These days, everybody’s got a hot take and our news feeds are full of them. Considering how much noise we’re exposed to, it’s not hard to understand why – if you can’t be louder, then saying something shocking is a surefire way to grab someone’s attention.
Ryan Severino isn’t here for it. As the Chief Economist at JLL he’s no stranger to making headlines, but his brand is more about keeping it real – even if it’s unpopular or unfit for standard click bait. To help us right-size our reality, we sat down with Ryan and covered all the trending topics…and got a few little surprises, too. From why your lunch is way more expensive, to the resilience of the Costco hot dog, you’re in for a treat (and now we’re hungry). Thankfully Ryan’s dishing up The Spaghetti Method on this episode of Three in 30.
Tune into the full episode below, or continue reading for a quick skim of the highlights from our conversation.
Since we’ve been going heavy on our conversations with economists, it only makes sense to start the conversation off in the crudest manner possible: “what the heck is going on out there?”
“We don’t have a really good pithy term to describe what’s going on because there are so many cross-currents and inconsistencies. There are things that are more objectively positive and things that are more objectively negative – and the running joke I have is that I’m just going to start calling it a “Severino” and see if it catches on. But it’s a good question, we don’t have a good way to describe this.”
Ryan is an economist, and as it turns out, he’s an armchair linguist, too.
In the episode, we asked Ryan when we can expect to see a reset in the CRE space and if he’s seeing a rolling over of values. Here’s what he had to say:
“I would say we’ve definitely seen a repricing over the last 6 months or so, since when the Fed really started their tightening again. It hasn’t been as dramatic as I think some people would have anticipated, but what I always come back to with this is that if you look at the historical relationship between interest rates and cap rates, there’s a very poor correlation and in many periods in the past, it’s been a negative correlation and the reason for that is there’s more that comes to bear on a property yield than just what the risk-free rate proxy is as measured by the 10 year treasury. Up until recently, you’ve had some disruption in the economy, but by and large the components in the economy that tend to support commercial real estate have held up pretty well.
I think while the upward push on cap rates has come from interest rates and uncertainty in the economy, we haven’t seen a significant gaping out because the underlying drivers of the major property types have held up really well, even with GDP itself somehow faltering in the first half of the year.”
With every turning over of a generation, there is also a collective shift in what the new guard is griping about. Baby boomers were hippies and beatniks. Millennials are lazy and entitled, and Gen Z is the class of social-obsessed influencers of ‘wokeness’.
More acutely, this conversation has shifted hard to the debate around office and work. This episode, we took aim at some of these trite assumptions and why they might overlook changes in the macroeconomy that have ultimately created them.
“I do think the narrative against office has been overblown for the last two years. We have an industry that loves to do that. We fall for that narrative over and over again: “nobody is ever going to shop at malls again”, “Millennials are never going to own homes”. There are multiple cycles and you can find some version of this narrative.
The current one is now some version of “nobody’s going into an office” and “nobody wants to live in the city” which are obviously interconnected. The latter part of that has already been disabused, and certainly in places like NY, where you’ve seen rents come rocketing back and occupancy moving up. The office part of things is still a work in progress, to be fair, the B and C part of the market was already being challenged before the pandemic with some of these buildings being rendered, if not functionally obsolete, perceived as being obsolete. The pandemic accelerates that.”
On the heels of the midterm elections, the conversation around the housing crisis is more relevant than ever. In our conversation with Ryan, we discussed what’s happening with the housing market and why, in spite of the fact that everyone seems to agree that it’s a problem, it remains so difficult to solve.
“It’s interesting with the housing market, if you look at most metrics, sans prices, things have already rolled over (transaction volume, starts, permits, pending home sales, mortgage originations, demand, etc.) Pricing at least in some measures has started to roll over and in the last 3-6 months in some parts of the country. Does that tip over to the entirety of the nation? I think it probably does, but I dont think it’s going to be the blood letting that we saw with the financial crisis. This is not that. What we’re dealing with now is the fallout of that. We just don’t build enough housing relative to demographic demand. If I look at underlying supply and demand, we are short millions of housing units in the United States. It’s not an easy fix and I don’t see a lot of policy prescriptions in place to make it so.”
While Joe and Ryan both admitted to favoring a more Laissez Faire approach to government intervention, they shook hands on the fact that without some interference, a sustainable solution isn’t likely to emerge on its own.
“This is one to me where it feels like the market is failing on its own. Everybody agrees that we need more housing, we just disagree on the prescriptions to get there.”
Our conversation with Ryan gave us quite a bit to chew on, and even if the looming recession and effects of inflation have killed your appetite, rest easy on the fact that there are still some constants in life that will never falter no matter how bad things get out there. Sure your lunch might be more expensive than ever, but there’s always a Costco hotdog, and that’s pretty good.
Listen to the full episode here.
Lindsay Curry | Head of Marketing