CBRE Group, Inc. (CBRE) Earnings Call Transcript & Summary

Good morning. I'd like to welcome everyone to Evercore ISI's 13th Annual Real Estate Conference, and thank all the speakers and attendees for joining us this year's event. While it's certainly disappointing that we aren't hosting this event in person, we have lined up a number of tours that are going to be starting this coming Monday in New York and we look forward to seeing many of you, whether it's in New York, Boston, Texas or the West Coast over the next 5 weeks, and we certainly look forward to trying to get back to a more normal way of work. Each year, we do try and add a few twists to these panels, given the ever-changing landscape. And this year, we're very fortunate to have David Simon rejoin us on the lunch panel who'll be joined by Sam Zell and Barry Sternlicht. And we plan to touch on a number of topics, including politics, fundraising for nontraded REITs, urban versus suburban trends, surprises post the pandemic and a host of other topics. In addition, we also are hosting our first dedicated health care panel and we look forward to that broad discussion on senior housing and life science with Welltower, Healthpeak and Biomed. As I get ready for the conference each year, it's always amazing to look back over the last year or so and see how things have played out and where trends were stronger than expected. And clearly, if we look back to a year ago to this conference, we were starting to talk about the vaccine, but it certainly wasn't available at that point. We've now seen the vaccines rolled out quite aggressively across the U.S. I checked our stats most recently from our health care analysts and 53% of the U.S. population is fully vaccinated and 62% of eligible folks have at least one shot. And the U.S. has rebounded quite sharply. And now we're starting to kind of look into the growth and where things will settle out into 2022, and just how quickly companies can get back to their normalized earnings power. But in some cases, we've already seen companies get back to their pre-COVID FFO levels and we'll see more of them approaching that level in '22. Pretty amazing given the surge in REIT this year. REITs are up 32% year-to-date and they've handily outpaced the S&P, which is up 21%. And I'm sure we're going to get into a healthy discussion about inflation in the Fed in a number of these panels. But suffice it to say, the Fed does remain very accommodating, and while there are clear concerns from investors over the pace of Fed tightening, our house view is still that rates are going to remain relatively low and the Fed is going to still be somewhat accommodating over the next year. So we don't really expect a big surge in rates over the next 12 months. Just a couple of quick housekeeping items. Before we kick off the lunch panel today, that will begin at 11:45, we will have about a 25-minute break from 11:20 to 11:45, so everyone can grab some food as we then get ready for the lunch panel with Barry, Sam and David. So with those quick intros out of the way, I want to get started for our first panel. It's always great to have folks super knowledgeable on the transaction market. And we've got 3 folks that joined us last year and some of these folks have been with us for many years. Janice, I think, has the crown for most appearances at the conference. But we have Janice Stanton once again, who is the Senior Managing Director in the Capital Markets Group at Cushman & Wakefield. Spearheading the multifamily group is Brian McAuliffe. Brian is a Senior Managing Director at CBRE. And certainly, the last but not least is Chris Ludeman, who's Global Head of Capital Markets at CBRE. Chris is going to cover a number of different topics, kind of at the high level, but we'll also pinch hit on places like retail and industrial, which we have seen very good transaction volumes.

And so let me start with Chris just kind of looking at the big picture and to kind of help frame out for the audience sort of activity levels maybe in the first half of the year and try and put the first half of '21 in context. Maybe the first half of '20 isn't the best comparison, but if you want to compare it to maybe '19. And then maybe give us a little insight into the third quarter and how things are trending.

Sure. Thank you. Good to be with you, everybody. Again, I would say that 2021 feels a whole lot better than 2020. And we saw that in the statistics through the first half, and we won't comment on the Q3 because we're not quite through it. But if you compare it to 2020, our first half volumes were up almost 50% domestically and even better in some countries around the world and exceeding by 6%, 7% what we were doing in 2019. So that's certainly an encouraging factor now. What's behind all that, I think there's more -- there's increased confidence in the economy. There's pent-up demand. There's some concern about changes in tax rates and tax codes. But I do believe there's more capital flowing into commercial real estate than there had been in quite some time. And we, frankly, are seeing more downward pressure on cap rates and yields than we had expected. So all things being equal, we think industrial, and as you mentioned, multifamily, Brian and others will talk about that, will continue to be in favor. E-commerce didn't seem to have any sort of negative drag on the industrial business as that continues to increase. And we think there may be some surprises, frankly, as the year progresses in retail and hotel sales. So I'll leave it at that as for our opening comment with the exception of saying that the debt markets are also quite accommodative and increasingly so.

And I know you sort of mentioned it, but just is there anything as you sort of look at the landscape, if you look at regional kind of variations or performance or trends that are sort of noticeable? Or any real upticks or slowdowns in any particular region?

I would say the U.K. and Japan and Australia have been remarkably resilient -- not resilient, but they've been very aggressive in their growth. The activity in the border -- or the states along the coast in the Southeast have continued to perform extraordinarily well. And of course, if you think of things like life sciences, you've got San Diego, San Francisco, Boston and take places like Philadelphia that have continued to show real market increase in activity in terms of niches.

Great. Okay. Janice, let's transition to office and we're going to get into some of the macro drivers of office. But suffice it to say, and I'm sure we're going to be talking a lot about return to office and the slowness that we've seen in RTO and people getting back to the office, but maybe take a few minutes and just help us frame out. We saw, what I would call, I guess, long-weighted, high-credit deals really flying off the shelf, but multi-tenant buildings were maybe slower to sell and price discovery wasn't as good. Maybe give us an update kind of on what you're seeing in terms of the types of assets coming to market, what investors are really looking for and what is your outlook for the office sales business over the next 6 to 12 months.

Yes. So I mean pretty consistently with any disruption, right, there's flight to quality. So in a flight to quality when you're not quite sure what's going on, the work from home, the first thing you want to do is high credit, long term. So as you said, we have seen this triple-net lease stock credit trade kind of 75 bps below kind of other types of office. But that's not to say there isn't return. We are seeing a return to multi-tenanted office. One of the things that we kind of struggled with is if you look at the card sites of people entering a building, right, when someone buys a building, when someone inspects a building, if you got a credit tenant there, you know he's going to pay. You look at the card swipes for a multi-tenant building, and on average, we're 33% today. It's a little lower because of Delta. But 33% on average, 10% higher in like Texas, so like a Dallas, et cetera, and about 10% lower, frankly, in San Francisco and New York. So while we're still seeing trades and we're seeing big deals come on the market, some trade quietly, some not so quietly, $1 billion in New York, I think the key is WAULT. Because people are looking at this short period and saying, if there's a hole in occupancy, I don't think the shoe has completely dropped yet on work from home, so we're seeing investors prioritize credit and WAULT. But across the board, post Labor Day, we've seen a ton of product come out because, as Chris mentioned, there is a lot of capital-chasing deals and as we get through COVID, people are expanding the bulls-eye. They're becoming more comfortable with multi-tenanted first with the recap, then with the full sale. So we're seeing kind of more strength as we move forward. But today, what's king, multifamily, industrial, long-term credit lease.

I'm sure we'll get into some regional discussions. But obviously, for the audience, the gateway markets are extremely important. What is the appetite? What are you seeing in terms of investor appetite for New York and San Francisco, in particular for, call it, multi-tenant sort of traditional kind of core office buildings, but not long WAULT-ed or traditional non-super credit-oriented buildings.

Sure. So appetite is increasing. I would say this time last year, it was a lot tougher than it is now, but because credit is good, because there are more people coming back in to the office, we're seeing an uptick in appetite, kind of unlevered IRRs in the 6.5%, somewhere between 6% and 7% range. So that's good news. It isn't pre-COVID levels, frankly, whereas you do have that in the Sun Belt, right, and in other property types. But definitely kind of much better than we've seen and quality is king, Class A assets. If you look at this, people think -- drawing people back into the office has to do with people wanting to be there, amenitizing. So there has been a flight to quality. So if you have a new building -- one if you have long WAULT that we talked about, but if you have a new building, if you have lots of amenities, that's going to trade well. If you have an older building with a big hole in occupancy right now in the gateway cities, you're going to get banged in terms of free rent and TI at this moment in time. I think that a year from now, 18 months from now, that will be gone. But right now, that's the reaction.

Okay. Brian, let's transition into multifamily because that sector took a lot of pain very early in the cash flows. And basically, eviction moratoriums hurt, bad debt went up, rental rates in the gateway cities really plummeted. But your sectors come back quite nicely. And I don't know if there was ever really a disruption in the transaction market, but maybe give us a sense for what you're seeing in multifamily today. And we certainly have all the public companies trading at sub-4 implied cap rates and I'm curious sort of where you see pricing today for good quality multifamily.

Sure. And maybe got to start with some of that transaction activity. But you mentioned a lot of headwinds early about what are those -- all of the obstacles that we are all experiencing in the second quarter and the impact in value. And certainly, in the multifamily space, seemed to be much more of a pause as there was so much uncertainty so there wasn't that transaction activity. And realistically, we did not see the declines in value from an activity perspective and valuations. The first 6 months of the year were clearly just rebuilding those pipelines based on the significant improvement in the economic conditions and the support on the public health crisis. But we've seen multifamily values across the spectrum, whether they be urban or suburbans, in high demand, falling cap rates. And the big impetus, of course, is the fundamentals, which I'll probably reiterate several different times between strong occupancies than what we've had in the past, significant increases in rental rates and the majority of markets and even the resiliency of the core markets. As we look at our research department and their review of 69 markets, there's only 10 markets that have not -- are not at the level of where they were in pre-COVID. But the majority of those markets have recovered significantly. And then even the -- you're talking about the San Francisco and New York markets, those have had noticeable improvement in property performance, which gives back to the confidence. Chris mentioned the debt markets briefly. But in the multifamily, the higher LTVs, there is increased competition. The confidence amongst those lenders has really helped accelerate transaction activity, especially with the debt funds filling a significant void. And then finally, just the momentum for -- that we've experienced in the first half of 2021, investment sales volume is currently ahead of the 2019 levels, which, of course, was the prior peak.

And Janice mentioned that unlevered IRR for her sector kind of in the 6% to 7% range, where do you think for the deals that are getting done in multifamily today, investors or return hurdles are given where interest rates are? Is that a sub 6? Do you think it's around a 6? Or how would you kind of...

It's going to be case by case basis on the different markets, but generally in those returns, Steve. So what we've seen is less than the office sector, obviously, because of the security of the revenue stream in the multifamily sector.

So I think the net of that, Steve, is that we're starting to see those leverage returns -- unlevered returns compress. And the difference between, say, Janice's comments around office and Brian's comments around multifamily, you probably see 100 to 150 basis points swing there.

So not to try and put words in your mouth, but if we would sort of bracket and say office is 6.5% plus or minus, depending on the deal, would you say that like industrial and apartments and storage, things that are really in vogue today, are those kind of in the mid-5s if we think about unlevered IRRs and then cap rates are obviously much lower than that?

In industrial, that would certainly be the case, and I'll let Brian answer for multifamily.

Yes. On multifamily, we've seen some in the higher end of the range of the 5. But certainly, for the most prestigious assets, sub-5.5 is not uncommon.

Great. I mentioned interest rates early on, Chris. I'm just curious, when you're sort of talking to clients, the uncertainty over the Fed taper and then ultimately tightening as we kind of come out of COVID, what are sort of investors' thoughts broadly around U.S. interest rates? And what impact is that having, if any, on how they're looking to come to market, finance, do deals? Just what is the rate picture? Helping? Hurting? Or is it kind of a neutral impact on deal flow today?

I think it's accommodative. The rates have continued to stay low. We've expected for quite some time to have them stay low for an extended period of time, which is supporting the equity markets. While you mentioned the central banks are probably easing or pulling back on quantitative easing, there are a lot more participants in the credit markets. And our research would suggest that the monetary policy will continue to stay pretty accommodative through 2023. So net-net, we think it's -- the debt markets are supporting the equity markets and that's going to be good for commercial real estate.

Got it. [Operator Instructions] I've got a bunch of questions, but we'd love to entertain yours. So I apologize for not mentioning that at the outset.

So can I just make a quick comment just on kind of the lending environment, as a follow-up to Chris, because we hear a lot about what those low cap rates are historically, unprecedented in some markets. But at least in the multifamily sector, we still have very positive leverage, right? So if you're buying deals -- transactions at, let's say, 4%, 4.25%, sometimes certainly less, borrowing costs can be 3% to 3.5%. In some instances, it's less. So when you have 50 to 100 basis points of positive leverage, the numbers can work without question.

Janice, maybe before I switch to you on a work-from-home question, because it wouldn't be a panel out work from home, just how are rates do you think impacting sort of your market? Obviously, if you've got higher cap rates with where interest rates are, there's got to be a lot of positive leverage in your sector. Is that driving deals? Or has that not been a big factor?

Yes, absolutely. We have been pleasantly surprised with the condition of the debt market. It's clearly supporting cap rate compression, especially in the net lease office market, especially in the credit market. But overall, it's keeping cap rates kind of at their current levels. It's supporting cap rate compression in multifamily and in industrial where there are kind of better cap rates than pre-COVID. So definitely a positive. We have a number of investors where the first thing they ask us is less what is the cap rate and more what's my 5-, 7-year levered cash-on-cash at 65% LTV and that will drive a discussion about pricing.

Steve, speaking about industrial, if you look at the rate of growth in rents in significant markets around the United States, that mark-to-market can also be quite exciting for investors. In the past where people who really wanted long duration rents, leases that we're very, very predictable, I think there's a whole squad of investors that are seeking things that have a great mark-to-market story in the near to intermediate term as opposed to figuring out what's going to be 5, 7, 10 years out.

Right. I'm going to come back to Brian to talk about rents in a second for the apartments. But Janice, work from home has obviously been a huge discussion point and it really drives not just office discussion, but ultimately, if people are going to come back to the major gateway cities and what is that going to do to rent growth. So it has ramifications at more than just office. But when you're talking to potential buyers, how are they thinking or how has their thought process on work from home evolved today versus kind of where we were at the start of the pandemic? We've now had 18 months to sort of work through this, think about it. And so I'm just curious, what is the mindset of buyers today on work from home? And how are they thinking about maybe structural occupancy or structural vacancy in portfolios?

Right. Well, first off, you'd think 18 months would be enough, but the fact is everyone is not back in the office. It's really hard to tell. As I said, you're 33% on average occupied. But we are reading the tea leaves and kind of figuring out. Of course, we'll know with more certainty in January when more people come back. But what's really happening now is employers are losing people. Just a lot of people deciding I want to move on, I want to quit. So they are 100% catering to what the employee wants at this point in time. And if you look at the McKinsey studies, if you look at the Cushman & Wakefield studies, it's pretty clear that McKinsey says 89% of people want to return to the office. So that's good news for office. But none of them want to return without the flexibility of work from home. And I've got work from home right here, it's early in the morning. So -- and I love that. So employers are starting to do a couple of things. They're using a carrot-and-stick method. And the carrot is they want to make the space that people are coming to awesome space. So collaborative space, lots of meeting places. And they're also using the stick, which is if you want to work from home full time and if you want to work from Florida or Texas full time, we're going to adjust your salaries, okay? So investors look at that and they say, okay, this short-term arbitrage of get a New York salary and work in Florida, we think that's short term. Because long term, they're going to squeeze that arbitrage by -- if you go to Florida, they're going to pay you less, frankly. So investors are not changing the structural occupancy rate, so like long term, right? So they're not saying, okay, it used to be a 97%, we're going to move it to a 95%. And they're not doing that because of a couple of things. The first one is they think the biggest impact is going to be in Class B assets, so you may see some of that pressure in Class B assets, but not in Class A. But they're not changing it because a lot of firms when they make their space more inviting to people, the space per person is actually going up. So there are slightly fewer people, but we're seeing like a tech number go from 120 to 150 to 160 when you put in all the collaborative space. So we're definitely seeing a work for home ding in current underwriting with current vacancy. But as you kind of roll your -- if you roll your run forward, we haven't seen kind of the structural full occupancy level tick down. People have looked at it. People have debated taking it down for Class B assets, but we have not seen that tick down yet. Because if you look at our polls, if you're in the office 3 or 4 days a week, you are 12% -- you have a 12% better employee experience, 10% more engaged, 10% higher think that they're doing their best work, they have a better work-life balance. So we -- people are still taking a wait-and-see attitude. What really helps is second quarter, tours are up 80%, okay? So kind of up through the first quarter, kind of before the vaccine rollout, the numbers are really tough. But now leasing is way up, tours are kind of within 90% of 2019 levels. So -- and the renewals that we've been seeing where people are saying, I'm not making a decision, I'm going to renew for 1 year, those renewals are getting longer. So there's more confidence returning to the office sector.

Steve, one point I'd like to add is more of a question. If you think about -- Janice outlined the environment well, if you think about all those companies that delay the decision, extended for a year, extended for something slightly longer than that, think about that as water coming up against a dam. And if you've got well-capitalized owners, there could be a tipping point where all of a sudden, the negotiating power may slip from the tenant to the landlord and it may be quite a surprise to many.

Yes. We'll come back and quickly touch on rents. So far, it doesn't seem like there's much pricing power for the office companies, but they're trying to fill some holes and get occupancy back up. So -- but that does let me dovetail into Brian because I did want to talk about rents and how buyers are thinking about rent growth. We're sort of in an unprecedented part of the cycle now where rents dropped precipitously. Free rent was maybe going up 2, 3 months in the gateway markets. But -- what is your sense of appetite for the gateway markets versus maybe the Sun Belt markets? And how are people thinking about rent growth today looking forward in some of the various markets?

Sure. I guess a couple of comments there. Obviously, in the pandemic, just the rents in the majority of the markets had the erosion of rents as a result of very little demand, of course, and those gateway markets got hit the hardest. Certainly, San Francisco, San Jose, New York, not uncommon to have 10% to 20% decline in rent levels. But by midyear, 2021, of course, the vacancy rates have fallen and rents rising in pretty much all the different markets. So your question on rental rate growth and how are investors looking at it, certainly from our research team's forecast over the next 12 months, we're going to be close to 6% in rent growth, which is well above, of course, where we were in the pre-COVID levels. So when we start talking about the rent increases primarily in the Southeast, Southwest-type markets, those type of rent increases, when you're underwriting acquisition values significant rent growth in the first year or 2 has a significant impact in valuation. I think the other significant point, Steve, is as we were starting to have those rent increases early in the second quarter, a number of the investors were questioning how we can have that 6% plus or minus rent growth. And then very quickly in the span of 60 days, plus or minus, they started looking at their own portfolios and they started experiencing those type of increases with the most notable increases being on leases for vacant apartments and the renewal effective rents lagged slightly, but still very significantly. So what that ended up doing is providing a significant amount of confidence by the owners' investors in underwriting significant rent growth as a result of their own portfolio and experiences that they were seeing in their individual assets in pretty much every single market.

Great. I've got a couple of questions that have come in from the audience, so let me take a quick break for mine. They are heavily focused on office, Janice. So I'll try and get through them quickly. But first question was we talked about unlevered IRR sort of being in that 6% to 7% range, broadly speaking, and that is today. How do you think they've changed from pre-COVID? Are they up? Do you think they're flat? Are people just being more conservative in the underwriting? Like how do you think underwriting has changed? And maybe specifically, have the IRRs changed?

Yes. So it really depends on what part of the U.S. you're in. I mean the Sun Belt, you're at pre-COVID levels, right? I mean the Sun Belt fundamentals, you've actually had rent growth in Dallas and Austin and Florida. In the markets that are challenged by an overhang of sublease space where there has been kind of a rent erosion, those are softer than pre-COVID levels. But the distinction is, though, it all has to do with how good is your asset and how durable are your cash flows because everybody thinks of this right now as a relatively short- to medium-term phenomenon. So as long as you have kind of locked up the next couple of years, you're not going to really feel it as much. But if you have a whole -- or a large hole in occupancy, in particular, in a gateway city, we have seen TIs go up significantly kind of $50 increases in TIs in some markets. We have seen free rent, which typically was a month of free rent per year of lease, so a 10-year lease with 10 months of free rent, we've seen that tick up to kind of 12 to 18 months. So the Sun Belt has skated and they're kind of at pre-COVID levels because there have been companies that have decamped short term potentially. Because I don't know how many people are going on to stay there if you lower their salaries to be there. So -- but the Sun Belt has skated and the gateway cities are somewhat softer, but the gateway city assets have done very, very well. So they have assets that are new. Everyone wants kind of new amenitized roof decks, lots of meeting space and not a lot of rollover in the next year or so.

Okay. And then maybe this could be -- Chris, I'll maybe sort of throw this question out. It's kind of a broader question. It's really about Manhattan and Northern California and just how are investors looking at those 2 markets. Obviously, they've been at the center of COVID, they've been slower to open, as Janice mentioned. They've got lower return-to-office stats. We've seen some migration of tech firms leaving Northern California. So just broadly speaking, from your discussions with investors, have New York and California, maybe specifically Northern California, is there a red line through them? Have they be deemphasized? Or are they just as important and interesting to investors as they were pre-COVID.

Well, if you look at the gateways over time, they've gone through these kind of traumas over 100 years and they all seem to come back in a meaningful way. We sometimes forget, that if you take San Francisco prior to the pandemic, we saw people couldn't find housing. Transportation was really horrible. So the going into other cities was almost a relief valve. And remember, before the pandemic, there was seemingly very little vacancy. Now there could have been a lot of space that was -- had been committed but had not been occupied. But there was a lot of stress in terms of employee satisfaction, Janice referenced that. And I think that what has been interesting if you look at some trades that are going on right now in San Francisco, where you're taking city blocks with large complete rehabs of spaces, that's a vote. I mean this is in the hundreds of millions of dollars post closing to reposition large assets, that's a vote of confidence in that gateway market that it will, again, return. Things will normalize. And we're starting to see real value-add trades at numbers that were frankly surprising to many of us in places like New York. So my belief is the gateway cities are not going away. They may recover in a -- at a different rate, but they will recover and they will be robust centers of economic activity and growth. People want to be there. Education is there. Smart people gravitate big cities.

Got it. So it sounds like there are some short-term hiccups, but investors haven't red lined them. Janice, there's a couple of questions here that I'll sort of center around space usage. You made the point that while number of employees may be going down a bit, the space per person, the densities are kind of going back up. And I realize you really focused on the transaction side and -- but you have to encompass leasing and speak to the leasing folks. What is your sense of firm's overall space usage? I mean it still feels like we see more downsizing announcements than we see large expansion, at least right now. So what is your sort of sense of just the overall leasing activity and total, I guess, occupancy trends in the sort of short to intermediate term.

Sure. So leasing activity has gone way up, and we mentioned the nature of it has gone less from 1-year extensions to longer -- medium-term extensions and new leases. So that's all good news. And that's even on the tech firms where the tech firms are the most mobile, they've signed the most leases kind of in New York, in Washington, D.C. Austin and Atlanta are on that list, but kind of in their traditional markets. If you look at what we're seeing on the occupier side, we overran the mark. For firms, they were looking at 120 square feet per person and that they can't do anymore because in order to lure people back to the office when you have work at home, they're putting in kind of what they call a recreational space, right? So a lot of meeting space, a lot of collaborative space. That has increased that benchmark by at least 30 to 40 square feet per person. So when you look at the offset of possibly fewer people because some percentage of the workforce, Google said maybe 20% of their workforce work from home, you're actually getting a 20% increase in the square feet per person of people who are still in the office. So while right now, people are still giving up space because I think people are taking this period economically to do write-offs because everyone can understand the write-off, right, during COVID. So if they're going to take a sublease write-off, let's go ahead and take it now, accelerating it. But in terms of the space usage, we actually -- we expected to see a much bigger pullback than we really have, okay, because people are taking -- they're building out roof decks, right, kind of outdoor space. They're actually sometimes taking in the corner of a building space that is interior and opening it up to make it exterior, taking the windows up. So the concept that employers now want to use their office space and make it the best that it can be and entice people back to the office is pushing a much larger square footage utility per person, which we're seeing is offsetting the number of people who are going to permanently work with them. It is a much bigger issue with smaller companies. Smaller companies, some of them are giving up on their offices or at least waiting a year or 2, saying I'm going to get back my lease and then if I need to open up in a year or 2, I'll sign a new lease. But bigger companies are just revamping what they think about their office usage and increasing square footage utility per person.

Great. There's a question that came in. I'll start with Chris on this and maybe get Janice's comment. It really has to do with the arbitrage between public and private market pricing. And we spend a lot of time looking at where the private markets are and where the REITs trade, obviously, by sector. The 2 areas that are probably the most sort of distressed versus the private market has been lodging and office. And we saw a deal get announced with Columbia got over the hump and got a deal done. And I'm just curious, maybe Chris, start with you, what kind of conversations do you have with folks? And how relevant is that sort of arbitrage? And do the investors look at the REITs as opportunity sets versus trying to go out and do deals in the private market?

I would say the conversations that we had early in the pandemic is people went to the public markets. They could -- there was a lot of liquidity there, they could track it every day, there was a lot of transparency. But over the last 12 months, those conversations that we've had with investors have been less about the public markets. And you mentioned hospitality, and I'll go back to Janice for her commentary on office. But if you look at the activity around hospitality and trades and hospitality and the credit markets supporting those trades, it's actually been quite a surprise. Now you've seen a lot of hotels either permanently closed or substantially closed. So you've seen a lot of units go out of the marketplace. But at the same time, you've seen maybe 3 out of 4 and the fourth meaning maybe large box convention hotels who haven't sensed any sort of recovery yet. If there's any distress, it may be there, but it hasn't really been tested. We're starting to test that market today. But if you look at hospitality trades that have been taking place across the country and drive to resort, the kinds of places that people could get to get a relief from working at home, they're pricing those things at pre-COVID NOIs. So the real issue is, and I know you're going to have Barry and others on the discussion later, but I'm telling you that the hotel business is much better than people thought. And as for those of us that spend a lot of time frequenting big cities like New York City, more and more hotels are opened up. The rates aren't low. In fact, what is quite interesting is you have to opt in to some services. So those hotels have figured out a way to make a lot of money by rightsizing their staff and rightsizing their offer. So I think the -- to summarize, I think less conversation doesn't mean it's not happening in the public markets, it's more going to private markets.

Okay. But it sounds like the lodging REITs have been maybe the worst performing group this year, and I realize there's been fits and starts with the reopen and we're stalling out a little bit here with Delta, business travel is called in the question. But the lodging companies, the lodging REITs still trade at probably pretty meaningful discounts to those replacement costs into transaction pricing levels. So -- but it doesn't sound like investors are looking to take advantage to try and come in and scoop up some hotel REITs on the cheap and buy that in front of the recovery where sometimes it does happen in other sectors, and we've seen some M&A starting to tick up in REIT land this year. We've had a number of deals get announced, and again, Columbia being sort of the most recent.

Lodging usually reads -- the poor performance in lodging kind of leads into an economic downturn, they lead out. And I think the big difference here is people are waiting for increased mobility. And when people can move more fluidly from country to country, city to city, when tourism increases, I think you'll see a significant pop in both the NAVs for these lodging REITs as well as the activity levels and the performance of the -- at the asset room.

Janice, let me flip that question to you because I know we've talked about it in the past and I don't know what conversations you might have had with folks because Columbia obviously had run sort of a public process. But what is your sense of that arbitrage and discounts? And do you see more folks trying to look at the REITs as an opportunity set or not really?

Yes. I mean we talked about this last year as well, and we said there's a huge arbitrage the problem is the debt market doesn't support executing on an arbitrage, right, because if you're going to do it, you're not doing it with all cash. You're going to lever up. And now we've seen the debt markets come back and facilitate executing on that arbitrage. And we see the light at the end of the tunnel with the vaccine and everything. So yes, we still talk to people. Last year, we were talking to them and they were saying, I really want to do this, but I can't, okay? Now it's more actionable, but also with the price runoff, that arbitrage is eroding. So it's a window and it's not that long a window at this point in time because of the run-up in REIT prices.

Steve, the other thing that maybe we should think about, and I don't know if we have time to talk more deeply about it, is in Brian's space and in logistics, you've seen such compression in yields, there's going to be an increased movement for some alpha, right? And where are they going to get it? They're going to look at retail, they're going to look at hospitality, they're going to look at office. So there is going to be the balance between the fundamentals and what people are doing in those spaces and how and where they're shopping and where they're sleeping. But those yields in multifamily and logistics are highly compressed, so people are looking for alpha.

Great. Well, I was going to ask you to just comment quickly, and we didn't really touch on industrial. It's almost like it's so good. Everybody knows how good it is and rent growth has been phenomenal and Janice would just love a taste of that in office. But Chris, has the appetite at all waned for industrial? Or is it just whatever comes on the market is just a feeding frenzy at almost any price. I mean have you seen any just backing away from folks at pricing? Or how do we think about that market?

Well, I would say if there's any backing away, it's because of frustration, not because of desire. And some capital is frustrated, they keep bidding and losing in the industrial and logistics space for a variety of products and their strategies around last mile, infill, bulk distribution, things that are going on with big Amazons and big Walmarts. And if you look at the capital and the bidding activity on those, it's super robust, but you've got more people wanting to play than can play. So consequently they're saying, well, if I'm continuously shut out, where else can I go?

Got it. Brian, let me just quickly switch to you. This hasn't been a big problem in too many markets, but eviction moratoriums in New York and California have hampered collections a bit. And while the federal moratorium was lifted truly up to each state and New York and California have been very tenant-friendly, does that have any impact in multifamily sales in those markets? Is that impeding transactions? Is that hindering underwriting in any way? Or is that just kind of a moot point at this.

No. I think it's maybe more of a moot point in a sense of decision-making because for those assets that they have experienced some lack of rent collections because of the friendly eviction policies, those type of owners have just said, I'm just -- this is short term, it's going to be a pause. I'll just go ahead and wait before I put any assets on the market. But we also see that the investors are really looking at the lasting value of the assets. So that short-term volatility in rent collections is not diminishing any type of investor interest or underwriting within that year 3, year 4 going forward. So it's more of an underwriting on a short-term basis, but not having any impact on the valuations.

Okay. I know we're getting sort of -- we have about 5 minutes left. So I'm going to try and just see maybe, Janice, and I'll ask Brian the same question. Just as we think about rent growth, and Brian touched on it, but when you think about rent growth in office, should we be thinking about any rent growth in any of the kind of bigger markets in the short term? Or at this point, it's kind of fill up the vacancy assume market rents are kind of flat, keep TIs high? And how do we sort of think about the underwriting process and rent growth over the next couple of years in office?

Yes. So unfortunately, in the gateway cities, which have an overhang of subleased space, we see underwriting really at 0 rent growth for the first 2 years, okay? There's a catch-up period after that where you're going to grow faster than market as the market recovers. So people really see the end of 2 years as being where that extra free rent will kind of dissipate, where the extra kind of TI kind of rolls back to prior levels. But I think it's really the subleased space that's creating that pressure. And when that gets eaten up, that will go away again. In the Sun Belt markets, you are not seeing the same thing. You're seeing rent growth -- you're seeing rent growth now, right? You're seeing 5% to 7% rent growth in a number of the Sun Belt markets. So that does not apply to those markets. But that's what we're seeing.

Brian, I think you had sort of thrown out the CBRE forecast was sort of 6% rent growth. I kind of assume that's a sort of forward 12-month rejection. How wide a disparity do you get when you sort of look at the markets? And what are some of the stronger markets? And where some of the weaker rent growth goes?

Yes, that's very wide from some of the, let's say, urban markets that are still lagging in their recovery, which I mentioned before, San Francisco, San Jose, New York, but has certainly shown signs of resiliency and positive trends. But as we look at kind of -- you mentioned the research, well, we also do the investor intention survey. And clearly, Austin is being the most attractive investment market followed by Phoenix, Dallas, Atlanta, including Denver. I think Janice said -- you mentioned all those other markets as well. I think we've seen a significant increase in Denver by investor appetite going forward. So it's really -- again, I don't want to be so repetitive, but in that -- in those growth markets, kind of the Southeast and select Southwest markets as well.

All right. And the last and maybe just ask one last question. Just kind of a bold prediction or bold surprise that you think might happen over the next year when we get back together for the conference next year, what do you think will have surprised people the most? Chris, I'll start with you.

I would say there's going to be a snapback in office occupancy by the end of the next 12 months. And I think retail may be back on people's list.

Brian, any bold prediction? Surprise?

Star have been pretty aligned here for multifamily as well. So trying to identify what that disruptor is going to be that's going to impact values or investor appetite, that's for someone else to go ahead and predict.

All right. Janice, any bold predictions when we sit here a year from now?

Yes. No, I agree with Chris in terms of -- we tend to underwrite from how it feels right now. So I think that just like we saw through 9/11, I think that we will have a snapback in office and in hotels, frankly.

Got it. Well, we are basically at the witching hour here. So I want to thank Janice, Brian, Chris for joining us this morning for a great conversation. We -- for the investors, we'll take a 10-minute break, and the office panel will start at 8:30. So we look forward to having you all back, and we look forward to continuing this conversation certainly next year to see how some of the predictions played out. So thank you all for joining.

Thank you.

Thanks, guys. Yes.