Hello everyone, and welcome to "The Capital Stack" by Yardi. In this video series, we dive into the latest market trends in real estate with a practical take on how software can, and is, helping investment managers oversee and grow their capital stack. My name is Jace Swank, and I'm responsible for the investment management solutions here at Yardi. Within today's episode of "The Capital Stack," we'll be focused on the latest in capital markets, including some insights into how investment managers can think about and analyze office and industrial property types. Additionally, we'll dive into ways to centralize and manage the acquisition pipeline, allowing investment managers to quickly review and analyze numerous deals at their fingertips. Joining me today is my colleague Peter, who heads up research of commercial data here at Yardi. Peter, can you introduce yourself a little bit further? Hi, Jace. Peter Kowalczewski, Director of Commercial Research here at Yardi. Great. Thanks, Peter, and you'll notice I didn't attempt to say your last name. That's a tough one for me. Still trying to figure that one out. You're just Peter to me. So thanks for joining us. It's most people. Peter K. Are you Peter K? All right. I like it. Well, thanks for joining us today. So office and industrial, that's our topic, right? Two property types that seem to be at very different inflection points in the cycle for each of them. Industrial has been on a tear for the better part of a decade. Meanwhile, office is going through a bit of a renaissance of sorts of its own, continuing to settle into the new normal of this work from home, work from office. So Peter, let's start first with office. The ongoing question is: Has it hit its floor, or is there more downside to come? So can you share your views and some insights into some of the data your team collects in terms of office, including available data and reporting on the office sector? Sure. So I think taking a half a step back, I think the first issue with office and valuations that can be overlooked is physical occupancy. Right? So it remains at about 55% to 60% of what it was pre-COVID numbers, and that to me is the driver of where we're seeing this. To go to your question, has it bottomed out? And like with most things in real estate, I think it's going to depend. Right? So if you're in a highly amenitized building in a desirable location, I think we've probably seen the floor. But our thought going forward into '25 and into '26 is we're going to start to see more decisions being made on everything else that's out there. Right? So people that have maybe been kicking the can on a loan that's maturing and doing an extension, I think we'll see more decisions being made, and if we see an increase in distress, then maybe that floor kind of shifts down a little bit than we've seen in the past, and we'll see some more distressed assets coming on the market and have their fate decided at that time. Got you. Yeah, one of the other things that I hear a lot of investment clients talking about or considering is if we can find a deal that's highly undervalued, well, it's vacant for a reason. Right? So what are we going to do with it next? Do we turn it into a highly amenitized building? Do we consider things like multifamily? Right? Which there seems to be a shortage of. So what do- Conversions. Exactly, yeah. Yeah. So how do we kind of think about that? So we have spent a lot of time on conversions. We've created this conversion feasibility index tool. So we've taken from a perspective of the functional characteristics of that building, analyzed all 81,000 office buildings that we're tracking that are over 25,000 square feet, and we assigned a score for each functional characteristic. Right? And our hypothesis is that as you can see a continued destruction of value, and as you see more, I'd say, city, local, state, and I think eventual federal subsidies or incentives come to the market, then more of these buildings can be turned into multifamily. So from our standpoint, we went through all eight billion square feet, and the preconceived notion was that a very small percentage is actually a candidate for a conversion, and our number was significantly higher. Right? So it's more like 23% was our number. Mm-hmm. Almost two billion square feet of space. Right? Understanding and not oversimplifying the fact that conversions can be difficult, and they will be difficult, but I think there's a decent percentage of buildings that were kind of brushed aside as saying that's not an option. Whereas you see, if I'm able to purchase that out of distress for a dime on a dollar, and I'm getting incentives at different levels, suddenly it can start to pencil out. So what is functionally capable of being converted is potentially a much larger number than people had previously thought. Yeah, it's interesting. I remember as I heard clients really beginning to talk about these conversions, the thing that came up a lot is, well, an office building is not an apartment building. Right? If you put a unit right in the middle of it, there's no windows, and that's- And it's difficult ... not really going to fly. It's difficult. We understand, and again, we're not oversimplifying it. Access to light is one of the characteristics, right? Mm-hmm. So taking into account the floor plates and the structure, those things are all part of our numbers. Yeah, it's so interesting to see it too, right, because as you pencil it out, it doesn't work out, but all of a sudden now there's maybe an incentive from the local government or federal government- Taxed ... then numbers start to make a little more sense. Yeah. It does. Yep. And we're starting to see that. Jumping into some of these reports that we have, you can see that office values have slipped 11% last year on a price per square foot basis. The prior year, in '23, they were down 24%. So these are some significant drops that we're continuing to see year over year. Since 2022, I think we're down $90 a square foot from an office perspective on transactions, which is showing us that there's a discontinued destruction of value and more things becoming possible. We're also starting to see now this idea of the total property universe decreasing. Which is something new, where the buildings taken off market are exceeding what's being brought on with new deliveries. Mm-hmm. You're still seeing these new office deliveries, I'd say, I call it jewel boxes in class A plus properties, but they're a much smaller size than they historically have been. It's not one and a half million square feet. They're 150,000 square feet, 200,000 square feet. So that's a change that we're seeing. And at the same time, buildings that are being removed from the marketplace altogether, just changing the dynamics of what's happening out there. Interesting. Yeah. The other thing that I want to chat with you about is loans. And loans take a while to mature. We know interest rates have been high for a while now, but as these loan terms are coming up due, what are we doing, what is your team doing in terms of collecting data? How do we get that data, and what types of loan trends are we seeing now with these maturing loans? Sure. We're tracking $870 billion in office debt. Oh. About 35% of that's maturing between now and the end of 2027. So you have a good amount of properties that decisions have to be made on, and something has to happen, whether they're sold, refinanced, or changing hands altogether and changing perspective. So about 35% of what we show is maturing here in the next three years. Wow. And something's got to happen, right? So that'll be interesting catalyst to see as that picture evolves. It's an event creator. Something has to happen. Yeah. Okay, well, that's office. Thanks for the quick rundown there, and great to see some rich, powerful data that your team has collected and to have on that, both at a national and an individual sub-market level. Let's pivot a little bit now and talk about industrial, kind of the darling child of the market the last decade or so, as I mentioned. Everybody knows the story. Amazon, other big companies coming out in the picture, pushing e-commerce really forward, driving demand for industrial with really a long tail end of other sectors who still need industrial, but e-commerce is kind of eating it all up. So it really has created a bottleneck. So over the years, with basic supply and demand, development has picked up. All of a sudden, there's a ton of inventory coming into the market over the really last few years and even forward-looking. So can you maybe talk a little bit about that and what you're seeing in the data and market trends in terms of industrial and supply coming into the market? Yeah. So one thing we can look at, and you can see in our reports, is from the development and inventory perspective. What is being proposed, what is actually being built, and what's been delivered? Huge construction boom in '21, '22, feeding that COVID engine of e-commerce. And now it's really focusing on absorption. So what was delivered needs to be absorbed before I'm delivering new product. So we've seen a significant decrease in the construction pipeline, which we have here. From all-time highs, we're talking less than half now of what it used to be. So big decrease. Short-term view, and this is a positive thing for the market. We say normalization. So normalization of the construction process, and then finding different niches that are out there as well. We've seen in Atlanta specifically, talking about getting down into a market level, Jace, a big boost in data centers. Mm-hmm. So a big run-up on data centers and that construction. Manufacturing construction that's been happening over the last, I'd say, year or so. At the same time, I think going forward, we talk about normalization in the next three years or so. Towards the end of the decade, we see it ramping up, and we can see that in our construction forecast, which we have at the national level and at the market level. But also, I'd say from an individual development perspective, just being more careful and more selective and more nuanced in what that looks like. We saw the big run-up in e-commerce in, I'm not going to say overbuild, but it was a significant increase in deliveries. Mm-hmm. And making sure that that doesn't happen with data centers. We're not overbuilding to support the AI need, as that still is an uncertainty that's out there. Yeah, definitely. Feels like we're hitting a soft landing, I think is what you're telling me. We had this big construction buildup, but the demand was so high, we haven't over-supplied, and at least at a national level, we're not seeing an oversupply quite yet. Yeah, and I think just a focus on thoughtful and necessary projects. Maybe more of an emphasis on pre-leasing them or having a tenant in place- Mm-hmm ... versus e-commerce, it was as fast as you can there for a couple of years. Yeah, I know. I heard a lot of folks, instead of going your traditional five, seven, 10-year leases, they were doing shorter-term leases because the rent was going up so quickly, they wanted to potentially renew, get a new tenant in, or renew the lease terms altogether. Yeah. A positive thing for industrial. Your lease was expiring, you can come back at a higher rate. Versus office, the last thing you want to see is an expiring lease. So very- Yeah. ... conflicting. Yep. Truly can't paint the market with one broad brush. In fact, the brushes are probably going the opposite direction in this case. Correct. And I think we're seeing price per square foot, even valuations per square foot, really kind of equaling in office and industrial, which I don't think has ever happened in the history of US real estate. They were last year for a little while. We saw the cross-section of that. Now we're starting to see office peel away a little bit more as industrial flattens out. But yeah, it was an interesting nuance last year that we were seeing in the third quarter. Nice. Yeah. Well, thanks for that, Peter. And I want to sort of hit the other end of our equation for today's conversation, which is the acquisition side of things, right? So obviously, you've got a lot of research, a lot of market information, which can help drive these trends, help drive the owner or investor's purchasing. So I just want to spend a few minutes highlighting a new solution that Yardi's brought to market recently for investment managers, something we call Acquisition Manager. And my colleague, Alex Lewis, is going to take us through a very brief demo of what that product looks like and how it can add value to investment management companies. Thanks, Jace. And Peter, I got to tell you, I really like that market snapshot that you were showing there. It's really where I want to pick up where you left off and talk about that scenario. It's like how our clients can use this information to get a deal into the system. So let's say I'm looking at the Atlanta market, and I really want to see properties that I'm interested in and the maturity of loans, let's say, that are going to be coming up in the next year. Those loan maturities are going to be peaking in 2026, right? So maybe I want to use this as a way of researching and finding properties. So if I go into my property research screen, I say, "I want to find properties in Atlanta for industrial that are maturing between now and 2026," filter on this criteria, find all properties in that range and say, "Well, I'm really interested in this 6100 Fulton." Looks like it's in our price range. It's a Class A building. Drill into the data around this, get the details around this property, and say, "You know what? This is one I want to add to my deal portfolio pipeline so I can take the next steps." And it's easy to do, right? I go right into the Acquisition Manager. I go into adding a deal, and I start putting this in, right? Industrial property. This is going to be for 6100 Fulton. And I'm going to prioritize this. So hey, this is a pretty good one. I want this to be a high priority. And I say, "Oh, but I really want Jace to run this." He's going to be the owner of this deal, right? Put in my address, save it in the system, the state, and then I have a brand-new deal that I can start tracking in my pipeline. Okay? Just that easy. And the data that I want to capture here, characteristics, property information, investment details, returns, cap rates, financing. This is a template that I can design whatever I want to show up inside of here. Okay? And for my existing pipeline, I see every deal that I have in the pipeline. I can drill down into my deals by property type, all my industrial properties versus office, for example. I can filter on those. If I'm interested in this Rockefeller Center, I can drill down to the acquisition itself, look at the summary of information, square footage, last renovated, sell price, and I can even come in and look at the milestone process through a workflow that I've designed to help me get from start to finish in actually completing a purchase of an asset. Right? So I'm in the beginning stage of this investment and transaction information. I got to go out and get maybe an appraisal report coming up, meet with a mortgage broker in the coming days. Jace and I are both responsible for this kind of stuff. And I can drill in and leave comments and follow up with him on anything that we need to do to get done as a team. Okay? And then all of the images and documents can be stored inside of here as we go through this. There's a full repository for every document we're tracking. I got my OMs in here. I got my brochures that I'm tracking inside of here as well. Okay? And then I can also take a step back and look at the property on a map over here as it relates to other properties that I might own inside of Yardi and start to compare them. I can see the details between the current portfolio, which is the property I'm looking at, and any dead deals that maybe we looked at in the coming or the prior years, for example. Okay? And this one is, I want to come in and go a bit further with it. I can actually start putting into underwriting models to start to compare some ideas about how we might want to configure this deal. So model one versus model two. I can compare those side by side and get some comparisons and some changes in what I want to go through inside the system. So extremely powerful tool to be able to kind of manage the data that I'm getting, get it into a system, do some comparisons, then ultimately the goal, obviously, is to go through the workflow, purchase the property, complete the last step, and have it create the property in Voyager for me as well. Okay. Well, I wanted that to be quick for you guys so that you guys keep moving on. But I really want everybody to kind of take a look at this. If there's anything else you want to know, please reach out to us at Yardi. Find your sales rep. We're here to help with anything we possibly can. All right. Thanks, guys. We'll see you next time.