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Spencer Levy
Investor sentiment has improved considerably this year in anticipation of the Federal Reserve's recent decision to drop interest rates. With that decision in the rearview mirror, investment volumes are on the rise. On this episode, a firm that's developed its own unique approach to investing and underwriting amid these current events.
Drew Fung
And I think that marks an important inflection point in the market. So it's not just an impact to rates, but I think it will have a very large impact on the market’s psychology.
Spencer Levy
That's Drew Fung, Managing Director at Clarion Partners and a Portfolio Manager in its Debt Investment Group. Drew oversees investment activities across a variety of instruments and loan types for a global firm with around $75 billion of assets under management.
James Millon
Treasury market trades every day. It moves in anticipation of a number of factors, but this has been a race game from day one.
Spencer Levy
And that's James Millon, President of U.S. Debt and Structured Finance for CBRE. James leads the company's preeminent commercial and multifamily financing platform. And over the course of his 20 plus year career, he's originated more than $75 billion in commercial real estate loans throughout the United States and counting. Coming up, Clarion Partners and investing in commercial real estate as the Fed signals a change of direction for interest rates. I'm Spencer Levy and that's right now on The Weekly Take. Welcome to the Weekly Take and this week I'm here with Drew Fung of Clarion Partners. Drew, great to see you. Thanks for coming out.
Drew Fung
Hey, I'm super thrilled to be here.
Spencer Levy
I know you had a long walk to get here, Drew. I think you're – I could see your office from here across the street, but thanks for coming anyways.
Drew Fung
It – it helps to have an easy commute into the podcast.
Spencer Levy
Well, speaking of not easy commutes, we've got James Millon, who came in running from the train in New Jersey, President of U.S. Debt and Structured Finance. James Millon, thanks for coming out, James.
James Millon
Spencer, it's good to be with you and it's great to be with a good friend like Drew. And Clarion is a terrific partner of CBRE.
Spencer Levy
Well, it's terrific to have you two together. So, let's start big picture, Drew. You've been one of the leaders of the debt industry for a long time. How would you describe the industry, big picture, right now? Are we seeing more liquidity? What asset type? Just give me the big picture.
Drew Fung
Sure. I mean, most recently, we saw a nice 50 basis point cut from the Fed and I think that marks an important inflection point in the market. So it's not just an impact to rates, but I think it will have a very large impact on the market’s psychology, which is really important in terms of the broader market and it gives people the confidence or will start to give people the feeling and sense of more stability, less volatility. So, they'll be more willing to borrow, more willing to buy or sell, as the case may be, as well as lend. It's the first downshift in rates since, what, April 2020 or so. And I think you're seeing that already. All in all, I think we have an environment now where people are looking and feeling a little bit more positive.
Spencer Levy
Well, James, how do you see it?
James Millon
I think – and Drew hit on something that's really important – that psychologically whether it was 25 or 50 basis points, the fact that they actually went and cut was important to the market to see.
Spencer Levy
Yeah.
James Millon
Spencer, your point about our transactional activity really picking up – you got to remember we're talking about the short end of the curve, debt funds, SOFR, which is indexed and primarily consumed by floating rate borrowers. But most of the market has really been keyed off of kind of the five and ten year fixed rate market. And, so, Treasury market trades every day. It moves in anticipation of a number of factors. But this has been a rates game from day one. And, so, our transactional activity, again, keyed off that five year Treasury market, preceded the state curve by about 30, 45 days when the Treasury market really reacted. I would say it was most prominent when we got that first nonfarm payroll report and the VIX hit 62. Most of the market completely went away or gapped out or wasn't quoting deals. We rate locked with our flow business or our agency world a significant amount that day in the Treasury kind of has been hovering around 37, 375, which again kind of puts that cost of borrowing at around 5% for the core core plus assets, multifamily, industrial and is really, I think on this point forward going to like a lot of disposition activity.
Spencer Levy
Since my producer's ears are ringing every time we use a term. The VIX index is the volatility index on Wall Street of how much the market is moving. And I often tell folks that the two most important numbers in finance are the ten year and the VIX index and I'm glad that, well James, you got them both on the same first answer.
Drew Fung
Well, ding, ding, ding. Winner.
Spencer Levy
Winner. Winner.
Drew Fung
Well, you mentioned the 5% borrowing costs, right? I mean, there was a time not too long ago when the incentive hit 5%, rather. And for it to come down now to the 37, 38 range, I think is, again, a really important piece of getting the market from being quite illiquid and quite bound up to a little bit more liquid and more transactional. I mean, a lot of the debt deals we've seen over the past 12 to 18 months or very few acquisitions, right. It was mostly refinancing, mostly people who had to do something because their existing debt was maturing. So, we may see some progression from that. Hopefully.
James Millon
Drew categorized appropriately. And when I look at our numbers for the first three quarters of the year, 20% was acquisition financing. All right. That 50, 60% was refinancing activity. Another twenty percent was construction and recaps. When I look at what we're seeing today, the recent transactional activity again keyed off of that 5% cost of borrowing, 50% of our business is acquisition financing. Right. So we're starting to see the unlocking of recycling of capital on the equity side, this momentum, which I try to communicate to many of our more sophisticated borrowers that this is not just a moment in time, but this is probably where we're going to be for some time. I don't think that we should think that we're going to be in a ten year treasury world that’s going to be sub 3%. I think we're sort of sitting in three and a half, maybe 375 and an equity share reprogram cap rates around that.
Spencer Levy
So, Drew, you’re putting together a new index. I was with the NCREIF crowd last week, the ODCE Index folks – probably a lot of your friends on the equity side. And NCREIF and the ODCE Index have been, I would say, the benchmark for all core deals for a very long time. The ODCE Index is the Open End Diversified Core Equity index, for the people who want to know what ODCE stands for and NCREIF stands for National Council of Real Estate Investment Fiduciary. And that's what Drew's working on right now. Are you trying to bring that to the debt world? Tell us what you're doing.
Drew Fung
Yeah, well, you hit the nail on the head there. NCREIF is absolutely the gold standard in terms of what many investors use to benchmark their core equity investments when they're invested in core open-end funds. And what has been lacking in the debt markets is the ability for particularly high yield debt, for the ability to benchmark your investment's performance in high yield debt, whether it's mezz or BREF or even just structured bridge kind of loans. So, what we've been trying to do and the goal is to get an index together through NCREIF, again, the gold standard that will track that debt performance. And what that does, I think, is many of the CFO, CIOs and the LPs that we talked to who want to invest in debt but have a difficult time sort of because they typically are in stocks and bonds where there is some somewhat grave performance benchmarking that they don't have anything in the real estate debt space. So, we have actually made great headway here. It's an aggregate, it's not yet an index, but we have many, many of the open end core-plus type debt funds contributing data. And I think now what should happen is over time, as the index seasons, you'll have a way to track performance of your debt investments. There's been things that track life company debt, there's been things that track first mortgages, but this is more of an amalgamation of both mezz, BREF, and levered bridge. It's meant to and hopefully will open up the market to a much broader set of investors because they'll have the benchmark that wasn't there before.
Spencer Levy
Turning to the price of capital, James. We're talking about the benchmark rates, both of the short and long end of the curve. We've seen the short end come down in the last couple of weeks. The long end has come down a lot. But tell us about spreads. Where are they?
James Millon
When you think about cost of borrowing, whether on a fixed rate basis, it was 5 or 6% before this rally on a floating rate basis with SOFR being at five and a quarter, 550. You're talking about cost of borrowing for bridge-y type of investments that were seven and a half, 8% plus, right, of which 80% of that coupon is comprised of the index. And so that's why we pay particular attention to what's happening out there in the macro environment, because it used to be Drew and I would fight over ten basis points of credit spread. It's almost irrelevant, Spence, because now we see the ten year moving around 20 basis points in a weekly period. We now have some rate cutting going on in the short end of the curve. That's what's impacting cost of borrowing more than credit spreads. But to start the year, there was a huge rally in credit spreads. When we were down at CREFC in Miami and there was a lot of optimism about what was going to happen in the market. There's a lot of pent up capital sitting on the sidelines. It was coming into bonds, it was coming into high yield. It was coming in direct lending, private credit, and that was pretty consistent. So you saw – whether it was CMBS, whether you saw agency K-1s, whether you saw CLO paper, the credit spreads came in massively across the curve – triple-As way down through double-D’s. It's sort of held steady. Right. And then I would say there was a little bit of widening when we mentioned that nonfarm payroll report, but the credit spreads have generally come back in line. We look at the different capital sources that are out there. I touched a little bit on CMBS and CLOs, that’s kind of the liquid markets, but you also have life companies that are very, very prominent. Life companies generally benchmark of single-A corporates. We're seeing some of the tightest life company spreads that we've seen in a number of years. And a lot of that's just total return driven and where they see risk in relative value. So we're seeing life company spreads in the 130s to 140s. I haven't seen that in a very, very long time.
Spencer Levy
Now, that’s on the triple-A piece?
James Millon
That‘s the whole loan. Life companies that are leveraging 55, 60%, kind of a nine debt yield. And again, it's very isolated to what we'll call kind of CM1 core type of opportunities – multifamily, industrial, self-storage, maybe data center. Those are priced incredibly efficiently. We talked about private capital of the debt funds with the return of warehouse repo lines are able to price the bridge-gier type of transactions and sort of the high twos – so 275 to 290. That's fairly constructive now, again, with the short on curve coming down. The real challenge that we have is the bank part. Right now, we're starting to see some green shoots. We're starting to see banks get – realize some payoffs, come back into the market, saying to some of their core clients, you know what you have that's coming because we want to participate again. But they still are dealing with a bunch of legacy issues, they’ve got regulatory impacts from Basel III that are going to be coming down that they're still trying to figure out. And the markets still trying to figure that out as well. And the banks are half of our lending ecosystem, right. So, we're sitting here at, you know, 4.5 trillion with an outstanding UPB of loans. So, the banks are, you know, about two and a quarter of that. So it's incredibly important that they are active in the market. What they've chosen to do is they've chosen to redeploy capital through warehouse and repo lines because they get better risk adjusted returns. They’re providing liquidity in the market that way. We're just not seeing them show up in the traditional bi lateral. We're going - we’re going to finance Clarion on a transaction, but they're coming back.
Spencer Levy
So, there was a few terms there for benefit of our listeners I just want to define for them. Debt yield is essentially a cap rate for the debt portion of the capital stack and UPB is that unpaid principal balance? What is it?
James Millon
That’s correct.
Drew Fung
We started the conversation with sort of the big picture view and I think the lack of liquidity from banks is critical in sort of the the advent of more private debt capital coming into real estate is another big trend which we expect to continue. The question is how much of that private capital can fill the void where the banks to date have left that big gap. I'm a little skeptical. Right. You mentioned, I think 50%, right of the gross real estate finance market has traditionally come from banks, right – for both U.S. and foreign. So, you are seeing quite a bit more activity from – so the non-U.S. banks lending in our market. But I still think if you look at the private debt funds, maybe they're 11, 12% and they would have to increase lending quite a bit more to fill in that gap. But in the meantime, I think there remains a market that is a little bit less or quite a bit less liquid, right, than it was previously, although there's less demand for transactions. But again, for things to sort of get back to the store norms and normalize, I think there's going to have to be both a combination of more bank lending as well as additional capital into the market from private credit and hopefully an increase debt index will help for some of that capital flow overall.
James Millon
We saw this after the GFC as well. This is where they termed the shadow banking community was –
Drew Fung
I hate that term.
James Millon
I think any time that you have dislocation in the banking community, there's certainly a view out there that there's really good opportunities that are out there where some of them get solid risk adjusted returns and you can raise a significant amount of capital around them. And I think that's what you guys are doing and some of your competitors are doing as well. They've seen this coming–
Drew Fung
Yeah.
James Millon
–for a while now. And the bank's problems are not going to get solved overnight. It's not as if we're going to flip the light switch and all of a sudden the legacy issues in office are going to go away. Basel III is going to be solved overnight. They're going to be dealing with some of these situations.
Spencer Levy
Well, speaking of the private debt funds, if you can just go into a little bit more description of what Clarion does. Tell us about your funds and how your positioning yourselves in the market.
Drew Fung
Clarion is a pretty large organization, right. We're 75 billion of assets under management in ten different offices. We have a very broad array of both clients that invest in our funds and types of funds. And it's a very sort of client centric mentality at Clarion partners, whereby we're focused on what offers the best risk adjusted returns for investors, and that's the key pillar of the mentality there. So, we have three large open end funds. One is core-plus, one is a focus on multi-family and one's focused on industrial. And those are sort of the flagships, if you will. Then we have a number of bespoke and separate accounts and we have some enterprise zone funds. We also have a non-traded REIT which has been really active in the last several years. And, so, that's the broad range. And these funds, some of them do exclusively equities. Some do a combination of debt and equity. Or we'll do debt deals when it seems like the risk adjusted return is a good fit for them, even though it's predominantly an equity type deal. And one of the first deals that James and I think worked on when you came over here to CBRE was a large industrial portfolio that a borrower was recapitalizing. We knew the assets really well and that investment has since paid off but it was a pretty tight spread. We try to sort of overlay our house view into the investment strategy and all these different funds. So, it's a pretty broad range.
Spencer Levy
One of the things that we saw certainly in the last couple of years and I know it's loosening up now was, larger wasn't better, recently. Has that changed now?
James Millon
I think it's getting better. I think when you say larger, by definition, you're talking about portfolios or you're talking about New York City or San Francisco skyscrapers, large defined by $500 billion and up. What we saw and this is all because the underpinnings of the credit markets and what was happening there was pre-COVID a lot of these big portfolios are trading in portfolio premiums – multifamily, industrial, self-storage. Then obviously, the credit markets started gyrating and started widening out. And so when you think of our most of these borrowers or leveraging 65 to 70%, so your weighted average cost of capital just went out 2 to 300 basis points, well all of a sudden those portfolios really started going away. And so some of the parts were – it was more efficient to break them up and sell or finance them individually than combined. What's happened recently– again this is just we're now on the backside of this, right, where credit is now become cheaper. You can borrow more of it. Asset values are going up because of it. We're starting to see these portfolios that are now starting to come to market actually trade at par, not premium, but par.
Spencer Levy
Let's talk about asset types for just a moment. How do you look at it, Drew, when we're looking at not only the most popular asset types, but I think what our listeners are going to want to hear there is what if we go outside that? Because we know there are several assets right now led by office that don't fit that bill.
Drew Fung
It's a complex discussion that's sort of at the foundation of everything we do and what our investment philosophy and house view is based around. Obviously, we look at the cyclical fundamentals, right? Like interest rates, for example. But, there's also some varying structural changes which are easier to identify and observable, more observable, right than some of the cyclical drivers of real estate value. And, so, we look at demographics, we look at sort of shifting globalization. We look at a whole host of different things that are more structural. And then we kind of overlay that onto the different property types. So, you're absolutely right. We still remain very focused on multifamily because of the fundamentals there and as well as industrial because of the fundamentals there. So, there's long term globalization factors that are like taken industrial, for example, that are impacting that asset class. So, nearshoring, right, this talk about decoupling of the economy. Right? But I think it's more of a shifting right. So, we'll be trading the U.S., at least more so with, you know, some of our closer neighbors, perhaps Mexico, Canada, etc.. Right. And then if you look at sort of the innovation aspect of those big macro drivers, retail sales for air and for industrial or I should say online sales, right, going from 20% to 35% is our forecast. That's a huge jump, right? And it drives demand for industrial assets. So, the usual suspects are, I think, still high conviction assets classes for us. But, you mentioned something about malls and we're – Clarion are pretty focused on that. We've actually brought in some new folks to lead in investments structure and business focused on all of this. All right. So, I think the initial strategy is still being worked on, but there's certainly self-storage – I think BTR and SFR, right, are also –
Spencer Levy
Built to Rent. Single Family Rental. Sorry, I keep doing the terminology –
Drew Fung
Yeah, right. We got into sort of the lingo here. Is another one you could look at. So, again, demographic drivers in favor of medical office buildings and then, as you say, data centers are a whole nother kind of kind of thing, that investment class, asset class that, that we’ll be looking at. But, the Alts segment is super important right now because if you look at the fact that office and retail retail has been a longstanding kind of reduction in allocation, then a lot of these investors in our funds have. So, the office and retail allocation over the last, what, 10 years has dropped precipituously, right, in a portfolio, right, maybe less down 30%. But the allocation in a typical real estate portfolio that institutional investors have of multifamily and industrials increased 20%. So, there's still a gap there. Where do you put that money that formerly was going to office? And as you said, James, that's a slow recovery. So, we think alternatives have historically been less volatile. Really solid NOI growth. Manufactured housing is also a great example of that. These are all property types that we've been through debt investing in a bit, but also intend to focus more on those asset classes and equity as well.
Spencer Levy
But, James, you brought data centers that you were going to talk about. But now it seems to be the hottest new asset class. And without characterizing it as real estate or not, I know a lot of people put it in infrastructure funds, but also it's very large and also it's very much not real estate like. How do you see it?
James Millon
Well, I haven't seen anything like this in my 20-plus years. So let's start there. I don't know that anybody has, quite frankly, we are literally creating an asset class overnight. And when you think of just the quantum of capital involved in all of these projects, right, these multi building campuses, these data halls that are now popping up all – it's not just Northern Virginia anymore, which is the data center capital of the world. It's Dallas, it's Atlanta, it's Santa Clara, it's Chicago or it's Austin. And wherever you can get access to power, these data centers are popping up. I think there was actually just a recommendation where Open AI and Google and the like just went in there to try and put something together for data center development and then have a kind of a private public venture with the government. And, so, that we'll see how that plays out. Just given the importance of what we all know, which is AI is transforming how we are going to do our business for the foreseeable future. What's interesting to me about the data centers right now from a credit perspective is that you do have the ability to tap into different capital sources. In fact, I would say the nontraditional capital sort of center is the CRE lending, right? It's the project finance groups of banks. It's the big infra funds, it's the private credit, and they have a different way of actually analyzing these transactions. Most of what we're seeing now is development, right? It's putting a shovel in the ground and it's these campuses are anywhere from 500 to by the time they're all finished, $2 billion total cost projects. And a lot of the banks that we're putting it in the syndicate were a lot of the European and Asian banks and that it's certainly been financing data centers globally for for a while now. But, it's unbelievably efficient. We can get 75 to 85% loan to cost when it's 100% pre-leased to an investment grade hyperscaler have really, really tight spreads. I mean, spreads that would rival where you could build multifamily and certainly industrial right now.
Drew Fung
And that's really massive transactions, too.
James Millon
Massive.
Spencer Levy
It's really remarkable because what you're dealing with – the way I would put this in, in more basic real estate terms – you're dealing with a credit tenant sale leaseback essentially of a new form of real estate. But if you're dealing with one of the largest tech companies in the world, you're dealing with the best credit in the world. Is that how the markets are looking at it?
James Millon
Yeah, there's a huge bifurcation between investment grade and not investment grade. And there’s very few examples where we have a tenant that is not investment grade. In fact, we did one financing last year with a tenant that was not. But, most of what we're doing is all investment grade tenants but it – the liquidity is significantly different when you've got a non-IG tenant for 10 years relative to double-A rated credit, for sure. Even though the market is more accepting of the fact that this is a new trend and data centers – if that non-investment grade tenant goes away overnight because of X, Y or Z, I feel pretty good about the prospects of backfilling and some other, whether it's turnkey or power shell, some other user coming in there, but it's still a pretty big gap between the two.
Spencer Levy
So, let's dig just a little bit deeper into data centers, because most of the data centers that are out there, existing data centers or co-location facilities that have multiple tenants in them. I think the ones that you're describing generally speaking, are single tenant, single borrower. Are we seeing co-location facilities being built? Are we seeing spec facilities being built?
James Millon
You are, but certainly most of the capital is going towards what we'll call the PowerShell, which is where a certain sponsor will develop and own the shell. And the tenant will actually operate and put their own equipment in there. And then all the way through to what we call turns. And that's where a sponsor will actually operate and, and have a tenant in there. But they will actually be responsible for all of the equipment and all of the capital or CapEx. That's where most of the capital is going on a debt and an equity perspective. You still see plenty of co-lo out there. I mean, we've got 32 Avenues of the Americas in New York, 1 Wilshire in L.A., Right. There's still a legacy. But what the market is really trying to freight out right now is, is this development way that's coming on the PowerShell and Turnkey. And then I'd say more importantly, what is going to be the take out for all of this when it were all said and done in 2 or 3 years and you have these multibillion dollar projects that are now completed tenants and occupancy, they're operating how you recycle capital when you're talking about that quantum. And I think we're trying to solution that now as well.
Drew Fung
And isn't AI part of that potential take out in terms of the potential massive demand for, for additional space for many of the new things probably even haven't been fully developed yet, right?
James Millon
Absolutely.
Drew Fung
And then from a real estate nerdy point of view, right. We go to we – power, availability of power. There's lots of different new things to consider. I think they're considering some mini nuclear type sources of power which –
Spencer Levy
Or old school Nuclear.
Drew Fung
Old school. Yeah. Depending on how you look at it.
Spencer Levy
There was an article about Three Mile Island in the paper yesterday about restarting it. And that's not the only one. There are several nuclear power plants that are being restored for this purpose.
Drew Fung
Yeah. So, it's a brave new world for data centers. And the shift is, as James said, from co-location to more of cloud and potentially AI use.
James Millon
It feels a little bit like the space race.
Drew Fung
Yeah.
James Millon
I think there are certain tech companies out there that will tell you they missed on the Internet. And I think everybody's saying we're not missing on AI. And that's what we see even in situations where you're not going to have access to power for four years – tenants are still signing leases.
Spencer Levy
So, Drew, you used my three favorite words…
Drew Fung
What’s that?
Spencer Levy
…in real estate – risk adjusted return. Those are my three favorite words. How do you get to the best risk adjusted returns? Today we talked about going to the basic asset classes. You talked about going to the vaults. From the Clarion perspective, how do you – without getting too wonky but a little wonky – how do you get to the point of saying this is going to get us a return at or better than we can get any place else?
Drew Fung
Well, it's all about perspective, right? And seeing the market opportunities broadly. And I start with debt versus equity. There are times where you can get returns in particularly subordinated debt that are pretty similar to what you would get with a direct equity return. But…
Spencer Levy
It’s come in has it? In the last year that has come in.
Drew Fung
And it should, right? That sort of arbitrage, if you will, shouldn't exist in perpetuity, but it does exist at different times. Right. And that's kind of where we start. And it's debt versus equity. But, in general, I think the way we look at things is, again, very broadly across different asset types, different geographies and assessing the risks, whether it's in terms of tenancy or in terms of capital. And you take the office business, right? I mean, there's been a lot of negative focus on, on office and even in good times and can be a difficult business because it's very capital intensive relative to even some of the other real estate asset classes. So, that works against you. And if you look at the ten year performance of office in NCREIF as we've been talking about, it's not great relative to multifam or even some of the Alts, right. Manufactured housing or SFR, BTR – there it is again – and industrial. And, so, we look broadly, we try and identify the historical performance and then we look at the future risk that the different investment structures, rental properties, equity and property types and geographies go, right? So, and each one of those is the kind of drivers we get dig in quite a bit, right, in terms of what our research is doing. And we actually have a team that's data science and integrated into our research. And the leaders there both have Ph.D., three letters after their names. They're very bright, very focused on that kind of analysis. This is kind of maybe a look into the future a bit, but the data–we have vast amounts of data that Clarion’s been tracking on all our investments. Right. And then we have the ability now hopefully to harness that data and I think the Holy Grail is sort of predictive type assumptions, not just streamlining an email or process, right, but to be predictive using that data within reason. So, I think that's a little bit of a future, how are we going to get to what we think is the best risk adjusted return?
Spencer Levy
We're talking about data. I would agree with exactly how you described it, Drew. I think that when it comes to operations, the internet of things, I'm not saying we're there, but we're pretty close to there in terms of how the data can make you operate more efficiently. Any point of view on data, James?
James Millon
Well, I would just say that, listen, that's why private equity exists and that's to take advantage of arbitrage, to take advantage of what they believe to be inefficiencies in the market. I believe that markets are generally pretty efficient except in times like we're in or except with certain asset classes. Drew talked a little bit about the frontier. I mean, I still put my investor hat on for a moment, simply the old CAPM model, right. The capital asset pricing model for the listeners from business school. And that tells you that, okay, well, credit should have a sort of a risk adjusted return down year because it's the least risky. Then you sort of go up the scale of core, core-plus, value, opportunistic and distress. And, so, when we see imbalance or data points that suggest that something is out of whack as it relates to just the risk return of those assets and that those are the best opportunities for people. That's clearly what we're seeing now. So, we generally think about the market as being efficient and then when we think about where the dislocation is, that generally is where the best opportunity is.
Spencer Levy
I want to get final thoughts from both of you. And, so, I'm going to ask over the next 18 months, how do you see the market and how do you think you're going to position yourself? So, Drew, starting with you,.
Drew Fung
I think that the next 18 months will be a bit more of a gradual return to transaction volumes that we were more used to. But I think that the math problem, right, that existed, looking backwards 12, 24 months with higher rates, will continue, although it'll be less difficult because ostensibly rates are going to, on the long end of the curve, will come down a bit. Right. What we're wrestling with now, in some ways it's an opportunity, right, for people who provide subordinate debt is the fact that coverage is really thin, these high rates. You have loans that are maturing that the proceeds on the new loan don't quite cut it so you need that gap financing to come in. So, I think there will be from a debt perspective, plenty of sort of opportunities there and sort of a bid that are three to five year stabilized coverage numbers and then all that. So we'll continue to see that business. But from a broader perspective, and I think the switch to more acquisitions, if you will, it's hard to say but I don't think in the next 18 months you'll see real flipping of the switch quickly, although it sounds like we're seeing a very significant, very material kind of increase in, in volumes. And 50%, I think you said were acquisitions. So that's pretty encouraging and I think that there will be opportunities out there for the next 18 months to arb the market a bit and pick up some pretty good yields on the equity front that in 24 months or further out might not be there. But, specifically, I think you have to look for multifamily, for example, out a couple of years because there is quite a bit of higher-end supply right now that's coming online. So rent growth may not be as robust as has been in the past. So you’ve got to use a little bit of your crystal ball to get comfortable with some of the transactions you'll see in the next 18 months.
Spencer Levy
Final thoughts, James? Again, normally I say five years, I'm a little bit shorter-term now, 18 months. How do you see it?
James Millon
Well, this is under the assumption that we are going to hit a soft landing, because if we don’t it’s going to change the narrative a little bit. But I think it's just, Spencer, going to be a normalization, to Drew’s point, of capital markets activity. I think transactions, they're already starting to come back. I think the market has been starved of data points. And whether that’s you talking about valuations, whether you're talking about credit spreads, data is really, really important for relative value and for people to understand and actually get conviction and have confidence in what they're lending against or what they're buying. So, we're starting to see that. I also think that credit issues lag capital markets activity, right? And, so, I think it was–Barry Sternlicht was famously quoted to say the capital flows will overpower fundamentals. And just given where we are in real estate, how global real estate has become as an investment and we certainly have seen that. And, so, I think that the capital flows will continue to be extremely strong. I think we'll see a rebalancing of some of the asset classes that have been a little bit oversold, some of which we've talked about. And I also think on the flip side, I think some of the other asset classes – notwithstanding the heavy secular trends that are important for long term investors – I think there's some cyclical issues that are out there right now that the market's going to have to wrap its head around a little bit. And it doesn't mean that it's going to change anybody's 5-, 7- or 10-year view. But for the next two years, whether it's excess supply, whether it's softening, whether it's demographics changing, whatever the case may be, I think the fundamentals are going to be more in focus than they have in a long time.
Spencer Levy
Well, on behalf of The Weekly Take, what a great conversation with my old friend Drew Fung, Managing Director at Clarion Partners. Drew, terrific job.
Drew Fung
Thank you, Spencer. Thanks again for having me. James, it's great to be with you and have some fun with this podcast.
Spencer Levy
And James Millon, President, U.S. Debt and Structured Finance, with his second appearance on The Weekly Take. Great job, James. Thanks for coming out.
James Millon
Thanks Spencer, it's good to be with you.
Spencer Levy
For more details and perspectives on the market, please visit our website CBRE.com/TheWeeklyTake. Feel free to share any questions or comments using the Talk to Us button and don't forget to share the episode with your network. You can also do that as well as subscribe to the show wherever you listen. We'll be back next week with more perspectives on current issues in our business, conversations featuring hot button topics about development projects and advice for navigating community rules and relationships. A sit down with a builder and philanthropist whose family has been in real estate for nearly three quarters of a century and a focus of their latest work in the industrial sector. And a return to our insightful survey of cities that are shaping the future. All that and more as we head into the homestretch of 2024. For now, we thank you for joining us. I'm Spencer Levy. Be smart. Be safe. Be well.
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