catch us worldwide on Bloomberg
• 29:54
  Speaker 1: Radio