#365 - Mark Gibson - CEO @ JLL Capital Markets - In-Depth Analysis of Current Real Estate Market (2H 2024 - 2025)

Chris Powers: Mark, thank you for joining me today.

Mark Gibson: It's a privilege, Chris. Thanks for having me. 

Chris Powers: It's a privilege to have you here. I know today will be insightful. So, I'll ask you a loaded question to start. You're the CEO of the capital markets team at JLL. So, what is going on in the real estate capital markets at a high level? 

Mark Gibson: It's a pretty broad question there, but I'll do the best I can to answer it. So, we have been stating the following to folks. One is that there really isn't lack of capital. Some people would debate that just because they can't get debt or they can't get equity, but the reality of it is they could, it's just a matter of price. No one likes the price. So, you've had a vast bid-ask gap between the buy side and the sell side if we're talking equity. And on the lender side, it's the same risk that they're trying to price. So, they're going to be much more conservative than what folks were used to prior to the Fed raising rates the way they have. And then, you're going to have the consumer of that capital, the borrower going, gosh, I need something more than 40 or 50 % and I'd rather not pay what I have to pay given where I come from. So, there's been this bid-ask gap in both the debt and the equity markets. Having said that, if you found price parity between the two, no lack of capital, people have plenty of capital. So, that hasn't really been the issue, and we have done multiple, multiple billion dollar plus transactions where we met parity on price, either debt or equity. All right. So, fast forward, the Fed has done what they've done. We're now at the point to where the Fed chairman has come out and said we're going to begin to lower rates, which in and of itself is interesting and most of your listeners have been reading the press only. And the press has been quite negative on commercial real estate, which we did not agree with because, frankly, commercial real estate has performed. So, there hasn't been a demand issue. The issue has been cost of capital and loan rebalancing or derivative contract expirations. And that is a result of an inverted yield curve where the Federal Reserve’s utilizing monetary policy to defeat inflation, which they needed to do, just as a fact. But what people miss is that while that caused pain, it wasn't the real estate assets themselves were actually performing quite well during this period of time. It's just when your cost of capital increases 300, 400, 500 basis points, it makes debt service a little different. And it makes loan to values a little different because no one can agree on value. The inverse is true, too. So, when the short end of the curve, we'll call it the normalization of the yield curve, when that begins to drop, then real estate by and large, with a few exceptions, office being one of them, self-corrects because the pain was not demand, the pain was cost of capital. But that's not getting any press right now. And I think what we've seen over the last quarter are several things. One is the sell side of the equation, so you've owned real estate for a while, if you've been in partnerships for a while, if you've been in a certain strategy for a while, if you've been with a certain GP or you've been with other LPs, once every 12 to 15 years, things change. And we're in the middle of one of those. So, people, when I say people, capital, is looking at different strategies, different solutions, different GPs, different ways to play the current market, which is interesting. So change is happening there. And they're essentially going, look, if I don't particularly like what I want, I think the bond, the 10 year bond is what really matters to institutional investors, not the short end of the curve. And they're thinking the bond is going to settle, who knows, but I'm just repeating, 3.5 to 4% in general. So they don't see that much yield compression, if you will, over a 10-year IRR hold over the 10-year risk-free rate. So we've kind of pat on where the 10-year bond might end up. Who knows, again. And as a result, they're more convicted from a sell perspective. So, we're seeing more capitulation in the market, which means more product in the market. And as well, the buy side is getting much more positive on buying today at today's values and where the seller is willing to sell. So we see the bid-ask narrowing. So therefore, transactional volume we're beginning to see come back a little. Now remember, it's now 50% from normality, whatever you may want to call that. So, it's been pretty tough out there transactionally because of this bid-ask gap, but we're going to see that change. And we'll see if it holds. As soon as we think we have a strategy and a defined trend line that we're seeing, things change. That's been the normal over the last three or four years. Hopefully, we're going to get back to real normal, which is pre-pandemic, without the ups and downs and various things that we've all dealt with. We're beginning to see some normalization come back in both the equity and the debt market, particularly in the transactional side of things. 

Chris Powers: When you say 50% down on transactions from a normal market, you're going back to maybe 2019, 2020, not off of like 2022 highs or-? 

Mark Gibson: Well, if you look at the high was 2021. But we're down 50% from 2022. So not even pre-2020. So it's just been- and again, it's a classic bid-ask gap. And by the way, we have a lot of people that haven't been through cycles, that you talk to and that are investors of yours, I'm sure, that haven't been through multiple cycles. So, this is not abnormal. So, this is really normal. When you have inflation moving the way it's moving, the Fed needs to react. Its primary tool is monetary policy, which is raising short-term rates, but it also has other measures that it's put into place. And its goal is to conquer inflation. When that happens, capital flows and transactional flows pause. Because everybody's trying to figure out, well, is this temporary or is this the trend line? Is this longer? You've heard the narratives – hire for longer and all these various things. That becomes a narrative and people are trying to figure out which way to go. Their jobs are at risk, so they don't want to make a mistake. So they're going to wait until it's overtly clear which way to go before things ease up a little bit. So, a stat for you here is that the machine is working. The debt market, if you look at the public side of the debt market of CMBS and SASB, it's running at 2 to 2.5 times the pace of play that it was running at this time last year. So, the public debt market is freeing up and beginning to work efficiently, which has been challenged. And conversely, the private side. So, when you look at the banks or the insurance companies or others that are primarily lending in that world, the payoffs have accelerated faster than they anticipated. So, their liquidity is much more improved than they budgeted, and they're now back on offense and lending. So, you're beginning to see things really begin to normalize is the word that I would use, whatever normal is these days, but it's a heck of a lot better than it was over the last two years. 

Chris Powers: Twelve months ago. I believe you sit on the Federal Reserve, a board of the Federal Reserve? 

Mark Gibson: No, they call every once in a while and ask me to come in and have a chat. 

Chris Powers: Just to the extent you can share, how have they thought about rates? I mean, you've kind of talked to people close to the vest. How do they come to the decisions that they're now making? 

Mark Gibson: Well, I'm not an insider and I'm not on the board. So, what I say is very smart people at the Fed, which I think we all know, they were very focused, as they should be, on concurring inflation. We will see if they have, but it appears that's the case. The market certainly thinks that. They rely quite a bit on data because they are very focused on making certain that they are staying true to the mission. So, you have to be certain of the data, and you don't want to be caught flat-footed with a false trend line or a false narrative or whatever it may be. So, they want to see the data, and they want to see it consistently marching along. And I think what they have been doing really well this time is they've been talking to industry experts across every industry, trying to get a real sense of what is truly happening on the ground. Because the data that they look at, unfortunately, lags. So, they're trying to do the best they can to look a little bit ahead and make the most informed decision they can. So, I think their number one mission, which they've been very vocal about, would be to conquer inflation. We'll leave it to your listeners and other practitioners to determine if that is the case. If you believe that is the case, which again, just to be clear, I'm not suggesting one way or the other, but if you believe they've done a good job and if you believe that they have a mission to conquer inflation, then it's pretty likely at some point in time, then you'll see this normalization of the yield curve that Powell has indicated is likely to start happening. And you'll see that if the trend line holds, it accelerates faster than most people think. And we'll see what that means over time. But I think they've used every tool they had at their discretion to use to help conquer inflation. On that note, Chris, just because it has been a confusing time even for people that have seen multiple cycles and do this every day, someone like myself, and the reason it's a little more complex this time as an investor is the federal government has been spending an enormous amount of money and injecting an enormous amount of money into our infrastructure. There's plenty of bills out there and everyone has a favor monitor. But they have been spending quite a bit in the marketplace. So we'll call that the public side of the house. But at the flip side of it, in a diametric opposite manner, the Federal Reserve has been restricting capital and money supply. So, you've had these massive forces of government stimulus in the marketplace combating monetary policy. That's pretty confusing. It's beginning to parse itself out, which is good for investors. I think what the investor needs is consistency in both narrative from the Federal Reserve as well as just month over month type data that we're beginning to see happen in the marketplace. Everyone should give themselves a little grace that it has been confusing and it's been confusing because we've had two of our most powerful forces in the US economy doing polar opposite things. 

Chris Powers: On that note, when Goff was on earlier this year, he was just saying I think kind of what you were just saying, but in typical rate hike environments and recessions, you lose a lot of the construction jobs, you lose a lot of call it real estate related jobs, but if you talk to most builders today, anything they lost on the private sector, they've gained on the government sector doing infrastructure projects, and those are not really impacted by interest rates. So you can raise them as high as you want, not maybe as high as you want, but all those jobs are just ending up somewhere else where they're paid more to do more. And so, it's been tough to monitor inflation. 

Mark Gibson: Well, probably my only value add to your podcast today is going to be that you should listen to John Goff versus myself. That is exactly what you should do because he's right in that regard. So, I wouldn't say it's resistant. What I would say is it is muted and taken longer for the Fed policy to work for exactly the point he made. 

Chris Powers: If rates start cutting, do buyers raise their bid or do sellers raise their ask? 

Mark Gibson: It's a great question. So, let's talk about what I've just said. So, what are the practical implications of capitulation from a sales side and more conviction from a buy side? So, what are the practical implications? Well, one is you're going to have more product on the market. Normally, that affects price because investors have more options. If rates start cutting at the same time, then you can manufacture a better levered yield, not unlevered, but a better levered yield to make pricing perhaps be more competitive. So, you have those two forces at work. We'll see who prevails. But generally speaking, when you have a declining rate environment on the short end that is federal reserve led, it's generally because we have an issue in the economy. So, you have to start thinking now about demand, and I have previously stated that we really haven't had an issue with demand, that we've been fairly resilient in occupancies and various product types. Again, I made an exception of office, but generally speaking, there has been resiliency and demand. There have been pockets of oversupply in certain product types, et cetera, that have caused some rents to vary across the board. But generally speaking, it's been a pretty salty and good, I would say, demand side of the equation. Well, most people would sit back and go, that's been great, but it's also been quite some time since we've had a real cycle downturn. And so, is that this time when the Fed is suggesting that now is the time to start raising rates? Because you've seen the job reports and you've seen others to be less robust than they were. And so, that is the real question as an investor. So, your question is actually difficult to answer because you do have counter-prevailing forces in the marketplace. You're going to have more supply, you're going to have a better cost of capital, that could be interesting, but then you have to look at the demand side of the equation and how do you really underwrite that risk. So the risk for the past three years has been how do I underwrite the risk of a rising cost of capital? It hasn't been a demand question. It's been an inflationary concern. Well, now it could be the opposite. So we have to be mindful of that too.

Chris Powers: Is there any data you're seeing from the big corporations? Are they pulling back? Are they getting a little weaker? 

Mark Gibson: Everyone can read shareholder reports and quarterly earnings reports from every company listed on the New York Stock Exchange. So, everyone can take a look at that. What I think is interesting is I think where there would be no debate, which is a hard statement to make these days because everyone can debate everything, but I think where there would be little to no debate would be that companies are finding it difficult to pass along price increases to the ultimate consumer. I don't think people would debate that. So, as a result, if you have embedded cost increases due to labor or materials or whatever it may be, even though we're beginning to see material prices decline, you do have an embedded cost structure. And so, the question is, what do you do? Well, historically, what happens is they have layoffs. And you're beginning to see that in the job numbers. So, if you have layoffs and you have no more- you've got to get more lean. You have got to become very focused on productivity per employee. And that is what we see, which probably we'll come back around when we talk about office and productivity and things like that. But I think you're seeing most large corporations, again, there's always going to be anomalies by industry, but most are, I'll make this statement because I think it's not only for commercial real estate, I think it is also for corporate America, and that is operational excellence will be the catchphrase, the narrative, what everyone is going to be talking about versus financial engineering. Vis-a-vis cost of capital or where interest rates may be or may not be or overall cost of capital where it may be, they're going to be focused on being excellent at the operational side of their businesses, both from a commercial real estate standpoint as well as a corporate manufacturing standpoint. 

Chris Powers: This would be a perfect time, I wouldn't have been able to ask this question if we hadn't talked about it at lunch, but when you talked about layoffs at corporations, you told me there's something called the Detroit effect. Can you explain what the Detroit effect means? 

Mark Gibson: So yeah, Chris and I were chatting at lunch because there is a silver lining to a recession, and it was called the Detroit effect, which in essence was coined due to the cyclicality and decades past of the auto industry in Detroit going through boom-bust cycles. And what a few economists discovered was that, inevitably after a recession where there was a layoff period of time, the economy of Detroit boomed three years post. So, they started looking into that, and the answer, there were multiple answers, but the predominant answer was the layoffs there resulted in numerous entrepreneurial startups. And a percentage of those made it, which just buoyed the resulting economy of Detroit. So not only did you have the automakers recovering as the cycle ended, but you had all these new businesses that had formed as a result of the layoffs, but it took three years to see it. So that is the Detroit effect. And in a recessionary environment where you have an entrepreneurial framework and you choose your city or your state, you have to have a regulatory environment and an entrepreneurial, we'll call it VC, venture capital funding type situation. We've seen this play out in multiple cycles over time. 

Chris Powers: I love it. I'm going to start telling people about the Detroit effect. 

Mark Gibson: Well, don't attribute it to me. It's out there. 

Chris Powers: Real quick on that, I think it was a presentation probably a couple years ago that JLL put out, but it's been everywhere. ’21, ’22, you saw a lot of people moving out of gateway markets into Sunbelt or other markets. Is the population migration slowing down? Is it still at the same pace? How are you thinking about where people are going to end up from a demand perspective? 

Mark Gibson: So, just like anything, I'd rather just talk in facts instead of opinion, which by the way, I should have said this at beginning – I'm going to tell you facts not opinion. If you ask my opinion, I might give it but doubtful. But the fact on that is we have been in the same migration period both from a job standpoint as well as a population standpoint for a hundred years. So, if you really have students of demographics as part of your listeners, they can go look at the US census data for the last 100 years, and you will see a defined migration out of the northeast and midwest to the southeast, southwest, and west. And it accelerated during the pandemic for all the obvious reasons. And that pace has slowed, but the pace is still there, for sure there. And when I say slowed, it just accelerated at a really fast pace versus historical averages. But a couple of things, corporations are moving across state lines at a faster pace than they ever have in history. If I were a real estate investor, I'd probably be looking at where those corporations are going and are they in industries that I think are growth industries because, generally speaking, population follows jobs. And so, you’ve got to think about that. And then, of course, you have all of the other things that never go away. You have quality of life, you’ve got commute times, you have regulatory environments, you have all these other metrics that people look at to determine locations. I will tell you that institutional investors, probably for the first time in my career, so going back 30 years, are spending more time studying population and employment shifts by industry and by zip code than they ever have in terms of making bets as to where from a geographic standpoint. We're no longer betting on just highly urbanized populations. We're really looking at migration trends. So it's a great question, but it's been a trend line. It's not new, let's put it that way. It just accelerated a little bit. 

Chris Powers: You said that the deals that are getting done today are where the pricing parities come together. What's the trend line of what's worked? What's been working in this current year where deals have been getting done? Is it by asset class? Is it the type of groups? Is it a true buy-sell or recapitalization? What types of deals have been working? 

Mark Gibson: I would say it's all over the board. I don't think I can call out any specific one over the other. Let me just give you a quick bullet point on each, if you would. There’s no doubt, here’s another area you would likely find little debate, and that is the US needs more housing. The question is what kind and where. So, if you can go buy housing, and typically if you can buy it at a discount to replacement cost, good quality assets at a discount to replacement cost long term, long term, it works if you have the time. You may miss a cycle or two, but if you don't over leverage and you buy good real estate, it goes up. And that is historically true. Again, the qualifier being good real estate. So, if you know we need more living, then a lot of investors have made the choice that's where they want to play. And institutional investors move in scale. So, when I talk scale, I'm talking 250 million and above. And most of the things we've been doing lately have been very significantly higher than that. There are some notable trades that have happened in the multiple billion type place, but they all follow that narrative of we're going to bet on housing, we like buying good quality assets at a discount to replacement cost, whatever that may be. And they also see the fact that new product is at a multi-year low because it's just very hard to make the numbers work on return on cost. So you really don't have any new inventory coming to market from a supply standpoint. So historically, that tends to work out pretty well in the next two to three years. The industrial side of things is pretty similar. You have a bunch of on-shoring, re-shoring, fringe-shoring, whatever you want to call it, but you have, for national security purposes and just logistics generally speaking across the board, companies making certain that their supply chains are just much more resilient than they were pre-pandemic. You're going to need more logistics. And the question is again, what kind and where? And that's generally going to be around the manufacturing centers that were rebuilding the infrastructure in the US. So, that's interesting, although you've seen demand wane a little bit as we're going back to the corporate side of things there. Retail has ironically been just an unbelievably a strong performer. Everyone was very negative on retail. And it was all going to go online, which we didn't think was going to happen. And what has happened is the best business models for the retailers are those that adapted to both bricks and mortar and online combinations because that's the highest profit margin. And now, fast forward, retailers are performing incredibly well, those that have adapted their business models. And so sellers don't really want to sell them because they're doing so incredibly well. And now institutional investors are going, well, my goodness, if they made it through the pandemic and they adapted to the cycle and the new business model, there hasn't been any retail really built in a long, long time. This makes a lot of sense. So we've seen retail be quite in favor. And of the four product types, the one we really haven't talked about is office. But I don't know if you want to talk about it, but I'm happy to. 

Chris Powers: I think we should. Before I ask about office, just real quick, has e-commerce began to flatten? So there was that just, it's taking more and more market share every year. Have we hit maybe not a peak, but it's softening? 

Mark Gibson: I don't view- well, it depends, so I can't really answer the question. Some industries are accelerating, some are not. But generally speaking, I think you're going to continue to see growth there, which is great. But the business model is really sticks and bricks and e-commerce. If you figure out the proper balance in how you return items or how you select items online then go pick up, there's various strategies out there that are working extraordinarily well for the retailers for a host of reasons. So I see that balance being a cumulative positive for retail, not negative. The growth in online sales is not a negative for bricks and mortar retail. In fact, it's positive. It will vary because for a host of reasons that we don't have time to get into. 

Chris Powers: Really quick before, I really do want to talk about office, but you mentioned not a lot of housing is getting built right now, which I guess would mean ’25 and ’26, there's not going to be really any deliveries. 

Mark Gibson: I would say the market is down. Stats vary because people use different methods for calculating. But let's just say it's down 75 to 85% of normal delivery into the marketplace. Most of the people that follow living, we're talking rental multi-housing for the time being, would tell you that we're under supplied by a couple million units relative to historical deliveries as well as population expansion. So, if history holds true, and we will see if that is the case, I would say it's more like ’26, ’27 versus ’25. So probably ’26, ’27 that you see the effect of the existing supply, which we had some oversupply in the marketplace to absorb existing supply being absorbed and no new deliveries, that's going to create an interesting opportunity. 

Chris Powers: And on the industrial side? 

Mark Gibson: Same. 

Chris Powers: Same. They kind of track the same.

Mark Gibson: Ironically, they're a little bit the same in terms of supply being delivered, but the demand fundamentals are quite different. So, multi-housing is experiencing surprising growth and absorption for a host of reasons. Housing, single-family home prices are still high and it's difficult to buy a house as we all know. So it's creating outsized demand. So the demand side of that is really good. And industrial, we're in a period of time where corporations are trying to figure out what is the next strategy to grow. 

Chris Powers: On the housing side, coming out of the cycle, will we see more rental product being built or more for sale product being built? 

Mark Gibson: I think you're going to see both. 

Chris Powers: And of the rental product, obviously we need more affordable housing, everything's expensive. What are you seeing, what deals are getting done on like a more affordable type product? 

Mark Gibson: I would say that, that's a great question, Chris, a few things. One is affordability has always been a goal. It's just difficult to get. So for the first time in quite some time, you see business models of what we'll call merchant build, market rate, multi-housing developers and institutional partners of those developers begin to change business models to adapt to delivering a more affordable cost alternative to the majority of the population. So, what does that really mean? Well, if you look at the average income in a given location within a 10-mile radius, they're trying to hit 65 to 100% of the average median income of the population within that group. And they need to find rents that would be less than 35% of that discretionary income spend, generally speaking. So, if you do that, you back into the cost and you see what you do. Well, how do you achieve it? Well, one is you get vendor relationships, so scale matters, which is good. So, the larger players will have a cost advantage if they can standardize the product, which has always been the problem in multi-housing. But today, you see highly entrepreneurial and very smart business people in the multi-housing space standardizing the delivery of a product. So the same number of one bedrooms and two bedrooms and three bedrooms, the same architectural design. So they're eliminating cost vis-a-vis architectural friction, but they are also eliminating cost by buying the same roofing systems and buying the same plumbing fixtures and buying the same lumber materials and all of the various things that go into a standardized product. They're taking a page – I probably should have said this, it's a better way to say it – they're taking a page from the single family home builder playbook where, as you know, if you walk into a big master plan community, you have three models to choose from. And they build those models and you really go, well, I'd like a different thing. Well, no, we're going to build one of these three models. And they do that for efficiency and they know how to do that. They're really, really good at that. The multi-housing business is taking a page from that and standardizing the product to achieve those cost efficiencies to deliver a more affordable product. 

Chris Powers: Are units getting smaller or bigger? 

Mark Gibson: Depends. Depends on the market. 

Chris Powers: Okay. Real quick, you kind of touched on this at lunch too. I thought it was important. The importance of Mexico going forward.

Mark Gibson: Mexico has been a great trading partner with the US as everyone knows. We have NAFTA as everyone will recall and it’s always been a terrific partner. These days given on-shoring and fringe-shoring and the need for more simplified logistics chains and transportation systems, it has accelerated as a trading partner. So, you see companies, not only U.S. companies, but companies from around the world that are choosing Mexico for a host of reasons. So the demand is exceeding what I would say has been a fairly consistent story in Mexico relative to manufacturing, but it's accelerated from that point. So, I think you'll see it even more important going forward as a trading partner. 

Chris Powers: Would it be fair to say that'll have a positive impact on real estate in Texas, given that we're on the border with it? 

Mark Gibson: I'll leave that to you. 

Chris Powers: That would be an opinion. You only want to give it facts. 

Mark Gibson: That would be an opinion. 

Chris Powers: Okay. Let's talk about office. How's it doing? 

Mark Gibson: Well, I'll get to the bottom line. We think office is dramatically oversold, and I think most investors will look back in five years and wonder why they didn't make a play. But it's so out of favor for a host of reasons that it's created a really interesting opportunity. And to date, the only investors that have taken advantage of it, again for a lot of reasons, are the high net worth families. And when I say high net worth, significant high net worth families because they understand that if you buy a really good quality asset and you buy it at a discount to replacement cost and you have time, it goes up. And they're choosing the right office at the right basis to go make that play. So, go back to my company statement. There's now, when you get through all of the blather that has been in the media forever, in reality, it's been completely wrong from the start, which is productivity is better at home. Most academic studies that have come out, as well as people's own experiences, that is not true. So, you have interruptions every minute at home, generally speaking, and you don't have that in your office. Secondly, it is not young people that don't want to come to the office. It's folks that can afford a bigger primary home or have a secondary home. They happen to be the highest G&A cost to a corporation, so they're also making up the largest portion of REFs that we're seeing in the marketplace because they need productivity to increase and there have been multiple, multiple studies that training, networking, creating new ideas, new strategies happen much, much better together than they do independent. And for those of you who may be listening that don't agree with that, most people really want to lead in some form or fashion, well, you can't lead yourself. So, the human dynamic is an interesting art in and of itself in running a successful business. So, how to motivate a team and work within a team and contribute to a team and be a part of a team and have the satisfaction of doing that is pretty awesome for most people. Well, you can't get that. So everyone is seeing all this. And so we're seeing leasing demand in office accelerate. And that's not new. That has been occurring for a few quarters. But it is very much a have and have not construct. The newer buildings with the best amenities and the best locations are signing the highest rents and have the highest occupancy in U.S. history. So that is pretty shocking to most people to hear. And on the flip side, we don't know really how to value some office buildings because we don't know the future value of some. So you have a large have, have not. What I can tell you factually is that the US is by far the laggard in the world in terms of back to work. Asia, Europe, other countries are significantly ahead and never faltered. So, it's a US issue, number one. Number two is virtually every company is mandating back to work for all the reasons I just said, but with the same flexibility we had pre-pandemic, we just call it something different now. And we're a little more productive these days. If we're not there on a given day because we're traveling or we have a family issue that we have to take care of or whatever it may be that we need to not be in the office, we're much more productive than we were previously. So, you'll probably keep more people in the labor force with flexibility. And most people, like retail, you're adapting to the model based upon what is available, technology and other things. And I think it's going to be a good elixir, but back to working and networking and collaborating and team orientation is what it always has been. You're much, much better together than you are apart. And we're seeing that. And by the way, if you go look at some recent SEC rules and FDIC rules, there are very different risk standards for those enterprises that have work from home policies and managing risk. And that is something for everyone to go discover and look at because that is also true. And it has been proven with a few bank failures and a few other things where the policies were not connected or enforced. 

Chris Powers: And so, you're seeing executives at the big corporations, the leverage seems to have come back to where- there was a point in 2020, 2021 where they couldn't ask their people to come back. They just wanted them to stay. 

Mark Gibson: You also had a labor issue. Demand was not a- So there were a lot of factors. You can't point a finger here. It's just come back to what we all know to be true to begin with, which is we're better together. 

Chris Powers: Do you think you'll start seeing, you said standardizing housing, do you think you'll start seeing more standardizing in office where they just build things out? The TIs are what get- 

Mark Gibson: I think you have a lot of really creative business people working on that in terms of standardization or modularization or lots of different things in office. I should also say, Chris, though, in the office side of it, there is going to be less demand for office because the buildings are more efficient and companies are putting more workers together. And because they don't need certain things they used to have, they can take less space. There's going to be less demand in general. There are certain industries that really don't need to be in an office environment if you're performing a certain function. That's also true and that's common sense that you could think of. A call center is a good idea or a good example and some others like that. So, there's probably 12 to 15% less demand, but the question is in what office space that is there. So I started off, sorry for the diatribe here, but I've never seen a product type hit as hard as office where you have facts that would state differently, particularly in certain aspects of office, certain aspects, the facts, I mean, what has been in the media may apply to, but it's just I’ve never seen a narrative so dramatically skewed one way. And I think that's just because of what we've been through. None of us have ever been through a pandemic. We've never been forced to work from home. We've never seen these sorts of things happen. So it's taken a while to work through it. 

Chris Powers: What are lenders doing on office? Specifically, the ones that it's pretty clear they're out of favor, like you kind of said we don't know what to do with them, they might be worth land value, but there's a lot of debt in the market that's capitalized these things over the years, and lenders probably don't want them back. The operator didn't necessarily do anything wrong. They were just in office at an unfortunate time. 

Mark Gibson: In the wrong office at the wrong basis. So, it's all over the board. Here's the good news. The banks are very profitable in general. Their reserves are incredibly good relative to any time in history. And they're in solid ground. So they have plenty of flexibility to do what they deem best in the marketplace. And we have a lot of different strategies that banks are taking relative to problem assets in general. So it's not just office. But office is expensive to carry, as you mentioned with TI and a few other things that are part of that. So it's going to vary, but I think what most banks will do is what they did in the GFC. So, if we go back to the GFC, I will give credit to the Fed and to the government in general in terms of working through and giving flexibility to lenders and regulated banks, in particular, flexibility to do what they deemed best for a given asset and a given borrower and sponsorship. So, I think you're going to see smart policy employed similar to what happened in the GFC. I'll just remind everyone that everyone thought there was going to be this mass opportunity at the GFC in terms of going back to TARP days and various things like that. And the same thing in 2020. And actually, it didn't materialize near to the rhetoric because you had the flexibility and the policy to make the right long-term decisions. And I think you're going to see that play out here. You're going to have plenty of distressed office, don't get me wrong on that. That's probably the only product type you will see distress in scale of any sizable portion. But it's not unusual. It's things we have seen in the past in commercial real estate. This is not going to be one of these anomalies in the market. 

Chris Powers: Foreign capital just versus domestic, is one wanting real estate in America more than the other or-?

Mark Gibson: I think both are very energetic in investing in the US. It's just different allocations currently. So, most of your US-based large-scale institutional investors are investing in real estate and have 10 to 15% of their portfolios invested in commercial real estate. Whereas, the overseas investors are generally much larger than our domestic institutional investors. They have much less in commercial real estate. They have 1 to 4%, generally speaking, invested with 2 to 3x the scale. So, the runway is much larger in overseas investors in terms of just bandwidth to deploy capital. When you look at the US versus the rest of the world, it's attractive. So, I would say you would see both are going to be active, but you're probably going to see a lot more interest from overseas capital than we've seen in the past. 

Chris Powers: I want to talk about the different types of equity, but before I do that, I've got this word written down. When you think about your job or JLL thinks about the job they're doing, does the current election that's coming up play a factor in all this? Are people paused and waiting to see what happens? Or is it again more rhetoric than actual what's going on? 

Mark Gibson: We've looked at the data, and the data would suggest the following. In a presidential election year, there is 3.2% (Mark corrected as he misspoke saying 2.3%) increase in volume and it all happens in the first quarter of a presidential election year. That's it. The second data point is that the public REIT market, to the extent that it existed, so we have to go back to the 80s, the public REIT market has never had a negative total return the year post a presidential election. Those are the only two facts that I can share with you where you can really look at the data and discern any kind of take away from it. 

Chris Powers: But nothing more. Okay. On just types of equity, I wanted to start with the B-REITs, the S-REITs, the K-REITs. We had discussions a year and a half ago that you'll start seeing these mega financial asset managers start creating syndicated vehicles. Is that going to continue to accelerate the big institutions working with more high net worth capital and syndicating that into funds or is that going to be less? 

Mark Gibson: Well, I think I'm going to go back to an analogy of the overseas capital being allocated in commercial real estate. So, generally speaking, private citizens, so we'll call it retail investors, have their private home and maybe a secondary home, so less than 3% of their net worth in real estate. So, the runway is actually akin to the overseas investors that are not fully invested in commercial real estate. So, that's a fact. So, I think what you are going to see, it may vary by vehicle. It could be the non-traded REITs, which you mentioned. It could also be through RIAs that you also know about. There are going to be a lot of different vehicles that retail investors, we'll call it mutual fund type investors, are going to discover real estate in different ways than they have in the past. Most of their financial advisors are telling them that they need 10% at a minimum of their net worth in some form of hard asset in commercial real estate. And now is a pretty good time to do it. So I think you will see that element of investor significantly increasing over time as a percentage. Relative to your question of working with institutional investors, we've actually seen that blending together pretty well, which historically has not been the case, Chris. So I don't know if that's exactly where you were going with it, but that is true. But we're seeing that now work pretty well together because they recognize, since many of them have or invested in non-traded REITs, they see how this works now and they see different distribution avenues as a positive, not a negative. 

Chris Powers: Do you know the number, if individuals did go from 3% to 10%, like how much new equity that would be for real estate? Is that in the-?

Mark Gibson: I don't have it. I don't have the facts yet. It's not small. 

Chris Powers: It's not small. On the kind of the- or one question I had, are institutions, a lot of them have gone, like they'll give money to an allocator and then the allocator will give money to the operator. Is there a movement to try and go straight to the operator? Is the allocator going to get squeezed over time? 

Mark Gibson: Yeah, I think that's another good question. The business models have been changing for 10 years. So again, this is not new. I'll give you extreme examples. So if you look at the largest investment managers, I won't name any of them, but if you look at the largest investment managers in commercial real estate, they have bought or formed multiple operating companies that are developing industrial or multi-housing, retail or whatever it may be. They've been very property specific, so they have individualized teams that focus on a given asset, so whether it's retail or multi or industrial or office. That has been going on for quite some time. So, the largest of these deploy capital through 40 separate operating companies that they've either bought or built. Conversely, you've had numerous operators in the multi-housing space, in the industrial space, in the office space that have become extraordinarily large, top 10 type investment managers. So the investment management model and the operator model have essentially merged. That is what an LP is looking for because what is driving this are two factors. One is the institutional investor would rather not pay a double promote unless there is extraordinary value being created. So, in a perfect world, they would have one deployment and get both the operator and the investment genetic. And on the flip side, if you're the operator, you want an advantage to be able to buy when it's time to buy and not have to raise capital on an individualized deal by deal basis. So, that is really what is happening. We also have another trend happening, which is investors are buying into the common equity of operators to provide pre-development pursuit, land takedown type capital, so working capital to give themselves and the operator an advantage in the marketplace. So, what they see is proprietary deal flow, they see faster decision making, and the operator gets to take advantage of a current situation that may be very, very time sensitive to beat from a competitive standpoint. All those factors are at work, but that has been shifting for quite some time. We're very involved in this trend, and I don't think any of your listeners that are in commercial real estate full time would see that as a surprise. 

Chris Powers: Not the trading of real estate assets, but of just pure M&A in companies, are you seeing a lot of M&A of real estate businesses selling? 

Mark Gibson: You're not seeing it in the public market because the capital formation and the debt and the equity has been absent because of the bid-ask gap. But generally now, the public market is marked. So if you go look at the public REIT market, ironically, they're on offense. So I think you will see, and we talked about the debt market opening up and various other things, I think you will see M&A on the public side of things increase just because the formation of capital will allow it to happen, plus you have an equalization of NAV and trade price. We have been very active in the private side of M&A. So private owner operators bringing in either minority or majority investors into the operating platforms, both for alignment standpoint, but also for proprietary capital to execute a business strategy on a go forward basis. So, we've been quite active there and that has been rapidly accelerating over the last five years. 

Chris Powers: Does anything come to mind if I say during the ZIRP era, there were things that people did that probably won't come back in this new cycle? Like is there something that comes to mind as like there was a lot of this going on, probably not going to see it much anymore in a more normalized environment? 

Mark Gibson: I'm going to show my ignorance because I'm so real estate capital market, I don't know what ZIRP is. 

Chris Powers: It's an acronym, zero interest rate. I don't even know what the P stands for. 

Mark Gibson: Okay. I got it. Well, hindsight is always 20/20. If you've been through a few cycles, when you start trading things at 3% cap rates and below and a lot of reasons why. Cost of capital was incredibly cheap, levered returns were really good, compounded annual rent growth was pretty extraordinary. All those things made economic sense. But that was most definitely an anomaly. So, I think that most people – again, I'm repeating, this is not an opinion – I think most people would say that that truly was an anomaly, and we are not higher for longer, not going back to- we are back to normal. So what does normal really look like? Well, there’s a lot of measurements for normal. You look at an expected inflation environment, and you look at a risk-free rate construct of what that may look like, and you get a real rate of return. So, most people are back to the institutional view of the 3.5 to 10-year bond. So, if that's the case, there are metrics that index off the 10-year bond spreads above it to show where real estate should trade over time. And that's where I think most people are anchoring back to. So, never say never. You never know what's going to happen. But I do think that now, at least, the majority of institutional practitioners look back on that and go, yeah, it was a point in time. We probably won't see that again. 

Chris Powers: Are there any unique strategies that you've seen starting to develop that you either haven't seen much of or maybe never seen at all? 

Mark Gibson: Well, I think what I love about real estate is we have just great people in real estate, highly creative, highly entrepreneurial. That's why I love it. The personalities in real estate are unlike any other industry, I think. I’m challenged every day by the intellectual ingenuity of the participants in all aspects, whether it's in the leasing business or the ownership business or the management business or the capital markets business or the investor business. We're just a highly creative entrepreneurial industry. So yeah, I see unbelievable changes there. What we have been advising, just capital flows, because one thing we do know is just given our volume that we price every day, which is in the multiple, multiple billions, it gives us insight in terms of where capital is not going, which therefore, depending on what side of that fence you want to be on, it's either an opportunity, or either go with the flow or you go against the flow. It's one of the two. So, we've been stating to several clients that it's a good time to buy core because core capital has been absent from the marketplace institutionally. And it's primarily been high net worth and separate accounts that have been buying core. So, we said, look, if you want to buy core at today's prices, you're going to have a lot more competition in the near future than you have right now. So, that would be a good strategy. And we're beginning to see institutional core capital emerge again. So, that is happening before or as we speak today, particularly over the last 30 days. We've also been suggesting that everyone, aside from buying core at discount to replacement costs, which we've talked about, there's no, again, debate on needing more housing and there's no debate on needing more logistics. The question is where and what type. There's highly creative folks that are going, I think I figured this out and we're going to go build that. We're fans of that because we do see, because we're so active, we have a very commanding market share and raising equity for to be built industrial and multi-housing historically in the United States. And the business and the deliveries are down so far that we know there's going to be a need for this in ’26, ’27. We just can't make it up. So, we have been suggesting those items. And again, for opportunistic capital and folks that can see past the rhetoric and into the facts. We think office again is not for everyone. And when I say office, there's certain office, not all office because again I go back to the great divide of the have and have nots in office. But there are really opportunities there that we likely won't see for a while. 

Chris Powers: What about data centers and all the AI? I mean, is that going to be a huge business for you all? 

Mark Gibson: There's no- well, it already is a huge business. There's no debate that the demand is very robust. The issue there is scale. So, these days to play in that game, it's a billion dollars per deal. So, you have to think about not only capital formation at the front end and power, which is a whole different subject that would take us an hour just to discuss, but also exit and capital form to exit. But in the interim, there's no doubt there's demand. Its from a limited pool of tenancy, ironically, but there is an enormous amount of capital going into it and there's no doubt about the demand. 

Chris Powers: I've seen some of those, you're just going back to the super high net worth families buying those office buildings, I've seen plenty of them in the media. Traditionally, you'll read that they bought at 80% replacement cost or 80% below the previous sale price. Are they generally just buying the asset and just sitting on it or are they actually trying to get it going immediately? Or is it like, let's just hold this for five years, let the market come back, and then let an office operator come in and-?

Mark Gibson: I think the trades that we have been involved in, which have been quite a number, particularly on the loan sales side on behalf of banks, but also on the individual asset sales side, they're very active owners. So, they're operating. So, they're buying it to run a business. They're not- Yes, they're buying it cheap because of the risk and the carry cost and the unknowns that are out there and various other things that are there, cycle risk, et cetera, recession risk, all the things that we've mentioned on this call, but they're very active owners. 

Chris Powers: There's been a rise of like, and I don't know if y'all see these, where I've seen a lot of decks come through where people are building like baseball complexes or these recreational use complexes that are master leased to kids’ sports, select baseball. Is that really an asset class that's emerging? Has it always been around? I've seen multiple decks in the last year of these massive sports complexes or recreational uses that it's clear it's kind of one use but they sign these master leases and it's-

Mark Gibson: I haven't seen them. It's not where we play, but they do come in cycles. So, the last time I saw that was ’06, ’05, a long time ago. But I haven't seen it this cycle so I couldn't really…

Chris Powers: Okay. One thing we talked about at lunch, secondaries. Are you seeing a lot of, well, one, explain from your perspective, what does a secondary market mean, and then what are you seeing in that world? 

Mark Gibson: So, a secondary market was formed by institutional investors, and they're called secondary funds. What it means is if you're- the best way to describe it is if you are an institutional investor or a private investor and you are a retail investor and you're in a fund, generally speaking, the GP has discretion over a given fund. There's a finite hold period of 10 years or whatever it may be, unless you're in an open ended fund which has another construct to get your money out. But let's say that midway through the process, you don't really have decision making, so we'll call that non-control. You have an illiquid position because you can't sell it in the marketplace, and there wasn't an efficient methodology of how to gain that liquidity, but there was a need because at any given point in time, investors change. They change their needs, their strategic needs, all kinds of things change. And so, it has been a very significant part of the institutional market raising these secondary funds. And what they do is they go on into these closed-ended and open-ended funds where investors need liquidity, and they make a market. And they buy their interest in a given fund. And it varies on what that market could be, but I'm almost loathe to throw anything out, but it's at discounts to NAV and it depends on the product type and the duration of the fund remaining and various other things. But there's typical averages that are in the fund and it works. So it's good for the investor to come in and get a discount to current NAV assuming they think the fund has upside. If they don't, it's a bad move. And then secondly, it's good for the existing investor because they have no decision making, no control rights, and no liquidity options. So, it's a good win-win. 

Chris Powers: Is there a general comp in the market for what those discounts are? 

Mark Gibson: It ranges. I mean, it could be zero depending upon if you’ve got six months left and everybody knows what's going to happen. I mean, that's what it could be. But generally speaking, if you’ve got five years or more left, it's probably 20-30%. 

Chris Powers: Have you seen the Detroit effect happening at all in the real estate world where you're starting to see a lot of people spin out and start their own companies? Or real estate investment companies? 

Mark Gibson: I think we're just at the beginning of this. Because listen, it's no surprise if you were a vinted fund and you were buying at those three cap rates or whatever it may be, and all of a sudden, you have a three to four hundred basis point increase in cost of capital and therefore cap rates depending on what product type we're talking about, then there's- those funds have long dated durations and the promote is generally gone. And so you're going, well gosh, if I ever was going to start a company, now would be a pretty interesting time to do it. So we do see some of that happening, but I think we're at the forefront of that, both from an operator standpoint as well as an investment manager standpoint. But I don't think it will be the extent of what you see in corporate America, because real estate, you just have great people in real estate, generally speaking, and they stick with it. And reputation means everything, and so they just know it's a cycle, and if they just stick with it and take care of their investors and do the right thing and stay together as a team, it works out better in the end for everyone. But if you're contemplating starting a new business anyway, then it's not a bad time. 

Chris Powers: But you haven't seen a lot of new entrants trying to raise funds? 

Mark Gibson: Not really. 

Chris Powers: I had to ask the question just because it is the flavor of the year, maybe. Have you seen any practical uses of AI? 

Mark Gibson: All over the place. I think it creates efficiencies. We are not overblowing it and over sensationalizing it. I think the media has for a host of reasons, but there's no doubt that there are applications in every business for efficiency to take place. But it's within parameters. We're seeing that and we're taking advantage of it, but I wouldn't say it's revolutionary yet. I think that's going to take quite some time. 

Chris Powers: Are you seeing at all a trend that tenants are staying longer where they are because the cost to move has gone up, the delayed construction timelines to move into new space has been more uncertain even though they're kind of normalizing, like where just tenants stay in the same place longer, mainly more commercial tenants? Or are they still moving around like they always have? 

Mark Gibson: I think it's hard to answer the question unless it's by product type. So I couldn't generalize. But I would say there's always an element of risk and cost to move. So, people would rather stay where they were just from a cost standpoint unless the building has gone down operationally. So, I'll go back to my operational excellence comment because I really think that that is- there's two takeaways that I've mentioned so far. One is operational excellence instead of financial engineering. The other is listen to John Goff instead of me. So those are the two takeaways. But I would say that I really believe that if the building that they are in, so we'll talk about an office building, has been well-maintained, well-operated, it's just expensive to move. So unless there's no space there or other prevailing needs in some form or fashion, I think you'll see people stay. But again, we see migration. I mean, there's no doubt about it. So, it would be difficult for me to really pinpoint the moves unless we had a specific submarket or a specific building type in a given location. 

Chris Powers: So we'll finish on just transactions again real quick. That's what everybody wants to know about. Are you all forecasting 2025 to start picking back up? 

Mark Gibson: Well, I've already stated that we are seeing the bid-ask gap narrow. So, with that statement, we should see increasing transactional flow. But we don't know. I mean, you could have a macroeconomic issue that we don't foresee. You could have a rapid shift in inflation that we don't foresee, which causes a bid-ask gap to reoccur. There’re so many variables that I'm hesitant to forecast anything, particularly over the last three to four years. But if the trend line holds, then we should see increasing transaction activity. 

Chris Powers: And then one more question, will transactional activity look like buying and selling the asset or will that look like more transactions throughout the capital stack to begin, or they'll both-? 

Mark Gibson: I think it's all over the board. So, I think you'll see buying and selling. You’ve got 1.5 trillion maturities over the next two years. That in and of itself is a catalyst, it doesn’t mean it's going to happen because the banks now really want to keep the vast majority of good sponsors and good assets for a host of reasons. But that's a lot of catalytic power potentially in the market transactionally. And you're going to have, again, there's no lack of capital, Chris, at any element of the stack. In fact, I would tell you there's probably more preferred equity and mezzanine debt to deploy than there is need. So, there's a lot of it out there, but you also have a lot of formed equity and a lot of senior debt as well. So, I don't think there's a lack of capital. I think it will play in all aspects of the capital stack, but there will need to be a trigger. There needs to be a catalyst. One is a debt maturity, one is a derivative contract expiration, one is a fund life coming to fruition, one is change in GP, one is an enormous number of triggers out there that could happen. But generally speaking, when we go through what we've been through and you've had a sobering realization and objectivity hit the marketplace, people are just looking at, okay, do I stay here and do I see value accretion from this point forward? And if the answer is I do, but I see a better use of capital if I get my liquidity now and can redeploy in a different strategy, that's where we are right now. So, you have a lot of people doing the buy sell or sell hold analysis in that fashion. Let's analyze where we are, if we think we've gotten the majority the upside out, we don't see that much more relative to other options that we have in commercial real estate today, it's saying commercial real estate which is good, then we'll go and trade. And we're beginning to see those types of decisions opt for a transaction.

Chris Powers: Is there any kind of trend as far as capital wanting to be more permanent versus cycling in and out every three to five years? 

Mark Gibson: It's interesting. You have- here's the best way to say it. The one fact and constant about capital is that it changes its mind. So, it could be long-dated capital and in three years go, you know what, I think I'm done. We've sold what we needed to, we've seen what we needed to see in value creation. We're going to go ahead and recycle because they see a better opportunity. And then you have certain investors, primarily high net worth investors, that are investing for wealth protection and wealth preservation, and they see real estate as a great hard asset to preserve wealth over time. And when I say time, generations. And you see a lot of very wealthy high net worth families that built their wealth through holding real estate for a long period of time. So we do see that pretty constant in the high net worth arena, but not really in the institutional arena. 

Chris Powers: And the high net worth, I mean, family office, high net worth, you're seeing these mega family offices or multi-family offices. Is the trend to try and stay a family office rather than give it to some big institutional wealth manager? Are you seeing more of... 

Mark Gibson: Well, so an interesting stat that we will give to you, but there's- I'll get the data wrong, but two-thirds of the family offices have been initiated or formed since 2005 in the United States. And they're now multiple trillions of AUM. So, let's think about that. So, two-thirds in the last 20 years, and that trend line is not stopping. So, I would say that relative to what had been done pre, we'll say early 2000s, they're staying a family office and getting professional management as a CEO or others but not handing it over to an institution, rather running it as a family office. In some cases, the families remain on the board, but not as part of the management team. And it varies. Everyone's got a little different view of it. But I see much more staying a family office than I do handing it to an institution. 

Chris Powers: All right, Mark. Thank you for joining me today. 

Mark Gibson: I'm sure I've bored everyone today. 

Chris Powers: This was awesome. 

Mark Gibson: It's been great to see you, and I really appreciate the invitation. 

Chris Powers: Thank you for the opportunity. It was awesome to be with you. 

Mark Gibson: You bet.