CRE MARKET OUTLOOK: RISKS & OPPORTUNITIES WITH AARON APPEL, KRIS MIKKELSEN, & IVY ZELMAN - WALKER & DUNLOP INC

I can throw some red meat out there for the industry participants that are listening to this call on the transaction side, Willie, in our sales business, which is predominantly a multifamily sales business. We've awarded 120 transactions since the month of May, 65% of that. So two-thirds of the deals that we've awarded since May have either closed or getting done with no price adjustment. If you look at the third that are getting repriced, it's really 50-50 as to whether or not the deal reprices and gets done or just completely falls out. Walker and Dunlop brings you insights for life. Unique perspectives from impactful leaders. This is the Walker Webcast with Willie Walker. Good afternoon, and welcome to another Walker webcast. This is a good one. I know we have a lot of people interested in this conversation because I've been traveling extensively for the past couple weeks and going on Zoom call after Zoom call with Walker & Dunlop clients across the country. And the questions that they pose to me are, quite honestly, better presented to my three colleagues and incredibly insightful professionals in Ivy Zellman, Aaron Appel, and Chris Mickelson. Ivy runs ZellMAN, a Walker & Dunlop company that does amazing research on everything in the housing industry. Aaron runs Walker & Dunlop's Institutional Capital Markets Group and Chris runs all of capital markets at Walker & Nunlop. I got a lot of data for us to dive into and lots of specific questions to the three of you. But this is about as close to the all-in podcast on commercial real estate as we'll get. So I want to have a little bit of the just kind of back and forth banter between the four of us about what we're seeing in the markets and kind of what the general outlook has been. Chris, you asked me yesterday as we were doing our pre-call, what are the top three things that clients are asking me when they call and I get on calls with them? And my very quick response to you was the first question is, what do I do? Do I sell? Do I refi? Do i hold? And given where interest rates have gone, given where cap rates are today, what's your advice to clients right now who are trying to navigate what feels like an extremely tumultuous market, given what's happened with interest rates and the overall outlook for both housing and commercial real estate? Look, I think a lot of it depends on the nature of the capital that you're geared with. um i think what the market is saying right now if you just look at transaction activity is anyone that has the ability to hold is trying to hold so i don't think um you know there's not a lot of rash decisions i think um we get a lot of calls about when is all the distress coming and when you look at the composition of our pipeline it's very very little distress oriented selling. We took a look at our entire pipeline for the year about 45 days ago. And the number one motivation for sellers was people had just completed their business plans and it was time to recycle capital. And that remains the primary motivation for the majority of the pipeline that we're selling. But I think I might answer your question a little bit differently, Willie. I think anyone that has sold in the last 12 months is probably happy that they sold. I think the people that have missed out on acquiring assets over the course of the last six to eight months are probably relieved that they missed some of those opportunities. And I think everybody's sort of sitting around saying, what does this mean for transaction activity in 2027. And we think about, I think about the world and able to and have to sellers. And I think what's happened over the course of the last 30 to 45 days has sent a number of the able to sellers to the sidelines. And so I think that part of the market will be quiet for some time. But I do think some of the pressure that is building with rates and re-margin requirements and all the things that we're talking about with our clients every day are going to be a forcing mechanism for some transactions that, frankly, probably needed to have occurred over the course of the last couple of years. But because the credit markets are as liquid as Aaron will talk about, you know, candidly, this is a little bit of a direct comment, but there's been a lot of impaired equity that's been able to hide because of a hyper-liquid credit environment. And I think what's gone on over the course of the past month as this sort of interest rate regime persists, it's going to shine a light on some of that. Aaron, your team is wildly prolific in putting debt capital and equity capital on assets across real estate asset classes and also across all sources of capital. what's what's gone on the last three weeks as it relates to um both spreads um deals getting closed or deals falling out um last time we had this discussion um one of your big points as chris just said was debt capital is just wildly abundant has anything shifted in the last three weeks since rates jumped up as it related to the ability to get debt capital for deals It's a good question. I think it's a multi-answer question. One, just addressing spreads. Spreads really haven't moved much. You've seen a little bit of widening, maybe 10, 15 basis points here or there on some securitized product. And depending on the lender, there could be some banks that are widening a touch, but no sort of severe or massive credit spread widening. Spread have maintained you know they've been relatively stagnant i think the bigger issue that we've seen is we've seeing a big shift in how people are valuing real estate um i think this last real thrust up above a five percent treasury and and and you know certainly uh trying to test maybe you know 540 which which is which has been backed down into the low fives but certainly staying and and hovering above a 5% treasury, I think has affected valuation that lenders are looking at and also buyers. And we've seen, I would say, debt yield or lender cap rate margins widen by 25 to 50 basis points, depending on the location of the asset for multifamily. We've seen a similar widening in industrial for assumptions. We have not seen that widening necessarily in office or hospitality, but those cap rates that lenders were lending into on those asset classes were certainly wider. We haven't seen much of a move in data, although that has its own set of capital markets related issues right now. But we still see a tremendous amount of credit available across the board. The other issue I would say that we've seen is, and we have some odd 50-ish transactions in the pipeline to close by year-end, is we've seeing seven or eight deals in the last week that were slated to close where we're not closing right away. And there are minute issues that normally would have been, I don't want to say swept under the rug, but there would have some sort of agreement around them. And we're seeing lenders really behaving in a fickle manner around issues on deals. And those are all on the financing side, not on the sales side? Yeah, those are in the financing site. On the sales site, I think you're seeing that also. I think the sales slide is more just a pure play monetary issue where people are coming back for repricing or equity is not willing to transact at levels that they were. On the finance side, we're seeing a lot of issues amongst lenders where they're really taking more heavy-handed positions and non-monetary issues around transactions in order to maybe try to get to a better spot or maybe not transact. We're not sure. I can throw some red meat out there for the industry participants that are listening to this call on the transaction side, Willie, in our sales business, which is predominantly a multifamily sales business. We've awarded 120 transactions since the month of May, 65% of that. So two thirds of the deals that we've awarded since May have either closed or getting done with no price adjustment. If you look at the third that are getting repriced, it's really 50-50 as to whether or not the deal reprices and gets done or just completely falls out. And I would say the thing that I think is different about multi is it's more than just a, hey, here's the impact to my cost of financing. I was underwriting a four and three quarter to 5% exit cap. I can no longer have an exit cap that's inside the 10-year treasury, so I'm gapping out my exit cap. A 50 basis point move in the cost of your financing, if you're a total return IRR-oriented buyer, is a 2% to 3% correction to purchase price. That residual cap rate, once it expands out, particularly if you are expanding it out 50 basis points, is going to be a lot more impactful to value. But what's happening right now, that 50-50, is you've got some people that are keeping the conversation constructive And I'd say, here's the impact to my model. But then you've got overly opportunistic actors in the market that feel like this is a moment in dislocation. This is a movement in time where they can actually rein back in growth assumptions and really sort of pull every lever to the conservative side. And so when those asks come in and they're beyond my cost of debt with some exit cap expansion, and now all of a sudden I'm bringing in my rent growth kegger by 150 to 200 basis points over the term, those are the deals that just, frankly, we're not even really engaging with those groups. Those are the asks that are coming back in the 8%, 10%, 12%. And very few, if any, of those deals are getting done. Most of that is just going by the wayside. Yeah. Before I come to you, Ivy, I had a meeting yesterday, Chris, with one of our big clients and they are going after two assets right now, one in Phoenix and one in the DC area. And they'd looked for a 3% price adjustment. And I asked them, my question was going to be, did you have a big ask at first? And then when rates rallied a little bit and came back in from that 535 down to 510, were you asked to give up on some of your ask? And they said, no, we only asked for 3% so we didn't have to go and reprice our reprice. And I said, that was probably a constructive and smart thing for you to do. And they were like, yeah, we're still at the table trying to get those deals done. So I hear you loud and clear on what you said right there. I've yet to ever have a buyer raise his price during diligence because rates went down. So got it. Ivy, the backdrop from both Chris and Aaron is a little challenging for commercial and multi, but in comparison to the single family world, things are actually looking pretty good on the multi side. Give us your perspective as it relates to just housing generally, and then more specifically on what you and your team are seeing in the multifamily space. So broadly over the course of the last six weeks, we've seen a definite step down, which was already pretty depressed levels of activity. I think we've been bumping along a level of pricing that's kind of hovering in the existing home market call it one up one percent and maybe two percent and i think we're going to see prices fall further inventories are rising builders that had been very prudent about buy downs which negatively impact their margins pretty substantially now can't buy them down to the 499 which allows people to qualify so it's just too expensive maybe some are still doing it but i think generally we're seeing a pullback to a buy down in the mid fives um you know the move up market had been not not strong but the luxury move up luxury you know second time third time move up had been healthy that because of the geopolitical backdrop and the weakness in consumer confidence we've seen a lot of those um consumers step to the sidelines so there's really nothing positive willie unfortunately i was in a meeting last week in new york and doing a zoom while having clients present and a question i kept saying, I need green shoots. I'm like, well, look at the rental market. The rental market is definitely on a relative basis, definitely green shoots are present there. And what we're seeing with the multifamily market is why, while we still have too much supply and markets that have been very depressed, we're Seeing the rate of change is less negative. And those are positive green shoots, in our opinion. We also, overall, we think we're hovering around trough level of rents. We did have our multifamily operator survey published today. And while renewal rates kind of held in, the overall new move in came back, went back to being negative at 0.4%. And really, that was likely due to the operators pushing occupancy going into the seasonally slow period over price and willing to offer better pricing and at the same time kind of playing with concessions. So it feels like we're bumping along the bottom there. And I feel pretty confident given the strength that we see demographically for rental households growing, that we're going to absorb that supply and we're gonna continue to see low turnover, low move out to buys. You know, lease up competition is still very elevated, but multi in our opinion, relative to, you know, for sale, there's, you Know, it's no question it's going to be a better performing sector holding all, you Now, metrics constant today, i.e. the long end of curve. So let me pull up a quick slide here on Chris and have you talk about this. Ivy was just talking about her most recent survey data. This shows on this slide, and to those who are just listening today and not looking on the webcast, this slide shows where rent growth has gone for the last three years in 23, 24, and 25, where rent grow was doing pretty well for the first six to seven months of the year and then tailed off to be flat to negative over the last three years. Year-to-date in 26, we're holding in there at on this one at 2.83%, which is a number that is higher than what Ivy just said on their most recent survey data. But Chris, how promising does that look to you right now that this graph is showing 2.8 through September and that with the real opportunity that we might actually have a green number for 2026 rather than a red number as we've seen for the past couple of years? Yeah, I look forward to celebrating absolute growth versus rate of change. That'll be, I think, a welcome transition point for a lot of operators. You can't broad brush the rent growth story. Obviously, in these areas that have been heavily regulated and repelled capital for a long period of time and saw no development and now all of a sudden have significant amounts of economic growth, you see exponential rent growth in the Bay Area. You see super resilient, strong rent growth coming out in New York. You see slow and steady in the Midwest. And in the overbuilt Sunbelt markets, you still see real pressure on rates. The rate of change has improved. But interestingly enough, some of the deepest bid sheets that we have are in those overbuilt Sonbelt markets where the basis has just gotten so low relative to replacement costs that it's attracting a lot of capital and a lot a contrarian capital. So look, I think the fundamental story, if I were to just try and broad brush it, I Think, you know, everyone is frustrated and fatigued that the recovery and operating fundamentals hasn't come more quickly than we all would have hoped. You know, certainly when you looked at the underwriting of the most aggressive bidders, when we were transacting in 24 and early 25, you Know, they were underwriting a much, much steeper recovery curve than has actually played out in real time. But it's undeniable at this point to look across the market, look at the absolute absorption figures that we've been able to produce over the course of the last 18, 24, 36 months, that we are working our way through the excess supply that we delivered into the industry. And the one thing that I would say is, and with all due respect to my great friends in the development community, this has put the headwinds in their space on steroids. And so, you know, Ivy and I have gone back and forth on our view of what start numbers actually are over the course of the last couple of years. But I think we can both agree that the pressure that's on the market right now will hugely suppress start figures going forward and give NOIs room to breathe and time to grow. And that's ultimately really what we need in the multifamily space. Aaron, Chris talked about certain markets that have seen low supply and high growth in New York, where you and your team do a tremendous amount of deal volume is one of them. How are investors dealing with the sort of the completely contrarian data inputs of what the Mamdani administration is doing from a housing and regulatory standpoint and the underlying fundamentals of the New York market as it relates to saying I'm risk on or I'm risk off in this market, because the fundamentals tell you one thing and the political backdrop tells you something else. I think there's a specific set of institutional investors that are comfortable investing in New York and continue to invest capital here. um there's private families that have operated here for multiple generations uh some dating back you know 120 plus years and they continue to invest capital and operate here and there's a large subset of investors that will not invest capital in multi-family housing in new york right now um outside of pure plain market rate housing uh because of the political climate what about as it relates outside of multi into office, you and I went to visit with a client of ours about a month ago, who's looking to build an office tower in Manhattan. And the conversation went to a recently signed lease in the mid $300 a foot. And prognostication by this developer was that a $400 a foot lease would be signed before long in Manhattan, talk for a moment about the office market in Manhattan what you're seeing. It is the healthiest and strongest leasing market in the history of New York. That has been what has been told to me from my friends at JLL and CB and Newmark and other leasing brokers that are close friends. And the market's on fire. It's space is tight. A lot of stock has been taken off of line. A Lot of corridors that people thought were going to be full-blown residential corridors like 3rd Avenue from 42nd Street North in Manhattan, where you have some residential conversions taking place. Other buildings that were slated for conversion are staying office. We're seeing vacancy absorbed and rents are being pushed. And in true Class A space, rents Are close to double, if not more than what they were just, you know, call it in 2019 before COVID took place. So there's a massive supply-demand imbalance. And at the end of the day, real estate, when you come down to it, we can talk about rates, we can Talk about a variety of different factors. But at the end of day, it's a supply- demand business. And we have a massive supply shortage and markets where people want to office around the country, not just in New York. And the capital markets has been behind that. They're starting to catch up a bit. There is equity capital looking in the space to invest in office, albeit for the most part at capitalization rates that are non-existent right now. Hey, Aaron, who are the cap rates right now in office? I mean, that's a great question. One could argue that a trophy tower could trade a true trophy, Like one Vanderbilt will reset, could trade at negative leverage today and could trade, you know, somewhere in the low five range. But it's just not available and in the market, you Know, real quality class A that's not necessarily new built, you know, could be something in the high sixes to seven today. You know, that used to be in the fives. So there's certainly a widening. Um, but, uh, you know, I would tell you return expectations, um, are somewhere in the, you know, if you're taking on lease up risk or development risk, and it's a real value add transaction, you Know, I think those deals need to have an eight handle on a return on cost or cap rate to the equity. And, um. You know, we do know of a couple of large speculative new office developments that are are under construction, one of which is being developed on a leasehold in the Plaza District of Manhattan, and that's getting built to about an eight, but it's on a ground lease and one's being fee developed. And we're told that's being developed to a sub seven return on cost, somewhere in the high sixes. And both those projects are just finishing their foundations and starting to go vertical. So that's a tight margin on each of those deals, but It just goes to show the equity that's going into those deals is playing the scarcity trade. They can't buy that quality of asset. If it comes up for sale, it comes out once every 20, 30 years. So it's a different type of deal. And when you look at where costs have gone, I mean, sitting here in the Sunbelt, to justify new office construction, you're going to need plus or minus $90 a foot rents. You know, the highest rent per square foot lease in Atlanta just got signed. It just cracked over the $70 foot barrier. So you've got rents that are, you know, 20 to 25% below replacement cost rents. It's very hard to see a world where there's another new office building delivered in Atlanta before 2030. You know, listen to Colin at Cousins talk about sort of their view on growth in the near term. You know to Aaron's point, there is no inventory. You look at the amount of capital that's going to retail today because there is a tangible near-term growth story. You know that they rhyme, right? When you turn off the supply spigot and you give demand time to catch up and absorb, the growth returns. And so to go back to housing, I think one of the challenges that we've had is the start numbers that we have been delivering have been stubbornly high. I do not think that that continues into perpetuity. I think there's an extreme amount of pressure on development starts today that has ratcheted up significantly over the course of the last 45 to 60 days. Ultimately, I think for the health of the market, that's a good thing. That'll allow some of the growth that we need to return. The multifamily housing sector has had more capital in it in subordinate positions willing to go up to 85, 90, even the low 90% of cost range, which is really, in our opinion, sort of delayed or extended the supply sphere, which probably should have slowed substantially 36 months ago. And it extended that window probably two years. And really what happened is all the equity capital that was invested in new development or looking for new development for returns said, you know what, we're going to slide down somewhere between 7% and 15% or 20% lower in the capital stack, charge a low to mid-teen or even upper-teen return in certain cases and see if we can get money out the door. And there ultimately were a lot of takers around the country for that capital. And those deals maybe were built for fees, but for the most part, none of those transactions we think will work out in a positive light for who is building them. And that's really now helped to slow the supply spigot. And we're going to find out how many of those accruals are actually going to be recognized. You guys jumped through a whole bunch of different stuff. You said to keep it free flowing, man. I love it. I love It. Let me jump real quick to a slide that just on that. This slide is the refi wave, if you will, that's coming up in multi. And as those watching the webcast can see, we're gone from a 2026 of about $300 billion. And then over the next four years, we've got about a trillion dollars of multifamily debt maturing in 27 through 30. That's a significant amount of paper that needs to be rolled. And Aaron, to your specific comment as it relates to where investors have gone in the cap stack, how challenging from your standpoint is it going to be to get that trillion dollarsof debt on multi refied out? It's like one quarter of the amount of money we need for data centers. So it shouldn't be very difficult at all. All right. I don't want to jump to data centers right now, but so you don't view that to be a challenge, but I mean, one of the things that we continue to see is people who, I don' t know, bought an asset, value is a hundred million bucks when they bought it back in 2020, 2021. They' re coming up for a refi. The asset' s now worth 80. They had a $60 million loan on it. We' re sizing a new loan to 50 million bucks and they got to do a cash in refi of 10 million bucks and they don't exactly have $10 million just sitting on the sidelines. How's that going to get filled? How's it going to work out? They'll recap it with somebody, subordinate their interest. They'll sell it if they can. If there's no buyer, a lot of time the difference in this market, and I think when we started the discussion, Chris made it mention to once the distress coming, is the stakeholders in these transactions and the capital providers are all too comfortable to hold real estate. So it's a different ballgame than what we've seen historically. And we're looking at refinancing an asset for an investment manager, and they sent us their schedule real estate owned, and roughly a quarter of their credit fund was REO. And they have capital that can sit there for a generation to own the real estate and operate it. So that's why you're not seeing the distress. It's just people in capital stacks that are comfortable sitting there. And if it's not there, if the exit liquidity is not there or the refinance is not There's just patient capital that will sit and wait. And I'm not sure when that breaks. If you had asked me, I would have thought it would have broken 25 times over, but it just hasn't, and it doesn't seem like it's on the horizon. When I look, the one exception that I would see to that, it's been shocking to me over the course of the last 24 months, how many cash neutral refis we've been able to facilitate within the multifamily space. I pulled this stat a couple of weeks ago. In the last 18 months, we had done $20 billion worth of bridge debt. We had sourced that bridge debt across over 125 capital sources. It was 350 plus executions. It's one thing to be able to facilitate a cash neutral refinance. But as Aaron referenced, we are executing these not with debt service coverage focused lenders. We're executing these with debt yield focused lends. That's the only way that we're getting to the proceeds that we need to get to. So what's on the other side of your refinance with your bridge debt is basically very, very low single digits return on equity at best. And at this point, we're through the sort of first wave of maturities and we're starting to look at sort of bridge to bridge executions. And so my question is, at some point, equity will become exhausted of 1% to 3% returns in current returns in a world that has much more attractive alternatives. So I think that becomes a little bit of the forcing mechanism is that exhaustion point. You know, in addition to just the obvious, which is, you know, my proceeds were at 130 days ago and now they're at 90 and I'm going to have to come up with a 10. I actually take a little Bit of the other side of the trade from Aaron. There is a the lack of willingness to recapitalize an asset and subordinate your existing equity to new capital. I think there's a lot of capital that feels like on paper there should be a tremendous number of recapitalization opportunities. We just haven't seen as many get realized. Part of it is the pricing disconnect. But also just there is no yield to the existing investor once you introduce the new third-party capital into the cap stack and a recap. So, I think the more likely scenario for those assets, if they cannot call the capital themselves and fund the re-margin, is those deals just go to the trading window. Yeah. The one thing that I would – there are two things on that, Chris, that I Would just throw in there. One is you mentioned as it relates to, if you will, bridge to bridge and debt funds being the supplier of that capital and the debt funds investing on a debt yield basis and not on a loan coverage basis. You know, I was in a meeting this morning here with a large client, and one of our bankers said that on one of his go-to debt funds, they've changed their debt yield parameters from six and a half to eight over the last three weeks. So, you know, that debt fund right there on repricing from a six and half debt yield to an eight debt yield, just, you Know, what's that capital look like? And what's the underlying fundamentals of it? The other thing that I would go to is something that Aaron said a moment ago as it relates to the office market in Manhattan. I mean, stop for a second and think what Aaron was talking about in the New York office market in January of 2025. 19 months ago, the office market in Manhattan was flat on its ass. There was not a bid to finance an office property in New York. And bang, 19 months later, he's talking about the hottest leasing market you can find. So while I clearly see this rate movement and changes on debt yields and all that slowing things down right now. I do think that some of the stuff that Ivy's talking about, about some of The Green Shoots from a fundamental standpoint are going to help this market tremendously in 27 and 28 that could get some of these fundamentals turning in a way that make it a more attractive investment than sort of, if you will, Chris, the very realistic yet dour outlook you have as it relates to operating fundamentals and return on equity. I mean, we're in just two live examples. We're in the market with a $1.1 billion office transaction. That'll likely be a SASB. We're expecting to have eight or nine bids. And we think that there's a bank syndicate to do that deal also, given who the sponsorship is, that syndicate was non-existent. The public markets a year and a half ago were functioning and they were constructive on office, but go back six months before that And they were not. On the other end of the spectrum, we have a building, a mid-block building in the Plaza District that the entire rent roll rolls. It's about 300,000 feet. It's older class A space. But that deal wouldn't have any liquidity. There would be no bid for it on a credit fund or on a bank 18 months ago. And we think we'll have 10 to 12 offers today. So the capital markets have certainly caught up in many ways, but there's still a lot of participants that won't participate in office just because of losses that they've taken. The other thing I would say is the office market, it seems like office, industrial to a lesser extent, hotel, people are willing to take their lumps in those spaces and more keys have been turned over. We've seen more credit available and move around versus housing and the multi-space. it's the last space to crack. It's the one where we've seen capital most comfortable to take assets back, sit on them and wait. Aaron, on that, just real quick, you talked about the bank syndicate that you might be able to put together on this large office financing. Is that due to just the underlying fundamentals of office as an asset class, or is that dueto some type of pullback on their allocation of capital to data centers? No, no, no. I think it has to do with it's a great asset. It's a good asset. It's great sponsorship. It's extremely well leased. The coverage is there from a debt yield or coverage ratio standpoint. And the asset was also substantially leased up in a softer leasing environment a couple of years ago. So there's embedded upside in the rent roll relative to where the rents are today. So it checks all the boxes for what you would want to put on your balance sheet as a credit provider. Ivy, I'm going to transition for a second to another slide here. This slide here, again, I'll just describe it quickly for those that are just listening and not watching the webcast online. But this shows consumer sentiment in the dark blue line, which since they started doing the consumer sentiment survey at the University of Michigan is as low as it's ever been since they started in 1952. And the blue line is consumer spending. And typically, when consumer sentiment falls off, consumer spending falls off as you can see on the left-hand side of this slide. But for the last year, we have seen consumer spending continue to chug along, getting up to somewhere between about $745 billion a month as of September, at a time when consumer sentiment is in the tank, if you will. Ivy, how do you kind of make sense of this slide as it relates to the disparity between consumer sentiment and consumer spending? And then what does this tell you about overall housing and people spending money at Home Depot to fix up their house versus spending money on either buying or renting a new place? So the way I would look at this is say, for the most part, it's indicative of our K-shaped economy with consumers, the haves are spending and the have-nots aren't, and that's being masked by the haaves. And I think that today, consumer spending is at risk of definitely being impacted by a very significant deterioration in the housing market. And I don't think you're going to see positive results out of Home Depot or other companies in our ecosystem, because all of them are highly correlated to the not only housing turnover, but the rate of change of home prices. And if we're looking directionally, we just saw this week that pending home sales actually hit like an all-time low or low in 25 years. So I think that consumer sentiment will follow. historically, consumer spending has been about 70% correlated to housing starts. And while we haven't seen it, even with the flat five years we've had in housing, I think as we see home prices deteriorate further and turnover remains sluggish, I Think it's going to take some confidence out of the overall spending of the market. Now, you know, I saw a recent chart, instead of looking at the haves and the have nots in our case shaped example, it's AI and everyone else. So how much will AI mask what's happening with housing typically being a leading economic indicator for our economy or leading us in or leading out? I'm not sure, but I can tell you right now there isn't any part of our ecosystem with maybe the exception of multi and SFR that are feeling like maybe 27 could be an up year with respect to fundamentals. It feels kind of squishy at this troughing where we are. But I'd say the consumer is going to likely pull back if I just use my old playbook. And is there anything that you see? I mean, you very famously called the housing bust before many saw it coming in 2007. Is there anything in the housing construct, mortgage companies, home builders, owner, operators, SFR, BFR, what have you, that right now you look at and sort of look at with some concern that something might go, you know, might break there? Or do you think it's pretty well managed as it relates to the risk? I think one of the things you said to me yesterday was that there's sort of this slow trend down. It's not like a big break. Is that your feel as you look across the housing landscape? Yes. I think the housing market, while definitely depressed and likely to see further downside, I don't expect the housing markets to take down the broader economy like it did during the GFC. I'd be much more worried about the AI bubble that's forming and everything that goes behind that. So housing might become a very, very challenged market and we could see a recession, but I don'T see it breaking everything else in the economy by itself. Aaron, I sent you a graph yesterday as it relates to where credit default swaps have gone on a lot of the AI infrastructure companies. Everybody who's listening today probably knows very well about what happened to the credit default swap on CoreWeave last week. You and your team are deep in the data center financing space. Um, what's your take on the activity that's going on inside of that market as it relates to credit spreads? Um, and do you see that having a contagion effect on commercial real estate, or is that completely separate from what we've been talking about in this conversation as it relates to commercial real state? I think it's pretty isolated from the rest of the commercial real estates sector. For hyperscale credit, such as like a Google or AWS, spreads are pretty stagnant. Leverage is pretty stagnent also. That credit's still really able to get unwritten. I think it's when you go a level below, you go to some of the neoclouds or non-rated credit that's out there that's taking space and taking energy. that's where you're seeing a substantial widening in credit spreads to the tune of multiple hundred basis points. You're seeing it decrease in leverage. Those are the assets that are having a harder time at the current moment getting financed. But listen, the five or six most successful people in the history of humanity all are taking every dollar of cash flow they have and their companies, and then also borrowing on top of that to build out compute. And when I talk to people who are, you know, have engineering backgrounds that are in their 20s that use AI every day and are doing, developing different agents and using different tools, they don't think that there's any sort of bubble whatsoever. Can the public markets get a little bit irrational to the high side or to the downside? Sure, they can, but they don't see any sort of bubble whatsoever and have full faith and belief that the product is going to become more widespread than any of us can imagine. And a lot of the bubble talk comes from older generations that don't use AI day to day. Erin, as someone who's not an expert in AI or data centers, but just thinking about the magnitude of capital that needs to be deployed, but the power is not there. So Oracle just did a force du jour, I believe in New Mexico. And what's to stop that from happening? I myself am in a fund through Blue Owl and worried and thinking, and that's why you're seeing so many people exit these funds. There seems to be a mismatch with power and the actual completion of the data centers. And then there's triple net lease set up and they don't want to pay the bills. who eats that? So yeah, I mean, to me, that's a bigger issue than we have a data center bubble. I think that's supply-constrained issue that we have. That's what I'm thinking that is the bubble, maybe not the compute side, but recognizing that we've got a real dispute with expenses and negative cashflow that's been funding now, not contingent on cashflow, but leverage, as well as companies like oracle which used to be a bellwether it's now just above junk and it feels really concerning it is i mean look that that is that is the risk the risk in the in the ai trade is getting the product online and getting it developed and getting the power access and dealing with the local politics and the different moratoriums when you go you know basically red state versus blue state. So that is the issue. But there's a lot of – I mean, if you look at just last night, SpaceX, Musk was talking about the amount of compute that he's going to bring online in 27. I forget if it's two and a half gigawatts or five gigawatths. I was breezing through the article. But look, there's lot of this getting developed still. There are tons of new starts happening there are some starts that'll struggle i just can't get transformers and other parts of the the stuff's on backorder until 2031 yeah i mean so there's look look the market is so big it's it's uh it's unclear it all depends on who you talk to what the math is behind behind you know the size and scope so what's actually buildable versus not you you you sort of prompted this discussion by saying my question to you of, is there enough capital to, if you will, roll the $250 billion in multifamily debt that's up for refinancing in 27 through 30? And you said, look, in comparison to data center capital, it's a drop in the bucket. Yeah, there should be plenty of capital for it. I do think that to Ivy's point, that they go back to 1998, long-term capital management. That was a $3.8 billion crisis, $3,8 billion crisis in 1998 that caused a global meltdown in the capital markets. Now fast forward to the great financial crisis. The United States government stepped in with TARP. And the three of you will recall that TARPs was funded with $800 billion by the federal government to essentially save the global banking system, $800 billion. In its first two weeks of trading, SpaceX's market cap moved by $800 million. One stock in 2026 moved $800 trillion, which was the total capital the United States government put in to bail out the global financial system. So I do think that one of the things to keep in mind here is the size and scale of these bets is so much larger than anything we've ever seen. I mean, David Zussman from Related was out at Michigan speaking with me two weeks ago and talked about the data center down the street from Ann Arbor that Related is building. They're putting as much equity capital into that one data center as they put into the entire phase one development of Hudson Yards. We've never seen this kind of concentration of investments, which is the only, look, that may go brilliantly and might have the equity returns that everyone's penciling out on it. But I do think the size of these bets is something that many people haven't sort of considered as it relates to what the contagion effect might be should something go the wrong way. If it really went the wrong way, really, really went wrong way, it would collapse the global economy. I mean, the economy at this point is funding this buildup. But at the same time, you have to understand that every western democracy has just printed insatiable amounts of money so you know our our what was our debt balance in 2008 six six six trillion dollars something like that seven it's 42 trillion growing it you know they say two and a half trillion i think it's probably closer to four or five um on any given year now and and and growing even further than that and it's the same story throughout europe so you Know they just print the money i mean that's really what it comes down to. And that's why you see like the $800 billion number. I don't think anybody had ever even thought of $800 million in the context of private capital or the banking system back in 2008. And now it feels, I don' t want to say it's like monopoly money, but to a certain extent, we've just printed so much money that that's Why you see sentiments down, but spending numbers are higher. Yes, K-shaped economy, 100% agree with Ivy, but I think there's even more to it than that so i just i just bring this conversation back to what we were talking about earlier which is just demand um you know anthropics revenue has gone from an annualized basis of nine billion dollars a year at the beginning of the year to nine months later it's a 67 70 billion we've never seen companies like this ever we've never we've ever seen this before so um you What did their operating losses do? They were $882 billion in the first half of the year. Let's not forget that part of the equation. There's never been a revenue ramp like this in the history of commerce. But Chris, go down the path for two seconds about this. So let's say there is some kind of break. Paul Tudor Jones, who is one of the great investors of our time, was on CNBC last week and said, feels a lot like 1999. Okay. So if you sold the market in 1999, between 1999 and 2001, when we had the tech bust, you went up 40% over that subsequent 18 months. So congratulations, if you were able to hold on for the next 18 months, get that 40% and then get out. But many people, as we all know, got that 40%, and got the 40 and plus on the downside of it. So, if it feels like 1999, so there's sometime in the next two to three years, you get a reset. What's that mean for hard assets? What's mean for interest rates? And what's that means for the majority of the thousands of people listening right now about what their investment is going to look like? Not tomorrow, but a year from now, two years from now three years from that. I got I got all three on that. Let me go with Chris quick and then I'm going to go. I love it. I threw some a good scenario out there. Go Chris. Where I would actually go with that, Willie, is people are thinking about sort of what it means. I think the question is, what does it mean for the people that own real estate that are listening to this call, right? I am firmly out of the business of forecasting the direction of interest rates because I just got so tired of people coming to us with convicted forecast being dead wrong and having no accountability for it. So I'm not in the business of trying to forecast where the 10-year treasury is going to be 18 to 24 months from now. I can see legitimacy in cases for either direction. What I would tell you is, look, I think a lot of this that we're going through in the real estate business right now, and really in multifamily in particular, this is a return to the basics. Real estate was never meant to print venture capital-like returns. It became an attractive asset class because of three things. It had fixed income plus current returns. it had inflation protection vis-a-vis a real asset that reset its rates on some given schedule based on the product type and you did it all in a tax advantage strategy vis-à-vis depreciation. But it was fixed income plus. One of our biggest challenges right now is the success that we had over the course of 10 to 15 years of 0% interest rates brought in a tremendous amount of equity capital that's trying to generate 15 to 20% returns. Historically, that's never been what real estate is. We can't attract return capital that wants an 8 to 10% return on their equity because that capital can flow into credit funds right now. And the only risk that they're taking in the credit fund is they don't get paid back. So until that starts to change and we get some of that sort of core plus priced equity, what I would call sort of levered 8% to 10% capital back into the space, we're going to continue to go through this repricing. But ultimately what we're doing, I think there's some pain in this, but a lot of this is a return to the fundamentals, cash flow, positive leverage. Um, so, you know, I think if you, if you if you own assets today, and you've been responsible in terms of how you've capitalized that asset, responsible in a historical context, maybe not responsible over the course of the last three to four years, you hold and you let market forces take effect. the market right now is forcing within multifamily a turning off of the supply spigot and you give yourself time and duration to compound wealth i agree with chris i mean look at san francisco right now markets starved for new construction seeing you know significant rent inflation you know if you think if we had let's say a reset because the power couldn't match the demand that couldn't match the supply of data centers. And it actually rolls. We go, you know, Fed, by the way, recently, the head of the Cleveland Fed was speaking at the National Economic Council and said, I don't care why inflation is now rampant in our country again. We're going to do everything we have to do to stop it with no concern of what they break in the process. And they're goingto break the housing market. They'll probably break at least the transaction side and values will be under pressure in commercial real estate if they continue and they push yields up even further. But when the economy breaks, you're going to hope you held your assets that are cash flowing, that you assumingly are well capitalized. So I completely agree with you. People talk about buying 20-year tips now and we're going to protect them against inflation. How long before we see enough of a slowdown in the economy that rates actually rally is the unknown. We can all agree that inflation is not good for the long end of the curve. And that's what we're sitting upon right now, is a Fed that's going to take every measure to stop inflation. When we have diesel and everything else happening from the Middle East still rising, every developer that's out there, why they're stopping in addition to what Chris mentioned earlier, is their costs, their hard costs are up substantially. So you can't pencil it just because of the regulatory and hard costs. So I don't know. I think owning real hard assets at cash flow, assuming you're well capitalized, is probably the best place to hide. So Aaron, I'm coming to you in two seconds. I just got to tell one quick anecdote that I saw last night. A broker from San Francisco selling an $8 million soft price house in Pacific Heights gets an offer for $13.5 million with a demand for the existing owner to move out by Sunday. And in the offer, it says, we believe that this $5.5 million premium price is worth the seller moving out by Sunday. And then the punchline to his post on Instagram was, the buyer is 28 years old. So I just sit there and think – I hope every politician and every regulator listening to this webcast looks at San Francisco and sees what housing regulation and what an overly burdensome regulatory environment does to the cost of housing. Hear, hear, Chris. Aaron, we were talking on that – Get in a car and go to Houston, Texas. Yeah, exactly. Or Austin, for that matter, where single family and multifamily are down significantly, even though the population of Pittsburgh has migrated to Austin, Texas over the last six years. Aaron, we were on that scenario of sort of the break and everyone jumped in. I want to go back to where you were on that. Was there anything in that that hasn't been covered by Chris or Ivy that you want to underscore? No, I agree with him. I mean, I think, look, the biggest issue is that we haven't had that break and we should have had it a couple of times. And it's been pumped up by the government buying bonds and putting capital into the marketplace. So a break certainly would be helpful. It'd be helpful for CRE. It would help to constrain supply in oversupplied areas further. And a reset would bring back the return profile and threshold that people are looking forward to invest in commercial real estate. I think one of the things I would just add on to that, this – and I offered this – I don't think it's going to happen, but – Well, I offer this up because I think this is a theme of a lot of our sort of smaller conversations, and I think it needs to be acknowledged in a broader format. We have a lot excess capacity in the commercial real estate ecosystem. And I think part of that excess capacity has also contributed to the sort of lack of reset. And I thank this will be a forcing mechanism for that to be addressed. You know, if you look at our development pipeline across the Sunbelt and you add up the number of individual multifamily developers building apartments across the sunbelt, like, the numbers would astound you. Meanwhile, it's not just the development side. It's the entire ecosystem. But, you know, at some point, look, that's going to need to get addressed. Go ahead, Ivy. I was just going to say, you and I are on the same page. I do think starts are going to slow, but then you get permits this week that were actually up 544. My hat exploded when you sent that to me last week. I mean, I just didn't like, who's doing that? How are they penciling that? And maybe it's all equity capital and there's no debt financing, but it seems like well above trend line. Anyway, sorry, Will. No, not at all. I mean one of the things that we had a big debate, I had a dinner last night here in Denver with a bunch of our clients and one of big debates was the frequent number is that there's $340 billion of dry powder looking to be invested into commercial real estate right now. And I had three or four big owner operators sit there and go, there's no way that number's right. There is no way there's 340 billion dollars sitting on the sidelines waiting to be invested in to CRE right now. The conversation kind of went to how challenging it is to raise new capital right now, regardless of whether the 340 is out there, just that there isn't right now that desire to put additional equity capital. But if that equity capital doesn't get activated, all the numbers as it relates to the refi and what's going to be needed to be able to not only refi out the multi, but all the other asset classes is going to Be really challenged. Because you're not going to go up to 80 or 85% LTV, LT, whatever you want to call it, to get yourself out of this financing situation of all this paper that's rolling. Yeah. Look, I too am skeptical of the dry powder number. I mean, I quit to you a couple of years ago. It was like the fish story for my 10-year-old. It's sort of just the fish kept getting bigger and bigger and I'm sort of looking around. I'm like, where's the fish? Yeah, as we're trying to sell these things. um i i don't think that there's as much capital in the system as we would all like to believe um i think everyone who's out raising capital right now is an absolute knife fight to raise your next fund um there is capital out there that capital wants more discretion and it wants to control its own destiny um but at the end of the day the bigger problem is just price and that's the cost of that capital and it's the value of the assets and that'S what really we need to have reconcile with one another. So I want to end on this. We're rapidly approaching the beginning of 2027 or the closeout of 2026. As you look at the landscape for 27 and where you see opportunity, and opportunity might be just hold. That's sort of been a theme of part of this. But as you look out into 27, as it relates to opportunity to deploy capital, to get return, what have you. Ivy, what's the idea in your mind as it relates to what would be the opportunity for 27? In my world, it's clear that the for-sale market is going to remain really challenged. So if I'm looking at asset classes within our ecosystem, I'm going to look on the rental side for what may be attractive long-term returns. And whether that's multifamily or SFR, we didn't talk about it, but the United States is in a real pickle with demographics, Willie. We know that by 2030, more people in the country will die than are born. And we're not going to need a lot of supply when we get into the 2030 decade. We'll need a Lot less than we're currently running now 1.2 million, the number was just annualized. So I think where you can feel more confident about is when our households are growing. And so when I think about absorbing the supply, we will absorb the supply. So if you're looking for opportunity, because there's guys that can't refi, you know, and you're a well capitalized operator, then there could be an opportunity to add to your positions in 27 to the portfolio. And I would be looking predominantly in that area. Right now, I think the housing market, we need a reset and that's going to come from more likely land prices coming down. With Aaron's point about data centers, Virginia and Texas are crazy for builders to try to buy lots now and they're competing against data centers. We don't anticipate a significant land reset. So I'm hard pressed to see opportunities in 27 maybe distress will come in for sale in 28 but you know assuming rates remain elevated otherwise we'll have a recession and we'll have a lot of failures and then there'll be opportunities in for sell aaron uh 27 i think rates are coming down and cap rates are coming down are we having a recession why do you think is it a recession um i think we'll see some deflation from ai i don't know if we'll see a recession or not i just i just think that um i just i just think that we're very negative right now and i think things are not as as as bad as people think they are i typically will take the other end of the spear i was just gonna say that is that is contrary as contrarian from my friend aaron a fellas you'll get of his own view on the world chris let me i've been reading this book with so yeah yeah there you go that's great to anyone on the to anyone who's listening to this aaron just held up a book from his desk called how not to be an asshole uh chris final word so i think biggest surprise of the year for me was over the first nine months just the depth of the bid for these urban recovery plays that were just basis-oriented buys with no yield. I think the oxygen is out of the room for that trade today. I Think Yield Is Necessary Again. And I think the reaction over the course of the last 30 days has been, there's been a reactionary sort of impulse that is fueling massive amounts of conservatism and underwriting. And, you know, in my experience, whenever there has been windows in the market, and this is a multifamily-centric conversation because NOIs and multifamily are art, and in other asset classes, they are a science, right? But in multifamily, whenever there's been an environment where we are selling assets and the buying community is strictly focused on in place and trailing operations and not making any assumptions around trend, historically, that has been a very good time to buy multifamily assets. And that's where we Are in a lot of the market today. So. Extremely, extremely well said. um thank you three it's always great to get together with you we've had a fantastic live audience and i'm sure this will be listened on replay many many times um great to see the three of you thank you for your time thank you für your insights and um thankyou everyone for listening today and we'll be back next week with another walker webcast thanks thanks everybody Thank you for watching.