Hopium Rehab with Jim Costello

What should have been a quiet hiatus over the holiday season was anything but. Whatever you spent Q4 celebrating, the final months of the year only brought more of the tempestuous circumstances that had been escalating for the better part of 2022. Happy New Year? Maybe…

Uncertainty abounds, but only if you’re checking multiple sources for your news. Depending on who you turn to, it seems everybody’s got a (wildly) different take and outlook on the coming year. Confusing doesn’t even begin to cover it.

So, is the CRE glass half empty or full? According to Jim Costello (Head of Real Estate Economics & Chief Economist — Real assets at MSCI), it doesn’t matter. Join us for an impromptu history lesson, a discussion on ‘hopium’ and toxic positivity, and to find out what happens when a Realist and Economist walk into a bar…and sit down next to two people who just want some answers.

Tune in to the full episode at the link below, or keep reading for a quick skim of the highlights. 

The advantages of a different vantage point

Data experts are putting the CRE in CREative. We kick off our conversation exploring some of the novel explorations of how people on the frontier of CRE data analytics are working around the problem to help quantify unknowns. Jim shares with us some of the tangential use cases for data that are helping to add color to what has long been a monochromatic landscape of understanding.

“Theres some recent stuff thats been fascinating with all the folks trying to track how many people are actually in the building everyday day. This group, Castle, for example is using the security system. Others are trying to use cell phone data for a similar kind of approach. This is information where we’re taking data from other use cases and trying to make sense of the world to link it to performance. Thats the kind of thing where…30 years ago? Whew, that was just science fiction.”

If a tree falls in the forest and there’s no one around to hear it…

…Does it make a sound? The word ‘opaque’ gets thrown around far more than it should in the world of CRE. If ‘knowledge is power’, who holds the cards? How has this evolved over the years? And, most importantly, is it getting any better?

“Everything gets digitized, but not everything gets distributed and shared. There’s more information and the challenge that people have is trying to make sense of it when it’s an incomplete sample. Who bought a building and at what price? What cap rate? The debt side of the world was always opaque. We started to collect some information, but we don’t get everything. Sure it gets digitized, but then it gets put into a silo and no one shares it. There’s a lot of that. To figure it out its you need to talk to professionals and it’s not something you can pull up from a data base.”

Jim brings up a salient point about ‘social capital’ later on in our conversation (and in this post). As CRE becomes increasingly digital, it will certainly be interesting to see how information moves out of the minds of its experts and into a more fluid sphere online.

The ‘Good Old Days’…maybe not

We spent a good portion of our conversation with Jim talking about the idea of ‘better times’ and how our perception of the pre-pandemic market may be far from reality. Jim takes off our rose colored glasses to reveal that ‘Good Old Days’ might still lie ahead of us.

“There’s a view that a lot of folks in the real estate world have, that since the fed’s been raising rates and inflation did cool in the December report, maybe we’re done. Maybe we go back to low interest rates in a couple of years. Maybe we can go back to where we were. And, if it does happen, hey, great. Will it? Is this the thing thats going to happen?

When I talk with folks in the forecasting world, they’re more dour about what might happen next and that’s not to say that they’re right. The notion that the fed might be done, we just don’t know. To put all of your hopes on that happening and to get back to an abnormally low interest rate environment…you know, I have a hard time believing that. 

The fact that interest rates were so low for so long was not a sign of a healthy economy. That only happened because the economy was in such dire straights.”

Holding out for a better tomorrow

You’re not alone if the economic forecast has got you holding out for a better tomorrow…as Scarlett O’Hara would say, “after all, tomorrow is another day”. Jim, however, urged us to think differently about putting things off for better times:

“Why did I wait so long? Was I holding out for something that may never come? Theres folks out there that are riding on the belief that “this is temporary” and that might not be true. What then? There are people that have only been working in the market since 2011, or The Age of Free Money. You’re just delaying hard decisions that you should be making now.”

Investing in social capital

Often times when talking to an economist, the conversation is forward looking. “Take a look into your crystal ball and tell me what you see”. Jim, on the other hand, takes a different approach: how can we understand what’s happening today by taking a look into our past instead. Take office space, for example. Much of the discourse in CRE has been pretty dismal when it comes to office. Here’s Jim’s take:

“There is a lot uncertainty still in the office market. But I think of it as nothing new. Used to be, that half of all the financial sector workers in the united states worked on the island of Manhattan. You go back to the 50’s and that’s the way it was. Then you get these high tech tools, like fax machines, and these financial firms realized that they could take some economic activity and some job activity and move it further out to lower cost locations.

When you have to have a mass movement of workers from distant suburbs to a city center, you have to pay them more to incentivize them to come into the city. In the 60’s and 70’s they started building suburban office campuses and what that in turn allowed them to do is hire workers at a lower wage. The profit motive is the one constant throughout all of this: get the right people at the right price. The tech allowed for further dispersion.

…And that didn’t kill manhattan. Because you still had the most productive workers with the most social capital (the ones who need to interact with each other) there. If a job can be done remotely, they move to low cost locations. There are smart folks outside of the US willing to working for a lot less. The world is flat because of tech.”

Not only is Jim suggesting that what’s happening with office space is nothing new, he also gives us some prudent advice to rethink our approach to work. If you want to be indispensable, focus on building up your social capital: “If you are going to rely on processing and administrative work, you are putting your career at risk for outsourcing. The underlying profit motive is going to drive this.”

Jim Costello is about as much a realist as can be. The antidote for a ‘hopium’ overdose? Cold hard facts.

Click here to listen to the full episode 

Lindsay Curry | Head of Marketing