Download Transcript
Spencer Levy
Debt and equity investors typically look at market opportunities very differently, and we're about to examine both sides of that coin to compare and contrast those views in the current climate – where activity is slow but some see potential for creating generational wealth. On this episode, a pair of veteran insiders from a major global firm – a debt leader, and an equity leader – share their perspectives and what they see on the horizon.
Rod Vogel
The returns are not quite that attractive in today's environment. And in fact, a lot of development doesn't make sense, just given the economic outlook and fundamentals. But we're still bullish long term.
Spencer Levy
That's Rod Vogel, a Senior Managing Director at Principal Asset Management, where he heads the private equity investment production operations for the global financial services company based in Des Moines, Iowa. A 35-year veteran of the company, Rod oversees acquisitions, asset management, and capital markets teams across all real estate, managing over $48 billion of assets for institutional and high net worth clients, foreign and domestic.
Chris Duey
I think there's a lot of powder out there that wants to get in motion. But we're all living on refinances right now, and we need Rod to start buying and selling a little more than he has.
Spencer Levy
And that's Chris Duey, a Managing Director at Principal Asset Management and head of a debt portfolio management team that's in charge of over $22 billion of its own in the private debt space. That includes core construction and other higher risk strategies such as bridge and subordinated debt and more. Like Rod, Chris has also spent his entire career at Principal, 32 years on the debt side, and counting. Coming up: real estate debt and equity at Principal. Seeing the world from Des Moines, Iowa. Views from two sides of a massive overall portfolio at one of the most recognizable investment firms around. I'm Spencer Levy, and that's right now on The Weekly Take.
Spencer Levy
Welcome to The Weekly Take. And this week we are taping live from Des Moines, Iowa. We're so delighted to have Rod Vogel back on the show. Rod, welcome back.
Rod Vogel
Thanks, Spencer. Glad to be here. Welcome to Iowa.
Spencer Levy
Thank you so much. Looking forward to the fair later. And Chris Duey, welcome to the show.
Chris Duey
Thank you Spencer.
Spencer Levy
For our listeners who want to understand why we're sitting here with Chris and Rod, Chris and Rod do two different things, even though they have the same business card. Principal has an equity side, which is Rod. Debt side, which is Chris. And specifically the equity side is less risk-averse than is the debt side, which likes to get repaid for a certain yield over a defined period of time. The equity side, while they have all forms of equity capital from core to opportunistic, they're prepared to go out on the risk spectrum further to have less certainty as it relates to the timing, less certainty as it relates to the overall return, which is why the returns that Rod expects from his deals are significantly higher than the returns that Chris expects from his. So now let's turn to you, Rod. You were on the show two and a half years ago and we joked before the show, nothing's changed, but it seems as though things are changing every day. Big picture, how do you see the markets today?
Rod Vogel
We're in a period of transition, Spencer. Private equity valuations are still murky. The valuation declines we've experienced are continuing, albeit they've slowed down, if you look quarter over quarter, which we think portends well for the future of the market. But by the end of this year, we believe you'll see those valuation declines dissipate, and into 2025 optimistic, where we'll again see positive appreciation in the U.S. commercial real estate market. So that's our current outlook at a very high level.
Spencer Levy
Chris, your point of view. How do you see it from your perspective with a focus on debt?
Chris Duey
I think we're entering a new credit cycle. The last two years has been, transition’s the right word. Needed to see the values reset to the current interest rate environment. I think we've done that or we’re at least getting there across most property sectors. I think right now, for all of us on the debt side, it’s more of a lack of transactions. I think a lot of us have more demand than we have opportunities coming out to finance. Acquisitions are really slow. I think the total debt activity per the MBA last year was down 50%. So it's competitive for the right deals. I think there's a lot of powder out there that wants to get a motion. But we're all living on refinances right now, and we need Rod to start, you know, buying and selling a little more than he has.
Spencer Levy
Come on, Rod, get going man.
Rod Vogel
We're trying. We're trying, Spence.
Spencer Levy
I know it. I know it. So, Chris, let's talk about that. So we had on this show about three months ago, Bob Ricci, who runs America's origination for Lone Star. And he said the biggest problem of the debt capital markets is, I guess the word he used was a log jam. That normally every year you get pay offs of 25 to 35% of your book. Last year, you got pay offs of 10 to 15%. And so you have all this back up. And because of that, it's hard to do new loans without having fresh capital from repayments. Do you see it similarly, or is it a different way to look at the debt capital markets?
Chris Duey
No, I see it's similar. I think a lot of the back up is probably more on the banks side. The debt fund side that had the short duration mortgages that churn every 3 to 5 years, the whole books rolling over. I think in ‘23, ‘22, there were a lot of extensions in motion as we were working through that transition period. I think what I'm hearing, our lenders are getting a little more forceful to push those maturities, those extended maturities, into the market. So hopefully that'll start picking up transaction activity for all of us. And if you're running a short book like a bank, you can start recycling the capital and get more active. I don't think the large money center banks are all that active today, but I think the regionals, the locals, are starting to pick it up a bit.
Spencer Levy
So I'm going to quote Rod Vogel, and go back to your first appearance on this show. I believe you said that you'd been doing development here at Principal since you got here, and you were getting something. This was two years ago. 31% levered IRR over that period of time. Congratulations on that. I presume that's how you look at it going forward.
Rod Vogel
Yeah, we look at it that way. The returns are not quite that attractive in today's environment. And in fact, a lot of development doesn't make sense, just given the economic outlook and fundamentals. But we're still bullish long term. The U.S. population will grow, employment growth. It's going to require a new development. And right now, this year, we'll probably do a billion and a half of new development. A typical year we may do 4 billion. So it's down dramatically, which again, given market conditions makes sense. The majority of what we're doing is industrial or data center development right now.
Spencer Levy
Well, it makes sense for a lot of reasons, not just because of the high cost of construction with labor and interest rates. But actually fundamentally, industrial’s gotten a little softer. We certainly have seen the declines in certain markets. And the softening of the development pipeline is going to help your existing product.
Rod Vogel
Absolutely. I agree. Vacancy rates for industrial are up 2 or 300 basis points, you know, depending on which market. You know, still, the overall U.S. market’s maybe 6 or 7% vacant. So not in bad shape, but, you know, coming off 3, 4% vacancy rates. What that's translated into is softening rent growth, right. We knew 10, 15, 20% rent growth per year wasn't sustainable. That market is adjusting. As you well know there's been tremendous amounts of new supply. Looks like new permits, new starts are down dramatically. And so I think that sector will fare okay. It's in a period of transition. As we talked about, the slowing rent growth. But overall fundamentals still look pretty bright.
Spencer Levy
Chris, let's talk about some of the debt deals that you're looking at today. I think it's fair to say everything that you said at the beginning about the logjam in the market, about hard to originate new deals. But we are seeing, surprisingly, in the multifamily sector, quite a bit of need for re-fi activity because of many of these groups bought deals in 2019 to 2021 vintage. They're seeing their hedges come due and it's very expensive. Are you seeing a lot of that or what asset types are you seeing the most opportunities today?
Chris Duey
I'll answer that question first, then I'll go backwards. Yes. We are seeing that type of multi-family profile where what we've seen is more development deals come through the banks, come to maturity. They got an extension last year. Now the bank is saying we're serious. You really need to get off their book. So we have a commingled debt fund that's been happy to pick the ones we like the best. We don't have unlimited capacity, but we circled 4 or 5 in the last 2 or 3 months that are extremely attractive from a quality standpoint market. They're brand new. They're stabilized. They need to turn that rent roll a couple more times before they get into the sales market or the permanent finance market. But those are terrific investments for the fund I mentioned. Most of the flow, at least up to recently, maybe some anomaly, has been multifamily, has been industrial product, whether it's for the core fixed rate client programs that we have or for the construction programs that we've been running. Here recently, we finally got some quality anchored retail to come through the door and we circled three deals last week, which is fantastic. We can't do everything in multifamily and industrial, we need diversification. So, whether that's a blip or not, I don't know. But it was kind of a welcome relief to do something different. And as Rod mentions quite a bit here internally, retail has been a strong performer. I think collectively the industry, we all threw it in the penalty box for probably too long. And then of course Covid hit and had to say it was going to perform and if you had the quality retail properties, it has performed extremely well.
Rod Vogel
Yeah. Chris brings up a good point, Spencer, on the multifamily sector where we're benefiting, too. And what I mean by that is that not all of those deals can be refinanced because there's a big equity paydown, right? You develop a deal in a three and a half cap market. You think it's going to sell, you know, fours maybe. But your return on cost is high fours or five. Well today that's the cap rate, right? So valuations have been hit. I think that's a tremendous opportunity going into 2025 from an investor perspective is to buy new constructed, well leased multifamily assets where the developer just can't come up with enough equity. So it's going to go to the market. And I think that's going to create attractive opportunities to buy multifamily at discounts to reproduction cost. If Chris can't lend him enough money, we’ll buy it.
Spencer Levy
We'll come back to retail in just a moment. By the way, it was music to my ears because I got thrown out of many-a-meeting five years ago when I said retail was materially undervalued. This was pre-Covid and, well, I guess I get lucky once in a while.
Chris Duey
Well, we had to fight through the e-retail, the Amazon risk, right. That brought up the big question mark who's going to survive? Amazon's gonna wipe everyone out. That of course didn't happen. And then Covid. We had to work through the Covid. And retail didn’t do well. Before you move on, I should say I think the next opportunity for the debt fund I mentioned, I think there's going to be a wave of industrial that comes at us and they won't be stabilized. They'll be coming off a construction loan because of softness in particular markets around the country. They may only be X percent leased, but they're really high quality products. And it may take the developer to pay down the current loan a bit to get a new refinance. But I think we're going to try to ride that way for a couple of years. That'll be the next chapter, I think, for our debt fund.
Spencer Levy
I think there's some other dislocations in the marketplace today. I think the industrial story long term is a great one, but there is overbuilding at the moment, even though we are slowing down the existing pipeline. These are deals that are coming due. I think some of the other opportunities are those segments, and these may be subsectors, that have high labor costs, because if you look at senior housing as an example, senior housing, the demographics couldn't be better for senior housing in terms of the aging population. And we have a logjam right now in America, people not selling their single family homes because they're all locked into low cost mortgages. That's going to end. People are still going to get older, and then labor costs are going to stabilize. When you see all three of those things, maybe senior housing looks better in the future than it does at the moment.
Chris Duey
Yeah, I think you're right. We've studied Rod’s equity in our debt. Teams came together. We've got a task force just on senior housing, and we probably started looking at that, it was pre-Covid for sure. Worried about supply at the time. Right or wrong, that was our thesis. So we hit the pause button. Covid hit. That kind of wrecked the industry for a while. We need to figure out… they keep moving the puck on us. The average entry age into senior housing keeps moving a bit. You know, with better health and medicine, what have you. And people really don't want to move unless they have to. We'll get there. And at least on my team, I got lucky and hired a portfolio manager a year ago or so when he's got senior housing experience. So I've asked him to kind of dust off his experience and start educating us a bit. He was more on the finance operations side, so I think we'll get there. We just gotta find the right entry point.
Spencer Levy
There's so much innovation that's happening today that we say, well, what does that have to do with senior housing? So the show last week was about affordable housing, and one of the innovations they had were single family homes. The thesis was that if you take these single family homes and you break them up, basically rent them out by the room rather than renting them out by the house. There are other issues that come along with that, but I think if you start looking at things that are operational today that weren't operational before, because that's kind of what happened with single family rental. That happened with BTR, where it used to be 10% operational cost, and it just didn't make sense. Now the operational costs are down near multifamily makes sense as well.
Chris Duey
Student housing did the same thing. It went by the bed and rent per unit doubled and someone had a really good idea.
Spencer Levy
Breaking it up is a good idea. Being more efficient is a good idea. It's sort of like Uber on real estate and people, these ideas, they all are kind of like a seamless web. Once you apply the same principles to what we're trying to do today. So let's look at data centers. I'd like to know where are you building them and why? Because I think the footprint of what would be considered institutional grade data centers doesn't necessarily have to be in the hubs of Northern Virginia, New York, Dallas anymore. What do you think, Rod?
Rod Vogel
We have been active in that sector. In fact, we developed our first data center in 2006. So, we've liked it for a long time. Certainly in the last five years, the demand has exploded, supply has been anemic, and the fundamental space market fundamentals are tremendous today. Today we have over $3.5 billion of data centers and growing. All of ours have generally been spec development deals, a few value add acquisitions, buying vacant buildings, repurposing them. And we've experienced tremendous demand. Initially, to your point, we started out in the major markets, right. DC, Chicago, Dallas. But that market has expanded widely. I mean, Phoenix now has a huge data center market. Atlanta, Portland, we’re in those markets. And then even Des Moines, Iowa. They're going where there's power, which is really a key thing right now, and lower risk of weather events. But power is really a key driver for them. Water availability is a key aspect. And that's really only been enhanced by the demand of AI. We're focused mostly on the hyperscalers. You'll see them announce every week they're buying land and going to build. But it's an insatiable appetite. And as soon as we can build them they're going to lease them. So we're really excited about this sector. These deals are getting larger and more expensive, talking about costs. And so that's impacting some investors' interest in it. A, they're just not large enough to do them or B, they're concerned about the liquidity and the exit, which is a fair risk to analyze. But I think there's a pretty strong runway from a supply demand perspective. And more and more debt capital is coming into the space, which has been probably one of the more challenging aspects of developing these as accessing debt capital.
Spencer Levy
I'm going to push the hypo for just a minute, because there's an area that I talk about a lot which is manufacturing. Good old fashioned manufacturing. And one of the gaps in our industry, I found, is most of our institutional clients don't like to invest in manufacturing, and they don't like it because it's purpose built, very expensive, often in a tertiary location. But I think that given how attractive data centers have become and quite candidly, data centers are a high tech form of manufacturing, I see that people should be considering true manufacturing. And if you do a triple net lease, the credit profile is very attractive. But I don't know that we're there yet. So first data centers, second manufacturing. Your point of view, Chris.
Chris Duey
We're really right in the coattail of Rod and his team. And they got in early. You mentioned ‘06, their first one. So they're on the front, we've been learning as we go on the debt side. We financed a couple. I say a couple, and that was all the demand we had. They’re just really, really big deals and we haven't found the right vehicle or client on the debt side that can handle how large these projects are, just pure size. So we're still trying to find a vehicle or a partnership to enter. I'd rather do it on the development side, the construction loan side. I think we could get paid pretty attractively for that at a loan to cost that looks pretty safe. And frankly, I'm not smart enough on technology to really underwrite an exit 10, 15 years down the road. So I'd rather stay short, get paid, let someone take the permanent run on it and call it good.
Spencer Levy
Interesting comment here because I see, and again, this is not like Family Feud where we're going to have Chris and Rod duke it out over data centers.
Chris Duey
Hope not. He'd kill me.
Spencer Levy
But we have had on this show this very same debate where we've had clients of ours that have the equity side is all in, and the debt side pulls back. And one of the areas is this triple net. The comment was that a client of ours will do as many triple net equity office deals with good credit as they can, but the debt side won't touch it. And I'm seeing a similar type of, that's not ready yet while the equity might be. Is that a fair way to put it?
Chris Duey
In terms of data centers?
Spencer Levy
In terms of data centers. Like you're still up and coming up the curve?
Chris Duey
Yeah, I think the debt side, where most of us are trying to come off the curve and really get educated around the sector and the drivers. I mean, we all understand power is the driver and resilience or redundancy and all the buzzwords, but part of it comes down to, well, how do I get out? On any debt investment we make, I tend to say we can get into any deal we want. How do we get out? So the exit is really important and the size and the technology and Moore's law and all the stuff we learned about years ago. The exit is hard for me to get my head around. Doesn't mean it's not an attractive investment. You're getting triple net leases from creditors that are pretty incredible. It's just how do I get paid off? And I don't think the equity guys, sorry Rod to cut you off. I don't think Rod's going to borrow from us and say, well, let's do a fully amortizing loan around this 15 year lease to this A credit. That doesn't serve what he's looking for. His leverage returns need to be higher than that. So we'll get there. We'll figure it out. The one thing with data centers that’s really interesting is I think part of us on the debt side view it as infrastructure. So the infra funds and the ABS financing, they can handle it. No problem. The pure real estate, shops, we're getting educated.
Spencer Levy
And you're seeing more and more of the pure real estate shops getting into it. But you're correct. It's a clear tweener between real estate and infrastructure.
Rod Vogel
Absolutely. And it's interesting, Spencer, to your point about, you know, of course, Principal’s a big lender, big private equity investor, and Chris and I both sit in on our investment committees. And there'll be transactions in there where I'll say, I like this deal a lot as a lender. I wouldn't want to be the equity investor, but I love it from a debt perspective and we had that deal last week that was the same way. And so, you know, Principal University, when we train our new people, it's the same whether it's debt or equity, right. The blocking tackling is the same. But then you get specialized into debt investment and equity investment. And that's where there can be a difference of opinion. And a perspective of why I like to make an equity investment here or debt investment. And having both a lender and an equity owner perspective, I think, helps us make, hopefully better investments for our clients.
Spencer Levy
Well, let's talk about where we are in the market cycle at this moment. And I think it's fair to say that there's more of a dislocation on the debt side than there is on the equity side. But today, has your cost of equity gone up because of the dislocation. Because I know the cost of debt has gone up. But has your cost of equity gone up?
Rod Vogel
It has. Yeah, it certainly has. You know, debt drives equity prices. Equity prices drive valuation. So we've adjusted. And that's one of the reasons transactions have slowed down. This bid-ask spread between buyer and seller, it's all due to where interest rates are at today. And people trying to guesstimate where the ten year treasury is going to be. You know, dropped down to 3.7 last week for a bit. And everybody's pretty excited about, well, five cap looks pretty good. But if you think long term the ten year Treasury is going to be in the 4, low 4% range, cap rates need to adjust further than where they're at today. And I mean upwards to get an appropriate spread to take that additional risk. A lot of this stuff we're looking at today's benchmark. Like I said, if we're buying a multifamily deal, the cap rates are in the fives, right? I think they should be in the sixes maybe if given, you know, ten year treasury, but they're in the fives. The argument we make is, look, I'm buying this at 70 or 80% on the dollar relative to reproduction cost. And with that I should expect and probably will get above inflation rent growth. So I'll get that five up into the sixes in short order. And that's what we're looking at is when do I get that spread on the return on cost equal to where it should be. You know, a couple hundred basis points over the ten year Treasury. And if I can get that in three years, we'll make that investment. We are doing some all equity deals because the cost of debt capital is pretty high. You almost have a negative leverage scenario. So we're seeing clients willing to just do all equity and wait for that return on costs to go up or the cost of debt to come down. But we're in that transition period where I think 1 of 2 things has to happen. And cap rates go up a little bit more, or you make the bet that interest rates are going to drop below four. So you're economists are predicting it will be in the threes, mid threes over the next few years, which, certainly a plausible argument for that if real estate's priced pretty well today.
Spencer Levy
So Chris, Rod just expressed a fair deal of optimism about certain sectors where he's willing to go out on the risk profile, even if maybe leverage would be dilutive. So my question for you is how many of the borrowers that you were seeing are willing to accept negative leverage, and for our listeners, that means that the cost of debt is above your cost of buying the asset on a yield basis.
Chris Duey
I haven't had to really answer that too often because acquisitions are down quite a bit. So it's been mostly refinanced. Now, where we do have to answer that question is on the construction loans we bring into committee. And I always have to say this just because I scratched my head, but if we're gonna do a construction loan at SOFR plus 350. You know, you're mid to high eights, maybe sniff a 9% on the coupon and the return on costs, it's a legacy land basis from 21 or 22. And on their numbers they're going to build it at a five and a half or a six. And they're paying us nine. And I know the SOFR curve will give them some relief. But then we have a SOFR floor, and so it's negative leverage all the way through the construction loan. But they're sitting on a legacy land basis that the IRA ticker’s going. So we’ve got to get moving. So they take it, they eat the negative leverage for a three, four year construction loan, and they live another day. So that's really where it's showing up until acquisitions really crank up. So far it’s been on the construction side.
Spencer Levy
So let’s stay on construction for just a moment. And you just gave a very ballpark estimate of costs, call it 9%. What loan to value are you seeing on those types of deals and what's the quality of the borrower?
Chris Duey
The quality of the borrower is quite high. A lot of these deals do have institutional equity partners. Loan to value, I'll focus on maybe on a loan to cost. Say 60% and less, loan to cost.
Spencer Levy
And where was that at the peak of the market?
Chris Duey
65, high 60s.
Spencer Levy
And where was the cost?
Chris Duey
Spread wise, 250, 275.
Spencer Levy
So the spread is about 75 to 100 basis point wide of where it was at peak.
Chris Duey
And the LTC’s down ten points, plus. I keep telling them, Rod and I will talk or…. we’re in a Goldilocks period for us on the construction lending side. I don't see us getting another combination of loan to cause, meaning D risk loan positions and these outsized spreads. Let's pick the right one. Stay focused as much as we can. And I think it's a great spot.
Rod Vogel
Yeah. And those are the deals where I see him come in and say, I'm glad we're the lender on this, because I look at the developers underwriting, as Chris identifies, like, well, it doesn't make economic sense to me, but they may have other motives or they're just much more optimistic, right, about where the exit cap is going to be or rents are going to go. But I agree with Chris. Getting 8, 9% on those deals… that, I mean, that's better than an equity return I can make buying a fully leased building today. So I think it's a tremendous opportunity for our clients.
Spencer Levy
When you take a look at things like multifamily, like industrial, maybe not as much office, but certainly retail with rooftops, there is a case to be made that the secondary markets provide a great risk adjusted return, so long as you're not as caught up in liquidity risk on the exit. What's your point of view?
Chris Duey
I think you nailed it. It comes down to when we look at secondary markets to make a new loan or new debt investment, it does come down to a conversation around the exit, which is really the liquidity risk in secondary markets kind of come and go in terms of where the money's flowing, whether it's equity or debt. There are certainly markets that are defined as secondary, and some people may take an Austin, maybe not today, but back in the day and say that’s secondary. Well, we were pretty excited about Austin back in the day. And we viewed it maybe a little more optimistic. But in any event, I think you pick your spots on what secondaries are attractive to get into, get out of with certainty. I think you're right. Multifamily, the Midwest markets have actually held up pretty darn good. I didn't have a huge supply push. I think the rent growth so far year to date has been probably a little better in the Midwest than the Sunbelt where all the supply is headed. Does that stick? Well, it probably should stick unless supply turns on pretty heavy and I don't see that happening in a lot of the secondary markets. So yeah, we spend a lot of time picking our spots. And I think at this part of the cycle, investment selections are really important. Just stick to the fundamentals. A stock pickers market. We'll get back to a market with cap rate compression and lower rates and everything will be cooking. We're not there yet.
Spencer Levy
I want to take out our crystal balls, if I can. For our listeners out there looking for opportunities, how do you look at opportunities in the next couple of years in terms of market asset class, and how do you find these opportunities?
Rod Vogel
It does depend upon market and submarket, and at different properties in different markets. On the equity side, we're in 45 different markets, and I think we will continue to be in those markets. Diversification, we've seen strength in those secondary markets. So we'll be in a lot of markets. We have expanded, like many of our competitors, outside of the four traditional property types, the niche sectors. Data center being one. But now we're in more manufactured housing, single family for rent, life sciences, student housing. So we've expanded where our portfolio is in the next 3 or 4 years, we'll have 8 or 9 property types versus the traditional four. So that's one aspect. The opportunities I see near term. Again, I've talked a little bit about, I mean, data centers, it's the supply-demand phenomena is so strong. All right. So keep developing there like we're doing. I'm really optimistic about buying Sunbelt multifamily deals. Why? Well, there's so much supply coming. It's a matter of timing. There's so much supply coming there. You're going to see concessions, rent decline, vacancy rates go up, loans coming due, that I think it's going to be the best buying opportunity on the equity side than we've seen in 10 or 15 years. New product that, again, as I said earlier, it's 15, 20% below reproduction costs. We know what reproduction cost is. We're building it. And we got some of those deals ourselves that we’ve got to recapitalize. But I think that's going to lead to some attractive opportunities in a market like Austin, Nashville, Tampa, Charlotte. I mean, look at the amount of inventory that's coming in. Those are growth markets. They'll come back. But I think near term and it's 25, I think there's going to be a tremendous buying opportunity for multifamily. You know, office, we have very few clients, not surprisingly, that are interested in buying office. I've been, maybe like you in 2015 or 16 when you're pushing retail, I've been a fan of buying office that's new, right? 2017 and newer. You look at the statistics that quality real estate is holding up. We own a lot of that. It's holding up. Tenants are moving there or they're staying there. And so there you can buy an office building if it's vacant, which isn't really my preferred. I'd rather have a leased building that's new that you can buy probably $0.60 on the dollar. The vacant ones, you're buying them, you know, 10, 20, $0.30 on the dollar. A lot of our clients are still hesitant to do that. They're working through their office portfolio. But if you're an investor who doesn't have office exposure, it's a contrarian play. But I think there's really going to be a kind of generational wealth type of opportunities created in that sector in the next 3 to 4 years. I believe more and more companies are going to require employees back in the office. Principal Asset Management, four days a week we’re in the office. That may never go to five, but you still have a lot of companies 2 or 3 days a week. I think they're going to grow to four days a week. I think that's going to help the demand side of office, but really selective. Gotta pick the right spot, the right asset. But I think that's another potential, really attractive investment opportunity.
Spencer Levy
And Chris, same thing. From the debt capital market side, where do you see the best opportunities?
Chris Duey
Property sector market, market wise I agree with everything Rod said. I'd like to figure out how do we participate in data centers on the debt side? We'll figure it out. It's just a size thing, and we’ve got to get the right partners put together on that front. On the debt side, you know, credit cycles, vintage years. If nothing else, in the last five years, it has really solidified. Vintage does matter. When I think with the valuation resets, I think the 24, 25, 26 vintage debt deals, whether it's core or it's something higher yielding strategy, are going to be extremely attractive. I think the exits on those loans will be pretty easy to get your head around. Office… I agree with Rod on the return to office. Four days is probably where we settle, at least at a high level across the country, and that's okay. 2 or 3 is not okay. That demand function is hard to get done right with any conviction. We don't have any clients looking for new office. We got to see some poking at me a bit to think about it. And, I mean, I suppose we were starting with zero. Okay, we can do that, but we're not starting with zero. We're starting with a certain exposures already. So we'll get there. This just got a longer tail to it, at least for me to get my head around the demand side. The tenant procurement costs are a killer. It can't be a 5 or 6 year break even on a 10 year lease. That doesn't work whether you're your lender or on the equity side. But things will reset. I think it'll be the haves and have nots. I think everyone's saying the same thing there. But in the haves, if we can get paid for it, at some point we're going to consider it.
Spencer Levy
Well, on behalf of The Weekly Take, what a great conversation. Rod, first of all, thanks for coming back. Rod Vogel, Senior Managing Director, Principal Asset Management. Great job, times two.
Rod Vogel
Thank you, sir. Appreciate it.
Spencer Levy
Well done Rod. And Chris Duey, first time on the show. Great job. Senior Managing Director, Principal Asset Management, right here from Des Moines, Iowa. Home of Caitlin Clark.
Chris Duey
Thank you Spencer.
Spencer Levy
We hope you found this perspective on the business as informative as I did. And if you're wondering if I made it to the Iowa State Fair while in Des Moines, you bet I did. And I met a champion pig named Finnigan and tried to guess his weight. That is the kind of hard hitting information we're happy to share if you just ask by using the Talk to Us button on our home page. Of course, we’d like your real estate questions and comments, too, so please visit our website CBRE.com/TheWeeklyTake. And don't forget to subscribe, rate and review the show wherever you listen, and follow us on LinkedIn for show updates and more. Current LinkedIn followers already know the winning number where Finnegan tipped the scales. It was 1,420 pounds for those of you keeping score at home. We'll return with more unique perspectives on the industry, including another conversation that brings together two sides of the business, namely a dynamic discussion juxtaposing investor and occupier perspectives on the market. We're also working on a series of shows featuring CBRE’s special report, Shaping Tomorrow's Cities. So come on back for those programs and lots more. Thanks for joining us. I'm Spencer Levy. Be smart. Be safe. Be well.
.jpg)
