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#69 2026 Real Estate Outlook: Economist Chris Thornberg Tells You What’s Coming · Own More Doors

0:00
SPEAKER_01: Are you a real estate investor and you're wondering if 2026 is gonna be doom and gloom or if there's gonna be tons of opportunity?
0:05
SPEAKER_01: Well, tune in to today's show because I'm interviewing Chris Thornburg, who's an economist, and I get to ask him all the questions that I know you're thinking about.
0:14
SPEAKER_01: Let's hop right into it.
0:15
SPEAKER_01: Hey everyone, it's Juan Weees are coming to you from Mid-Wheelchair.
0:18
SPEAKER_01: We made the drive.
0:19
SPEAKER_01: Why?
0:19
SPEAKER_01: Because we're here with economist Christopher Thornburg.
0:23
SPEAKER_01: Uh Chris, we're gonna dive into a lot of questions.
0:26
SPEAKER_01: We're gonna answer the top questions that the people that I serve, the community that we serve, have.
0:32
SPEAKER_01: But tell us a little bit about yourself.
0:34
SPEAKER_02: All right.
0:35
SPEAKER_02: Uh yeah, great to have you here, by the way.
0:37
SPEAKER_02: Welcome to my uh my neck of the woods, so to speak.
0:40
SPEAKER_02: Uh as you noted, Chris Thornburg, uh, I'm an economist, which a lot, you know, I tell people that.
0:45
SPEAKER_02: I'm an economist, and they look at me kind of quizzically and go, What exactly do you do for a living?
0:50
SPEAKER_02: Yeah.
0:50
SPEAKER_02: Which is a good question.
0:51
SPEAKER_02: Former academic, used to teach at UCLA, but 20 years ago, I started this company, Beacon Economics, and we do economic research studies.
1:00
SPEAKER_02: We do impact studies, we do policy studies, we do market studies, we do forecasts, we work with private groups, we work with public groups.
1:06
SPEAKER_02: It's about 20 of us right now at the company.
1:10
SPEAKER_02: Um, and of course, I uh help people understand what's happening in our in our world today.
1:14
SPEAKER_02: And that's sort of sort of my job.
1:16
SPEAKER_01: Please note that Chris will be our our keynote speaker, February 26, 2026.
1:21
SPEAKER_01: It's a half day event.
1:22
SPEAKER_01: Make sure to get your tickets.
1:24
SPEAKER_01: There's still some left.
1:25
SPEAKER_01: And so to meet Chris, to hear him in person, please get your tickets.
1:28
SPEAKER_01: This is going to be our second annual multifamily investment summit.
1:32
SPEAKER_01: So, Chris, let's let's dive into it.
1:34
SPEAKER_01: Yeah.
1:34
SPEAKER_01: So I I think the people that I serve, apartment owners, housing providers, would say what can we expect when it comes to investments, specifically multifamily, in 2026?
1:49
SPEAKER_02: Yeah, and and it's a great question, obviously, especially after uh a few difficult years.
1:55
SPEAKER_02: We know, of course, about the big increase in interest rates, um, how that, of course, has has had an impact on cap rates, and we know that a lot of owners of various sorts of commercial real estate property are still sort of struggling through the process of figuring it all out.
2:09
SPEAKER_02: When I talk about apartments, when I think about real estate markets in general, I always like to divide it into two basic things, which is uh the supply side and of course the demand side.
2:19
SPEAKER_02: And on the demand side, um, the answer is things are good.
2:23
SPEAKER_02: Uh and uh look, I I appreciate that every time you pick up a paper, there's another story talking about how terrible and tragic everything is here in Southern California.
2:33
SPEAKER_02: And they go on and on about how renters are struggling to pay their rent, and supposedly we have some sort of rental affordability crisis going on in our county right now, in our state at this particular point in time.
2:48
SPEAKER_02: But if you come to the presentation in a couple weeks, um you're gonna hear me talk about the fact that many of the things that we hear from our elected leaders, many of the things we see in the papers, are not real.
3:00
SPEAKER_02: They're not in the day that I study on a day-to-day basis.
3:02
SPEAKER_02: Take, for example, just the basic idea of uh uh the fact that we supposedly have a rental affordability crisis.
3:09
SPEAKER_02: And I have to immediately point out to people that the median rent to income ratio in LA County at this particular point in time is lower than it was a decade ago.
3:18
SPEAKER_02: It's actually fallen over the last decade.
3:20
SPEAKER_02: And yes, I know rents are up, but the reason they've come down is believe it or not, renter incomes have been rising at a very, very solid pace.
3:28
SPEAKER_02: Over the last few years, there's been a lot of labor market tightness.
3:31
SPEAKER_02: Labor market tightness tends to benefit lower-skilled, lower-paid workers because those are the ones that have the opportunities for advancement.
3:38
SPEAKER_02: They might not in a in a looser economy.
3:41
SPEAKER_02: You've seen that show up as rising incomes for a lot of renting families, and it's that demand gets actually push rents up.
3:51
SPEAKER_02: So, with that said, where is the demand side of the equation?
3:55
SPEAKER_02: Well, guess what?
3:56
SPEAKER_02: People are still doing pretty good right now.
3:58
SPEAKER_02: Um the labor markets remain reasonably tight, uh, wages continue to go up at a relatively decent basis, and we all know that what the real problem in LA is we don't have enough housing.
4:10
SPEAKER_02: So the net result of that is almost assuredly renters are gonna do fine, and landlords are gonna be able to charge the rents they want to charge and fill up empty units at a relatively reasonable basis.
4:23
SPEAKER_02: Now, the other side, of course, of the equation is the supply side.
4:26
SPEAKER_02: And on that front, well, again, from a from an investor perspective, things are a little trickier.
4:32
SPEAKER_02: First thing you've got to worry about, of course, is the fact that there is other stuff coming online.
4:36
SPEAKER_02: Uh, in fact, over the last couple years, we've had a little bit of an increase in deliveries of units to the LA economy.
4:44
SPEAKER_02: We see that kind of coming into place in the fact that that rental growth has been a little bit soft.
4:49
SPEAKER_02: Again, it's not a demand phenomenon, it's absolutely a supply phenomenon.
4:53
SPEAKER_02: I'm keeping those a little bit soft in that front, a little bit more competition.
4:56
SPEAKER_02: But I'm not worried about it again, because renters are doing well.
4:59
SPEAKER_02: Again, you you you it may be that things aren't renting quite as fast as you want, but you're gonna rent it.
5:04
SPEAKER_02: That's okay.
5:05
SPEAKER_02: Um, and of course, given that the the various local cities have done really nothing to deal with the barriers to entry in this particular market, that too is a positive for people, of course, in the investing space.
5:22
SPEAKER_02: Um for me, I think that the biggest issue that that investors may be facing over the next couple years has nothing to do with local factors of supply and demand, but rather changes in the cost of capital that we're likely to see over the next few years, having to do with broader conditions and what may be happening at the federal level.
5:42
SPEAKER_02: Uh and of course, that interest rate phenomenon, it may be not an issue right now.
5:47
SPEAKER_02: Right now, actually, the market's looking a little better.
5:49
SPEAKER_02: Um, but that said, uh my anticipation is we're going to be seeing rising interest rates over the next few years.
5:56
SPEAKER_02: And that, of course, will have an additional impact on cap rates.
6:00
SPEAKER_02: And that means while things may be good right now, you still may find yourself in a position of not seeing the same level of appreciation over the next couple of years that we've seen over the last five.
6:10
SPEAKER_01: Interesting.
6:11
SPEAKER_01: So so we've seen interest rates go up.
6:14
SPEAKER_01: A lot of us, including myself, we're I'm I'm hoping, uh there's a lot of hope out there that that we're we're at the peak and that interest rates aren't gonna go up any further.
6:24
SPEAKER_01: Because what we've had is interest rates come up, cap rates have come up, and so we've we've seen uh people who bought five years ago, and and in the apartment world that that loan's gonna come do every five years it's gonna change.
6:36
SPEAKER_01: So now we're five years into it, and now a lot of them are panicking because everything has changed for them.
6:42
SPEAKER_01: And so that is good for the buyer, so for for the clients that we're representing to pick up those properties now from the person who's in a tough situation because their interest rate went from three to say six.
6:53
SPEAKER_01: Right.
6:54
SPEAKER_01: And and if you're lucky.
6:55
SPEAKER_01: If that and then also also then then the value took a dip.
6:59
SPEAKER_01: Okay?
7:00
SPEAKER_01: What we were hoping is that that 2026 would be the time that we would see an improvement in interest rates, but that's not what you're that that's not what you're telling us today.
7:08
SPEAKER_02: Well, you've actually seen an improvement in interest rates.
7:10
SPEAKER_02: Look, over the last year or so, uh the Federal Reserve has backed off in quantitative tightening.
7:15
SPEAKER_02: And that's a whole other conversation, by the way.
7:18
SPEAKER_02: Uh but the backing off of quantitative tightening has allowed a little bit more liquidity in the market, and mortgage rates have indeed drifted down.
7:25
SPEAKER_02: Uh 30-year fixed rate mortgages right now are running a year over 6%, which is the best they've been in a couple years.
7:31
SPEAKER_02: And that would suggest that, yes, perhaps we'll see a different sort of interest rate regime over the course of the next year or so.
7:39
SPEAKER_02: But that said, again, when even thinking about interest rates, I go back as always to the basic phenomenon of supply and demand.
7:45
SPEAKER_02: And when it comes to interest rates, we can think about supply and demand of capital.
7:49
SPEAKER_02: There's been a huge increase in demand for capital in the United States, primarily by the federal government itself, who's running a$2 trillion plus deficit at this particular point in time.
7:58
SPEAKER_02: But that hasn't actually had a material impact on interest rates yet, in part because the nation has seen an enormous influx of capital from the rest of the world.
8:08
SPEAKER_02: Um, and that inflow of money has, if you will, offset some of that increase in demand from federal government borrowing.
8:15
SPEAKER_02: Now, my worry is that while interest rates will start this year at a relatively good level, as the year goes on at some point in time, we're going to see confidence in our equity markets start to wane.
8:28
SPEAKER_02: Okay.
8:29
SPEAKER_02: And when that happens, the dollar starts to drop.
8:31
SPEAKER_02: When the dollar starts to drop, almost as surely that means higher interest rates inside the United States because we're going to have to start self-funding our own deficit.
8:39
SPEAKER_02: And that's where things get tricky.
8:41
SPEAKER_02: So my argument is A, prepare for higher interest rates in the future, given the fact that the federal borrowing surge is going to continue.
8:50
SPEAKER_02: And at some point the bubble will pop.
8:53
SPEAKER_02: And don't let, if you will, this mirage of falling rates at the beginning of 2026 blind you to that fact.
9:01
SPEAKER_02: Look, you're absolutely right.
9:02
SPEAKER_02: A few years ago, people got into the market at very low interest rates when the market was popping.
9:07
SPEAKER_02: A few years later, inflation, Fed reset, they're having a refi.
9:12
SPEAKER_02: Um, and you know, a lot of folks have avoided the hard truth.
9:15
SPEAKER_02: They've been playing the sixth, 10, and pretend game.
9:18
unknown: Okay.
9:18
unknown: Yeah.
9:19
SPEAKER_02: But we are now at a point where, again, it looks a little better, and that may get people to start thinking about, if you will, overleveraging.
9:28
SPEAKER_02: And uh this is it's a head fake.
9:31
SPEAKER_02: Don't kid yourself for a second.
9:33
SPEAKER_02: All everything tells us that uh on net, when you look at our economy, it's far more likely for interest rates to be coming up than going down over the next few years.
9:42
SPEAKER_02: And what you don't want to do is get yourself caught out in front of your skis the next time there's a big surge in interest rates.
9:48
SPEAKER_02: So I would tell people proceed cautiously, um, don't overborrow, anticipate higher rates at some point in done.
9:56
SPEAKER_02: In other words, continue to be cautious on that particular front.
9:59
SPEAKER_01: So right now, when we're selling someone, say, a 10-unit building, you know, the lenders will say, hey, we'll give you a three-year option and a five-year option.
10:06
SPEAKER_01: And a lot of the lenders are saying, hey, just go with the three-year because we expect after the three years the interest rates will be low.
10:11
SPEAKER_01: I just don't know if that's the same.
10:12
SPEAKER_01: No, no, absolutely not.
10:13
SPEAKER_01: Okay, so go for the five-year because we have to be able to ride that through.
10:18
SPEAKER_02: Yeah, absolutely.
10:19
SPEAKER_02: And and I know it while it will diminish your potential returns up front, you also want to not excessively use leverage.
10:27
SPEAKER_02: Because if you excessively lose leverage, and my my hunch is right, nights come up, cap rates are gonna change, and suddenly you're gonna have to find yourself in a position of having to put more equity into the building when you do refine next time.
10:40
SPEAKER_01: Well, that's what's happening right now.
10:41
SPEAKER_02: Exactly.
10:41
SPEAKER_02: And look, that's what be getting people into trouble.
10:43
SPEAKER_01: Yes.
10:44
SPEAKER_01: Yes.
10:45
SPEAKER_01: Okay, so you talked about a bubble, people ask about a recession.
10:49
SPEAKER_01: We asked, you know, I told people that we I was gonna be coming in.
10:51
SPEAKER_01: One of the questions are like, uh, where is the economy headed?
10:54
SPEAKER_01: Other people with YouTube channels are talking about this doom and gloom, but they've been talking about this doom and gloom, this bubble thing for years, and I keep shaking my head saying, like, it's not happening.
11:03
SPEAKER_01: I don't know what you're talking about, but how do you respond to that?
11:06
SPEAKER_02: Well, uh there's two parts to the doom and gloom scenario.
11:10
SPEAKER_02: The one part of the doom and gloom scenario goes back to this idea that so many Americans are are struggling, they can't pay for food, they can't pay for housing, the so-called K-shaped recovery, which gets repeated over and over and over again in the press.
11:24
SPEAKER_02: Yet when you look at the data again, you don't see that actual situation in our nation at this particular point in time.
11:31
SPEAKER_02: If you look at real incomes over the last decade, for the top 5%, they're up about 30%.
11:36
SPEAKER_02: For the bottom 80%, they're up about 23%.
11:39
unknown: Okay.
11:39
SPEAKER_02: So it's a little bit of a gap, but the bottom 50% are doing pretty well.
11:44
SPEAKER_02: And given that these are renters, well, no wonder you see uh very few people actually being uh, you know, uh evicted from their home at this particular point in time, because most of them are indeed in relatively good shape.
11:57
SPEAKER_02: Uh, it's not what you think.
11:59
SPEAKER_02: So on that front, uh I continue to be optimistic about, again, renters.
12:05
SPEAKER_02: But that said, um uh the real interesting thing is when you start to recognize that much of this abundance is coming from the fact that we don't have to pay for a couple trillion dollars of federal borrowing on an annual basis.
12:20
SPEAKER_02: Now, when people hear that number$2.1,$2.2 trillion in borrowing, it's tough to put your head around.
12:27
SPEAKER_02: But let me put it in a in a way I think people can better understand.
12:31
SPEAKER_02: That if you wanted to close a federal deficit this year, and I'm not even talking about paying down the$40 trillion in existing debt, if you just wanted to close the deficit, the average household in the United States would have to pay between$15 and$16,000 more in taxes per year.
12:46
SPEAKER_02: That is an enormous sum of money.
12:49
SPEAKER_02: Um, and it's that subsidy, that inherent subsidy from the federal government, that is largely responsible for our kind of collective uh financial well-being.
13:00
SPEAKER_02: Uh but again, going back to that deficit, the deficit's not sustainable.
13:05
SPEAKER_02: At some point in time, we're gonna have to pay the piper.
13:07
SPEAKER_02: And when we get to that point in time, what will be the politics?
13:10
SPEAKER_02: Who's gonna be asked to pay more?
13:13
SPEAKER_02: And how much of that will come out of the inherent subsidies that go to so many people at the bottom end of the pyramid?
13:19
SPEAKER_02: There's a lot of big questions out there.
13:21
SPEAKER_02: And and for me, um, going back to the other part of the equation, which is the financial bubble, almost assuredly what's going to cause that fiscal crisis to be dealt with is when the financial bubble, of course, actually itself pops.
13:35
SPEAKER_02: Now, what financial bubble?
13:37
SPEAKER_02: And we talked about that as well.
13:38
SPEAKER_02: Every keeps talking about a popping bubble.
13:40
SPEAKER_02: Of course, what they're talking about here is the is the AI bubble.
13:43
SPEAKER_02: That is to say, uh our equity prices have gone up at a record pace.
13:48
SPEAKER_02: Uh we have the second highest PE ratio in our stock markets ever.
13:52
SPEAKER_02: The only other time the PE ratio has been higher was in 1999 and 2000, right before the tech bust of 2001.
13:59
SPEAKER_02: Um, you have the cryptocurrency nonsense.
14:02
SPEAKER_02: Uh, Wall Street last year had record bonuses.
14:06
SPEAKER_02: And I'll tell you, you know, that Warren Buffett famously said, be fearful when others are greedy.
14:11
SPEAKER_02: And when Wall Street's pulling in record bonuses, something's not right.
14:15
SPEAKER_02: Something smells in the land of Denmark.
14:17
SPEAKER_02: And yeah, that's a bubble.
14:18
SPEAKER_02: That's not to say that AI isn't a transformative technology.
14:21
SPEAKER_02: That's a different conversation completely.
14:23
SPEAKER_02: The question is, is are the companies that have seen our equity prices going up so much actually going to see profits that match that valuation, given, of course, changes in AI on that front, I don't know, I don't see how they could.
14:37
SPEAKER_02: Right.
14:38
SPEAKER_02: So the net result of that is yes, absolutely, it's a bubble.
14:41
SPEAKER_02: And at some point in time that bubble pops.
14:44
SPEAKER_02: When that happens, foreign investors in particular will be less inclined to put money here.
14:48
SPEAKER_02: In fact, they may be well inclined to take money out.
14:51
SPEAKER_02: And that's what's going to upset the Apple cart.
14:53
SPEAKER_02: That's gonna cause the fall of the dollar, that's gonna cause the increase in interest rates, that's when it's gonna start setting off the fiscal crisis that I'm really worried about.
15:02
SPEAKER_02: Real estate specifically is not directly at threat.
15:08
SPEAKER_02: We don't have a private sector debt problem, we don't have a mortgage problem in the United States.
15:14
SPEAKER_02: Our our debt problem is on the public side of the ledger, which is something that this nation really hasn't dealt with before.
15:20
SPEAKER_02: And I don't think a lot of people appreciate what a situation like that would look like.
15:26
SPEAKER_02: But when that financial bubble pops, foreign investors know how to put money here, and that's gonna set off a rush for the exit.
15:35
SPEAKER_02: We'll have to start self-funding the deficit, and that means an increase in interest rate because there's a less supply of capital, just as much demand, rates go up, and that creates an enormous increase in interest rate payments by the federal government, and that causes the deficit to go up all by itself without any changes in spending on the part of the federal government.
15:54
SPEAKER_02: And you can quickly see the wheels coming off this train.
15:56
SPEAKER_02: What ends up happening for real estate is they get caught, of course, if you will, in the backwash.
16:01
SPEAKER_02: That while this is going on, they're saying their interest rates going up, and then the federal government needs to start cutting spending, and there yet again do they start cutting Section A housing, for example.
16:13
SPEAKER_02: We don't know.
16:14
SPEAKER_02: This all has to get there.
16:15
SPEAKER_02: But you do have to be worried, very, very worried about that.
16:19
SPEAKER_02: Now they asked the question, the other question you really asked me was well, when does it happen?
16:22
SPEAKER_02: And the honest answer is, and I realize I'm a forecaster, I'm not supposed to say this all out, but the real answer is I have no idea.
16:29
SPEAKER_02: Uh you can't.
16:30
SPEAKER_02: Bubbles by definition are um unpredictable.
16:34
SPEAKER_01: So if I'm we represent sellers that have owned for 30 years, that done well, yeah, they've they've gone, you know, they've gone a couple rounds in the boxing ring with tenants and maintenance and everything else, insurance costs.
16:48
SPEAKER_01: And a lot of them are saying, hey, now it's time to sell.
16:52
SPEAKER_01: And then they look at me and they say, Who is gonna buy this from me?
16:55
SPEAKER_01: Because I'm fed up with rent control, I'm fed up with all these things, I'm you know, uh the insurance is asking that I upgrade the electrical and the roof, and it's not worth what it was five years ago, who's gonna want to buy it from me?
17:07
SPEAKER_01: And then I look them dead in the eye, I'm like the younger version of you.
17:09
SPEAKER_01: Yeah.
17:10
SPEAKER_01: That's who's gonna want to buy it.
17:12
SPEAKER_01: Um and so we do have so I think if someone's watching this and they're like, okay, I'm in I've owned for, you know, I I own several apartment buildings throughout LA Orange County.
17:23
SPEAKER_01: Given what Chris just said, maybe I do want to sell right now.
17:28
SPEAKER_02: Possibly.
17:29
SPEAKER_02: Uh again, um a lot of it depends on on what your plans are, right?
17:34
SPEAKER_02: I mean, look, why does one invest in an apartment building?
17:37
SPEAKER_02: Well th the best way to live your life is to make money without having to work.
17:42
SPEAKER_02: Yes.
17:42
SPEAKER_02: And and yes, owning an apartment building, there's some work involved there, but I tell you what, uh ultimately it's still less work, particularly if you have a good apartment manager, uh, than of course uh a 40-hour a week job as the case may be.
17:56
SPEAKER_02: And there are people who are planning for the future who want that option, they're willing to dive in and and build that stream of cash and into the future.
18:03
SPEAKER_02: As for the sellers, well, again, maybe you're beyond that point.
18:06
SPEAKER_02: Maybe you already have your money in the bank, you're getting your flow, and now you just want to clear off and be done with it.
18:13
SPEAKER_02: There's always those changes in life as the case may be.
18:17
SPEAKER_02: But the other thing to keep in mind is this.
18:18
SPEAKER_02: What's interesting about California is there's are we a difficult place to operate in?
18:24
SPEAKER_02: Absolutely.
18:24
SPEAKER_02: From a regulatory standpoint, absolute nightmare.
18:28
SPEAKER_02: Um, yes, you're talking about rent control, um, which is something I think we need to worry about, uh, particularly at this particular point in time.
18:35
SPEAKER_02: But all that said, the thing about California we all have to keep in mind is is twofold.
18:41
SPEAKER_02: A, it's a place where people want to live.
18:43
SPEAKER_02: The demand to come to the state remains high, and that ultimately is one of the reasons why this is a place that these buildings can continue to create, if you will, future returns.
18:56
SPEAKER_02: Because people want to live here.
18:57
SPEAKER_02: I'd be a lot more worried about buying an apartment building in, say, Ohio, which doesn't have some of these regulatory issues, but nevertheless also has a much poorer medium-term outlook because people want to get out of the Northeast.
19:11
SPEAKER_02: They don't want to be in that mess anymore.
19:12
SPEAKER_02: They don't want to be in the snow.
19:14
SPEAKER_02: Um, and of course, the other part of it is that unlike places in the Southeast, such as Tennessee, we're not overbuilding.
19:21
SPEAKER_02: Go back to those regulations that prevent a lot of competition and a lot of the units coming coming online.
19:26
SPEAKER_02: While it is true that rents are soft in LA uh at this particular point in time, they're a lot better in much of the United States.
19:32
SPEAKER_02: In fact, they've been falling pretty steadily in in Tennessee and Georgia uh and Texas, all of these markets are soft right now.
19:40
SPEAKER_02: And yet again, ooh, you have more problems here, but you have less competition, there's less entry, and and perhaps that that uh is enough to offset, if you will, some of those regulatory concerns having to do with renters.
19:52
SPEAKER_01: If you're if you're a buyer watching this video right now and and you're I'm telling you that the values are down by 25%.
20:00
SPEAKER_01: Yeah, I I assume that we were at our bottom.
20:04
SPEAKER_01: But if interest rates keep going up, well then the cap rate's gonna go up, then the value is getting gonna get pulled down.
20:09
SPEAKER_01: And so that's that could put potentially be happening in the next uh three to five years.
20:13
SPEAKER_02: Absolutely.
20:14
SPEAKER_02: And and I think that anybody who's getting in real estate right now needs to appreciate that the interest rates really will go up in the next few years.
20:21
SPEAKER_02: They're not gonna come down.
20:22
SPEAKER_02: Don't buy into that myth.
20:24
SPEAKER_02: It's not there.
20:25
SPEAKER_02: But that said, look, it it that's part of the process.
20:28
SPEAKER_02: If you sit down and you and you and you plan it out appropriately, um, okay, maybe you're not gonna make as much in returns at the very beginning of the process as you will later on.
20:41
SPEAKER_02: But here's the other side of it.
20:42
SPEAKER_02: Um go back to um what I was talking about in terms of this fiscal crisis.
20:50
SPEAKER_02: Because there's a whole other thing we haven't really talked about here, and it's part of the interest rate scenario as the case may be.
20:56
SPEAKER_02: When we get to a point in time and that fiscal stress is starting to rise, the government has to make decisions, they're gonna have to raise taxes, they're gonna have to cut spending.
21:06
SPEAKER_02: But my guess is they're gonna find that very politically difficult to do.
21:10
SPEAKER_02: And as a result of that, they're almost assuredly gonna be reaching out to the Federal Reserve for a little bit of help.
21:15
SPEAKER_02: A little bit of help, of course, will come in the form of quantitative easing.
21:19
SPEAKER_02: And despite the fact that Ben Bernanke, Janet Young, and Jerome Powell have all told us over and over again that quantitative easing didn't have anything to do with inflation, quantitative easing has everything to do with inflation because it's basically printing money.
21:32
SPEAKER_02: My guess is they're gonna throw a little QE at the problem as well.
21:35
SPEAKER_02: That's gonna create a little inflationary pressures.
21:38
SPEAKER_02: That'll be part of the thing pushing interest rates up.
21:40
SPEAKER_02: But inflation is great for landlords.
21:44
SPEAKER_02: Because the inflationary pressures will pick up the price the nominal price of the value of your of your apartment building, and it also tends to push up rents.
21:52
SPEAKER_02: So the combination of these two things means that there is some potential relief.
22:00
SPEAKER_02: If you will, from those higher interest rates in the form of these nominal gains.
22:04
SPEAKER_02: Um, clearly, if you go back to the 1970s, for example, the last big inflationary surge, was that a great time owing apartments?
22:12
SPEAKER_02: No, not really.
22:13
SPEAKER_02: Uh I'll grant you that.
22:15
SPEAKER_02: That said, if you held on, when you got out of that inflationary situation, boom, valuations took off.
22:23
SPEAKER_02: You know, it's funny, my father was a real estate agent.
22:25
SPEAKER_02: Okay.
22:25
SPEAKER_02: And uh did apartment buildings in Rochester, New York.
22:28
SPEAKER_01: Okay.
22:28
SPEAKER_02: Rochester, New York, where I'm from.
22:30
SPEAKER_02: I got his license in, I think it was 79 and was uh head of broker brokerage in his own company by 82.
22:37
SPEAKER_02: And I asked him one point in time, Well, what were the best years for you?
22:41
SPEAKER_02: And oddly enough, he said to me, 1983 to 1985.
22:45
SPEAKER_02: And I went, What?
22:47
SPEAKER_02: I said, I thought interests were like double digit.
22:49
SPEAKER_02: And he goes, Yeah.
22:50
SPEAKER_02: I go, how was your best time?
22:52
SPEAKER_02: He said, Well, look, we were coming out of it.
22:54
SPEAKER_02: Inflation was down, the economy was taking off, and it was boom, boom, boom.
23:00
SPEAKER_02: And people were buying and selling it.
23:02
SPEAKER_02: And what people don't appreciate is that the what if you can make it to the top of the hill, you got a nice smooth ride down the other side.
23:11
SPEAKER_02: And my argument for folks would be look, you you you accept the risks, you prepare for the risks, but at the back end of that, it might be a little longer than you're hoping for, there's a big payoff.
23:23
SPEAKER_02: And I gotta tell you, someone in your 30s right now, if you're gonna own this thing for 20 years, think of it this way: seven years, probably not great for all the reasons we just talked about.
23:33
SPEAKER_02: The next 13.
23:34
SPEAKER_01: Right, right.
23:35
SPEAKER_01: Yeah, and that's and that's an argument that I use all the time.
23:38
SPEAKER_01: You know, we use the term cap rates, which is just a snapshot of one of 12 months income.
23:43
SPEAKER_01: And I tell people, hey, look at the income of today is not the income of tomorrow, and and as income goes up, values come up, right?
23:49
SPEAKER_01: Right.
23:50
SPEAKER_01: So you you you can't make a decision on a on an asset that you're gonna own for 20 years, but you're just looking at a 12-month snapshot.
23:57
SPEAKER_01: It's kind of what this is.
23:58
SPEAKER_01: And so would the advice, because I want to because I want someone to say, well, one should have asked.
24:01
SPEAKER_01: Like, would the advice be if if I'm an investor today, looking, say LA, Orange County, I'm looking at a 10-unit building, should I wait because interest rates go up, values are gonna come down, I get it that I'm gonna be eating this higher interest rate, but I'm gonna get a lower price property.
24:21
SPEAKER_02: Yes.
24:22
SPEAKER_02: Uh you you could try and play it out that way.
24:25
SPEAKER_02: Um but well again, I I I'm not one to say you should try and time the market.
24:34
SPEAKER_00: No, I I get this.
24:36
SPEAKER_02: You know, and and and my clients are gonna ask.
24:38
SPEAKER_02: They're gonna ask you.
24:39
SPEAKER_02: I know they would be able to do that.
24:39
SPEAKER_00: So then I need to say, uh, here's what I think you should do.
24:42
SPEAKER_02: Yeah, I I don't no.
24:42
SPEAKER_02: But actually I would actually argue the opposite.
24:45
SPEAKER_02: What one of the things about getting into the market right now is there are a lot of people who over-leverage themselves in 2021 who are now looking for an exit.
24:55
SPEAKER_01: Uh yes.
24:56
SPEAKER_01: And we're we're watching them.
24:57
SPEAKER_02: Yes, yes.
24:58
SPEAKER_02: And and so do I think it's a good time to buy right now?
25:00
SPEAKER_02: Yeah, I do.
25:01
SPEAKER_01: Yeah.
25:01
SPEAKER_02: Um, because there are all these people who need cash injections.
25:06
SPEAKER_02: You can get into the market, probably find a pretty good deal.
25:10
SPEAKER_02: Uh but don't make the mistake they did.
25:14
SPEAKER_02: In 2021, too many people over-leveraged.
25:17
SPEAKER_02: Yes.
25:18
SPEAKER_02: They picked up too much debt, they extended themselves too much, and now they're struggling with it.
25:22
SPEAKER_02: You gotta be smart about your buys.
25:25
SPEAKER_02: Go find that killer deal.
25:27
SPEAKER_02: Um, understand the rates are gonna go up, keep yourself in a not excessively leveraged position, give yourself some wiggle room.
25:37
SPEAKER_02: Will it reduce some of your returns in the short run?
25:40
SPEAKER_02: Yeah, but that's okay.
25:41
SPEAKER_02: Because the trade-off is you're in a safer position.
25:45
SPEAKER_02: When the storm hits, you're gonna weather that storm.
25:47
SPEAKER_02: And as noted, when the storm's over, skies are clear, that's when you pick it up.
25:53
SPEAKER_02: Got it.
25:53
SPEAKER_02: So I actually think today's probably a very good time to buy.
25:56
SPEAKER_01: That's exactly what we've been advising our our our clients to do.
26:00
SPEAKER_01: I know you mentioned um AI bubble, but I I won't talk about the about the actual bubble, but here's here's my perception on what I see happening is that AI is gonna replace a lot of our professional jobs.
26:16
SPEAKER_01: And so I could see AI taking over my job.
26:19
SPEAKER_01: So, okay, so let's just say that someone goes on, finds an eight-unit building, it tells AI, please, please analyze this, underwrite this for me, and tell me who should do the loan, and write up the offer and submit it to the and submit it to the listing agent.
26:35
SPEAKER_01: Like those things that when I tell someone, I'm like, it could actually probably do that now.
26:40
SPEAKER_01: And then the question is, are they gonna need, say, a real estate agent or a professional or an advisor?
26:46
SPEAKER_01: What I'm thinking is that we as investors need to own hard assets, so uh businesses that AI can't do, um uh trades that AI can't do, and and obviously real estate, AI is not gonna own real estate.
26:58
SPEAKER_01: So that's kind of one of my concerns.
27:00
SPEAKER_01: Are we gonna be replaced?
27:03
unknown: No.
27:04
SPEAKER_02: No, no, no.
27:04
SPEAKER_02: I I I don't think so.
27:05
SPEAKER_02: Because look, there's nothing intelligent about artificial intelligence.
27:08
SPEAKER_02: Okay?
27:09
SPEAKER_02: Um it's been mislabeled and misnamed.
27:13
SPEAKER_02: Um artificial intelligence, as they call it, is really simply um uh uh the fact that what they've been able to do is get computers to understand human speech.
27:28
SPEAKER_02: Before we had to translate, we had to take human speech and in some convoluted way turn it in zeros and ones.
27:34
SPEAKER_02: But now we've built this fancy interpretation engine that allows computers to go out and grab human text and understand, kind of understand what it means.
27:44
SPEAKER_02: They could sort it out and organize it, uh, they could spit attack to you in some logical way.
27:49
SPEAKER_02: But it's not thinking, it's just processing existing information.
27:54
SPEAKER_02: Uh, if you go to an AI engine and you ask it a question, it will go out there into the world and it will find the median response to that question.
28:03
SPEAKER_02: It's not thinking, it's finding other people to think.
28:06
SPEAKER_02: So the question you just asked me is, is there any room for a specialist in that in that world?
28:13
SPEAKER_02: And the answer is of course there is.
28:15
SPEAKER_02: Specialists, by definition, have more information than the median person.
28:20
SPEAKER_02: Specialists, by definition, are smarter than the median opinion on the internet.
28:26
SPEAKER_02: So, from my perspective, I think that um AI has been oversold.
28:32
SPEAKER_02: Uh, it's a fantastic tool.
28:35
SPEAKER_02: It should make your job more efficient.
28:39
SPEAKER_02: You should be leading them, helping them understand what it is they need to buy, what kind of risks they need to worry about, and how to think about this investment property from a sale or a purchase perspective.
28:51
SPEAKER_02: And I would anticipate that you would use AI to more efficiently help them through the process.
28:58
SPEAKER_02: But the AI isn't going to replace your expertise, it's not going to replace my expertise.
29:03
SPEAKER_02: Um, the kind of jobs that are going to be replaced by AI are jobs that are largely perfunctory, where you're simply moving papers around on a desk.
29:12
SPEAKER_02: Um I would hope those jobs would be automated and make everybody's life more productive and more efficient.
29:19
SPEAKER_02: Um but I don't think I think we're a long way from from watching the expert no longer become important.
29:25
SPEAKER_01: Chris, uh as an economist, what are the like what's a commonly asked question that you're receiving now?
29:33
SPEAKER_02: A lot of them we already touched on.
29:34
SPEAKER_02: What's going to happen with inflation?
29:35
SPEAKER_02: What's going to happen with interest rates?
29:37
SPEAKER_02: What's going to happen to the value of my house?
29:38
SPEAKER_02: Is the state of California doomed, as the case may be?
29:43
SPEAKER_02: Yeah.
29:43
SPEAKER_02: I tell you, when I talk to the to folks nowadays, and and um I'm giving a presentation again, I'll be with you in a few weeks, and they'll see some of this as well.
29:53
SPEAKER_02: I started the conversation by saying, look, there's there's two economies we're gonna talk about today.
29:57
SPEAKER_02: And that of course immediately gets people to be thinking, oh, he's gonna talk about the K-shaped recovery, winners and losers, or red states versus blue states, and and how terrible it is to be in the state.
30:06
SPEAKER_02: But that's not what I'm gonna talk about.
30:07
SPEAKER_02: What I'm gonna talk about is the economy we think we have versus the economy we actually have.
30:13
SPEAKER_02: And for me, when I start talking about the economy and I start with that dichotomy and I start telling them what the data actually tells me, a lot of the questions they have suddenly fade away because they realize those questions are based on information they got from a news headline, and that news headline is mischaracterizing what's really going on around us.
30:33
SPEAKER_02: Um so a lot of the questions boil around how do we get to this place?
30:39
SPEAKER_02: Why are we so fooled by things?
30:44
SPEAKER_02: And ultimately, what does that mean for the for the future of the U.S.
30:48
SPEAKER_02: political system, as the case may be?
30:50
SPEAKER_02: On the other front, I I don't have a lot of clean answers.
30:54
SPEAKER_02: We we live in interesting times, precarious times, but they're not precarious because of the economy.
30:59
SPEAKER_02: The economy's great.
31:01
SPEAKER_02: It's precarious because of human psychology, because of human sociology, and how the internet is just messing with us.
31:11
SPEAKER_02: Uh we are in a world of information overflow, and somehow or other we thought people were going to be able to deal with this massive inflow of information in a reasonable way.
31:22
SPEAKER_02: But what it's done, more than anything else, is it's it's it's almost uh it magnified our own biases, our own misinterpretations of the world around us, which is why we see the rise of populism in the age of abundance.
31:39
SPEAKER_02: Trevor Burrus, Jr.
31:39
SPEAKER_01: You brought up California.
31:41
SPEAKER_01: So a lot of so a lot of people that are exiting as sellers now, and one of the main reasons people hire me is they'll say, look, I'm sick and tired of our politics in California.
31:51
SPEAKER_02: Yeah.
31:52
SPEAKER_01: Um large employers are leaving, everyone's leaving.
31:56
SPEAKER_01: And it's interesting, Chris, because I don't know that we're uh fighting to get to the border to leave California, but somehow I hear it over and over again.
32:04
SPEAKER_01: And for my business, if someone believes that, and like I can't convince them otherwise.
32:08
SPEAKER_01: And if you decide that you want to hire me because you want to get rid of your assets, that's fine.
32:12
SPEAKER_01: Someone else wants to buy them from you.
32:14
SPEAKER_01: Yeah.
32:14
SPEAKER_01: But there is a narrative that it that uh that that California is doomed.
32:20
SPEAKER_01: Don't do business here, don't have a business here.
32:22
SPEAKER_01: Yeah.
32:22
SPEAKER_01: Um what's your advice there?
32:25
SPEAKER_02: Um they're wrong.
32:26
SPEAKER_02: Okay.
32:27
SPEAKER_02: Simple as that.
32:28
SPEAKER_02: California is, I don't know, depending on how strong the dollar is, something between the sixth and fourth largest economy in the world.
32:36
SPEAKER_02: Um we aren't always the most reasonable or rational places, but there are a lot of large economies in there, neither reasonable nor rational, but there's a lot of people making money in them, as the case may be.
32:45
SPEAKER_02: Places go through cycles.
32:48
SPEAKER_02: And uh take the Bay Area, for example, as a as a great microcosm what we're talking about.
32:53
SPEAKER_02: I I would argue that Bay Area hit absolute rock bottom in 2021.
32:58
SPEAKER_02: The the political ridiculousness of what was happening in that place was off the charts, and everything was in complete free fall.
33:05
SPEAKER_02: Here we are a couple years later, and suddenly there's a breath of fresh air up there.
33:10
SPEAKER_02: Politics as usual were tossed out because people were fed up with it.
33:14
SPEAKER_02: And there's a a new mayor in San Francisco who's doing great and shaking things up, and there's a breath of fresh air in that city.
33:20
SPEAKER_02: Uh, we have a mayor in San Jose who's who's kicking buck and taking names, and he just announced he's gonna run for governor, which would be a fantastic opportunity for this particular state.
33:29
SPEAKER_02: And what this all says to me is is is there is suddenly starting to be a general sense of dissatisfaction with politics as usual.
33:36
SPEAKER_02: And I believe that over the next few years you're going to see pushback, and we're gonna be get back on a on a more, if you will, level-headed basis.
33:46
SPEAKER_02: Yet again, that's my belief.
33:48
SPEAKER_02: Other people may not believe that, but if you're thinking about buying real estate in California, and I own real estate here, uh you should understand, again, go back to the idea that you are buying a long-run asset, and the long run for California is clearly very, very good.
34:04
SPEAKER_02: We have very, very good outlook.
34:06
SPEAKER_02: One of the nicest places on the planet, some of the smartest people on the planet, some of the most important businesses on the planet, call this place home.
34:14
SPEAKER_02: That's not going to go away anytime in the near future.
34:17
SPEAKER_01: When we're talking about sales, any any insights?
34:20
SPEAKER_01: So 2020 2025 in multifamily commercial, pretty stale.
34:27
SPEAKER_01: Um, would can we expect maybe an improvement in sales transactions uh this year?
34:33
SPEAKER_02: Oh, it's already happening.
34:34
SPEAKER_02: And actually, I would argue that 2025 wasn't all that bad.
34:37
SPEAKER_02: Transactions were picking up.
34:38
SPEAKER_02: Certainly after a couple of years where nothing was happening.
34:41
SPEAKER_02: You started to see increase in activity.
34:43
SPEAKER_02: Um was recently looking at some surveys from the industry, people are are again picking up things.
34:49
SPEAKER_02: Um some of the folks who took hits are finally starting to work through their problems.
34:54
SPEAKER_02: Uh it's funny, you don't see bank debt is still really, really clean, but we know there's backroom workouts going on.
35:01
SPEAKER_02: Yes.
35:01
SPEAKER_02: I talked to a receivers group last night and they're busy, but that's a good thing.
35:06
SPEAKER_02: Um, you know, they they talk about this idea of zombie building, zombie real estate, of zombie governments, zombie banks.
35:14
SPEAKER_02: These take place when government markets policies are there to prevent a market from just working through its problems.
35:25
SPEAKER_02: We're past that point.
35:26
SPEAKER_02: Things are starting to move.
35:27
SPEAKER_02: And I think that that that you with the return of capital and everything else, it's gonna be a decent year.
35:34
SPEAKER_02: I think there's gonna be opportunities out there.
35:36
SPEAKER_02: But again, that's all predicating the idea, and a couple years after that, we're gonna have another problem.
35:42
SPEAKER_01: Got it.
35:43
SPEAKER_02: So take advantage, make hay when the sun shines, but remember the dark clouds on the horizon and appreciate you gotta weather that storm that's out there in the not too distant future.
35:56
SPEAKER_02: That's always the case.
35:57
SPEAKER_02: There's look, there's always another recession, there's always gonna be another economic problem.
36:02
SPEAKER_02: You can't avoid that.
36:04
SPEAKER_02: And to try and avoid it and try to time it, you're just gonna fail miserably.
36:08
SPEAKER_02: But if you go into it with your eyes open, if you go into it with some common sense and the right advice, you can make good choices and do very well for yourself in the long run.
36:16
SPEAKER_01: Well, thank you for that, Chris.
36:18
SPEAKER_01: Um and we kind of talked about this, but a couple years ago we were talking about this this avalanche of debt on the commercial front that's gonna come.
36:25
SPEAKER_01: We talked about the blend and extend.
36:27
SPEAKER_01: I'm seeing, I'm seeing out there that, like, hey, that's not gonna continue.
36:31
SPEAKER_01: There you're gonna start seeing foreclosed properties, which y we've yet to see that.
36:36
SPEAKER_02: Yeah.
36:36
unknown: Yeah.
36:37
SPEAKER_01: Can we expect that in 2026?
36:38
SPEAKER_01: Are you hearing that?
36:39
SPEAKER_01: No, no, no, no.
36:40
SPEAKER_02: It's gonna be quiet workouts.
36:41
SPEAKER_02: Look, foreclosures are not good for anybody.
36:44
SPEAKER_02: They're not good for the lenders, they're not good for the for the borrowers.
36:48
SPEAKER_02: Um and if there is a way to work it out, people will find a way to work it out.
36:56
SPEAKER_02: That is ultimately the best solution for everybody involved.
36:59
SPEAKER_02: One of the things that we have been um well, we benefited from is the fact that the economy has continued to grow.
37:08
SPEAKER_02: As much as the uh insurgent inflation and the increase in interest rates hit investors, hit owners, the front end of the house has been doing fine.
37:19
SPEAKER_02: Rents have been reasonably stable.
37:21
SPEAKER_02: Yeah.
37:21
SPEAKER_02: On outside of office space, you haven't seen a huge increase in vacancies.
37:25
SPEAKER_02: Um and then a result of that is you have enough cash flow to work through the process.
37:32
SPEAKER_02: When things get really ugly is when you can't service your existing debt with your cash flows.
37:40
SPEAKER_02: That's when the problems really get ugly.
37:42
SPEAKER_02: And we're not seeing that.
37:43
SPEAKER_02: Right.
37:43
SPEAKER_02: So folks are are are are recognizing the situation, they're making the moves they hand, the lenders for the most part are willing to work with them, and as a result of that, um, I think the market remains relatively calm from that particular perspective.
37:55
SPEAKER_02: Now, those people who want to be bottom feeders, who want to pick up on that auction, there's not a lot for you out there.
38:01
SPEAKER_02: So there you go.
38:02
SPEAKER_00: Okay, so no, exactly.
38:03
SPEAKER_02: Well, there's not there's not a lot of auction.
38:04
SPEAKER_02: No, there's not there.
38:05
SPEAKER_02: Yeah.
38:05
SPEAKER_02: And and I don't think there's going to be either.
38:08
SPEAKER_02: Um and of course, uh, a seller who's not completely distressed is a seller you can't fully take advantage of.
38:14
SPEAKER_02: But that said, again, it's a calmer situation, and and I believe that that there's plenty of opportunities out there if you have the cash and you know appreciate that you're playing a long game.
38:25
SPEAKER_01: I love that, Chris.
38:26
SPEAKER_01: Um so so two more things.
38:28
SPEAKER_01: One, um I'm gonna give you I'm I'm gonna give you the final say.
38:32
SPEAKER_01: If anyone now listen, the the one thing we didn't say is Chris Chris speaks like 300 days of the year.
38:38
SPEAKER_01: So he's flying all over the nation, probably all over the world, and and he's he's speaking on stage.
38:44
SPEAKER_01: And so if someone wanted to get a hold of you, if someone wanted to have you um to on stage, have you speak to to a group like you do often, yeah, what what would be the best way to contact you?
38:54
SPEAKER_02: Well, you can find us at beaconecon.com, B-E-A-C-O-N-E-C-O-N.com.
38:58
SPEAKER_02: Uh I think I uh my old personal speaking page, uh uh Christ Thornberg.com.
39:03
SPEAKER_02: People could find me more about my speaking on that front.
39:05
SPEAKER_02: I would tell you, you know, it's funny, um I'm very comfortable on stage, but I'm very uncomfortable on stage with a bunch of slides behind me.
39:11
SPEAKER_02: Yeah.
39:12
SPEAKER_02: And today um we're just talking.
39:14
SPEAKER_02: Yeah.
39:14
SPEAKER_02: And I have to always uh kind of get my uh my words right without having my slide behind me to tell you what I what I'm actually thinking about.
39:23
SPEAKER_02: Uh but even on that front, again, if you go around to our website, you will find some of our presentations up there that people can take advantage of and get a little sense of how we think about the world.
39:32
SPEAKER_01: That's awesome.
39:33
SPEAKER_01: I'm gonna give you the final say.
39:34
SPEAKER_01: So how are we gonna wrap this up?
39:37
SPEAKER_02: Don't let the turkeys get you down.
39:41
SPEAKER_02: Every time you pick up the paper, there's yet another doomsayer.
39:45
SPEAKER_02: Call them the end is nigh.
39:47
SPEAKER_02: And while there are problems we have out there in general, the world has really never been as good as it is right now.
39:53
SPEAKER_02: There is a future.
39:55
SPEAKER_02: Plan for it.
39:56
SPEAKER_02: Um, for those willing to take the risks, the returns are there.
40:00
SPEAKER_02: You just got to be smart about it.
40:02
SPEAKER_01: There you have it, folks.
40:03
SPEAKER_01: Make sure to like, comment, and subscribe.
40:05
SPEAKER_01: Until next time.