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Spencer Levy
Major news-making events and potential market-shifting developments seem to be moving at light speed these days. And whether it's about technology or global market dynamics or other factors, it's our mission to keep our listeners at the forefront of industry trends. On this episode, we're in Boston to bring you a compliment to insights that we presented from overseas. The CIO of a diversified U.S. firm and a leading American advisor and large loans share insights on deploying capital around the world in today's rapidly evolving environment.
Mike Byrne
Uncertainty is just part of the job here. And so in some places, that uncertainty, when it reaches that level, causes us to think maybe a little bit differently around how we're deploying capital.
Spencer Levy
That's Mike Byrne, Chief Investment Officer for AEW Capital Management. Mike's seen a lot of changes over more than 25 years at a firm that manages about $90 billion of real estate around the globe. Mike says AEW's portfolio is split just about evenly between North America, which he oversees from its Boston headquarters, and Europe, and is growing in the Asia-Pacific region as well.
Tom Traynor
I feel like everyone's looking over their shoulder a little bit still of what's the next shoot or drop, what's the next thing we have to be prepared for. So it's not easy managing money these days.
Spencer Levy
And that's Tom Traynor, a Vice Chair at CBRE. Tom is the co-head of large loans in the U.S. Debt and Structured Finance Division and has originated more than $75 billion in commercial real estate loans throughout the United States. Coming up: the not-so-easy business of managing money these days, the impact of global trends on the capital markets, and an American perspective on a world of opportunities. I'm Spencer Levy, and that's right now on The Weekly Take.
Spencer Levy
Welcome to the weekly take at AEW's Boston offices right here in the Seaport. And we are delighted to have with us Mike Byrne, Head of Private Equity and the CIO of AEW. Mike, thanks for having us in your office.
Mike Byrne
Great to be here.
Spencer Levy
And our old friend, Tom Traynor. Tom is a Vice Chair at CBRE, co-head of large loans, and a proud Boston College Eagle.
Tom Traynor
Exactly. Great to be here. Thank you.
Spencer Levy
Great to have you. So, Mike, the year started off very good and then we had a hiccup. And the hiccup is still impacting the market. The tariff situation caused spreads to blow out, so it caused bidders to pull out. So, without going into all those details, just give us the big picture. How is the real estate markets today in the United States?
Mike Byrne
So, if you go back just to March, this market had a lot of momentum. If you're talking about being a real estate investor, all right, we had two years of healing, whether you're talking about valuations or whether you’re talking about portfolios, time to come to terms with what a higher cost of capital meant in our business, and so that felt good. We had debt markets that were healing or healed. Credit markets were leading the way for a lot of investors like us. We had access to debt capital for almost anything we needed in the market, especially for stabilized assets, including office assets, which was really good. Capital raising was picking up across the industry for us in Q3 of last year, Q4 of last, and Q1 of this year. Strongest capital raising period we'd seen in many years. Transaction volumes were up, or at least deals in the market were up. So, all of that felt really good, and then April 2nd happened. And, so, obviously the word we all talk about today and we hear a lot is uncertainty, but, you know, we've had no shortage of uncertainty in the market. First, it was Brexit, and then it was COVID. And then it was the ports of LA congestion. And then it was Ukraine, and then Israel-Palestine. And was the U.S. Election, and was U. S. debt. And, so, now we have the tariff situation. I don't want to minimize the significance, because it's tremendously significant, and probably the most impactful in terms of us as an industry, in terms of how we're all reacting to it. But, uncertainty is just part of the job here. And, so, in some places, that uncertainty, when it reaches that level, causes us to think maybe a little bit differently around how we are deploying capital. But generally, I like to think that we take a slightly longer view around what we're doing. When you have a diversified business like AEW without a singular strategy, we're not a sector-specific fund manager, we don't have one big fund, we have different pockets of capital that do lots of different things at different times, we sort of pivot our direction and start to look elsewhere. So, there are elements of this business today where we feel like it creates a great environment to be opportunistic and deploy capital through it.
Tom Traynor
Mike's exactly right. A lot of momentum had been gathered. I'll say this. There's a ton of resiliency in the market and real estate owners and you know, just been in a lot of asset management mode for many years talking about all these different exogenous events that have hit and affected the real estate market and the broader economy and people were just kind of continuing to push forward. And, you know, with no help, frankly, from the debt markets. What was cooperating was, frankly, the spread part of the equation of the coupon where you had all this capital both on the equity side and on the debt side. So you had this wall of capital that was looking to get deployed. And, so, groups like AEW are out there, whether it's refinancing or looking for acquisition financing. And the overall coupon, not so bad, because of how much compression there has been and spreads. And look, the little relief we did get was in the fall of last year, after Labor Day, the Fed cut, and things were looking really good going into 2025. And then, as you said, hit the liberation day and tariffs. I'd say it's smoothed out a little bit. I feel like the market is constructive. People are still endeavoring to get deals done. There's a fair amount of volume, but I feel like everyone's looking over their shoulder a little bit still of what's the next shoe to drop, what's the next thing we have to be prepared for. So it's not easy managing money these days, and I give folks like Mike a lot of credit.
Spencer Levy
So let's just go to where the market is today. If you want to get a loan today, where are we today versus where we were, say, on April 1st?
Tom Traynor
Overall, pretty solid footing right now. And I would say it really changed last fall. If you rewind the clock to 12 months ago, debt funds, you know, were active. They were constructive. Fannie Freddie, of course, never goes away on the multifamily side. Life insurance companies were quite active. What was really missing for the most part was the banks. And you started to see some international banks, the Japanese banks, some European banks start to come back in. They started coming back in for different reasons. One of them was data centers. You know, they're very interested in the infrastructure side. And at the same time, what was happening with the U.S. banks was a lot of their non-office loans were getting refied off their balance sheets. And, so, they were very concerned about the exposure and the percentage of office on balance sheets, and what started happening is it started on a relative basis increasing because multifamily industrial started coming off from other banks or life companies or what have you. And, so, when we came back from the summer after Labor Day and hit the first rate cut, the banks just kind of flooded back in.
Spencer Levy
Domestic banks.
Tom Traynor
Domestic banks, money center banks. And, so, here we are today. It's busy. It's like I said, it's constructive. All asset classes are there to be lent on. There's the most favored, as always – there's multifamily industrial, data centers are in there as more of a niche category. But retail is certainly back, hotels are back. The debt capital is there if you wanna access it and it's pretty cost efficient.
Spencer Levy
Mike, you have so many pockets of capital. For the benefit of our listeners, just explain what you're buying by asset type and how you buy it. Because you may have a separate account that likes retail, you may have a separate account that likes data centers. You may have separate account that overlap. How do you figure out which capital source within AEW you go to?
Mike Byrne
I'll go there in a second. Maybe just for a second, just I want to dovetail on what you were saying there, maybe less about what the market is giving us today and – because I think it'll frame some of the comments where we're investing, is just to restate the fact that the real estate market is highly cyclical. It always has been, and it feels to us like we're just in the next phase of the market cycle, right. And, so, when we go to the market today and we try to buy an asset, what we're finding is the best – however you subjectively define it, the best 25%, the best quarter. Some people call this the have and have not markets, right? The best 25% or best quarter are trading at pricing that doesn't make sense relative to today's cost of capital, right. And you find yourself – you're trying to buy an apartment building today, you're buying an asset that maybe it's a 4.5% yield on your numbers, right, as soon as you move out of that subjectively best area, everything else, either there's no bid or it has to reconcile with today's costs of capital.
Spencer Levy
Let's pause that comment, Frank, because I call this a math warning to our listeners. I want them to understand exactly what we're saying here. Because when we advise our clients, we say, well, how do you get the best risk-adjusted return? And if you're getting something that is too tight, basically the yield is too low, even if it's like, say, in retail, grocery anchor retail, everybody loves grocery anchor retail. You get the best 25%, price to perfection. As data centers, price to perfection, meaning the yield is too low relative to the risk you're taking. Is that a fair way to describe it, Mike?
Mike Byrne
I think that's right. I think as you look at valuation metrics today, and if you're investing in the way you've just defined it as the best assets, price to perfection, right. And I think, that's the psychology of a lot of investors saying, I believe in the quality of the cash flows here. I believe this is a good risk adjusted asset to own. And I'm comfortable with some, if not all of the valuation metrics, right. But if you move out of those best assets. That's where all the metrics need to make sense to you, I think. And I think that's what we're seeing today. And, so, while some people call that the haves and have nots, I think it just reflects what's happening in every business everywhere, which is, this is just a highly discerning time. And that's the part of the market cycle we’re in, it's highly dissoning. You focus on the most highly discerning parts of your business and you make selective decisions to deploy capital very preciously. And I think – I think that's what's happening. As we look and think about deploying capital into that environment, we think about it with two spheres of thought. We have absolute return capital that our clients are giving us a dollar and our goal is to give them back two or $3. And we have benchmark oriented capital, trying to beat a benchmark. And I think, and where we're looking to develop long-term exposures, right, and so, we think about those things totally differently. And the great thing about this market for us today is you can do all of those things today. You can look around the market today and find places to grow in a way, right. And, so, that, that's not everywhere. You can't just make a sector allocation decision like you made back in 2018 and buy industrial. You need to look at the asset and the market differently than you did before, but you can find places to grow in a Y. You can find places to invest opportunistically and find something that's broken and find an asset that is capital starved in some way and invest in some sort of distress situation. You can actually reposition assets and you can do all of these things today and deliver returns to your clients that make a lot of sense. It's been a while since all of those avenues for investment were available to you as an allocator. So we are doing a little bit of all of it, to be honest with you. The opportunity set now is in all corners of the real estate market. And I think for a lot of us here, that is so refreshing to get away from the narrative-driven market and just go find bottom-up deals again.
Spencer Levy
The opportunity set is in all corners of the market. And if our listeners really paid attention to what Mike just said, he used the O word, office, as did Tom Traynor. And what we see in our numbers and our econometric advisors group is based right here in Boston, they're telling us that office is gonna have the best overall returns by asset class over the next five years. And the reason being is that it's been so disfavored. And if we had this conversation like six, nine months ago, I said, there's no way you're doing office. But now folks like AEW are, because they see on a open playing field where all asset types are available. So Tom, this is not the office show, but since it came up – office.
Tom Traynor
Yeah
Spencer Levy
Where's the market?
Tom Traynor
So, the market's there. The market is there certainly for the high end. You're talking about the top 25%, right. So if you're on Park Avenue in New York City, you don't have any problem raising capital on the debt side. I'd say once you start going away from main and main and subway stops, those types of submarkets – one of the biggest factors is actually acquisition. The fact that it is an acquisition, the fact that a institution is coming in and deploying new capital and establishing a lot of times a new basis for the asset. And, so, that gives people a lot of comfort on the debt side. They look at that and they say –
Spencer Levy
As opposed to a refi.
Tom Traynor
As opposed to a reify where you can triangulate to where you think value is, the reality is there haven't been a ton of trades and so a lot of times when you look at appraisals, they're referencing deals from the past and there's some skepticism around what values are. Someone comes in with brand new acquisition, it is new money coming in, it's establishing a new basis that's today. As far as, like, checking the boxes, acquisition is a huge thing. I mean, it's treated very much differently than a refinance on the office side. Frankly, most situations with existing loans, there has continued to be a kicking the can mentality and frankly, that's continued to happen kind of across the board. Usually there is obviously something in return for a lender to extend the existing loan. A lot of times it's new equity coming in. It's not so much about increasing spread. Or anything else, it's about trying to get an owner to essentially recommit to the asset. One of the biggest things, I mean, office, it is expensive to re-tenant office buildings, right. And, so, they're looking for a commitment sometimes to pay down a loan, sometimes to put up in a reserve money for TILC, etcetera, for future teneting and if that's there, a lot of times you can get an extra two or three years. The issue is, when we talk about COVID, COVID was 2020, right. Some loans that were originated, even floaters in 2015, are still outstanding, right. They were extended for a couple of years, they're extended for another year, they were extended another couple of years, and a lot that was, you know, banks, um – them willing to kick the can, frankly. And, you know, we have seen, if you look at the quarterlies for one of these big financial institutions, they have been taking marks against their positions. And some aggressively, some not so aggressively, but the more marks that you see taken against a loan, let's say office loan, more chance that eventually they're going to work something out. They may sell the loan, right? They may do something, just kind of pay off with the owner. It could be anything. But you're starting to see more and more resolutions happening right now. But overall, in general, so much is about looking at the WALT of the tenancy.
Spencer Levy
Weighted Average Lease Term.
Tom Traynor
Weighted Average Lease Term. Who are the tenants? Are they sticky? Have they been there for decades in some cases, right? And, so, WALT’s huge. And what do the leases look like? Are they below market? Do people – do people know what market is, you know? If we go out with an office opportunity for lenders, we also budget a lot more time than we used to. We used to be able to put a package out and get responses from lenders in a couple weeks. And, now, unless it's the most pristine example of an office opportunity, it's gonna take people at least a month to get their heads around or get their credit risk management groups internally on board. And, so, a lot of it's pivoted to the debt funds where they are willing to, you know, take more of a chance than maybe a more conservative bank.
Spencer Levy
So for our listeners, debt funds are typically a non-bank financial institution, could be a private equity fund. And typically, their cost is 200 basis points higher than a bank, 300 basis points.
Tom Traynor
In a lot of cases, yeah, I mean, debt funds, that opens up a can of worms, honestly, because the old definition of a debt fund was an opportunity fund, really, right on the debt side and it used to have a bad connotation because some groups, if you go back long enough, they were kind of loan-to-own.
Spencer Levy
And loan-to-own, meaning that they would lend aggressively and maybe hoping you defaulted so that they will take the real estate.
Tom Traynor
Yup. But over time, it migrated to a real business of just lending money, collecting interest, and looking to get paid back to their principal. And, so, groups like AEW and many others, they're out there raising these debt funds just like they're raising equity funds. And, so, you ended up having this spectrum that evolved from opportunistic money to value-add to core plus to core, all on the debt side, right. So they actually started competing more with life insurance companies and even banks in some cases. And then the one last comment I'll make about the debt funds is they started buying life insurance companies. And, so, now it introduced a whole new kind of cost of capital to the equation. So now these debt funds are now offering fixed rate loans that are competing with traditional life insurance companies and that's been great. Groups like AEW and Mike knows it, like there's just far more participants out there right now that are bidding on these loans than there were 10, 20 years ago.
Spencer Levy
So, Mike, on Tom's point, how are you seeing that debt versus equity fundraising risk-adjusted return?
Mike Byrne
It feels like a good time to be more senior in the capital sack today, to have that security. Feels like a time to prioritize credit in the market, regardless of how concerned you are with the greater macro economic environment. And when you can do that at a very similar return profile, whether you're talking about investing on the more core side of the business or whether you are moving up the risk curve to doing something more opportunistic, that's obviously gonna constrain equity capital interest in the market, right. And, so, and I think that was so unique about what happened at the second half of last year on the equity side, which was we saw investors picking their head up and saying, I've totally been focused on the debt side or on the credit side of things for the last two years. There isn't a material difference in terms of return opportunity anymore. But if I'm a long term investor, there's elements of being a private equity real estate owner that encourages me still to lean in a matter near a cyclical bottom – I want to allocate to both credit and equity at the same time. That was so unique about the third quarter and the fourth quarter and first quarter that we were paying attention to. Does that continue through the balance of this year? I'd be cautious to say that if we continue to see the uncertainty that's in the world today continue to pile up, I think there will be a renewed focus on the debt side of things still. Um, but we've had more – we’ve had a lot of success on the debt side as well, um, really from core through opportunistic. Um, and I think if you see what's happening in the market today, if you're an opportunity fund, a traditional opportunity fund, looking to invest equity and capitalize on the distress that's in the world today, oftentimes the rescue capital that's coming to the aid of a multifamily asset owner is really a debt fund, right. And they're lending on terms where sometimes you scratch your head and you say, how are they thinking about refinance or exit risk here? Are they thinking of that the right way? Because this deal doesn't pencil. This is something an equity fund should do. We're seeing a lot of debt funds lean into those positions today at reasonably good spreads if you're the borrower, and it's definitely chilled the opportunity for a lot of opportunistic equity to get deployed.
Spencer Levy
Now, some of our investors will say, well, we could look at industrial, we can look at self-storage, we look at office, we'll look at multifamily, but you know what I really like to look at? Vibrant sub-market, just the sub-market. And in that sub-market, I'll buy everything in that sub-market. Is there any thought of a change to that? And I'll give you two basic types of sub-markets. One is a dense urban environment sub-market, like we're sitting in right now in the seaport. And second is completely on the other end of the spectrum, which is these new manufacturing zones where you're seeing some reshoring of manufacturing, whether it be chips, and then you have the industrial around it. Do either of those investment ideas of going to the sub-market and buying everything in that sub-market of growth and being a little bit more agnostic on asset type make any sense?
Mike Byrne
I think so. Um, I feel like you're reading my diary. So, yeah. No, we think about that a lot. It used to be you'd think out of the left side of your brain and the right side of your brain, property sector and geography, and we've lost focus on geography, right. I think there's real merit to the idea that certain regions are going to disproportionately share from outsized growth, whether it's tied to some of the deglobalization things that are happening here. There's economic activity coming back to different parts of the country where it wasn't there before. Uh, Ty did uniquely strong demand drivers, whether it's AI in certain markets or whatever it is. I think the idea of betting on geography makes a lot of sense today. Uh, you used the seaport as an example I use here all the time internally, right. There's pockets of the country that are just better positioned to capture outsized rent growth from a customer base or a tenant base that's willing to pay more rent for that location. It feels more secure in terms of consistent demand. It feels like there's more upside. Feels like better protect the downside. And, um, yeah, I would be happy to own an office building in Century City, California today. Be happy to have one here in the Seaport. Um, and so, I think you characterized it exactly right.
Spencer Levy
What about those areas, and again, not to overly generalize here, but a lot of these manufacturing sites are in secondary and sometimes tertiary markets, which probably haven't shown up in an investment committee too often. If they are, it was a very short conversation. Will you go there?
Mike Byrne
I think we will go there. Yeah, I do. It depends on how you define it, right. If you move to the far suburban parts of Phoenix, where there's massive chip manufacturing plants being developed, we're spending a lot of time looking at ways to invest there, whether it's through housing or retail development or something like that. We're looking at markets like Columbus in ways that we haven't looked at before. I think if you're focused on NOI growth, you're either evaluating the market based on its market fundamentals or you're looking for a catalyst. And when you're talking about our catalysts I think we are a big believer in following certain catalysts. I think we're gonna try to be selective in terms of where we make that bet. We're gonna spend a lot of time hemming and hawing around what our exit looks like in those markets. But I think ultimately, you'll see us invest there.
Spencer Levy
And the other thing that we're seeing trend-wise is many groups like AEW that traditionally had the capital and you had an operating partner and they were separate entities. We're seeing more groups like AEW buying the operator, like doing a fully integrated model. What's your thoughts on that?
Mike Byrne
Well, it's been very – it's been highly topical, right. Um, I think, um, I think there's places where that makes a lot of sense when we invested in a cold storage operating business for that exact reason. Um, I would be – uh, I think there's a couple of things driving that. One, I think we all believe that real estate is more of a service-oriented business and all real estate is becoming more purpose-oriented to its customer in some way, right. Whether it's specialization of the asset or services you provide. We've all talked and seen the proliferation of all these niche strategies that exist. I think that's part of the reason, right. I think if you look at the industry broadly, a lot of that trend was driven by the idea that we were – the market was looking for scalable platforms, right. It was tied to what was happening in the market. There was a narrative-driven market tied to large, powerful, secular themes that existed. And, so, you wanted to invest in a platform that could build a big MOB portfolio or a big cold storage portfolio or big data center portfolio. And the only way to access that was through controlling the platforms. I think there's probably room for a little bit of caution there as we move into a period of economic disruption like we're seeing here. I think, just to use an example, the groups that went forward and bought big life science platforms aren't feeling so great about that today, right. And I think we're learning or relearning that bubbles can form in real estate, right. Bubbles can form when there's excess demand. There's a highly tangible narrative that ties it – to it, and then you're in a sector where rents can grow extremely fast, extremely quick. That's almost the definition of a bubble, right? We take increasing risk in a sector tied to promise a future demand, and then the tide goes out, right. And, so, there are places where controlling operating platforms makes a lot of sense, right. Especially if it's a forever part of your business, whether it's in housing or logistics or something like that. But if it's super niche-y. Think it makes a lot of sense so long as you prepare yourself for a lot of volatility.
Spencer Levy
So, Tom, let's turn now to fundraising. What are you seeing in the capital flows today in terms of challenges, opportunities today for clients like AEW and otherwise for money coming in?
Tom Traynor
That's a tough question. There's been a lot of disruption since Liberation Day. There's been a lot of news and noise about a renewed focus on Europe, for instance. There's kind of no–I mean, you just can't avoid that kind of topic right now with a lot of people making a lot of big statements about big dollars being allocated to that region. And at the same time the U.S. has always been a safe haven. Um, you know, I know there's skeptics out there. I feel like when push comes to shove, that's gonna continue to be the case. I'm not hearing bad things, let's put it that way. It's not, it certainly doesn't sound like it's terribly easy. You really have to continue to sell your platform and sell the opportunities which we've been talking about. I think there are a ton of opportunities. I do feel like a lot of that capital does, you know, it's kind of groupthink – does continue to chase those best asset classes. But look, frankly, you got to be positioned and have that kind of history, the pivot into, like, hotels and hospitality. If you haven't done that before, um, it's something very different. If you hadn't done data centers before, frankly, that's different too. I know it looks and feels somewhat like industrial logistics, but it's a lot different. Um, and so, I think the jury's out like it always is. We'll see how it goes. I have heard good, I have her bad, so.
Spencer Levy
I guess the macro challenge is the world's getting away from defined benefit pension plans, losing endowments, foreign capital challenges. How do you see capital raising today, Mike?
Mike Byrne
So, I would say, broadly speaking, capital raising is improving. And I think capital has started to pay attention to all elements of the real estate market, maybe not in equal doses, but it's much more evenly distributed than it was a year or two ago. And that's coming from all parts of the plan sponsor universe, whether it's corporate and state pension plans or whether it's endowments or whether it's foreign investors, it's definitely more balanced than it was before, so I think that's healthy. I think core fund capital raising is about to pick up dramatically, which I think is great. I think in terms of managing the issue, which is as institutional capital starts to abate or starts to decline, where do you go for new sources of capital? I think that's a much bigger question. I think when we think about the retail capital world, we think of it in two ways. We think they're about the tax exempt retail capital that's out there. So, the 401k universe. And then we think about the taxable retail capital through the RIA channel that's either invested through aggregator funds into products like ours or invested into the B REITs of the world. And I think we're all waiting and believing that 401k capital is going to have a massive impact on our business – a massively positive impact on our businesses. The institutional allocations have gone from 5% twenty years ago to real estate and they've probably tapped out at – where are they today? 13, 14 –
Spencer Levy
13-14%.
Mike Byrne
Something like that. That's been a really strong wind at our back for the last many years. We need a new wind at our back, right. Especially in a world where interest rates and the cost of capital is likely to stay structurally higher. We've taken two massively supportive macro trends. We need something else to support that. I think there's a real case for why real estate should belong in a 401k portfolio. I think people like us have done all of the right things to build the plumbing so that capital can come into our funds when it's ready. And candidly, we can't turn that spigot on fast enough. So I think it's there and ready to go. I think there's a fair amount of product development happening, but we really haven't seen it. It's a trickle at this point, and it really hasn't turned on.
Spencer Levy
Let's talk about a couple of mega trends, technological changes, data analysis. I still think we're at the beginning stages of its predictive capabilities. How is data, AI, all this stuff, changing your business, if at all yet, Tom? And then I'm gonna ask the same question for you, Mike.
Tom Traynor
I think it's happening slowly. There hasn't been any incredible event or anything within our business. I feel like it's certainly, you know, getting information is certainly easier, whether it's a simple Googling for information or whatever. The AI response is often very kind of clear and most of the time to the point. So just small little day-to-day things are certainly easier. I – you know, our company, CBRE, is spending a lot of money on this topic right now, and you know CBRE is – you know, I'm sure you get the commercial all the time, largest commercial real estate services firm in the world. We have a lot of data points all over the place, whether it's capital markets or leasing or whatever. And I know our focus, and we talk about it all the time internally, is to harness that data for our clients. And, so, I think we're seeing that in our systems, internally I'm talking about, if we're about to launch a deal and we're looking for other data points other than what my group is directly working on. It's a few strokes on the keyboard and I can pull down all sorts of information across the country and across the world on what is getting done live. That was not the case five years ago. Yeah, it's certainly having an impact and expect it, frankly, to have much more of an impact going forward. How we get there is yet to be seen.
Spencer Levy
How's it working at AEW?
Mike Byrne
Someday, someday it probably will be. I would say, I think it's happening very fast. But as a business, like always, we're adopting really slowly. I think we surveyed 100 people in my seat, 99% of them would say that technology is going to massively change their business over the next five or six years, probably most of it tied to AI. But if you look at the average, you know, technology spend of all of those 100 people, it's probably like five to 10% of their overall P&L. I don't think the industry really knows how to integrate it with its business fast enough, appropriately enough yet. I do think it's a major cross for all of us to bear and a major hurdle for all of us to overcome and we’re doing it here. We're layering it into parts of our business as prudently and as quickly as we can. And it's happening in more supportive elements today, whether it's talking about responding to communication inquiries or whether you're talking about using it in the research function first and foremost. I think in short order, we're gonna rely on some sort of AI-driven research product to weigh in on our investment committees. I couldn't tell you if that's three weeks from now, three months from now or three years from now. But I know it's coming. And I think we're probably gonna be underserved or mis-served if it's not on the faster end of that.
Tom Traynor
We have a younger client, who’s probably mid-30s, who's, you know, that type of person is gonna adopt this stuff much quicker, and we recently played golf, and he said, I haven't played in five years, but I used to play in college. And, so, he went to ChatGPT, and he basically provided a lot of information on his past, and it spit out a handicap for him, which ended up being very accurate. Now, I'm bringing it up, because it's kind of interesting, it's kinda funny, but his – that's where he pivoted to say, I'm going to run on ChatGPT to give you a golf handicap. So, it's just, um, it's just interesting. I think it's obviously going to impact everything going forward, it's just a matter of how quickly.
Spencer Levy
Well, I wish it was that easy to get my handicap back to where it was. I used to play 60, 70 rounds a year. I play maybe six to 10 now. And I'm a great partner in a scramble because I will still get a whole bunch of pars, but I will get triples all over the place. So in any event, my 14 handicap is dangerous right now.
Tom Traynor
There you go.
Spencer Levy
Would love to get your outlooks towards the next couple of years. I mean, I used to say five year crystal ball, but the world's changing in five month increments today. Next year, how do you see it playing out for the real estate markets? Any big ideas that we haven't covered that you think we should cover as well.
Mike Byrne
So, I mean, I think we've covered a lot of it. I think one place where we haven't talked about, and it is more thematic, contrary to everything I've been saying, where we're spending a lot of time is in the seniors housing sector. So, if you're looking for a sector we believe in, I've said this for two years in a row now, and I think it's less interesting now is the world is seeing a lot what we were seeing two years ago, which is really strong fundamental improvement, really strong NOI growth, really strong opportunity to capitalize on some distress in the market and buy well. I think that continues through the balance of this year into next year. I think there's so many positive forces at work for continued demand growth there that I think that's one place where you'll see us continue to thematically invest. I personally have a more cautious view of the world in the U.S. here around some of the prospects for economic deterioration, and so I do think we're all going to be looking at our portfolios next year and saying, um, you know, maybe 50% industrial exposure wasn't a good idea. Maybe the term we all used for the last several years, which was exposure, we all wanted exposure to everything, we're gonna start using the word diversification again, right. Two different ways of saying the same thing, and people are gonna start thinking about where they have diversification as a risk management tool in their portfolio as opposed to an exposure commentary which talks about growth. So, I think that's maybe on the docket for the second half of 2025 and 2026.
Spencer Levy
Tom, your outlook for the next year, anything we haven't covered.
Tom Traynor
I'll stick to the debt side and there's no question everyone's eyes continue to be on the Fed and base rates. And you know, if we can get to 100 basis points of relief with SOFR on the floating rate side and have a more traditional upward sloping yield curve, I think that would do a ton for this business on our industry. When you're kind of whipsawing the fours and up to five percent both in treasuries and obviously, we came down from the five handle on the floating rate side with SOFR. But I think if we can get 10.3%, 3.5% on SOFR, I think that would be tremendous for value add deals, transitional deals. And then once you've moved that on to stabilized, then you can hopefully lock in a treasury at around 4%. Just to give you a little evidence of that, we saw rates, particularly treasuries, dip below four percent, activity all of a sudden just would just – was just happening. Refis were happening all over the place and people were looking at acquisitions and frankly some people timed it perfectly and you looked at these coupons and you said, that looks like a coupon from another era. So if we could get that and Mike's smiling, but I – you know, if you could – these guys have great portfolios, you know, if you can kind of dip into that for five years of fixed rate, all of a sudden returns are just jumping. So, I think, um, you know, it's going to continue to be something to watch. It's in the paper every day, you know. It's the administration constantly making comments to the Fed and the Fed is being patient. They're being very, very patient. You always have a strong opinion on this, Spencer.
Spencer Levy
I have no strong opinions, Tom.
Tom Traynor
So, it's wait and see, fingers crossed, but hopefully we get some relief. I think what we do want to avoid is you can't control it, but is having a dip too low again, where you had just kind of a crazy response to interest rates are basically zero. And, so, keeping it in a nice, reasonable, long-range level would, I think, be tremendous. It felt like we were at the start of a really nice bull market in the fall. And I think if we got some relief there, it really could be.
Spencer Levy
Well, with that comment, and I hope that's an optimistic way to end the show, what a great conversation we had today in Boston with Mike Byrne, Head of Private Equity and the CIO for AEW. Mike, thanks for coming out.
Mike Byrne
Thanks for having me, Spencer.
Spencer Levy
And Tom Traynor, Vice Chair, CBRE and proud Boston College Eagle.
Tom Traynor
Go Eagles. Thanks, Spencer. Great to be with Mike.
Mike Byrne
Likewise. Fun time.
Spencer Levy
For more insights on global investing, we'll return with more from our friends and colleagues overseas. We'll feature a deeper focus on the impact of technology, including AI, on investment decision making, and also a focus on construction and development. You can find more information and insights on our website too: CBRE.com/TheWeeklyTake. I'd encourage you to look for our recent episode with the U.K.-based investment firm Schroeders for a wider lens on global capital flow. I'd also encourage you to share our shows with your friends and colleagues. You can do that right there on our website or using the podcast platform of your choice. You can also subscribe, rate and review The Weekly Take wherever you listen. We'll be back next week with more conversations from our European trip and then we're back stateside for episodes you won't want to miss. Thanks for joining us. I'm Spencer Levy. Be smart. Be safe. Be well.
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