Data Driven Real Estate Podcast #18 – The U.S. Economy And Commercial Real Estate With Charles Dougherty of Wells Fargo. DDRE#18

The U.S. Economy And Commercial Real Estate With Charles Dougherty of Wells Fargo. DDRE#18

Charles Dougherty is a Vice President and economist with Wells Fargo Securities. Based in Charlotte, North Carolina, he covers the commercial real estate, housing, and construction sectors of the U.S. regional and macro economy. He regularly writes indicator reports, produces special commentary, and contributes to the company’s Weekly Economic & Financial Commentary. His commentary on the regional and U.S. economy has been featured in various regional and national media publications, including Bloomberg News and The Washington Post. We discuss the state of the US economy, which commercial real estate sectors or doing well and which are struggling, if co-working is a thing of the past, how commercial rents have performed, and the outlook for the 2021 market.

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Show Topics

00:00 The Data Driven Real Estate Podcast welcomes Charles Dougherty, Vice President and economist with Wells Fargo Security

07:15 How has the overall economy faired during the pandemic?

09:38 How has commercial real estate handled Covid-19?

20:55 Is work from home the new normal? How will this impact commercial real estate?

24:01 What are the key datasets Wells Fargo considers when forecasting economic growth?

28:46 How much impact could local law changes like California Proposition 15 impact commercial real estate?

30:46 How important is small business to the overall economy and real estate?

35:10 What commercial real estate sectors have done well and which are having issues post-pandemic. Retail vs. office space.

41:07 Is the Co-working space done? What happened to WeWork?

46:11 Finding the opportunity in commercial real estate during the downturn as landlords.

48:35 Is hospitality real estate going to see massive foreclosures?

52:14 Is the US economy on the path to recovery?

54:41 Are buyers and sellers on hold until after the election?

Show Transcript

Aaron Norris 00:03

Hey, welcome back to the Data Driven Real Estate Podcast. This is Episode 18. And this week we've got Charlie Dougherty with Wells Fargo Securities. He is based out of North Carolina and he covers the commercial real estate, housing, and construction sector. And you can actually sign up in our community which you would never want to forget to miss. We've got links there on how you can sign up for emails with information that they put out consistently on the economy. And it's actually very good. This week, we talked about commercial how it's doing everything from apartments to retail opportunities, foreclosures. And if we're on the other side of the pandemic, recovery, and if there's anything post-election, we should keep our eye out on you won't want to miss this week. Hey, welcome back to the Data Driven Real Estate podcast, the podcast for real estate professionals dedicated driving business using data. I'm Aaron Norris with co-host Sean O'Toole with PropertyRadar and today we are happy to welcome Charles Dougherty, Vice President and economist with Wells Fargo Security. Thank you for joining us.

Charles Dougherty 01:00

Hey, thanks for having me.

Aaron Norris 01:01

Hey, Charlie, explain a little bit about Wells Fargo Securities, I was not familiar with that branch of Wells Fargo.

Charles Dougherty 01:09

So Wells Fargo Securities is a part of overall Wells Fargo. This part of the overall bank is more involved in capital markets, investment banking, things like that. So we're our own kind of separate entity, but we are a part of Wells Fargo. So as part of Wells Fargo Securities, we have a team of economists of which, you know, I'm a part of. So as I was just saying, you know, we're about 13 people, we dedicate, you know, 100% of our time of following you know, what's happening in the economy, we produce a monthly forecast for the economy, which ranges from you know, what's going to happen to real GDP, what's going to happen to employment growth, what's going to happen to you know, interest rates, things like that. So then we, you know, of course, you know, follow the incoming data that we get, and then we write our analysis. And I'll just sort of tell you, where you, when your listeners or viewers can find that going to, all of our reports are there, they're all free, you don't have to be a client, you can sign up for our email distribution list, you can choose what type of you know, research you're going to receive, whether it's housing or commercial real estate, or maybe you're just interested in what's happening with the Federal Reserve and monetary policy. So you can sort of curate your, your list to what your interests are. So again,, you can find me all my information there. But that's basically what our group does. And that's what we focus on every day.

Sean O'Toole 03:06

Do you guys publish everything out there, or is some stuff you know, only for clients.

Charles Dougherty 03:15

Um, as part of the economics group, it's all out there, it's all publicly available. There's other parts of our research, like equity research, that's just for the client. But the economics part is widely available.

Aaron Norris 03:30

I did post links in our community to how to sign up for that very easily, I was actually turned on to your work by our CMO of PropertyRadar. And so I get your emails all the time on anything on housing, and it's impressive, you guys do some really great work. Now you're saying is specifically real estate and commercial? How did you fall into real estate.

Charles Dougherty 03:51

So I have been following real estate for you know, quite a while now. I really started, I used to work for a company that sort of compiles economic data, and I was part of the regional group. So you have the national economy, and then through separate from that you have what's going on, you know, at a region or, you know, local basis. So I was in charge of covering, you know, different, you know, individual markets and what's going on in their economies. So, of course, you know, part of that it's figuring out what the, you know, real estate is doing in those local economies because it's such an important driver for the rest of the economy. So that's sort of where I first started, you know, covering real estate markets. And then soon after that, I worked for a very large building products manufacturer, and you know, they make basically everything that's surrounding right now walls, you know, ceiling tiles, basically everything right, so as part of their, you know, their, you know, group, but basically what I was tasked with doing was sort of following all different types of residential and commercial real estate, because they were, you know, the entities that were buying our products. So that's sort of how I transitioned from, you know, there to now, you know, where I primarily am focused on, you know, the sort of what's ongoing, and what's happening, you know, with both residential and commercial, real estate.

Sean O'Toole 05:36

And what's Wells Fargo's primary reason for, you know, you creating this research, putting it out publicly? Is it? Is it kind of a marketing effort? Or are they using it in internal decision making? Or, you know, client decision making? Or, you know, what, how does? How does your work typically get used?

Charles Dougherty 05:59

So, I would say all of the above, um, you know, certainly internally, I mean, think about what's happening, you know, right now, when everybody has so many questions on what's happening with the economy, so right now, we spend a whole lot of our time speaking with clients and customers and trying to, you know, relay our insights on what we think is going to happen to the economy over the next few years. Because everybody, you know, everybody is sort of wondering, you know, what's the trajectory of the economy? What's going to happen? You know, it's a big question. So that's sort of how we get put to use. And, you know, before, you know, COVID, pre-pandemic era, you know, we spent a lot of time traveling on the road and going, you know, in-person and sort of explaining, you know, our economic outlook and explaining, you know, how we think the economy is going to fare how we think housing markets are going to fare, you know, high level. So, you know, to answer that question, I think it's really all of the above

Aaron Norris 07:13

COVID, so, we should jump in, are you surprised where we're at today, maybe compared to six months ago.

Charles Dougherty 07:23

Ah, you know, it's, if you kind of go back in time, right to February or March, when everything really started to, you know, pick up speed here. It's been a long, seven months. And it's, you know, I don't want to say it's gone as expected. But I think if you listen to what the experts were saying, In March and April, you know, this was always going to be, you know, more of a long term event and what a lot of people were initially sort of expecting. So, you know, we knew it was bad, we knew it was going to take a long time for them to, you know, develop a vaccine, you know, reports are now that saying, okay, we're, we have over 200 vaccines under development worldwide, you know, hopefully, fingers crossed, one of those things works. But from the onset of this, we knew it was going to be, you know, very serious and very, very bad terms of public health perspective, in terms of, you know, the economy. That was probably more of a, you know, it's still a sort of a big question mark, frankly, right, because heading into this, you know, how we sort of forecast what the economy's going to do is, you know, we plug prior economic data into an economic model. And that sort of stresses out the trends and tells you, you know, what the current trends are going to how they're going to take you over the next, you know, the short term, and that'll give you, you know, a forecast right. So, what happened with COVID is basically all the economic data got so bad, deteriorated by such a large extent, that essentially broke all of our economic models. So that made our jobs much more difficult in forecasting the economy, which is, you know, part of what we get paid to do. So, it has been a challenge, because, you know, this is such a, you know, strictly unprecedented situation that we found ourselves in.

Aaron Norris 09:38

In the commercial space, what are some of the key data points that you're looking at that were just completely thrown out the window because of COVID.

Charles Dougherty 09:47

So, actually, commercial data kind of tends to lag the rest of, you know, the economic data that we look at. So one thing I was just talking to somebody about is the cap rates, right cap rates haven't really done anything, property prices haven't really showed much movement of the past seven months. And you know, the reason for that is because, because of the just how crazy things have been, there's this huge gap between, you know, where buyers and sellers perceived values to be. So there's just no sales transactions. So you need those transactions to actually get the cap rate, get the property price, etc. So none of that's really happening. Because nobody knows what next year is going to look like, you know, the way you derive value, or you come up with the value of a building is the intersection of perceived values between buyers and sellers. So note that there's so much disagreement there, that there's simply no transaction. So in the commercial space, you know, there's actually, if you look at the data lines, there's actually very, you know, are relatively few indications that any, like a severe crisis happened at all. Now, eventually, the data will reflect what happened. But if you look at, you know, you know, what's happening with prices, or cap rates, which is what, you know, a lot of people in commercial real estate, you know, focus on, that's not really showing anything. Now, if you drill a little deeper, and if you look at what's going on, you know, underneath the hood, if you look at things like, you know, demand for commercial space, or net absorption, or if you look at rents in different sectors, those are showing, you know, quite, quite substantial impacts. So, for example, you know, we just put out a research piece on apartment rents, right, so if you look at apartment rents, it's about, you know, February, which you see is in certain, very large, major markets, like, you know, the classic example has become New York City or San Francisco, you see apartment rents, just declining at a very, you know, very strong rate. Interestingly enough, you know, in other parts of the country, rents are holding up better. But, you know, these, these, these are the sort of indications that that pandemic is starting to have, you know, a very huge impact on commercial real estate.

Sean O'Toole 12:27

Yeah, I mean, I think that's, it's a great point that you made, it's like, you know, Bruce, I mean, Aaron's Dad is famous for having told everybody to get out of the single-family market. And at the end of 2005, beginning of 2006, I made a similar decision. And, but it really wasn't until, you know, September 2008, that I think, the markets and everybody else really realized the crisis, you know, so that's, you know, almost three, you know, plus years later, so these things do take a while to work through, it's one of the reasons I love real estate, right is because you do get, if you're paying attention, you do get, you know, you do get to see some things ahead of time, if you're looking at the right things. Drilling in on, you know, so have you guys worked on models around like, okay, we see some softness in rents, right. And so when we get back to a normal market, where there's normal level of transactions going right, and assuming those rents stay low, right, we can start to predict maybe what starts happening to prices and that kind of thing. Does that stuff you're working on, like various scenarios, like, okay, if if rents stay at this level, people are signing one year leases now. You know, there's rent control in places like San Francisco, so even like a short-term impact the rents could potentially lock in long-term impacts on rents.

Charles Dougherty 14:01

Yeah, we do look at that. And it's really hard to judge or even quantify at this point. Because there's just so much uncertainty out there. Um, you know, going back to the whole rents thing, you know, New York and San Francisco rents have come down, they've come down quite a bit, you know, but the thing you have to keep in the back of your mind is they were pretty high to begin with. Right? So how far above equilibrium were they to, even before the crisis, value?

Sean O'Toole 14:37

Values, probably were based on those high rents and an assumption that those rents would keep getting higher right. Now that mindsets been burst.

Charles Dougherty 14:48

Yeah, yeah, I would agree with that. And, you know, again, it's very sort of challenging, right? Because if you think about You know, where values are, for example, you know, York City versus, you know, other parts of the country. I'm speaking to you from Charlotte, North Carolina. Right. And what's been happening in New York City for the past few years where there actually has been a population, you know, out-migration, right for for a lot of years now. And Charlotte has been on the receiving end of that, where we've had a large influx of population growth. So one, I'm not so sure, you know, any of that was either baked into those pricing models or not, I mean, assuming they are. But you know, one of the trends that we've kind of seen, and we're kind of trying to determine now is, you know, how how, how much of what we're seeing now is just sort of an acceleration of pre-pandemic trends. But like I mentioned, the, you know, outflow of residents from New York City, which began 3 or 4 years ago, really, you know, how much of that is just an acceleration? Now, so when you're trying to predict, you know, okay, what's, when's the turnaround? Where's the inflection point here? You know, we might actually be closer to that than many people think because, you know, we were certainly sort of saw this trend happening years ago. So it's kind of further in the ballgame, and many people think.

Aaron Norris 16:33

In California, we've spoken at the Apartment Owners Association for over a decade. And last year, the question got asked, "Are we in a, an apartment bubble?" And we sort of asked the question to the audience, "Would you buy your current asset at the prevailing cap rates?", and there was rolling laughter across the audience, and we're like, there's your answer. And that was pre-pandemic. So were we just just really taking advantage of cheap money and driving up rates to where it didn't make any sense? In markets like New York's and California?

Charles Dougherty 17:11

You know, maybe a little bit. The thing, you know, going back there was, you know, some concern with property prices for, you know, apartment buildings, especially if you look, you know, if you look where all of the investment was made, you know, unfortunately, over the past decade, the investment was centered in these places that are now being hit quite hard, like New York, like San Francisco. So yeah, you know, it's hard to say, because, again, it's comes back to a supply and demand story, you know, the supply, we were building a lot of apartment buildings and prices, were going up alongside that. If you look at the demand for apartments, you know, heading into this thing, the ban for apartments was pretty strong. Now, not saying that justifies the property put prices a lot, you know, everybody was seeing different markets. But demand for apartments was holding up, you know, even past the, our expectations, at least, because we were saying for years heading into this thing, that this was a potential area of weakness within commercial real estate. But the man kept, you know, sort of surprising and surprising. And I think it's a demographic story, when it when it sort of comes down to it. And I think that demographic story is still, you know, largely going to hold moving forward. Right, the demographic story is, if you look at, you know, you can break out the population by age, right, we have a whole lot of baby boomers, and we have a whole lot of younger millennials. Well, those two segments of the population, a lot of them are actually, you know, tend to be renters, right. So if you're just graduating college and you're going out into the job market, you're probably renting an apartment, if you're a baby boomer, you know, maybe you're sick of owning a house, you're sick of taking care of your backyard, you want to be around all the restaurants and, you know, cultural amenities that, you know, urban areas provide. So that's, that's sort of this inherent demand for, for rentals. Right now, how much does that change now that, you know, the, you know, we've had this COVID-19 crisis and things are changing. It's going to change clearly. But again, there's just so so many, you know, of this population of these younger millennials and baby boomers who are looking to retire that's going to support the man for apartments. You know, as people leave center cities and you know, the residential real estate market picks up so I'm not saying like, okay, apartments are fine, the part of markets, you know, in the Here, but I'm saying it's probably not going to be as bad as people think. Just because I think the demand for apartments is a little bit stronger, you know, than what people realize.

Sean O'Toole 20:12

Okay, I, you know, the pendulum is always swinging, right? So it's swing, swung way over here to, like, get out of town get away from everybody, right? But after a year or two of that, like I expect, people are gonna be like, Oh, my God, I want to be downtown, and I want to go to restaurants, you know, after COVID, you know, cleared up. So I think that, you know, the doom of one thing, or the other is always kind of overstated, and pendulums always swinging.

Charles Dougherty 20:40

Yeah, I definitely think there's going to be a lot of pent up demand for, like you said, restaurants or travel. I do think once we get beyond it, it's going to be, you know, it's going to be a little bit of a different story.

Aaron Norris 20:55

Has there any research done on how long so we're seven months in the work from home thing has become real popular as people plant roots and get used to that? Is this the new normal?

Charles Dougherty 21:08

I think, I think a little bit I, you know, with the way I kind of think about it, and I think other people are thinking about it is, you know, is everybody gonna be working from home forever? No. are a certain slice of people going to be working from home one or two days? A week? Yeah, probably. Right. Because it's ball, you know, we have worked from home, and has been generally successful, I'd say, right, for both employee and employer. Right, employees have been more productive than they probably thought, and that's probably good news for players. But it's really hard to replace, you know, the, the office environment, you know, as it is, and why, you know, offices sort of emerged, you know, as something that, you know, we do in our workforce. Right, so it's hard to replace the collaboration, the productivity, innovation. Yeah, that's the other side of it, too, I think is, you know, you know, some people like working at home, some people like working at offices, and they genuinely, genuinely look forward to getting up and going in and being with their co-workers, they find themselves more productive in the office environment. And they kind of view it as sort of a second home, right? So they enjoy that and that's part of, you know, the contract where they, they say, I'm working for you, and I'm going to give you, you know, 8, 9, 10 hours of my day, and this is where I'm going to be. So it's certainly, you know, the office I think is going to be still be the predominant, you know, workspace, right. But I think what's going to happen is, you're going to see this hybrid, you know, workforce where, okay, if you know, you really don't have to be in the office, and if you do have to be office, maybe it's one or two days a week, so we're going to kind of keep up with this work from home policy. Um, so that's probably more of the, you know, the longer-term thing that's going to happen, because, you know, on the other side, you know, employers, you know, because of everything that's happened, everybody's, you know, facing these really large financial pressures. So employers are at the same time looking to say, hey, how can we reduce occupancy costs, so that might be a win-win, where you can reduce occupancy cost a little bit, but while maintaining us, you know, similar levels of productivity growth that you saw beforehand. Um, so again, that could be a win-win a hybrid workforce.

Sean O'Toole 24:01

I'll jump a little into data. And, you know, so as a real estate economist, right? You're looking at lots of data, and what are your, What are your favorite data sets or data indicators or releases from others? Or just, you know, wide open there? What are the what are the things that you like, can't wait to get each day, each week each month? Whatever?

Charles Dougherty 24:28

Yeah, that's a that's a good question. So the vast majority of data or economic data that we look at, are either lagging indicators, or coincident indicators just meaning that's what's happening yesterday or today or what this happened last week or last month. But in those you know, buried in some of these indicators are leading indicators are by far my favorite thing to look at, because they make my job easier, because we have to kind of predict what's going to happen. So I'll give you an example. Yesterday, you know, housing starts report comes out. Okay, the big number is okay, housing starts rise. One 1.2%. Yeah, the bulk of the game was in single-family construction, what multifamily construction fell in a big way? Yeah, but underneath that what we saw is building permits. So before you start anything, you have to file a building permit. So what we saw was, okay, a big rise and single-family permitting and, you know, some weakness in multifamily permitting. So that kind of gives you Okay, well, if you think about permits, you know, 90% of permits eventually become starts for that a month or two. So that tells you something about what's going to happen next month with housing start, so let's just say, Okay, now, next month, single-family housing starts really strong and multifamily permits or housing starts, you know, might be weak. So that's, you know, an example of that. Another example is, you know, today, you know, mortgage applications came out. So this is another favorite indicator of mine, because they come out every single week, and they tell you, you know, okay, what's the man for homebuying? out there. So, you know, we all did this really strong, you know, recovery in purchases, or purchase applications, since about April, they've kind of leveled off in recent weeks, and they kind of continue to soften a little bit. So that tells us, it's like, okay, how's the market, people are still buying homes, you know, at a pretty rapid and strong rate. But the fact that mortgage applications for purchase have sort of come down a little bit, that means, you know, we're not going much higher, to be strong, but we're not just we're not gonna continue to be on that growth path up, you're on just a few months ago. So this types of leading indicators, I think, are, you know, my favorites, and what I, you know, get out of bed for.

Sean O'Toole 27:07

Awesome. Now, what else? Maybe a kind of a top 5 or 10 list of other things, you watch that forbearance data? And are you looking at? Are you mostly looking at data that others have compiled? Are you looking at raw, you know, data, like public records, unit data and that kind of thing as well?

Charles Dougherty 27:32

So, all of it, right? So one sort of interesting thing that's happened, going back to, you know, COVID, broke our economic models, is we, as an economist, we are looking for any type of indication that might give us, you know, direction, on what the next few months are going to tell. So that means looking at every possible data source that we can find, and sort of judging on how valid or how robust that data actually is. So we've looked at a ton of sort of what you might call, like a high-frequency data set. You know, for example, Google has a lot of high-frequency mobility data. There's a company called home base that, you know, gives you no indications of how small businesses are doing in terms of hiring. So we're looking at all data across the board, and through this interesting thing that's happened is, you know, we've come to more rely upon that sort of all these alternative data sets to sort of help us form judgments about you know, what's going to happen.

Aaron Norris 28:46

How close do you pay attention to politics at the state level? So California example in the commercial spaces, considering the Proposition 15, which will split roll taxes, and has the potential to change some values, I would think?

Charles Dougherty 29:02

Yeah, we, so we do pay attention to local, you know, state and local level, you know, politics, we stay away from Propositions and things like that, or pop potential policy changes, because there's always different things floating around and you're never sure if they will actually come to fruition. Obviously, we kind of stay away from, you know, those sort of granular type, you know, propositions, where, you know, we're not exactly sure what the impact is going to be because of all those different factors. So, you know, we pay more attention to, you know, what's happening nationally. Of course, we've got a big election coming up. We've done a lot of work on trying to figure out, you know, how that's going to impact the economy, how it's going to impact certain areas of the economy. It's very difficult because again, you know, 2020, who knows what's gonna happen? Once we, once we actually know, you know, the who's going to be in place, then we can kind of start to really dig in deep and say, Okay, this is how x, x-y is, so, why x is? Etc.

Sean O'Toole 30:16

You mentioned we we talked to Doug Duncan a few weeks ago, Chief Economist at Fannie Mae, and, you know, he said, one of the things they worry about for housing is what the impacts to small business are going to be. And you just mentioned a small business, it's kind of like a company you looked at for small business, hiring. What about closings and openings? Is there other things that are, How much do you look at that small business data? And how does it play into your housing models or real estate models?

Charles Dougherty 30:46

Ah, so it plays more into, you know, the judgmental aspects of our models, you know, what that means is, you know, we have models, and we have very specific variables that drive the models, small business formation isn't a big part of those. But we do have a, you know, this judgmental aspect where we can, you know, look, see what's happening, you know, at a large scale and say, Okay, this might this might affect, you know, that this housing market, or this might affect, you know, demand for office space. So, it's certainly something we pay close attention to more on a national scale, Wells Fargo actually has a small business survey that we release on a quarterly basis. So that's shown, you know, generally what you would expect, where we saw, you know, confidence, small business confidence kind of, you know, plummet earlier in the year, and it's come back, but not to the extent where, you know, you could say there's a full recovery. Overall, you know, I think we're all aware at this point, that small businesses are probably been more impacted by everything that's happened. And compared to, you know, larger companies with bigger balance sheets. So, you know, there's not a whole lot of great granular data on this, you know, one of the things we're actually looking forward to, which will provide more detailed estimates, is, you know, the 2020 census, which should give you have better, you know, indication of business formation, and how actual counts of, you know, small businesses have either, you know, grown or declined as a result of this pandemic. So, of course, it's important, you know, there's a whole lot of small businesses out there, it's, it's a, it's a big thing that's going to have long lasting impacts, we just don't have all the data to sort of quantifying what those impacts are not debating.

Aaron Norris 32:55

Is there any concern about the census data being impacted by COVID at all?

Charles Dougherty 33:01

I think so, I mean, if you if, you know, this census is a very, very important thing that we do in this country, because a lot of the data that we get is sort of derived, you know, either directly or indirectly from census counts. So it's extremely important for a whole lot of things. And if you look at through some of the data that the census has been collecting, over the past seven months or so, you can tell there there has been an impact and not necessarily it's not the fault of the census. It's just they have to go and a lot of times, you know, either make phone calls or figure some way out to contact, you know, households to get information. So one of the things that happened, if you pay attention to homeownership rates, right, you see if you know, what happened in the last quarter of data that we got it was it showed the strongest rise in homeownership, you know, on record, right. So, that's the data says, Now, is that data, correct? Or is it as correct as it could be? Probably not? Because if you look at what the census said, they kind of admitted, they said, Hey, you know, we can't go house to house anymore because of social distancing. And, you know, these new COVID norms. So, you know, we relied on phone calls, and we got a very low response rate, that low response rate makes, you know, us making or there an error makes more likely there's an error in this data. So this is the data this is what we collected, it showed a really strong rise in the homeownership rate. I'm sure homeownership did rise because of everything else that's happened that we can, you know, we have better data on. But that's just one example of the challenges I think the census is going to have with collecting data. Very important.

Sean O'Toole 35:00

Could be it was just easier to reach homeowners and it was to reach renters? Yeah.

Charles Dougherty 35:05

Yeah, that's true. Yeah. Yeah. Yeah.

Sean O'Toole 35:10

I'm going back to small business because you cover all real estate, not just housing. Right. So we talked a little bit about multifamily and the outlook there, where are you guys on, you know, retail, and we'll start with maybe retail, and, you know, office, and some of those places that, you know, we're small impacts, the small business may have a pretty big impact on the underlying real estate values.

Charles Dougherty 35:37

Yes, so, uh, you know, real estate, or retail, excuse me, retail is one of those areas that it's sort of been in dire straits. You know, even before the pandemic, it was, it was tough going, you know, for a lot of the retail sector and clearly, you know, one of the biggest impacts there, and we're sort of seeing this even clear now, is, you know, competition from E-commerce retailers, like, you know, all the big names, right. So, you know, that, unfortunately, is going to cause some weakness in the retail sector, you know, probably over the short term, over the longer term. However, you know, retail is the sector, and that's the thing that's always been in the state of flux, right. So if you go back to the 50s, in the 60s, that was, that's one of the malls sort of, to, you know, crop up around the country, you know, big-box retailers, and, you know, you know, for that it was these huge department stores on every corner in every city. So, there's always been this, you know, this, you know, continuous state of flux and retail. So, you know, the way you know, I do things is, you know, with E-commerce coming in, and taking out the ever growing share of transactions, right, in that market, you know, eventually, you know, we're going to continue, that's, that's gonna, that effects gonna be there, right, we're gonna see more retailers start to implement that and work with that. And we probably will see a turnaround, you know, sometime, probably sooner than what most people are expecting, you know, in retail properties that, you know, the things are, will adjust, I guess, is my point. You know, if you think of some of the things that we're seeing success beforehand, some of the retail properties, were moving away from enclosed indoor spaces anyway, and they were more walkable and outdoor, you know, I think that fits very well into, you know, what a post COVID environment will look like, in terms of retail space, because I think, you know, I think people still, people still like to go to retail stores, right, there's obviously things you can do, you know, more efficiently online more that stuff will move online, right, people still like to go and, you know, try on clothes to certain to a certain extent to, you know, engage with different products, learn how to use them, you look at younger demographics, Generation Z, you know, there's some early evidence that they, you know, sort of like to go out and experience, you know, in-store shopping more than other generations. So, I think, you know, I think the turnaround in retail is probably coming a little sooner than what people would expect. That's not to minimize, you know, retail is certainly has a few headwinds ahead of it. But yeah, I think that term is coming, you know, sooner rather than later. Um, you know.

Sean O'Toole 38:50

So for thinking that the mall isn't over yet.

Charles Dougherty 38:54

Yeah, right. So yeah, so there. I mean, if you look at other, you know, types of commercial real estate properties, um, you know, we talked about offices a little bit, and I think, you know, the big things, limiting offices right now, you know, is again, going back to this uncertainty where, you know, nobody really knows when that return to the office is going to be, we're fairly confident that people will eventually go back to the office. And I think employers are, you know, sort of anxious to get their employees back to a certain extent. So, so it's just that it depends on the timetable for the virus, which, frankly, nobody really knows. Probably next year at some point. That's when you know, companies will have more than an idea of how much office space they really need. They'll probably have firmer plans put in place with, okay, this part of the workforce is going to stay at home, this part of the workforce can come into the office to do these rotations, or come in and staggered shifts, etc. Next year, you know, that'll probably, you know, start to take hold. But the good thing about the office market from a, you know, high level is, you know, heading into this thing, the office market was in a pretty good spot. Now I'm talking about in terms of supply and demand, we all know what can happen when you have an imbalance and either of those too much supply, were too little demand or vice versa. So the office market was really balanced, you know, as of, you know, early 2020, right. So when you're coming in from a position of strength, that's going to allow you to recover quicker, so we weren't over-building, we didn't build too many offices, you know, over the past 10 years. So hopefully that, you know, that sort of seeds the ground for faster growth, sooner, which would be a good thing.

Aaron Norris 41:07

While we're talking about office, I was just thinking, you know, the company brand I have not heard of in a while WeWork. Is coworking sort of passes now. Is that so, you know, 2019? Are we going to see a comeback?

Charles Dougherty 41:20

That's, that's a good question. That was certainly an interesting trend that we saw, you know, over the past few years, and then, you know, if you just think about, you know, what's happened with, you know, in terms of social distancing, and just a general aversion to, you know, enclosed indoor spaces, that would make me you know, more pessimistic about, you know, coworking, you know, rather than being an optimist, so, I do think it'll be challenging for coworking companies, and when, you know, wasn't as we work, there's a whole list of coworking companies that are in basically every major market. And, you know, what they kind of have to offer is kind of interesting. And I think one of the good things about coworking space was always that, you know, it wasn't just, you know, for entrepreneurs, or people, you know, starting their own businesses or things like that, you know, we saw some really large companies leasing up, or subleasing space, you know, with some of these coworking companies. And we actually thought that was kind of that was good, because if a company was trying to test out or stick their toe in, you know, in a certain market, they could go in and, you know, lease, or suddenly some space for, you know, and not make that longer-term commitment. So I think, you know, it kind of grease the wheels, few companies expanding their footprint, which I think was a good thing. Unfortunately, you know, everything that's happened over the past few months, you know, kind of make that challenging.

Aaron Norris 43:01


Sean O'Toole 43:01

We actually, I have a tenant in one of my office buildings as a coworking space, and he is desperately trying to expand, because he can put fewer people in, and he's got more demand than he's ever had before. But we are in a little bit different situation, we're in a resort town that everybody is moving to, and then realizing, okay, I got to get away from that.

Charles Dougherty 43:26


Sean O'Toole 43:28

Whatever. So it's a little bit a little bit different. But, you know, you know, there was, there's coworking but I also wonder about, like, you know, if this desire for? Well, I think, one thing that might come out of this is for businesses to have a desire for greater flexibility. So maybe they're changes in leasing terms going forward and changing in you know, rather than vanilla space that you come in and spend so much money building out. You know, coworking kind of pre-builds out these really beautiful spaces for you and gives you a more flexible term than you'd get normally when you take over floors of a building or an entire building. Do you think there'll be a trend more? You think we'll see some changes in the underlying contract terms going forward?

Charles Dougherty 44:21

Oh, yeah. Without a doubt, I mean, if there's anything, you know, I think we're starting to see changes around the margins, right, with a lot of everything, certainly for you know, leasing terms and things like that, um, hard to say what those, you know, larger scale impacts are going to be but, you know, if there's one thing we know, changes around the margins can have really big impact. So, I think, you know, of course, we're going to see those types of changes or companies just and, you know, occupiers sort of figure out what they need and what's gonna work best for them. So yeah, absolutely.

Sean O'Toole 45:03

So landlords that want to stay ahead of it and don't want to have vacant space and start thinking about air filtration systems and, you know, maybe pre-designing space to be a little bit more COVID friendly, maybe move back towards individual office versus so much open space, some of those kinds of things might.

Charles Dougherty 45:24

Yeah, yeah.

Sean O'Toole 45:25

Gets built going forward. Right.

Charles Dougherty 45:28

Yeah, you know, higher rates of technology adoption is something we see a lot of companies doing, you know, it's could be as simple or complicated, I'm not sure, but as, you know, installing specialized buttons on the elevator or something like that. So you don't have to touch it or, or, you know, things like that, or installing, you know, generally just more technology that allows you to know, you know, abide by all these social distancing requirements that we're going to see. And surely all these companies are going to need to implement. So that's Yeah, that's just one example, I think of something the company should probably think about moving ahead.

Sean O'Toole 46:11

I think a lot of people spend so much time thinking about all the negatives of this, but there are a lot of positives and a lot of opportunity, as well, I think even for those building owners that maybe are, you know, struggling right now, if they look at the opportunities and the way to do things differently, right, they probably are going to be the first to recover.

Charles Dougherty 46:33

Yeah, yeah, I think that, that that's true, you know, I always try to, you know, light a candle versus, you know, cursing the darkness, and it's looking ahead, there are definitely a lot of, you know, things that could be positive, you know, coming out of this, you know, especially, you know, across a broad number of commercial real estate properties, and one thing that we're kind of seeing right now, and, you know, industrial properties are doing very, very well. So this is another trend that we saw before, you know, there has been an impact, for sure, from, you know, just the drop in global trade, which you know, a lot of industrial properties are involved with, but if you think about, you know, what's happened to retail, and the opposite end of that is, you know, we need a whole lot more warehouses and distribution facilities, sortation centers, and things like that, right now, as these companies, you know, these e-commerce companies sort of continue to expand, what we're seeing is, these were more and more warehouses pop up, not just in the outskirts of town, you know, in where wherever the real estate's cheapest, but they're getting closer and closer to basically every major market. So that's, you know, of course, to, to, to get, you know, as fast as delivery as possible. So, that's it, that's a huge bright spot, and that's probably not going anywhere, you know, for for a long time. So if you're looking for, you know, things to look forward to, you know, this rapid acceleration into Ecommerce and to infer company's abilities to ship things through to customers in a very rapid time, you know, that that's, that's here, and that's gonna be that's going to be, you know, something, though, it's gonna be a big positive move ahead.

Aaron Norris 48:30

Hospitality space, any opportunities there that you're saying?

Charles Dougherty 48:35

Yes. So, you know, clearly hospitality is, you know, it's a, you know, if not the most impacted part of our entire economy right now, is, you know, hospitality, hotels, restaurants, you know, large events, spaces, unfortunately, it's going to be a, you know, it's going to be, you know, a full recovery, there's probably some ways off, you think that was probably the first hit hit, and I'll probably be the last to recover, unfortunately. And that's just because, you know, all of this is very close contact, in person, you know, type of activities. So, it's just one of those things that's going to depend on fully defeating COVID-19 and the pandemic and then we can start to fully think about recovery. I mean, we are starting to see, you know, I was just looking at hotel occupancy rates nationwide, right and we've seen hotel occupancy rates have come up, right, they went down, you know, they plummeted really, they went down from, you know, high 60s to, you know, 20% around there, you know, the depths of the crisis. So they've come back up, the accuracy rate is right around 50% right now, nationwide. But still, there's that, you know, like I said, I was probably around 70%. Last year at this time, so there's still that gap that needs to be made up. And, you know, what can you know, what can happen there? You know, obviously, you know, I think people are a little, you know, space confined and sick of being at home. So I think travel, leisure travel probably picks up I think, I think people, you know, are generally a little bit more okay with going and staying at hotel than they were, you know, a few months ago, you're probably not thrilled about it. But I think that's, that's improving and improving as we go on. The big thing holding everything back there, though, is international travel and business travel. So business travel, probably isn't going to come back for you know, some time, again, as based on the virus, I think companies are going to be very cautious and sending people in a big way back out in the road. You know, an international travel is sort of, you know, very similar to that. And, you know, I think, you know, officials are going to be very reticent to sort of open up the gates again. And that's just one unfortunate aspect of sort of, you know, where we found ourselves. So that's going to take a long time to come back. But yeah, I'm a little bit more optimistic on the leisure travel side. But unfortunately, you know, think business travels probably 20% of all travel. Yeah, that's that 20% gap that won't be filled.

Sean O'Toole 51:41

Is it really only 20%? I would have thought it would have been a higher percentage.

Charles Dougherty 51:46

Yes, we looked at data from 2019. And that's what it was. So I'm sure it fluctuates. But that's, you know, that's the numbers we came up with, at least according to the ITA, travel agency. But yeah, it's it's it's certainly a big slice no matter of you know, what the actual number is? And unfortunately, it's going to remain very depressed.

Aaron Norris 52:14

Are you fairly positive overall on where we're headed? And is there anything if it happened in the next several months that you'd sort of step away and say, Nope, gloves off now? This is a freefall?

Charles Dougherty 52:27

No, I do think we, you know, we are on the path to recovery, right, which is where you want to be at this stage. Now, the question is, can we get where we're going faster? Or is there going to be something that slows us down? I think, you know, if you look at the general, you know, economic drivers that, you know, kind of determine where commercial real estate or where residential real estate is going to be. Those are looking pretty good. And we're still making gains. Now, the thing is, those gains are becoming smaller as we go, you know, move ahead, which is one, a consequence of just the depths of the losses that we saw in the early spring. So it's really natural to have, you know, some cooling or moderation there. But we are, yeah, we are firmly on the path to recovery. You know, it's, it's going to be a long road. There, probably some things that could happen to get us back to where we were, at the start of the year, a little bit quicker. But right now, you know, we think, you know, if you think about real GDP, you know, the economic growth that we kind of pay attention to, you know, our forecast calls for us getting back to where we were at the start of the year, right in round 2021 Q3. Right, so that's about eight months away. So it's still gonna be a little while till we get there. But we are on the right track. So that's I'm sort of, you know, cautiously optimistic, that we'll continue to stay on that track. And then maybe, you know, we get some upside surprises as we move forward.

Aaron Norris 54:24

And one more question, the no matter who wins the presidential election, is there any thought that some people are just on the sidelines waiting for some kind of stability, or at least what the next four years might look like to get off the fence? And maybe we'll see the numbers increase again.

Charles Dougherty 54:41

Yeah, that's, that's always a possibility. You know, we did look and it's really hard to say because, you know, just everything that's happened in 2020 it's just completely you know, it's just you know, all Yeah, whatever. But yeah, Anyway, we did look at the impact of elections in our economy, you know, in prior years, you know, and we, what we came up with is, you know, do elections impact the economy? You know, a little bit, you know, to the results of the election impact the economy more, yes. So one the election itself. You know, if you hear reports saying, okay, there's stock markets going to tank, we're gonna go into economic oblivion, if X, Y or Z is elected, that's probably not true, right? But the outcome of the election, you know, Republican, Democrat, the outcome of, you know, the makeup of Senate and the House of Representatives, that's all very important, that'll have an impact on the economy, but the election itself is not going to impact the economy. So we just have to wait and kind of see, okay, you know, what are the results? How is that going to impact things? How's that going to impact, you know, real estate? Because there's definitely a lot of important policy proposals that I think both candidates have, and that are, you know, up for, you know, up for change, really, and that will have direct impacts, but we just kind of have to wait to see you know, what those results are gonna be.

Aaron Norris 56:23

We're at that time mark. If one more time if people could find out where they would best connect with you online.

Charles Dougherty 56:33

So if you go to, all of our information or reports, our forecasts, everything can be found on there, and you can sign up for our email distribution list, and get everything sent to you directly.

Aaron Norris 56:51

Sounds great. Thank you so much for your time today.

Charles Dougherty 56:55

Thank you.

Aaron Norris 56:56

All right. Thank you for listening to the Data Driven Real Estate podcast, you can find show notes and links to some of the resources mentioned in the show at Click that join the community. And you'll be forwarded to the property radar community where you can ask questions about the current show and even see upcoming guests and ask questions there. We'd love to engage with you in the community. So check it out. Please don't forget to like favorite, subscribe and share on your favorite platform where you're listening to the show. It helps us out a great deal. Thanks for listening and we'll see you next week.

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