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Commercial Real Estate and Money Issuance · Bloomberg Intelligence

• 0:05
  Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm Pim Fox.
• 0:08
  Speaker 1: Along with my co host Lisa Bramowitz. Each day we
• 0:11
  Speaker 1: bring you the most important, noteworthy, and useful interviews for
• 0:15
  Speaker 1: you and your money, whether you're at the grocery store
• 0:17
  Speaker 1: or the trading floor. Find the Bloomberg p m L
• 0:20
  Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. Well,
• 0:33
  Speaker 1: there have been a number of reports PAIM that have
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  Speaker 1: come out recently about commercial real estate in the US
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  Speaker 1: that I have found really interesting. Goldman Sachs, for example,
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  Speaker 1: came out saying that Siri is probably overvalued, with commercial
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  Speaker 1: real estate prices ten to sixteen above fair value. Joining
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  Speaker 1: us now is Police Marand's she is a Bloomberg News
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  Speaker 1: reporter covering equities and as well as commercial real estate. Police.
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  Speaker 1: Thank you so much for being here. I found this
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  Speaker 1: really interesting. You sort of you looked at a roundup
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  Speaker 1: of analysts talking about being concerned about commercial real estate.
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  Speaker 1: Can you lay out what it is specifically that has
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  Speaker 1: them so concerned? Well, the big thing is, uh, the
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  Speaker 1: trend towards higher interest rates. Uh. And that's followed by
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  Speaker 1: what's being labeled the Amazon effect that Amazon is driving
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  Speaker 1: retail vacancies. So it's pretty easy to paint a narrative
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  Speaker 1: about why there might be some concern in commercial real estate.
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  Speaker 1: At the same time, uh, you know, there's always the
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  Speaker 1: other hand, And that other hand is that we're not
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  Speaker 1: actually seeing any losses at the moment. Okay, no losses
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  Speaker 1: at the moment, but as you said, weakening fundamentals and
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  Speaker 1: specifically this combination of increased the debt costs as well
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  Speaker 1: as certain you know, debt service burdens plus higher vacancies.
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  Speaker 1: According to noted Bernstein, this is something that's pretty easy
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  Speaker 1: to tell. Yes, indeed, that that kind of narrative is
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  Speaker 1: it is easy to tell. And I think that people
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  Speaker 1: are always looking for the next thing to worry about,
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  Speaker 1: and as long as there are the so called brown
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  Speaker 1: shoots as opposed to green shoots, which is how Baird
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  Speaker 1: had characterized the situation, people are going to be looking
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  Speaker 1: at that and trying to figure out what's going on. Well,
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  Speaker 1: you know, please, One thing that I find interesting is
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  Speaker 1: that a lot of investors around the world sort of
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  Speaker 1: flocked to you as commercial real estate as a bond substitute,
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  Speaker 1: since you get study income from renters, leasers, etcetera. UM,
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  Speaker 1: and that was sort of driving a lot of Chinese money,
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  Speaker 1: Asian money, as well as European money into the US.
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  Speaker 1: Has anyone talked about sort of a shift in foreign
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  Speaker 1: money and that kind of leading to some of the
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  Speaker 1: worries here too. I think that people are questioning whether
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  Speaker 1: there's going to be a shift. I haven't really seen
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  Speaker 1: any evidence that there is in fact shift underway. One
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  Speaker 1: of the comments from US Bank are chief executive on
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  Speaker 1: the conference call recently this goes back, I guess to
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  Speaker 1: December said that they haven't been growing their commercial real
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  Speaker 1: estate loan book because they see some competition for things
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  Speaker 1: that they would choose not to do. What kind of
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  Speaker 1: things do you believe they are? Well, I was wondering
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  Speaker 1: that myself and other analysts have noted that there are
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  Speaker 1: some loosening standards UM, certainly at banks. Now it's easier
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  Speaker 1: to track standards at banks because the FED surveys that, uh,
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  Speaker 1: you know, I would wonder what other things are happening
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  Speaker 1: and in a less regulated or less monitored corner of
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  Speaker 1: the market. Well, and this is actually really important because
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  Speaker 1: if you have you know, US Bank, Corps, Wells, Fargo,
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  Speaker 1: Goldman Sachs warning about commercial commercial real estate valuations. You
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  Speaker 1: have to wonder perhaps they're seeing loosening standards and they're
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  Speaker 1: seeing something that perhaps haven't materialized yet, but that could
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  Speaker 1: kind of filter in more rapidly than than people expect. Well,
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  Speaker 1: you have Morgan Stanley pointing out that core commercial lending
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  Speaker 1: standards loosened in the first quarter for the first time
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  Speaker 1: since the third quarter of but at the same time
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  Speaker 1: demand continued to decline. Richard hill Over at Morgan Stanley
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  Speaker 1: called that a peculiar relationship, since demand usually increases when
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  Speaker 1: you have let loosening standards. And does this have to
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  Speaker 1: do when you talk about commercial real estate? Is this
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  Speaker 1: all about new build or is this because you're seeing
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  Speaker 1: a shift in what it is that the businesses want
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  Speaker 1: at a real estate That's a great question, and it
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  Speaker 1: really is very very broad, I think. Unlike the housing market,
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  Speaker 1: which is also complicated for reasons of its own, the
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  Speaker 1: commercial real estate market covers everything from apartments to warehouses. Um.
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  Speaker 1: You know, if you look at the Bloomberg Reed Index,
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  Speaker 1: you can see that that's down about five percent year
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  Speaker 1: to date, and that's probably correlated with rising interest rates. However,
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  Speaker 1: you can see that warehouses, which are known as industrials
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  Speaker 1: in uh reed parlance, are actually rising, so you do
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  Speaker 1: have a big variety of their construction loans. Um, it's
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  Speaker 1: a very kind of complicated and varied sector. I want
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  Speaker 1: to thank you very much for coming in and sharing
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  Speaker 1: this information with us. Uh police morants of Bloomberg News
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  Speaker 1: talking about commercial real estate, and I guess it's also
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  Speaker 1: worth noting that commercial real estate, just like residential real estate,
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  Speaker 1: is a geographical uh indicated we say bam And Joe Maisak,
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  Speaker 1: editor for the Bloomberg brief on municipals appears in our
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  Speaker 1: studio magically, Joe Mysak, Um, you might be uh sort
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  Speaker 1: of if you're hunting for municipal bonds this summer, are
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  Speaker 1: you are people going to come up short? Because I
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  Speaker 1: was reading a story about how muni negative nets supply
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  Speaker 1: it's nearly nineteen billion dollars. Oh yeah, Well, see the
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  Speaker 1: municipal market is um. Municipalities are rewarded for their very
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  Speaker 1: conservative bond issuance tradition of selling mostly serial bonds which
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  Speaker 1: mature every year. So you have maturing bonds being taken
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  Speaker 1: away all the time in the municipal market, and you
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  Speaker 1: have the ten year call. So every ten years you
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  Speaker 1: have bonds being taken away total. This year I think
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  Speaker 1: it was over four hundred billions were being taken away.
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  Speaker 1: Now if if you consider that we're going to maybe
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  Speaker 1: have three hundred three fifty billion dollars in issuance total
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  Speaker 1: for the year, well you could see the problem. So
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  Speaker 1: basically we're looking at means of a bond issuance that
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  Speaker 1: is down and it seems down for the year. Which
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  Speaker 1: what you're raising your eyebrows, it's you know it's down, yes,
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  Speaker 1: but there's some wait refinances right, Well, yes, but no,
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  Speaker 1: the thing that was done away over the last year
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  Speaker 1: was the twenty of the market is advance of fundings
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  Speaker 1: in any given year, and Congress took those away last year,
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  Speaker 1: or the Republicans did, and uh so that's why we're
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  Speaker 1: seeing over all volume down this year. But in I
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  Speaker 1: took a look at this earlier this year and I said,
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  Speaker 1: you know, what we're seeing is new money issuance municipalities
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  Speaker 1: out there selling bonds for projects is up. It's up
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  Speaker 1: ten percent so far this year. So you know, people
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  Speaker 1: lose sight of that fact. I mean, if you're an underwriter,
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  Speaker 1: you just want you know, lots of value and you're saying, oh,
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  Speaker 1: the volume is down by about you expected that. You
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  Speaker 1: expected that because the advanture of fundings were taken away.
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  Speaker 1: But with new money and and building things for projects, um,
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  Speaker 1: that's up and ten percent is robut growth. So municipalities
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  Speaker 1: haven't been sitting back and saying, well, but I'll hold
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  Speaker 1: our fire now. No. Well, so, given the fact that
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  Speaker 1: in the municipalities are borrowing money for their projects, can
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  Speaker 1: we just take a moment to take a pulse of
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  Speaker 1: the cities and counties and states I see you taking
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  Speaker 1: the moment breathe deep, Uh, just to take take a
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  Speaker 1: sort of a pulse of the health of these of
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  Speaker 1: these regions in terms of, you know, their taxes, their
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  Speaker 1: borrowings going up, their pensions getting more indebted. How are
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  Speaker 1: we doing right now? Well, you know the thing you
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  Speaker 1: mentioned you talk about regions, and it even goes further
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  Speaker 1: than that, because the municipal market, as an investor pointed
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  Speaker 1: out to me years and years ago, it's particular and
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  Speaker 1: specific to a remarkable degree, or you could even say
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  Speaker 1: an insane degree, because when you look at these states
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  Speaker 1: and municipalities, you really have to go on a one
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  Speaker 1: by one basis. Let's say, what's going on here? For example,
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  Speaker 1: our Amanda Albright how a story this week about how
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  Speaker 1: fort Worth, Texas. There you would expect right that fort
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  Speaker 1: Worth would be booming. So why do they have such
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  Speaker 1: a huge pension live just just let people do because
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  Speaker 1: oil praises are up so much, so they should be
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  Speaker 1: getting the revenues from that. It should be a great time.
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  Speaker 1: Carry on, should be a great time. And the reason
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  Speaker 1: is because fort Worth, believe it or not, was they
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  Speaker 1: stinted on how much they put in their actuarial contribution
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  Speaker 1: to the pension fund. So when you skip those payments,
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  Speaker 1: or you trim those payments, or you don't put in
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  Speaker 1: as much as you're supposed to, as for example New
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  Speaker 1: York always does, uh, you run into a problem. And
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  Speaker 1: people can't believe it. Texas for worked Texas, any Texas city,
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  Speaker 1: And yet it's true. A second, the point being here
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  Speaker 1: that now they have to pay the bill and they
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  Speaker 1: have to divert money away from other things to put
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  Speaker 1: into their pensions to make up for those payments, and
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  Speaker 1: possibly even more because they could have been impluing interest.
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  Speaker 1: Is that what's going on here, That's what's going on.
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  Speaker 1: But also after the financial crisis. Okay, when when a
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  Speaker 1: lot of these big public pension funds and small public
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  Speaker 1: pension funds for that matter, took a hit, a lot
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  Speaker 1: of these places decided to to go very conservadi very safe,
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  Speaker 1: so they missed out on the stock market run up.
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  Speaker 1: You know, you're around the turn of the century, two thousands.
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  Speaker 1: Most public pensions, believe it or not, were over funded.
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  Speaker 1: So can you give us a sense of what other
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  Speaker 1: areas just really quickly also are suffering from a similar
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  Speaker 1: type of thing where they've been skipping payments and are
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  Speaker 1: going to face the reckoning. It's some point. Oh you know,
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  Speaker 1: it's a lot of your usual suspects. If you think
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  Speaker 1: about State of Illinois, Chicago, State of Connecticut, Pennsylvania, Kentucky. Uh,
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  Speaker 1: you know it's not every place, but there are like
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  Speaker 1: you know, as I say, the uh, the outliers in
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  Speaker 1: the municipal market that are in some trouble. So California,
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  Speaker 1: to believe it or not, a lot of the smaller municipalities,
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  Speaker 1: they're uh short cheated the bed. All right, Joe Meisak,
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  Speaker 1: thank you so much as always for joining us and
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  Speaker 1: to discuss short cheating the bed. Joe Meisac is the
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  Speaker 1: editor for the Bloomberg Brief focused on the municipal bond market.
• 11:56
  Speaker 1: There's a lot of movement today, particularly in the European markets,
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  Speaker 1: and there's a big question on days like this, which
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  Speaker 1: is how much leveraged money is there at play, how
• 12:06
  Speaker 1: many traders are making bets that are short term versus
• 12:10
  Speaker 1: investors making a big and longer term allocation shifts. Here
• 12:15
  Speaker 1: to give us some kind of insight into some of
• 12:17
  Speaker 1: these issues is Sylvia Jablonski. She's managing director of Capital
• 12:21
  Speaker 1: Markets and Institutional et F Strategist Direction Investments, which specializes
• 12:26
  Speaker 1: in leveraged e t F s. H Sylvia, thank you
• 12:29
  Speaker 1: so much for being with us. I'd love to get
• 12:31
  Speaker 1: your sense of, you know, really whether you're seeing increased
• 12:34
  Speaker 1: flows in some of these leveraged products on days like
• 12:37
  Speaker 1: today when you see the Italian bond yield surging to
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  Speaker 1: h two three year highs. Yes, thanks so much for
• 12:43
  Speaker 1: having me. So the quick answer is yes. Um, you know,
• 12:47
  Speaker 1: any kind of market news or headline news tends to
• 12:51
  Speaker 1: result in flows in our funds, so i'd say energy
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  Speaker 1: today was a good example of that. So month to date,
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  Speaker 1: you know, there's been a lot of fear about inflation,
• 13:00
  Speaker 1: and uh, energy tends to be a late cycle performer.
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  Speaker 1: You had Iran Venezuela sanctions uncertainty around that, and you
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  Speaker 1: know a lot of investors started flocking to the energy
• 13:10
  Speaker 1: bull funds, so basically anything oil and gas related. So
• 13:14
  Speaker 1: we have an ETF called the gush UM which is
• 13:16
  Speaker 1: three beta oil and gas gas three beta natural gas,
• 13:19
  Speaker 1: and UM three beta energy saw huge inflows and also
• 13:22
  Speaker 1: performance a month to date. You know, prior to today
• 13:25
  Speaker 1: they were up pcent respectively. But then today you saw
• 13:30
  Speaker 1: the two percent pull back with the Saudi output boost,
• 13:33
  Speaker 1: and you know we sort of see short in the
• 13:35
  Speaker 1: short term traders looking to tactically take advantage of the
• 13:38
  Speaker 1: bare sides. It's really you know, your short term view
• 13:41
  Speaker 1: on the particular trader sector, and you know all market
• 13:44
  Speaker 1: news factors into that. Well, I was just looking at
• 13:47
  Speaker 1: the r X one of your direction of three times
• 13:51
  Speaker 1: leverage energy ETFs down nine and a quarter percent today,
• 13:57
  Speaker 1: But I thought it was interesting that one word you
• 13:58
  Speaker 1: mentioned was trader. Are these products typically used in conjunction
• 14:04
  Speaker 1: with something else by traders? Absolutely, so the three beta
• 14:08
  Speaker 1: products are meant to be traded and not held, so
• 14:11
  Speaker 1: they're tactical products that allow you to you know, if
• 14:14
  Speaker 1: you have a strong conviction, you usually have, you know,
• 14:16
  Speaker 1: some factor that compels you to enhance your exposure to
• 14:19
  Speaker 1: an index in the short term. You usually have a
• 14:21
  Speaker 1: view that is going to go up or down, and
• 14:23
  Speaker 1: you usually have a view that there will be you know,
• 14:25
  Speaker 1: little volatility for the time period that you're holding a
• 14:28
  Speaker 1: three betat et F and that could be a day,
• 14:30
  Speaker 1: it could be a week or a month, but you know,
• 14:32
  Speaker 1: your conviction should be volva below and it will trend
• 14:35
  Speaker 1: in the correct direction. You know, most of the clients
• 14:38
  Speaker 1: that we see using these products are using them for
• 14:40
  Speaker 1: alpha generation, to take advantage of short term market opportunities,
• 14:44
  Speaker 1: and for portable alpha. You know, this is sort of
• 14:46
  Speaker 1: behind the construct of a long term buy and hold portfolio. Okay,
• 14:50
  Speaker 1: so are these hedge funds. They are are as family
• 14:54
  Speaker 1: offices and hedge funds institutional clients and also sophisticated retail traders.
• 14:59
  Speaker 1: Are these people who don't want to register as a
• 15:03
  Speaker 1: counter party for a staff for a clearinghouse for derivatives
• 15:07
  Speaker 1: and are using e t F as a proxy for
• 15:11
  Speaker 1: just doing the derivative trades themselves directly. Yeah, you know,
• 15:15
  Speaker 1: that's a that's a great point. You know. One of
• 15:16
  Speaker 1: the things that we say is where we are trying
• 15:18
  Speaker 1: to democratize leverage here. So if you have an r
• 15:20
  Speaker 1: a A an individual with a strong conviction that would
• 15:23
  Speaker 1: like to enhance his exposure to an index, you know
• 15:27
  Speaker 1: that person doesn't have an agreement with seven different counterparties
• 15:30
  Speaker 1: on the street, They don't have swap agreements and what not,
• 15:32
  Speaker 1: so it allows them to access that index. How do
• 15:35
  Speaker 1: you make sure that people who aren't sophisticated stay out?
• 15:39
  Speaker 1: I mean, especially given the fact that it has I'm
• 15:42
  Speaker 1: looking at Gush for example, which has an expense ratio
• 15:44
  Speaker 1: of nearly one percent, and I'm wondering, you know, how
• 15:47
  Speaker 1: do you make sure that you know, marketer or doesn't
• 15:51
  Speaker 1: go to see a higher potential spread for themselves, a
• 15:54
  Speaker 1: higher commission and market that to uh, to an individual,
• 15:58
  Speaker 1: It's it's really all about education. And so you know,
• 16:00
  Speaker 1: there are again sophisticated traders that are the appropriate crowd
• 16:03
  Speaker 1: for these products. If you're trading it for two or
• 16:06
  Speaker 1: three days, you probably don't care too much that the
• 16:08
  Speaker 1: expense use ninety five basis points because you're not paying
• 16:10
  Speaker 1: a whole lot. But for the other crowd, the classic
• 16:13
  Speaker 1: long term assid allocators. You know, we talk to them,
• 16:15
  Speaker 1: we educate them about light leverage. So at one point
• 16:18
  Speaker 1: to five beta product, for example, which will you know,
• 16:21
  Speaker 1: lightly enhance their underlying exposure to an index and you know,
• 16:26
  Speaker 1: in periods of net positive compounding, they'll get a little
• 16:28
  Speaker 1: bit of enhancement, but not the level of drawn out
• 16:30
  Speaker 1: and volatility that's say an oil, gas or energy et
• 16:34
  Speaker 1: F would have in the short term. But there are
• 16:35
  Speaker 1: a lot of education, um, you know, efforts to make
• 16:39
  Speaker 1: sure that the right people are using the three X products.
• 16:42
  Speaker 1: I just want to give you a chance to talk
• 16:43
  Speaker 1: a little bit about you bought you b o T
• 16:48
  Speaker 1: because this is really about what many people are interested in.
• 16:53
  Speaker 1: This is artificial intelligence and robotics. Yes, um so, I
• 16:56
  Speaker 1: love the ETF. Actually, I think it's one of the
• 16:58
  Speaker 1: most innovative ones we've come out with. It's three beta robotics,
• 17:01
  Speaker 1: artificial intelligence, and automation. So it's basically the idea that
• 17:06
  Speaker 1: you know a lot of these companies are looking at ideas,
• 17:08
  Speaker 1: designs and ways to automate manufacturing, um medical fields, and
• 17:14
  Speaker 1: you know, even military. So they're looking to create robots
• 17:17
  Speaker 1: that can replace say the aging Japanese population, uh in
• 17:21
  Speaker 1: the future, to staff factories in America and China with
• 17:24
  Speaker 1: sensors and you know, non human manned machines basically so
• 17:28
  Speaker 1: so really robotics. And in the medical field, it's you know,
• 17:31
  Speaker 1: making invasive surgery more efficient with companies like Intuitive Surgical.
• 17:36
  Speaker 1: And I think for the average investor, a lot of
• 17:39
  Speaker 1: them haven't heard of Kiants and Phinuk and Cassawa and
• 17:43
  Speaker 1: you know, Intuitive Surgical probably they have heard of, but
• 17:45
  Speaker 1: I think it's a it's a diverse basket of access
• 17:48
  Speaker 1: to those different sectors. Thanks very much for being with
• 17:51
  Speaker 1: us at Jabonsky is Managing director, Capital Markets Institutional et
• 17:56
  Speaker 1: F Strategists. For direction, Thanks for listening to the Bloomberg
• 18:04
  Speaker 1: P and L podcast. You can subscribe and listen to
• 18:06
  Speaker 1: interviews at Apple Podcasts, SoundCloud or whatever podcast platform you prefer.
• 18:11
  Speaker 1: I'm pim Fox. I'm on Twitter at pim Fox. I'm
• 18:15
  Speaker 1: on Twitter at Lisa abramoits one Before the podcast, you
• 18:18
  Speaker 1: can always catch us worldwide on Bloomberg Radio.