Video Q&A with NYU's Dr. Sam Chandan

Matt Henry

Hi, I'm Matt Henry, managing partner and CEO of Chatham Financial. And today I'm joined by my longtime friend, Dr. Sam Chandan, the head of NYU Stern's real estate program. Sam has been a partner of Chatham Financial for over a decade now. He has taught many of our current Chatham employees when they were students, and we're excited to have a conversation about the current economic environment. Sam, welcome.

Dr. Sam Chandan

Delighted to be here.

Matt Henry

I'll kick us off with an easy one. What is going to happen to interest rates over the next year? What's your prognostication?

Dr. Sam Chandan

Sure. Well, I'll preface this by saying that it's actually a fairly complicated question in the sense that we cannot make a deterministic forecast that would allow us to say that this specific thing will happen with interest rates, or a year from now will be exactly in this one particular place. At the short end of the yield curve, we can certainly look at what the Fed is signaling very, very strongly that it will do with the Fed funds target rate based on the data that it has available. But the Fed has also communicated very clearly that it's having to watch the data as new weekly and monthly information becomes available. Their goal here in continuing to raise rates at a fairly brisk pace is to clearly contain inflationary pressures. What we don't really see in the data so far is that their moves are having a significant impact beyond market sentiment, beyond introducing significant volatility to equities, and raising concerns around the likelihood and depth and shape of a recession. Their goal, of course, is not necessarily to impact any of those things directly. Their goal is to simply rein in the price pressures. And that's where we've seen a very, very limited impact from their work thus far. So while the dot plots and other language from the Fed tells us that in March of 2023, we're probably looking at a Fed funds target rate in the range of 425 to perhaps even as high as 450 basis points, it's very data dependent and so we'll have to continue to monitor the effectiveness of the work that they've done. The risk for us, of course, is that there is a lag in monetary policy transmission. And by that I mean that while they will make discreet decisions, there's a meeting next Wednesday or the Wednesday after and they'll make a choice about what to do with rates. There can sometimes be a considerable lag between the increase in the underlying cost of capital and changes in the market environment, changes in consumer activity. And that, again, is where we don't really see that transmission into the broader economy in clear evidence as yet. The second part of this is what happens at the longer end of the yield curve. And right now when we look at the 10-year treasury or the 30-year mortgage rate - a really mixed set of outcomes and developments - the yield curve is largely inverted and by traditional reed that is a portent of recession. We can chat a little bit about that because at this point, I think discussions around whether or not we are or will not be in a recession are largely semantic. And it comes down to: do we meet some definitional requirements? The reality on the ground doesn't change just because we decide that we're going to put a recession label on what's going on in the world today. While that 10-year rate has not increased in a way that is commensurate with what's happened with the very, very shortest rates, when we look at the 30-year mortgage -and that is the thing that for most consumers in American families, the rate that they are going to experience most directly, particularly if they're thinking about or aspiring to buy a home - those rates have gone up very rapidly. And as compared to earlier in 2022, the 30-year mortgage rate is approaching 7%. When we think about what that does to the lifetime cost of buying a home, the way in which it has undermined affordability and access to home ownership, very, very significant implications than for how we think about outcomes for those American families, but also what it means for the housing sector, in the rental apartment sector in the United States as well.

Matt Henry

So I think this is going to be, at least in terms of my career, one of the most complicated times for real estate to sail through the capital markets. Before we go to real estate specific, recently some voices have been making noise about asking the Fed not to raise rates purely on humanitarian concerns - the fear that what they're going to do is kill jobs and kill jobs primarily for the working class. While at the same time, you have folks saying no one gets hurt by inflation more than the working class. If you were Jerome Powell, and you were having to balance these two different things, how do you even begin to think about the fact you have such a complex problem with so few actual levers you can pull?

Dr. Sam Chandan

Yes, I think your point about there being very few levers is so important for us all to keep in mind. There is the capacity to make adjustments to the size of the Federal Reserve's balance sheet, and we see that happening now. We're very early in the stages of beginning to reduce the size of the balance sheet after a period of time during the pandemic where it increased at an even more rapid pace than what we saw during the great financial crisis. There is the ability to set the Fed funds target rate and work within some very narrow bands and ranges there. Beyond that, some of the other more non-traditional tools that the Fed had deployed during the financial crisis, there are still open questions around the efficacy and usefulness of those tools. So we're really talking about, as you described it, a very limited set of levers. The Fed is in a tough position because it does have this dual mandate. On one hand, price stability. And they're clearly, squarely focused on trying to restore price stability in the economy today. But at the same time they have, as part of their mandate, supporting an environment of full employment. Now, how you define full employment is, again, allows for some debate and discussion and dialogue. Part of the reason I think we see them less focused on that right now is because the strength of the labor market, the fact that we remain, even during this period of concern around a recession, a slowing of the economy, the potential for the labor market to weaken. At least right now, the labor market remains extraordinarily resilient when we look at initial jobless claims in September and early October of 2022 - very, very limited evidence of a broad weakening in the labor market. And that, I think, in the minds of many people has given them the freedom, at least for a little while to focus their attention exclusively on restoring price stability. Your point about, and your use of the term humanitarian grounds, I think is also a very apt one because the biggest concern in the market today when we're looking at Fed policy, no one is questioning their commitment to reining in prices. But for those of us who have the longevity to remember the Volcker era, or at a minimum are students of economic history - there's actually a term for that: a cleamatrition is an economic historian. We know that sometimes the Fed feels compelled to act so aggressively in their moves in the interest rate environment that it overshoots and propels the economy into a potentially deep period of contraction. Where I see the greatest risk for that right now is that we do have, in my view, a conflict in the United States between monetary and fiscal policy. Monetary policy clearly has its goal reining in prices, and the mechanism through which they will do that is ultimately to undermine demand. They want to and need to rein in that demand curve. That is how they will bring in those price pressures. But at the same time, fiscal policy is being developed in an environment that is highly political. At this juncture where you and I are having this discussion, we are weeks away from a highly contentious midterm election and shortly thereafter we will very quickly move into what in all likelihood will be two years of a very contentious presidential election season. And so we do see that in the fiscal policy environment, there is a clear recognition of the impact of rising prices. Everyday things when families have to spend more on milk, on bread, importantly on rent, and those families that are most impacted being ones that are income constrained, that do not have a significant discretionary component in the household budget, they're having to spend less and we see this very clearly in the data having to spend less on education, healthcare, food, clothing, finding an apartment that gives them easy access to public transportation and economic opportunity. All of these things are very, very real. But I think in the minds of many people, if we were to see unemployment rates rise, that would be even more challenging heading into the current electoral cycle. And so there is a bit of a conflict here between fiscal and monetary policy. Historically, when those two have really come to blows, it has not made for a soft landing because the Fed has had to work extra hard to rein in prices. And I think that is a major source of concern and one that I think many business leaders around the country have raised. Be careful not to reach too far while you wait for that lag to play out.

Matt Henry

So it's interesting. Theoretically, many of us in our careers knew that inflation could happen, but we kind of fell asleep because we thought, "well, that was a problem of the 70s and 80s - that's not a problem today anymore". And I find that inflation is one of these issues that's incredibly complex because it's like a multiheaded hydra. There is no simple answer as to what causes inflation. But to your point, you mentioned monetary policy, fiscal policy, and I'll throw a third one on the table, which is just simple supply chain dynamics. Also, how would you divvy up where we are in the inflationary environment right now and which pieces between monetary, fiscal, and supply chain are actually the biggest drivers of inflation?

Dr. Sam Chandan

Your question is really on point because there has been a shift. Generally, the view is that to sustain inflation we need a wage price spiral. So wages have to be rising in a way that allows people to go out and continue spending. But to your point about the supply chain, when we look at the early stages of the pandemic, what was driving that first real observation of higher inflationary pressures? And the supply chain and supply chain disruption contributed significantly. Why was that? For most Americans, although we were constrained in our ability to engage with one another in any way that we would think of as normal. I certainly can remember back to the early months of the pandemic feeling very much locked in my home, leaving my Amazon delivery on my front porch for three days before I would dare bring it inside. What were we doing with the resources that we had available? We were not going out to dinner. Many of us were not getting our hair cut. We were not traveling. And so there was this - we were not spending money on the commute to work or on that morning cup of coffee, and so there was a little bit more to spend. Add to that then a very well intentioned, but blunt instrument approach, to supporting American families in the form of checks that went out. We don't really have a system in the United States that would allow us very very quickly to identify in the first few weeks of a pandemic whose income has been negatively impacted and let's target sort of stimulus or support checks to those families. And so out of a desire to act quickly, those monies went out fairly broadly. But for most families whose incomes were not impacted, that was extra discretionary spend capacity. Some of it got saved and we saw a spike in the savings rate, but some of it just became available to spend. Here's where we come back to the supply chain. What do you do with that money if you can't leave home? Well, all of a sudden we were very keenly aware of all of the deficiencies in our homes. The minor inconvenience or irritation of an older dishwasher or older aging laundry machine, a washer or dryer, became sort of the focus of a lot of our attention. And so we started buying things like washers, dryers, fridges, myself falling into the very same trap. I did not buy just one Peloton, I bought two. I got the tread and the bike and now they sit quite lonely in a corner of my home because I go back out to the gym. But the critical takeaway was that we were spending a lot of money on things that had to get here. And so the disruptions to the supply chain coincided with our starting to spend a lot more money on durable goods. We saw prices rise for all of these things that we were spending money on. As we've shifted over the last, I'd say beginning in early 2021, and it played out in different ways in different parts of the country, but there is a clear association with the rapidity with which we resumed more normal types of social behaviors and the availability of vaccines. What we saw was that once people were able to go back out again, their spending shifted pretty dramatically and the pendulum really swung in the other direction. There's only so often you need to buy a new fridge or need to buy a new television. And so instead we started spending money on experiences again. So the restaurants are full, at least at dinnertime, the concert venues, the basketball games, domestic travel and now international travel picking up again. So we're going out there spending money on experiences that are not so much about the supply chain, which has been largely restored. In fact, we're seeing significant excess capacity on shipping containers coming across the Pacific right now and prices for some of that trans-Pacific shipping having declined significantly. The constraint now has moved and it's related to services and the availability of moderately and high skilled labor to actually support the leisure and hospitality industry or anything else that we want to do. Rising wages there are really what is exerting a lot of that upward pressure on prices. But it is a really tough situation to be in because you've got folks that are working very hard to ensure that their incomes are simply keeping pace with the rises in the cost of living. And as you pointed out, it's going to be the median American family that is most impacted by this. For those of us who are in the privileged position of being able to own our homes and who may have locked in at a 2%, 30-year mortgage rate just a few years ago, our experience of inflation in today's economy is fundamentally different from the person who is renting or who is thinking about buying a home for the first time.

Matt Henry

So next I want to ask you to think about Jerome Powell and think about what might be in his mind right now. So if you're Jerome Powell and you are really the person on point for trying to kill inflation, the world is effectively looking at you. And you're also supposed to be independent from political discourse. And at this point, we're going to pan politicians on all sides.

Dr. Sam Chandan

Sure.

Matt Henry

But you're watching people it's the only-

Dr. Sam Chandan

It's the only fair way to do it.

Matt Henry

But you're watching people run on things like tax cuts or student loan forgiveness or how about I send out stimulus checks from the state of California to people. All three of which, I think, on the surface look to be highly inflationary from a fiscal standpoint. How does Jerome Powell deal with the fact that we're in an election cycle and while he's trying to fight inflation, it appears every single politician is looking to make decisions that actually push inflation forward?

Dr. Sam Chandan

Yeah, and that is exactly sort of that conflict between monetary and fiscal policy, broadly defined. I think while he would be loathe, as would any member of the FOMC would be loathe to admit, one of the overriding considerations at the Federal Reserve today has to be that there are certain moves that they may want to make that would risk jeopardizing the independence of the Federal Reserve. And from their perspective, in terms of ensuring the long-term efficacy and flexibility of monetary policy in the United States, they need to maintain that independence. It would be undermining to the bond market, to our capacity to stabilize the economy over long-term if that were jeopardized and became highly political. Apart from that, I think that one of the things that is also foremost on his mind is having to watch what's happening in the political realm and sphere very, very closely, because part of what the Fed is having to combat is exactly some of these moves. There's a tremendous degree of uncertainty that they face. They will talk about needing to see some of the latest data on inflation and so forth, but they're also having to watch very closely for how it is that they will navigate post midterm election. Depending on what happens, we could see significant increases in spending that, to your point, have the potential to be highly inflationary, whether they be tax cuts, cuts in student loan debt outstanding. I'm not offering any kind of observation on whether student debt forgiveness, as we've seen it so far, is appropriate or not appropriate. But from their perspective, they're thinking about there's a whole range of different proposals and ideas on the table right now that have the potential to significantly impact our capacity to contain prices. And they're having to, I think, do some contingency planning because they're not really going to know until they have a better sense of who controls the House, who controls the Senate, and what are the outcomes from the '22 midterms - what do they portend for what the federal election or the presidential election might look like in 2026.

Matt Henry

OK, so I want to jump into some very specific questions on real estate asset classes and how the economy is going to affect them. But before we do that, let's deconstruct and let's just remind ourselves, because a lot of us are real estate professionals, we tend to jump right into the weeds.

Dr. Sam Chandan

Absolutely.

Matt Henry

And we forget that real estate isn't the end. People are the end. People use real estate and when people's lives change, real estate gets impacted. So let's start with households for a second. You had mentioned mortgage rates are about 7%. What kind of impact is the fact that mortgage rates at 7% - what kind of impact is that going to have on our economy going forward? And let's also add a couple others just things on your typical household: commute times, hybrid or work from home, changing of cities - what do you see as things that look fundamentally different in a typical household today than we would have had three years ago?

Dr. Sam Chandan

Sure, I think it is the existential question of our time for the real estate industry, but also for many of us, just how we live our lives. Your point about real estate not being an end in itself, but it really being about how do we use space to drive all the kinds of outcomes that we want to see as a society or as an economy or as businesses - is something that we're having to reckon with at a very fundamental level in the real estate market today. So let's start with housing. I think what we see there is that as of mid October 2022, the 30-year mortgage rate, we're about 6.6%, 6.7%. And my expectation that we're looking at a range of possibilities, we cannot, in a deterministic way, say exactly what rates will be in six months or a year. We're looking at it trending higher and certainly by the end of this year, potentially moving as high as 7%, unless some of the newer data shows slowing of inflation. That really does a lot to undermine the capacity of a millennial or a family that is aspiring to home ownership, to actually own a home. What that also means for us though is that there's going to be some softening in the housing market first that will show up as fewer sales and that's very, very clear in the data. We also see it in a slowdown. We're early in the stages of the slowdown in construction permitting and new single family home starts. The equilibrating mechanism here though is that, and this is something that transcends the real estate market, a lot of times owners of assets peg their expectations of prices and the value of those assets at their highest levels in the cycle. And so consumers who own their homes are very sensitive to this. We may have this idea that higher rates, lower sale volume is pushing prices down. But for the unconstrained owner, the person who's not selling in an environment of distress or because they're at a point in their lifecycle that they may be compelled to move into independent or assisted living - they're not forced sellers in that sense. They're seeing what's happening with the market dynamics and they're simply withdrawing their home from the for sale inventory, so offsetting weaker demand, we've seen the inventory of homes available for sale also decline significantly. And that is limiting downward pressure on prices, which during the pandemic had risen to all-time highs far in excess of what we had seen during the housing boom both in terms of nominal and real prices. So you got still very high prices that have only reversed a little bit, very high mortgage rates. What does that mean for us? It means that we're going to have a lot of folks who had aspired to or hoped to become homeowners and the motivations are going to vary. Probably one of the dominant motivations we see, particularly amongst older millennials is that they're starting and growing families and so their priorities begin to change. If you're a young person being close to work, being close to your favorite restaurant, your favorite bar, all the social outlets that you want to take advantage of, might be the things that maximize your utility function. If you remember back to your early economics days, that utility function and what sort of maximizes your family's happiness changes radically when you have a young child. And all of a sudden proximity to a good quality public school matters a lot. It may matter more than anything else. Now this invariably in most major markets around the United States will motivate people to start looking outside of the urban core and to relatively more transit oriented and suburban communities. This coincides with this other point that you've raised around changes in the way that we think about the geographic locus of work. I do not believe that many industries will move to a dominant paradigm where people are working remotely all of the time. I think what we will see is that for the next several years, every firm will continue to struggle to understand how they can get the best of both worlds. How do I ensure that, particularly if you're working in an industry or a sector where relationships, mentorship, apprenticeship matter deeply to the continuity of your organization, to your capacity for innovation, there is simply no substitute for physical colocation. If you are in a knowledge field, we have to balance that against, well, how can I still take advantage of and extract the best elements and the best of what's possible from creating some flexibility around remote work? And what we're going to see is that for some organizations, that might mean that people working in professional roles are working remotely two days a week. We're going to see some firms that make a very conscious decision that given the type of work we're doing, given the overwhelming importance of our being able to sit down together and actually share ideas in a way that is organic, whether it is to engage with one another, whether it's to support our newest recruits and our new hires or our clients, there are going to be a large number of firms that say, "you know what, five days a week is exactly what makes sense for us. But we've made a very deliberate decision about that. It's not simply that everyone needs to be here, it's being driven by our business goals and the critical need to always be thinking about the apprenticeship and mentorship role that senior members of the organization have". Early in our thinking about this, you would find folks that would say, "well, you know what, I can do my job or fulfill my particular function today as easily or perhaps even more effectively from home because there are fewer distractions or I don't have to worry about the commute time". I think there's a greater realization after having for some companies doing this for two, two and a half years, that it has a detrimental impact on some critical aspects of the organization. And so for senior leaders of the organization, you may be able to knock out all of your backlog of emails by working remotely on that particular day, but your presence in the office and the opportunity that that creates for others to interact with you, are the externalities that you generate just by being present. Overall, I think what we see is that, and certainly this is supported by the data so far, we're looking at office leasing patterns very closely to see how that is reflecting or is a proxy for what firms' expectations are around how they'll use office space for the next ten or 15 years. Because firms are, when they're renewing leases, having to be very forward thinking as best they can in this environment about what work life will look like. And I think what we see there is that, for every firm, the answer will be a little bit different. That on average, folks will have some flexibility, and we can look at sort of the subway data and the light rail data for New York City or Boston or Philadelphia, for Chicago. It's very clear there are some days of the week where more people are coming in. And there are certain days, call them Monday and Friday, where far fewer people are coming in. And we shouldn't mistake that with people not working. They're working in a different setting. But for many firms, that kind of pattern may become the norm. There will be some inertia that we're, again, after just two, two and a half years, we are seeing some inertia that is allowing for that to become a little bit more calcified in people's expectations around what the location balance will be. And that has big implications for where it is that then people are thinking about living. What we don't see is en masse an exodus from a New York, a Philadelphia, a Boston, a Chicago. The competitive pressures and dynamics between sort of the Northeast Midwest sunbelt do not weigh in favor of the Northeast and Midwest right now. But we do not see a mass exodus in the way that may have been a source of concern early in the pandemic. The data that we have available to us now, and it's imperfect data, but with the data that we do have available to us now clearly shows, is that there is a dispersion of the population occurring within the metropolitan area. So someone who may have said, if I go in five days a week and I have no reason to believe that that will ever change because I would not anticipate a global pandemic, you would have chosen to live close to, closer to their place of work to minimize their commute. Now they're starting a family. They're anticipating that that commute only occurs a few days a week. They do care about open spaces, having a little bit more room at home, being close to a good quality school. They simply have a larger geographic radius over which to optimize their household's location preference. And so we do see that some folks are going to move a little bit further out from the urban core, but they ultimately are still tethered to their place of employment. There just not making that commute every single day.

Matt Henry

So you mention something interesting, and that's the older millennials who are maybe having a hard time transitioning from renting to owning, and I think it's often overlooked because we so easily get persuaded by headlines saying inflation is bad. Well, if you are a wealthy- if you have a substantial amount of wealth, inflation may not be bad for you at all. Inflation may be a great thing for you. As people ride the ladder, though early on in their careers, they tend not to have wealth. And you find that as you get closer to retirement, hopefully you're building up wealth. If these older millennials can't make the jump from being renters to buyers, does that have any longer term socioeconomic impacts on how our society thinks about wealth and thinks about the ability to move in your career?

Dr. Sam Chandan

Sure, I think it does. And when we look back as far as the housing boom and bust - so the last 15 years, not just the last three. But really the last 15 - from that run up to the peak of the housing boom, the subsequent bust, the very protracted and slow recovery in the housing market, this has been a very, very difficult period of time on a generational basis for aspiring to home ownership. And to your point, that has significant socioeconomic implications. Economists will be quick to point out that there are investments that you can make with your available wealth, whether it be large or small, that have the potential to generate higher risk adjusted returns than buying a home. That being said, home ownership remains the most reliable vehicle for wealth creation and intergenerational wealth transfer that we have in this country. And part of it is that, yes, if you don't own a home and are not making that investment you could be investing in other things that might generate higher returns for you. There is some value in the discipline introduced by homeownership - having to make that mortgage payment every month, the forced savings and investment through the mechanism of your principal payment, and the added benefit of all the public policies that are designed to support that, whether it be the relatively lower 30-year mortgage rate by virtue of the participation of the Agencies, the deductibility of mortgage interest - there are convergence of things that are really supporting homeownership as our most powerful vehicle, particularly for income constrained families in building and transferring wealth to future generations. So this has significant implications for us. What I would also suggest though is that there is an often overlooked cohort of Americans that want many of the benefits of being in a single family home. The location, the external amenities, the amenities that are internal to the home, whether it be the larger number of bathrooms or the yard for the kids to play in, that either do not want to or do not have the capacity to own the home at this particular point in time. That segment of the population I think, has often been overlooked. We've often in modern American history thought of these as being two very discreet populations: folks who want to live in the urban core and rent, and then at some point you make the transition. You move to the suburbs and you buy. The emergence of an institutional quality or institutionally owned and managed single family rental sector, I think is critically important here. Because it does give American families that, again, either do not wish to or do not have the capacity to become homeowners the ability to still access many of the benefits of being in a home. To reintroduce briefly the political dimension, there is some concern amongst some members of Congress that institutional investment into the single family market and the repositioning of those homes then for rental is part of what over the last several years has really driven prices up and undermined affordability. The work that my team has done, and I know the work that's also been done by colleagues at Freddie Mac clearly shows that institutional investment into single family housing really only constitutes between, depending on which measure we're looking at, between about 2% and 3% of national single family home sales. This is not what is driving prices higher or what had been driving prices higher up until recently. What it does do though is provide a greater range and a greater diversity of housing opportunities for American families. And so when we think about sort of from an investor perspective, where are some of the housing investment opportunities, housing development opportunities over the course of the next cycle? I think the emergence of a more robust, transparent, liquid, institutional build to rent and single family rental sector becomes a very important part of how it is that we meet the nation's housing needs.

Matt Henry

Okay, so let's talk about multifamily then. I think this all transitions very nicely into a multifamily discussion. If we take what we've been saying here, and that is mortgage rates are going up, it's harder for people to transition. Some portion of renters have always been temporary. They come into the rental community and they leave it when they go and they buy a house. And at this point the exit doors are getting slammed shut, but the entrance doors remain just as open as they've ever been. Now, on the economic surface that would look like this is a great time to invest in multifamily. If people aren't leaving and people are coming in, demand's only going to increase, should be increasing prices. And multifamily has the benefit of moving quickly with inflation. If your average lease is twelve months, they can reprice into an inflationary environment very quickly in multifamily. What would be things that might work against that basic investment premise, to say things might not be as bullish as they look like for multifamily?

Dr. Sam Chandan

So the overall we do see the sort of alignment of the stars in terms of what is driving net operating income growth, very, very high occupancy rates, the underlying fundamentals performance of multifamily. I think I'm very bullish on the outlook. In the near-term, will there be some softening because of income constraints, because of nervousness amongst consumers and households, because we may see a relatively weaker hiring season for undergraduate and graduate students coming out of our universities creating new households? Sure, there will very likely be some temporary softening in some markets. We may even see some of the big rent increases from the last year or two reversing just a little bit. But overall occupancy rates that remain very high, and that propelling continued rent growth. I think my main concern here is that there has been a dramatic deterioration in affordability in most major markets around the country. Historically, that may have been isolated to the biggest markets, particularly the coastal markets. And you'd be able to look at what we sort of refer to in real estate as a secondary market, not a New York, but maybe a Nashville, but also markets in the sunbelt. And that erosion of affordability during a period of great strength for the multifamily sector would not be nearly as severe in some of these other places. When we look at the market today and over the last couple of years, momentum and rent growth, rent increases as a significant driver of the national inflation story and not just at the local level, is something that we really see as pervasive. There are many markets in Florida, in Texas, even in some of the mountain states, that historically we would have been able to very, very credibly characterize as highly affordable markets. Low cost of living, high quality of life, vastly superior infrastructure to some of the legacy cities of the Northeast purely by virtue of the infrastructure being new. And we're not able to do that as easily today. I think when we look at a market like Austin, by virtue of some of the things that have made it such an attractive market for businesses, for young households, I think they give a market like that today struggles to meet the growth in demand with adequate supply. And so there has been a significant deterioration of affordability there. In some markets around the country, and these tend to be the more urban markets, we are seeing, and we're in the early stages of a real pushback against that deterioration of affordability, and moves again at the local level largely to introduce controls on what would otherwise be market rate multifamily. We have many questions to answer depending on where this is happening. Whether at the state level, a particular governor will allow a mayor or city council the flexibility that would be needed to actually intervene in market rate multifamily in a way that would constrain rent growth and limit the NOI growth prospects of properties, and then ultimately development activity as well. But also in various jurisdictions around the country, the legality of some of these interventions. Some of what we see being discussed is occurring an environment of real desperation for families that are struggling to make ends meet. And so, as you might expect, some of the proposals and ideas can seem a little extreme. And there will be a period of time where we will have to test in the courts the viability of some of these different proposals. Overall, when we look at this though, the supply constraint that we face in multifamily is the real issue. There's an attempt, as there has been historically in many markets around the United States, when we've seen affordability deteriorate, there's an attempt and a desire to control the rate at which rents can increase, whether it's rent stabilization, rent control, takes different forms in different places, both in the United States and in other parts of the world. But I think what we also see is that- and we know from a policy perspective, as economists, as real estate people, that when we interfere with the market mechanisms in multifamily over the medium- to long-term, it's self defeating because it limits the introduction of new supply and new inventory. It benefits incumbents. If you happen to be in an apartment, then you are a beneficiary. But it limits growth and it limits opportunities, affordable opportunities for younger people and people who might want to move into the market. So where does that leave us? We need more supply in different markets around the country. The reasons why we're not getting that supply differ. Sometimes it's about the availability of skilled construction labor, sometimes it's the availability of land or construction financing. And the cost of construction financing certainly has gone up in 2022. A lot of the time it has to do with local zoning and our needing to upzone to be able to introduce multifamily inventory. There are a range of different constraints that we face in bringing new workforce inventory into the mix. It differs in different parts of the country. But when we look at the Biden Administration's Housing Action Plan, while I have concerns around whether or not at the federal level we have the ability to actually influence things like local zoning, it's intermediated by the relationship between federal and state governments. I think what the plan does reflect is an understanding that improvements in our ability to bring new supply online have to be part of our solution. And right now there's not enough being done there.

Matt Henry

So continuing on the trends or theme of what's happening in the household, it's old news now that Amazonification of how we shop has been happening. We have watched almost a decade-long now of the industrial sector getting stronger and stronger and stronger. From your perspective, and for those folks who are either investing in industrial or thinking about investing in industrial, what weakness does industrial have? Where could this story of industrial just being the golden child for the next decade go off the rails? Or where can we start to see problems in the industrial sector?

Dr. Sam Chandan

Sure. I think the near-term issue for us in industrial is that there was such a focus on the sector during the worst days of the pandemic. As you described, Amazon ramping up employment in a way that we just don't see during any normal time. So much of consumer activity shifting to online in a way that even really broke records as compared to the overall rebalancing of some sectors towards online commerce prior to the pandemic. A real sense that - gosh, we need more industrial, there's not enough. We need more people working in warehouse distribution, in fulfillment centers, and capital really refocusing on investment opportunities in industrial properties. That allowed for many industrial markets around the country to essentially price to perfection. As we have moved beyond the acute pandemic period to one where COVID is more endemic in the United States, there's again some adjustment and some move of the pendulum. And so we can see as a leading indicator of industrial space demand some softening of employment expectations and hiring expectations at Amazon and other electronic commerce firms. So that lends itself to an all likely brief period of time where there might be some price adjustments, some markets that were priced very, very aggressively for industrial assets. We'll see some softening. The pipeline, again, a fairly aggressive pipeline in some markets of new industrial properties, some projects being canceled before they really sort of break ground. So there will be some adjustment period there. Long-term, given the challenges we face as a country, and many of them related to the quality of our infrastructure, in improving the efficiency of goods delivery, we will need more industrial space. That is the long-term outlook here. While again, related to the pandemic, some reversal of the extreme shift to ecommerce during the pandemic, even now, when we look at the relative trajectory of bricks and mortar retail sales and online sales, online sales growth outpaces, and I think we can reasonably expect will continue to outpace bricks and mortar. When we talk a little bit more about retail, that should not be misinterpreted as there not being room for very healthy, well performing retail spaces in the United States. There are, but online commerce continues to grow. In all likelihood, it will over the long-term continue to outpace growth in more traditional bricks and mortar sales. And that will require that we continue to add to the inventory of industrial. There's a geographic element to that because some parts of the country are growing more rapidly or more slowly. Fulfillment centers will remain an important part of this. If it was the case that we might reasonably anticipate improvements in the quality of our infrastructure in the United States over the next ten or 15 years that would allow us to radically improve our ability to simply get things from place to place, that might temper the outlook. But our ability to reach a political consensus around a trillion dollar infrastructure package, our ability to identify and prioritize different project priorities, when we look at something like a new tunnel under the Hudson, absolutely vital to securing the health of the Northeast United States economy, and by extension, the U.S. economy. Getting all of our ducks in a row for these kinds of major projects, whether it be a bridge or a tunnel or a road or our broadband infrastructure, really, really challenging. And so I'm fairly reserved in my views on whether or not we're going to see drones taking over our skies to deliver packages to people's homes in the suburbs. We may introduce at a more rapid pace of autonomous vehicles displacing some folks who work in the trucking space. But there again, I think we have to temper our expectations around how much replacement we'll really see in introducing autonomous vehicles to replace people. Even when we do that. Even if it were the case that were to reduce the overall cost structure of moving goods by road in the United States, you've still got the congestion, you've still got the fixed number of lanes. It doesn't necessarily allow us to get things from one place to the other that much more quickly than would otherwise be the case. So overall, a fairly healthy and sanguine outlook for the industrial sector. The next little while, I think, will be a period of adjustment given sort of the strong flows of capital and attention that the industrial sector in its many facets has received during the pandemic.

Matt Henry

So for all the good news in industrial, we've kind of had the inverse story in retail. We've had the decade of retail slowly dying. That said, within the last few months we've watched a couple of major retailers actually announce expansions in their retail footprint. What's driving announcements like this?

Dr. Sam Chandan

Yeah, I think that there is an improvement in strategy. Firms, I think, have struggled over the last ten years to think about how it is - by the consumer, retail firms - have really struggled to think about how it is that they're going to leverage, if they're a traditional bricks and mortar firm, online channel or if they're an online retailer. And many new and emerging retailers begin as online today, as opposed to bricks and mortar, how they will leverage a bricks and mortar footprint. And so I think we've seen significant evolution in the strategies that are being employed. Many firms would aspire to leverage the multi-channel approach in the way that Apple does. Very few firms are going to be able to replicate Apple's execution on sort of the leveraging of bricks and mortar spaces. In Apple's case, we have glass and mortar spaces and their online delivery and sales channels. But we have seen improvements that are the more targeted expansions. We also see that there are some sectors within retail that have shown tremendous resilience to threats from online commerce. While on one hand we have parts of the country that are growing in a way that allows for retail expansion, there is also, I think, coming out of the pandemic a lot of new evidence about what kinds of behaviors will have the potential to change and which ones won't. And this is probably the part of the retail story where, as an industry, we can afford to pay a little bit more attention. It is not random which types of products or stores have struggled within the face of online commerce. What we see is that there is something about the nature of the goods being sold and the format in which they're being sold that has allowed record stores or CD stores, movie rental, book stores, many commodity type products, pet food type goods, to really struggle with the growth of online commerce and have to reorient themselves very, very quickly. At the other extreme, there are a range of services that we offer through our bricks and mortar channels that because they are not goods, an online platform is not going to be able to easily replicate. We're not going to be able to get a haircut online. We're not going to be able to go to the gym online. And that is actually a very good case in point because during the Pandemic there were certainly concerns that we could see a significant vacating of retail spaces around the country and massive blocks of space being returned to the market because the major gym chains were simply going to go out of business. A range of different firms, some of them very prominent but even sort of very traditional, I shouldn't say very traditional, but even some of the service providing and hardware providing firms like an Apple getting into the business of being fitness companies. And with the combination of my watch and my Apple TV, all of a sudden Apple is not just selling me a phone and a laptop, it's also my gym as well. I think what we've seen is that there is something about the colocation, the motivation that results from that, the desire of people to simply get out of their homes from time to time. That has resulted in a near total reversal of the at home gym business. So we really want to look very closely at those types of case studies to say how is it and what is it about the nature of groceries, about the nature of gym going, that has allowed for some of these tenants in the bricks and mortar space to really bounce back very, very quickly and robustly from the pandemic. So again, bottom line here, a combination of things. There are a range of different things that we'll want to consume that are simply delivered better. It's a better experience through bricks and mortar. That is one area where there is real opportunity. The other is simply differences in the way in which the country is growing very strongly in the sunbelt, in some individual markets and the northeast and midwest that ultimately demands that we introduce new retail inventory. There will always be people in a growing market that will want to go to the grocery store.

Matt Henry

So if you really want to set a group of real estate people, put them into a frenzy at a cocktail party, all we need to do is talk about their outlook on office. The office sector right now is sitting at such an odd precipice and we can talk about, we talk about the end first. The end right now is this. It's very hard to sell office buildings. It's nearly impossible to finance office buildings. There are rumors of large asset managers just liquidating their office portfolios. We also know with a work from home dynamic of people aren't using offices. But it's not as simple to say it's A or it's B for office, because at the same time we're watching some marquee offices completely lease up. And then we're even watching leases - if I can be closer to a marquee office building, those office buildings lease up. While we're watching the fact you can't even sell an office building right now. Help us start to unwind what's happening in the office space and what our next 24 months look like in office.

Dr. Sam Chandan

Yeah, so I think the broad brushstroke outlook on office is very reserved. But to your point, when we really dig in on the details, what we see is that there's tremendous variation. If we were to go to Manhattan today, where we've come off of or at the tail end of one of the biggest office building booms in the city's history. Look at the inventory that's been introduced in Hudson Yards, in lower Manhattan as the World Trade Center rebuilding project comes to its full fruition. The rezoning of Midtown East and a very marquee office asset right next to Grand Central. These largest, newest, most, and this is key, most highly amenitized properties are the ones that are outperforming. Occupancy levels, the asking and effective rents that they are commanding, the desirability of these spaces is in many cases off the charts. Within that set, some locations are clearly preferred over others. But it comes back to sort of the larger strategic thinking on the part of firms. What kind of office environment do I want to provide? One to really double down on our ability to use our physical colocation to encourage the mentorship, the idea generation. It doesn't make sense to bring everyone into the office if they then simply sit in their offices. So how do I design and think about the space in a way that really encourages collaboration? But how do I also importantly, think about creating an office environment that is so appealing that it's part of my strategy for how it is that I can attract really talented people and keep them as part of the team? When we think about recruitment and retention, we often think about it in terms of salaries, bonuses. The workplace environment, and the physical space in which we work - is it's never been more apparent that that is also part of your recruitment and retention strategy and that is really strongly favoring the best and newest properties. We think about why it is - it's the higher ceilings, it's the natural light, it's the fresh air, it's the thoughtful design. Some of it is simple physical features that older office buildings won't be able to replicate. Larger elevators, larger lobby spaces, outdoor spaces. We look at some of these newer office assets in Hudson Yards, in Midtown East - thoughtful uses of space that we'd be tempted to have as leasable square footage, but is being allocated quite deliberately and purposefully to community amenities and outdoor spaces. The combination of all those things, I think, shows us that those properties that are best positioned to be responsive to employer and employee needs are going to perform exceptionally well. The challenge in many cases is going to be some of the older properties that are going to struggle to think about whether or not their highest and best use remains in the office sector. Now we have some precedent for rethinking older office buildings. After 9/11, we made extensive use of Liberty bond financing to reposition older office buildings in lower Manhattan for the multifamily sector. And today, it is in part because of that repositioning that we have a larger and more vibrant residential population in lower Manhattan than we've had in New York's long history. While there is a desire to explore how it is and where it is that we might do that today, because we have, on one hand, not enough multifamily, but perhaps in some markets, too much office, the cost and complexity of actually undertaking those conversions cannot be underestimated. One of the key issues here that limits our ability to take the experience of lower Manhattan and say, well, this is clearly and directly and wholly applicable to what we want to do next is that we were already working in lower Manhattan with relatively older inventory and relatively small floor plates. When we look at some of the buildings that might be ripe for repositioning today, they very often have much larger floor plates, which is going to mean that they're not suitable for apartments. There's not going to be enough access to natural light. A piece of this is that what the apartment tenant is looking for in an apartment has also evolved since the great financial crisis, since 9/11, obviously earlier than the GFC. And if that person anticipates that he or she's going to be spending a little bit more time at home because of workplace flexibility, then the very small converted apartment may not be appropriate. Everyone is going to need a little bit more space. This is especially true if you and your partner or spouse both have that kind of flexibility. I struggle With the stories that I hear from folks who for a year, year and a half, two years during the pandemic, their kitchen table was also their office. But not just for them, for their spouse as well. And for that median couple, the inability to really escape even on the weekends into a larger, more breathable space. We're going to face some very real challenges and think about how it is that we might reposition some of these older office buildings. It is not the case that we need to reposition them en masse. We're having to watch and we'll have to continue to watch very closely over the next several years as leases roll over. Those are the decision points for firms. For a lot of firms, yes, they're engaging with their teams to think about what is the optimal strategy for how it is that we think about leveraging the office space. And I should say that while there's a lot of focus on folks that want to work remotely, what we're also seeing after two and a half years of this is that there is a huge contingent to folks who are like, "I want to get back into the office as often as I can because I'm more productive there". But also it allows for a greater separation of my two lives. When work doesn't just come home with you, but lives at home with you, I think what we see is part of the burnout experience, part of the stresses and strains and anxieties of the last couple of years are that there is no clear delineation. We're able to simply say, "OK, family time until Monday morning," because your office is right there. So there are a range of dynamics at work. We are going to have to continue watching what is happening with leasing activity because those are the decision points for a lot of firms where they're really conveying publicly for the first time how they're thinking about the way in which not just this year or next year, but five years from now, ten years from now, they're going to be using their office space. One consideration I'll add here for a lot of these firms, particularly in a market like New York or Boston or Chicago or Philadelphia, part of what they are also watching is what is happening with the real and perceived safety and security environment in their urban cores and the quality and service level of the public transportation system. And I think what we see is that, and I'll use New York as an example, if we have peak days like Tuesdays, Wednesdays and Thursdays, where we see a lot of people coming into work as compared to a year ago, still not recovered to pre-pandemic levels. But Wednesdays is sort of this very busy day and we need to maintain peak load capacity at everything from your favorite salad lunch place to the number of desks we have in the office. Mondays and Fridays, the data shows us are actually much quieter overall. But we sort of balance that out. We see that utilization of the subway system is 70% of what it was pre-pandemic maybe, and we're not there yet. It raises a real question around how it is that we will maintain the fiscal stability of our public transportation network. It was precarious going into the pandemic with ridership at 60% or 70% of what it was pre-pandemic. We need to start thinking very, very creatively about the kinds of solutions that will allow for us to maintain the system. But in many of these cities, without a well-functioning transportation system, without a clear sense that it is safe to take the subway, that it is safe to walk around in the evening if you happen to be working late on your commute home. Those are going to be real impediments to our being able to resume a more robust level of in-person activity.

Matt Henry

That's a very interesting insight, especially on the peak demand usage of transportation. You're right. Everything really revolves around: can we get people to and from places safely. To close out the session here, I would like to ask you to prognosticate - so what are the chances - and I agree with you, the word recession gets banted about too quickly and it means different things to different people. So let's be a little bit more specific. Is the Fed going to be successful in combating inflation while keeping the unemployment rate at a manageable level? Or are we going to find that to really tame the beast of inflation that we're going to have to deal with an extended period of high unemployment?

Dr. Sam Chandan

Sure. What I'd say is that the risks are to the downside right now. And part of what that concedes is that there are so many variables at play. And so many of them are outside of the sphere of economic and rational decision making. There's a lot going on and feeding into these equations. Right now we find ourselves in a place where the risks are to the downside, the Fed will have to work so aggressively to contain inflationary pressures. We're very far from our 2% target that it will push unemployment levels up. The thing that I'd want to consider there is that these are relative measures of unemployment. And so even when we're looking at where we are with interest rates, the abruptness of the increases has been very painful. But by historic standards, if we were to look at sort of a map of in a trendline for the 10-year Treasury from the post-World War II period to today, we're still at very, very low levels. The abruptness of the increase after such a long period of time during which interest rates were at their historically lowest levels was part of the very difficult adjustment. Everything from families to real estate are thinking about cap rates and debt yields and financing costs. When we're looking at the employment numbers as well, we are still very close to historic lows and sort of historically tight labor markets. We have come down by, in terms of job vacancies, the number of jobs that are open and available in the United States, over the last month, we've come down by a million jobs in terms of vacancies. But we are still very, very close to having the largest number of jobs open and available in the United States as we've ever seen. Will those numbers come down more over the course of the next several months? Yes. And will we see unemployment very likely rise? Yes. I think the Fed is likely targeting in terms of what it views as tolerable an unemployment rate that's probably in the range of about 4.5%when, we look at that most oft-discussed measure of unemployment, it will feel high and there will be a great deal of focus on people who have been displaced and how it is that we can reengage them in the labor force. But by historic standards, it is a more extreme scenario, not an impossible one but it's a less likely scenario where we see unemployment levels rising to what we observed in the 1970s and early 1980s. As an educator, what I'm acutely aware of is that the skills that a person needs to be relevant in the labor force today have never been changing more rapidly. It may have been the case for most of economic history and sort of the cleamatritions. It may have been the case that for most of economic history, you could apprentice, learn a skill, and expect with that skill to be relevant in the labor force for the rest of your life. That is not how the world works today. The introduction of technology as a mediator for labor inputs into the economy and into the production function, and the rapid change of that technology means that the labor itself needs to adjust in terms of its ability to interface with technology. Our educational infrastructure as a country, whether it be the formal educational infrastructure - our schools, our universities, our apprenticeship programs - or the educational infrastructure within many of our large firms ,has not adapted as rapidly as the technological and skills environment has been evolving. And that threatens an environment in which, when people are displaced in one particular cycle and are not able to access the infrastructure to retool and build a new and relevant skill set, that they become displaced over the longer term. That would be a threat to issues around equity in our country that feed into then an unfavorable political dynamic that undermine political and social stability, but also from an economic standpoint will also work to undermine our capacity to enhance productivity in the United States. These are all things that we really need to be thinking about in the labor market. But a big, big piece of this is not just that interaction between employers, employees, and the broader market environment. It's what do educators, in their are many, many different forms, not just the faculty, not just the teachers, but each of us seeing ourselves as a mentor - someone who is sharing our experience with the new employees on our team, or the reverse mentoring where I certainly have a lot to learn from the youngest people that I encounter every day. Everyone sort of understanding that they have a role in knowledge and skills transfer. A lot of that only happens when you are physically colocated, but it is absolutely fundamental and essential to our being able to invest in our firms and our economy.

Matt Henry

Great. Well, I want to personally thank you. It's always a pleasure to sit down and to be able to talk about all things economics and real estate. On behalf of all of Chatham, thank you for giving your time and attention to this today.

Dr. Sam Chandan

Thank you so much.