Apr 09, 2020

The Real Market With Chris Rising – Ep. 38 Richard Barkham

In this episode, we have the privilege of hosting Richard, a world-renowned real estate economist and Executive Director at CBRE. With his expertise and global perspective, Richard serves as CBRE's Global Chief Economist, leading a team of 700 researchers. He is known for his extensive research on real estate trends, and as the Chairman of CBRE Econometric Advisers, he provides invaluable insights into real estate forecasting. Join us as Richard shares his wealth of knowledge and discusses the impact of emerging markets on real estate, drawing from his acclaimed book 'Real Estate and Globalization.' Don't miss this captivating conversation with a Visiting Professor of Economics at the Bartlett School of Architecture, University College London.
Episode Transcript

Chris Rising (00:02): Welcome to the real market with Chris Rising, the only podcast that brings the real estate conference panel to your headphones. You’ll hear from superstars from every realm of commercial real estate. The biggest brokers, the most well known architects, the largest investors, and the most visionary developers. And learn what they do, how they do it, and what drives their success. We’ll discuss the latest trends across regional markets, capital flows, both national and global, and we’ll explore technology’s role in shaping all of them. We’ll take a clear eyed look where we’ve been, where we are now, and what’s to come. Real conversations, real experts, real insights. This is the real market.

Chris Rising (00:50): Welcome to the real market with Chris Rising. I am really excited and really honored today to have Richard Barkham, the global chief economist at CBRE on the podcast. We have a very interesting conversation. We recorded this on April 6th 2020, right at the height of the pandemic and we talk about where the economy’s headed, what are the challenges we’re going to face to get through this, how he sees it going. This is a really exciting conversation and I know you’re going to enjoy it. Thank you for being on the real market and I’m looking forward to talking about the economy here on April 6th of 2020. It’s quite a time to be talking about the economy.

Richard Barkham (01:30): Yes it is. And I’m delighted to be here to do that Chris.

Chris Rising (01:34): Well, thank you so much. I’m really still amazed that on March 10th I was sitting in New York at a meeting at the New York stock exchange and I was talking about the great prospects for raising real estate funds that while I did believe that there was a chance that there could be some external event, I wrote about that in a blog post in January. I said, I really think that there’s some things to be nervous about with COVID-19, but we’ll have to see how it plays out. And that was almost a month ago. The entire economy has shut down. The world has changed dramatically. How have you slept over the last month since that all happened?

Richard Barkham (02:18): Well, it does fit quite well, but I’m working very long hours to try and figure out how it’s all going to play out. All of us economists have had to become amateur epidemiologists to figure out first the course of the virus, and then we have to work out, well, how does the lockdown and the measures to mitigate the virus, how does that impact on the economy? And then thirdly, how does that feed through into the real estate market? So, effectively nowadays I’m making three separate forecasts, virus, economy and real estate markets. And there’s a lot of information to take in. I have got a really good team globally of really experienced economists.

Richard Barkham (03:16): So it’s a pleasure to work with them, but, and it’s a very, as you pointed out, it’s an extremely fast moving situation. It’s kind of unfolded over the last three weeks, way more rapidly than people first thought that it would. So, I’m doing my best along with my colleagues to give the best unbalanced advice to real estate investors and occupiers.

Chris Rising (03:45): Well, talking about, occupiers, I mean, I’ve never in my life would have thought that we would have a period of time where literally nobody could even do work where you were in those, forget to work from home stuff. But think of all the people whose whole job in life was to drive somewhere and put in their time whether they work at a restaurant, or they worked at other jobs, bank tellers and things like that. And all those jobs have just gone away for a month period. Maybe it’s two months. So you’ve got a tenant who pays a landlord rent. The landlord has to pay their mortgage and the mortgage that gets paid to investors, but it feels like nobody did anything intentionally wrong, but the whole system is just stopped. Is that the right way to say it or am I missing things in thinking of it that way?

Richard Barkham (04:44): I think you’re broadly right. Nobody has, there is no villain here. I mean, you could look at governments around the world and say, maybe they should have reacted more quickly and some have done a better job than others. But I think, even those amongst us who are involved in forecasting and looking at the data, have been, taken aback at just the extent and the speed with which this crisis has come upon us. Now, one thing I would say is that granted, this is a very abrupt halt to the economy. It is a shock to the economy. We economists call these shocks. But the economy has had plenty of shocks in the past. And you will not remember. Perhaps most people listening won’t remember. But back in 1974, the oil price was tripled and that pretty much put the brakes on Western economies.

Richard Barkham (05:46): In the same way that this data, I mean, really stopped economies overnight. That’s not the only shock. We’ve had shocks that have come through stock market crashes where the nature of the shock is, everybody gets very scared. People see their wealth disappearing and they stop buying. So the point I’m making is this is a very, very rapid shock to the system. But the economy has survived these shocks in the past and it has quite powerful self writing mechanisms within it. So I just would want to put some of that longer term context in place.

Chris Rising (06:32): Well, I think that’s important. I’ve talked to my team about how go back to world war II with the British. And being bombarded and people still, the economies still working through all of that and that threat all the way up through, as horrible as this is and it is horrible. I still remember days in 2008 where I felt like the whole world had ended when Lehman went under and basically they did. So, I’ve been trying to counsel my team, let’s focus on the things we can, not the things we can’t. And really it’s getting to a point where we can get people back to work when all of this will come back. But is that too simplistic, do you think? Do you think it’s just a matter of getting people back to work when people feel safe that they can, or are there other things that they have to have?

Richard Barkham (07:24): Well, I mean it’s that simple and there are some other things that would help if they happen. But just as a little anecdote. When, I was young I used to have this little green bag that my mother gave me. And it turns out when I found out what it was the little bag that she used to catch used to take her gas mask to school because there was a fear of Nazi aircraft coming across and dropping gas bombs. So you know as I say we’ve had these shocks before and we’ve got through it before now. So I think it is a question of just, we’ve got to, because we don’t have a vaccine because we don’t have antibody treatments quite yet at the moment, then the only effective way of treating the virus is through lockdown.

Richard Barkham (08:17): And of course that causes huge damage to the economy. I mean basically stops it as we have said. And what we need to do is see the rate of new infections easing. And I think we’re already beginning to see that. It may take some while, and we think that the rate of new infections will probably ease significantly over the course of April. And then of course, the lockdown can start to be eased. And we think that will happen through May. Probably some form of lockdown in place to the end of June. And that is of course the most important thing for restoring the economy because then people can get out and shop, they can go to work and all of the transactions that are associated with that, the transportation, it’s not going to come back over night, no, I’m not suggesting it is.

Richard Barkham (09:14): But people will get out to work, and transactions will start happening. The economic life will, start again. I think the nature of the government, I mean it will help a lot that the government has put such a big stimulus package in place, both fiscal stimulus to directly support business but also liquidity support through the federal reserve. And they will act to preserve the economy while one is going through this period of hiatus. Those measures will not completely, but they will have some effect of preserving the supply side of the economies. So that when the lockdown ends I think we might be surprised at the relatively high rates of economic growth that will follow from I think what is, I have to say is going to be quite a steep drop in Q2. So Q2 is going to be pretty brutal. But Q3 does still, because of the end of lockdown offer the possibility of stability and regrowth.

Chris Rising (10:33): So if what I’m hearing is things will be very deflationary right now, right? Prices will come down. And then as we start to pick up, do we have to in your mind be worried about runaway in placing like it’s the late 70s? Richard Barkham (10:48): No, I mean, I don’t think it will be, this is a deflated shock, but it’s relatively short, sharp shock. So I don’t think even in the near term that we’ll end up with deflation. However, and I don’t even think in the next 12 or 18 months that deflation is really an issue. But, for some people out there who are students of economic history. What we’re seeing now is a really major government intervention in the economy, and it will be funded by government issuance of debt. And not only that not only in the United States, but central banks around the world are likely to start buying that new issue debt. And that’s called monetization. And we’ve seen monetization quite a lot in Latin American societies. We’ve even, but it comes straight out of the Weimar Republic playbook.

Chris Rising (11:55): Yep.

Richard Barkham (11:56): It is a classic inflation creating event. And if we also see extended supply chains kind of contract back out of low cost locations into high cost locations, it does point to more inflation in the medium term perhaps. But, I don’t think it would be a return to the kind of galloping and play inflation of the 1970s. But, there are inflationary policies. That’s the whole point of the policy, to inflate this.

Chris Rising (12:29): Well, do we have to now start worrying that there’s no GDP behind this stuff that it’s just printing money for printing money’s sake. I’m blanking right now, but I’m sure the [inaudible 00:12:44] is the new money program. Is that economist speak for that or there is a term, I know.

Richard Barkham (12:51): Yeah, we call this, I mean, not really. I mean, you could call it quantitative easing or printing money. I think when you get an adverse shock to the economy, it means that private sector demand has just disappeared. And this is pretty abrupt. It’s not even a sort of slow paced as people get worried about their economic situation, this happened like overnight. So private sectors’ demand has evaporated. And so the government needs to step in and it needs to provide the demand in the economy to get goods and services, being bought and sold again. And people might recognize it as kind of classic Keynesian, just, cool policy.

Chris Rising (13:45): It’s ironic that it’s coming out of a Republican administration, but when you think back to 10 years ago and it took us 18 months to get the kind of programs we had in place. But, now they’re jumping very quickly to do this. I mean, obviously this is extraordinary. They are one of the things that the irony is, but in February they’re moderate Democrats and Republicans were talking about how awful it would be to have Bernie Sanders. And now you look at this now we are providing universal basic income. We are providing, it sounds like, anybody can go in and be treated and not be charged for that. So it’s amazing how a crisis can change those things. But once [crosstalk 00:14:32].

Richard Barkham (14:33): If I might add, I mean I think, it’s entirely the right sort of policy and you’re exactly right. This is, I think it was referred to by [inaudible 00:14:47] as modern monetary theory. This is modern monetary theory area and it is about, governments issuing debt and central banks buying it to inflate the economy. It is exactly that. The real issue I think will be, and this is what kind of bedeviled the 1970s quite a lot is that, it’s perfectly good as a short term boost to the economy. But, you have to have an exit strategy to get out of it in the relatively near term. Once the economy picks up, you have to kind of withdraw the state out of the economy in part so that you can build up, reserves for the next big shock. So, and quite rightly, nobody’s talking about the exit strategy right now, but it might be something that some people, ought to be giving some thought to. When the economy gets up and running winding it all back in.

Chris Rising (15:53): So, when you’re looking at the different asset classes, maybe we start with hotels. How does the hotel business get itself out of this? Since every hotel right now probably has a average daily occupancy of about 1%. Does every hotel owner that’s got debt on their property are they going to lose it because they just have no ability to pay their mortgage? How does the hotel industry fire back?

Richard Barkham (16:24): Well, I mean, we have seen these sorts of shocks to the hotel industry before. So I mean, we saw it post SARS, we’ve seen it post 9/11 as well. So these kind of big major drop, it’s an occupancy. And I think, from my data, occupancy in the hotel sector drop from 65% down to 20%. I don’t know where the 20% comes from, but that’s what the aggregate statistics. And then we saw that in China. But China, it’s turned the corner and the occupancy is coming back and it’s kind of in shape a bit like a Nike swoosh. So you see that steep drop and then the gradual recovery is as confidence comes back. I think the hotel owners in America now, there’s approximately 60 billion of net operating income coming out of the hotel sector. Clearly that will have taken a big hit right now.

Richard Barkham (17:27): And I think that owners may not have that much cash, but the whole system depends on viable businesses. So, it is very much in the interest of the banking sector right now and we begin to see it happening. But the will be a grace periods offered by lenders to borrowers because this will be a relatively short shock, three to six months. And in that way, it’s kind of enlightened self interest. You might have to add that mortgage interest, or that interest onto the end of the loan or amortize it over the course of the loan. But these kinds of creative solutions that allow businesses to have some, a period where they don’t pay their interest but not default on their loans I think is what we see taking shape and industry, and actually what needs to happen. So that we can ride this out.

Chris Rising (18:41): How long do you think it will take for someone to be able to put a decent valuation on a hotel so that people could buy and sell again? Do you think is that something that could correct quickly or do you think that just to get people confident in buying and selling, they’re going to have another run of 10 months, or a year of operating history. What’s your view on when the capital markets in terms of sales is going to open up on the hotel side?

Richard Barkham (19:13): I mean, not all parts of the capital markets are dead, I have to say. But just, I don’t think that kind of realistic valuation can come back until we’ve got a real clear sight on where the virus goes. So once we see those virus curves bending there is, then I think the possibility once we all go back to work have a kind of a second round flare up. So people will want to get through that second round flare up. But I think, before long we will begin to see some sort of therapeutic even if we don’t have a vaccination, we begin to see the antibody tests rolled out. And that allows for a much more sophisticated method of management than just pure lockdown.

Richard Barkham (20:07): But, I don’t think asset values are going to be in a capable of, well, everything’s capable of being valued. But I don’t think, I think it will take a very clear view of where the virus is going which we probably see beginning to emerge in Q3. So there is a period of hiatus here.

Chris Rising (20:33): Do you think the size of the packages that was just approved and cares is going to be enough or there’s going to have to be more?

Richard Barkham (20:43): Well, I mean it’s 9% of US GDP, which is a huge stimulus. And if you add to that the stimulus, the way it works through the federal reserve and creating liquidity support, it’s 26% of GDP. And we’re talking about a drop in GDP probably in the first half of in the [inaudible 00:21:08] committee of around 30%. So, the government stimulus does balance the drop in GDP. But I do think more will be coming. I certainly do. And I wouldn’t be surprised if you see twice, and not a package of a similar nature. Just to make sure that the recovery I consolidated. Given that if we get all of that, we get that stimulus. And I think some of the devil will be in the detail.

Richard Barkham (21:39): I mean the willingness is there, the money is there. It’s just, people have to find out, the way in which they can access the money. The money has to get to the small guy, the small or medium size businesses. They may not be the kind of backbone of the economy, but they kind of add, they are important part of most city economies. So the money has to get there. And I do think more can but assuming it does, which I think you have to assume. It points that to potentially quite strong growth in 2021, once we’re free and clear of that as the pent up demand and the stimulus and the monetary stimulus all kick home. But it’s going to be, it’s obviously going to be a bit of a grind to get through that. The current period to that high growth recovery that’s going to be in the medium term.

Chris Rising (22:42): So, on the office side, there’s a lot of uncertainty. People are working from home. Some people think that’s an answer. I think a lot of other people don’t. I really don’t think people have thought about the technological security risks of working from home yet, and what will happen. I think we’re in the middle of the crisis so people will put up with it right now, but the risks that companies are taking from a home wifi network are pretty big. But what is your take when you’re looking at office product and office shoes. It’s a huge part of our economy and real estate is one of the largest sub asset classes. How do you look at office over the coming year coming out of all of this?

Richard Barkham (23:33): So I mean, I’ve heard at least two rounds in the past of people saying this is the death of the office. I heard it in the 1980s when information communications technology came along and raised the prospect of people working at home more than they did. But in fact, office use only intensified over the 1980 and 1990s. I heard it again after 9/11 where central areas will become much more unsafe. And that didn’t happen. So I think the need for offices which is a longterm trend to do with the evolution of the economy into the kind of tertiary sectors. And increase in the high-skilled tertiary sectors. I see that continuing. A lot of people are wondering about this right now. And some people are saying, as you suggest, this has been a big nudge in people working at home, but you’ve pointed out one or two of the limitations of working at home. I mean there are those, there are kind of social isolation.

Richard Barkham (24:47): And there is still, I think the need even, though zoom is pretty good. The need for face to face contact when you’re doing kind of really high level work. So there are disadvantages. And I think people will quite gladly go back to work in offices once this is over. And once the sense of safety is satisfied. Some people are asking the question, this may actually boost the amount of office space required because the trend over the last five or six years, has been the densification, but people will want more personal space.

Chris Rising (25:37): Yep.

Richard Barkham (25:38): I think these kinds of space per worker trends are, they’re very long term trends. They don’t usually get knocked about too much by short range shocks. But there may well be changes to the way we organize office life. The furniture that we use how easily that is susceptible to cleaning. The HVAC systems, the cleanliness of the air, and the kind of anti pandemic type of protocols that might have to come in. So it might, I’m not saying it won’t change our way of working, but I think it’s likely in my mind that the previous trends would broadly reassert themselves. And I see, as the economy recovers and the service sector recovers, sustained demand for office.

Chris Rising (26:36): Yeah. What do you think, how long we were having a call [inaudible 00:26:42] day on zoom meeting. And one of the things we were talking about is how long it will take for people to feel that lease rates have re stabilized, whether they’re 15 or 20% less, or comparative, sales start happening again. So there’s comparatives and your background and looking at all of this how long do you think it takes for those kinds of things to stabilize? And, the world gets going?

Richard Barkham (27:10): Well, common real estate always lags the economy. So we start with the economy and I think we see this isn’t going to be a recession quite like the 2000s or the 2008, where it took years and years actually for unemployment to fall, I think with a stimulus in place and the fact that the supply side has been reasonably well preserved, we’ll see unemployment falling quite quickly back down. Not perhaps two and a half percent, but over the next 12 months or so coming back from is likely to peak at about 12% and fall back down to say 6% by the end of 2021. And of course the economy and vacancy rates will follow that trajectory. So, I think certain sectors that will recover quickly are for instance the industrial sector might take six, to nine, to 12 months.

Richard Barkham (28:08): Offices will take longer, maybe six to 18 months. Retail may be longest [inaudible 00:28:15], because I fear that there are some retailers that have been permanently lost in some restaurants that are been permanently lost. So, it’ll take a little bit longer for vacancy to come down there. Hotels, you know about the same trajectory, kind of 12 to 24 months. So, that’s how I see that playing out. I don’t think it’s quite as long lived a recession either in the economy or the real estate market as the previous two recessions, which isn’t to say that the next three months isn’t going to be grim.

Chris Rising (28:52): Well that’s good news. I mean, I hope with this [inaudible 00:28:57] the payroll loans and all of that, that will keep people afloat for those few months. Let me ask you, when you look at the way the world is going to have to cooperate going forward, do you see longterm risks or opportunities, and how we’re going to have to cooperate in a world when a pandemic has brought the world to its knees?

Richard Barkham (29:21): Well, it depends, clearly this pandemic has shown the need for international cooperation. Even between, governance that don’t quite agree with each other. Whether, that will last after the virus goes away. I don’t know. I mean, if you look at the second world war was probably way too far back, but a lot of the multinational institutions that kind of dominate the world now, the IMF, the world bank and those types of organizations. They came in after a period of profound, kind of a nationalism really. So the question is, will this virus, and prior to the virus coming along, we had begun to retreat from that world of multi-lateral the cooperation. I think that is one of the big and interesting areas about politics over the next couple of years.

Richard Barkham (30:36): Will we see a jump back into more international cooperation? I think we might, I couldn’t say that for certain, but I do think as well more broadly that, we’re thinking about the virus in very near terms. Thinking about, is it going to impact the office? Is it going to bring more manufacturing back to the United States and so on and so forth. I do think the virus will alter politics in ways that are quite unpredictable. So we’re just going to have to, keep ourselves mentally agile, ready to make sure that we are really listening to what people are saying, and what people are feeling. And how that might pan out in terms of voting patterns.

Chris Rising (31:30): Yes. Well, it’s going to be a very interesting election in November, beyond just the nature of the people, our current president’s personality and all. But I think there’s going to be a lot of discussion about economic policy, and the future of it in this country and around the globe. Can you look to other points in history where we have any guidance for what’s about to happen here in November, and where we might be?

Richard Barkham (32:05): I mean, I can give you, there are lots of different, there are a couple. I mean, on the very, if I were to take a really extreme optimist perspective, I might look back to say 1987, where we had something called black Monday and some reasons that weren’t really clear at the time. Stock markets crashed about 40%, and the same sort of response. Everybody was worried about a mass global recession. So governments put fiscal support in and put monetary support into the economy. And in the end it wasn’t actually that much wrong or at least it wasn’t as much wrong as people thought. And we ended up in 88 and 89, with quite a strong boom that landed in a really big economic crash in the early 1990s. I suppose that’s one way it might go.

Richard Barkham (33:08): On the other hand, you might get some sort of, as I say, post second world war realization that there is a broader need for kind of multinational cooperation, that might occur. I definitely think people, and I don’t know quite how this will play out in politics, but people might want to, unwind some of the longest supply chains or at least, try to build a system that is both economically and socially more resilient. I mean, I think that’s one of the shocking things that we’ve seen. Even in our kind of very successful world, and quite wealthy well by any historical standards. There was a lack of resilience there. That has been quite shocking for everybody to see. What the political program is to address that. I’m not quite clear. I don’t think anybody is, but that would be something to watch going forward.

Chris Rising (34:21): So, our audience is a lot of millennials and a lot of gen Z, and they’ve watched their parents kind of go through the 2008. I don’t really have much of a perspective beyond that. What would be your thoughts or advice to young people in real estate today about managing through this, but also finding opportunity through this? What are key indicators that you would look at to see when values are going to turn or when the knife stops falling?

Richard Barkham (34:53): Yeah, it’s interesting. It’s not the first time I’ve done this. I remember canceling students in 1990, and they were graduating into an awful jobs market. And I don’t think this will be quite as bad. You’ve just got to lower your near term expectations, but somehow rather stay in the labor force. Even if it’s working for very little amount of money, you’ve just got to make sure that you hang in there, that you get the experience, you stay in the sector. You’ve got to be very… These things will pass, and it might be 24 months, might be 18 months, might be 12 months, but it will pass. So you’ve got to keep focused on where you want to go. And you just got to lower your expectations and just keep hanging in there. And try to make the most of what opportunities do exist.

Chris Rising (36:03): And when you’re looking at some of the things that we should be looking at between now and the end of the year, are there [inaudible 00:36:11] you try to become as best you could be, an epidemiology in terms of an expert, you are an expert when it comes to the global economy and the real estate economy. Where would you put more lay people, lay economists and testers? Where should we really be focusing our sites to see these things turn? What would be those indicators?

Richard Barkham (36:35): I mean, if you want the simplest of all, I would look at the rate of unemployment. Now I’m a European economist. European economists tend to look at unemployment. American economists tend to look at employment growth. They’re probably a little bit more optimistic, but I think as a good indicator of the momentum in the economy, and if you start to see unemployment coming down it’s because, on balance more people are being hired than they’re being laid off. That means, companies are beginning to feel confident and that means, slowly but surely those people who are rehired start to speak and money themselves and that works it way through that the system. So, if you want to quick single statistic, I would just look at the claimant count unemployment rate.

Chris Rising (37:32): That is something we look at very closely as it relates to office and as it relates to hotel because it’s more people employed, there’s more business travel, it just means the world’s better. Do you think that we’re going to… A lot of people are predicting that we’re going to see 30% unemployment, but then two months later it’s going to go back down to about 10, and then it’ll go back the five. I mean, is that realistic? I’ve heard certain contents try to say things like that. Do you think it’s realistic that it would play out that way?

Richard Barkham (38:05): I mean certainly we’re going to see a really nasty spike. I doubt myself it will go up to 30%. I think it’ll spike at about 11%. And then it will, I think then we’ll see, assuming that the COVID goes away and the stimulus kicks in. I think then we will see it will drop quite rapidly. But I don’t see it, I don’t see it dropping from 11% back down to three and a half percent by the end of the year. In fact, I think there might be some permanent, not major, but permanent damage to the economy, which means that, probably it peaks at 11 and then maybe get down to something like 7% by the year end. And then, more slowly fall over the course of 2021, to two, maybe five or 6%.

Richard Barkham (39:03): So it’s like kind of, it’s not a V shape or an inverted V shape, more like a sore tooth with a kind of sharp increase, sort of sharp initial drop, and then a slower recovery from that point onwards.

Chris Rising (39:21): And so as you advise pension funds and I take of the big ones out there the CalPERS of the world, and some of the Canadian European ones. Do you think that, would you advise them to just put everything on hold or would you say you’ve got to keep investing the real estate market as a whole as not going away? Or how do you advise [inaudible 00:39:46] at CalPERS today, in terms of investing both in the public markets and then the private market?

Richard Barkham (39:51): Well, I think you get the best bog. Well, I mean, I don’t want to imply that, what is a human tragedy is an opportunity for profit. Because, really we should focus in on solving the human problem. But markets have been very tight, values have been very high and it may be that those institutions with deep pockets can perhaps find a better value over the next 12 or 24 months. So I think there will be opportunities to deploy capital quite advantageously. And I do see that values themselves. Although they may take a short and medium term, over the course of three years, values are likely to be very resilient. So this is an opportunity for pension funds to continue to secure assets.

Richard Barkham (40:50): Now there is a mild problem with pension funds, which is called the denominator effect. So the fact that the value of stocks has fallen makes many of them potentially overweight in real estate. But I think real estate is proved its worth as an asset class over the last 10, 12, or 20, or 30 years. So I would advise [inaudible 00:41:20] to live with that and just continue to secure assets at advantageous prices if they can.

Chris Rising (41:28): It seems, it’s so hard. I’m gone through several cycles. What you said makes a lot of sense. The stock market goes down, their asset allocation strategy gets out of whack because of the denominator effect. But it seems like every cycle, the pension funds are the last to come back in. Do you think in the world we live in today where whether it’s the internet or people like having a bigger platform that then it might be different, or do you think the pension funds and, I’m just going to, by nature they’re slow movers and they may miss the buying windows because they’re worried about their denominator effect?

Richard Barkham (42:08): These are, quayside public bodies that have got fiduciary responsibilities. They’ve got, people’s pension funds. They are going to secure people’s lives for kind of 20 or 30 years. So it is entirely right. The pension funds, don’t rush into anything. I like a pension fund, my money to be invested with a pension fund that doesn’t kind of rush into market situations. So I think the degree of sluggishness or caution in their return to the market is likely on balance. That’s probably quite a good thing. But there will be other categories of investors that are kind of… I have a little bit more freedom of action. The private equity companies and they will be able to move more quickly I think.

Chris Rising (43:11): So I was on a call maybe three weeks ago when we first had the shutdown orders here in California, and it was a lot of real estate investors, a lot of operators and there was absolute panic. I guess one my might expect, but it was really this panic of the real estate market will shut down entirely because no one can pay their rent. And then I said this earlier, but I just kind of want to circle back then the borrower can’t pay the lender. The lender can’t pay the investor, and it totally shuts down. Some of the people who were a little less calm and had been through a few cycles said, no that’s not going to happen. We’ll have a stimulus of some sort, which we have had [inaudible 00:44:00] place, but still at the end of the day it would seem that someone’s going to be holding the bag. Even if there’s four [inaudible 00:44:08], all that still means that the lenders, investors aren’t going to get paid.

Chris Rising (44:12): Is that something that is going to get in the way of everything? Because unless the government as far as I can see is going to sit there and buy all these loans that are [inaudible 00:44:20] have a bunch of forbearance and change the deal. Somebody is going to be left holding the bag, aren’t they?

Richard Barkham (44:26): Yeah. I mean, but we did see this in the great financial crisis and it was rather pejoratively termed extend and pretend. I think with, with central banks being hyperactive as they are at the moment, I do think it is possible to support the financial system. Now you’re quite right. There is an actual loss of wealth here going on. You can either take as a kind of one off hit. Then it appears in a default and then a restructuring, or you can smooth it out. You can take that default and amortize it and you just end up with a kind of more smooth, lower return environment, which is less [inaudible 00:45:15]. But the will be a hit, don’t get me wrong, but you can to a certain state nowadays, manage the nature of the hit. Whether you want it one acute hit or you want, something that’s a bit more drawn out.

Richard Barkham (45:32): You will record as well after the great financial crisis, that first five years of economic growth, it was a pretty joyless recovery. So, some of this can feed through into kind of either lower returns or lower growth rates in order to have a less serious hit to the system.

Chris Rising (45:56): So, we’ve had a very nice conversation. You’ve been very calm through all our conversation and it may feel more comfortable that, that the world’s not going to end. But what is it out there when you’re looking and goes X, Y, Z happened, I’m really nervous because there’s got to be some of those scenarios that we all run in your mind, say if we don’t thread the needle on the PPP loan and those cares act, is that it or are there other things that really concern you that could make this a very long term recession, depression?

Richard Barkham (46:38): Yeah, I mean I think, first and foremost, daily I’m looking at the progress of the disease. And I’m noting with a degree of happiness, just a little bit of good news out of Europe, particularly Italy. Those curves do seem to be bending. So, what appeared to be the trajectory of the disease in China. It does seem to be playing out in America and Europe. That’s one. Clearly I think economists are always looking for second round effects, which is that, and that could be any number of second round effects. One is that I am I’m wrong in my optimism and that some of the nonpayment of debt does feed through into the banking system and you end up with a credit crunch.

Richard Barkham (47:33): So the businesses don’t get the capital they need to expand. That’s one area that I’d be watching. I think the third, as I say, [inaudible 00:47:43] got it’s great financial crisis playbook out and it’s really using it effectively. So I think the chances are minimal. But also I think, just the kind of the loss of small businesses in the US economy, the little restaurants, the boutiques and all of those things that you have developed over the last 10 years means that, when demand picks up, you can’t just turn a business on overnight. You’ve got, somebody has got to have the courage to mobilize resources and set up a business. And that, people get scarred by these events and there is a fear factor that can kind of prevent that kind of entrepreneurship for a while.

Richard Barkham (48:35): Well, American society is pretty resilient and pretty, pretty dynamic so it doesn’t happen forever. But those are the kinds of effects that I would worry about. One thing that I’m feeling reasonably good about, and one thing that typically creates a problem in these types of sessions is just the fee through the construction sector. Normally if you’ve got a big wave of houses or real estate, heading for the market, the moment the market stops, you end up with a big construction sector. Kind of out of work and the construction sector can be 6% of GDP. It can be quite big. I don’t think we’ve had that degree of overbuilding in the economy this time. It’s been a long a cycle. But a relatively slow and stable one.

Richard Barkham (49:27): So that kind of overproduction of real estate doesn’t exist. So that’s one less thing to worry about. But certainly there are second round effects. I just hope that, and I think that the virus trajectory is sufficiently predictable. Basically this is a one quarter hit. I mean it’s going to be a going to be a tough quarter, but it’s basically a one quarter hit in which case I think the damage to the overall economy is not too bad.

Chris Rising (50:05): And, you are the global economist for the largest real estate services firm in the country and now on the globe really. But certainly in the country, in the United States, that business has a lot of dependence on a lot of transactions happening, sales, leases. You do a lot of property management, facilities management, but the future of CBRE is really that we get back to doing transactions. When you’re advising people in your shop, how are you telling them to look at this, to set the proper expectations? And I know you’re a public company, I’m not asking for anything that isn’t public, but what’s your general internal advice to your team?

Richard Barkham (50:48): I don’t think I would have said, my teams internally would be pretty bored with me saying what I’ve just told you over the last hour or so. This is a very nasty but short, sharp shock. And then real estate markets will cover over, recover over six to 24 months. So CBRE is not unlike other professional services firms, accountants, or lawyers that depend on transaction. We’ve got a big, a stable revenue base from facilities management, and corporate real estate management, and property management of other sorts. So we’re not as dependent on transactions as similar companies in the past have been. But everybody does better when transactions pick up and there is a lot of knock on and associated activity including I have to say, some of which is in restaurants. That’s what I’m saying. I’m saying kind of keep your courage up. Hold your nerve. This looks like it is a one quarter event albeit with a kind of a Nike swish shaped recovery.

Chris Rising (52:14): Well, I hope we can quickly forget about all this economic pain, but I hope we all learn a lot of lessons about when the indicators are out during this pandemic. The best way to do these things is not to hope they go away. So I hope we’ve learned that as a society and as a globe. I have really enjoyed this conversation, but I just can not ask you a few questions just about what your experience has been working from home and technology that you’re using. This podcast, we tend to ask, what’s kind of the back bone of your company? And I’ve had people like Lou Horn in the past and talked about how advanced you all are with using technology, but what’s the experience been for you, working from home and not in an office?

Richard Barkham (53:05): Well, I found that zoom has worked quite nicely. But I can’t wait to get back to the office. I’m kind of bored rigid working at home. Work life is about teams. It’s about, to social activity as well as a productive activity. And I like to see my colleagues and chat to them and sort of, get to know them as humans. So I don’t mind working at home one day a week or two days a week and if we can use zoom so that I don’t have to get up very early in the morning and go to New York just for a couple of meetings, then that’s quite good. But I’m not really somebody who found that working at home is a brilliant thing. I prefer to back in the office and be with people. Really.

Chris Rising (53:59): Yeah. I think, one of the things I talk about a lot is, I think this is the last few years has been the last gasp of the baby boomer work hour ethic. You get in before seven in the morning and stay till seven. And that means you’re working hard. I think what this is really demonstrating is that there are those things that can be done at work, but it can be done somewhere outside of the office. There were those meetings that you can do with zoom, but I think it only has to me, underscored that there is something thinking really important about having in-person conversations when it comes to ideas. And, at the end of the day for my side of the business, you’re still shaking hands on somebody giving you $100 million to invest in a fund or a real estate deal. They will want to shake your hand.

Richard Barkham (54:49): Absolutely. And if I’m the [crosstalk 00:54:51].

Chris Rising (54:51): I don’t think that’s [crosstalk 00:54:51].

Richard Barkham (54:53): If, I may just interject. I mean, I’m just prior to the crisis. We released one of the reports I’m most proud of. It’s called real estate 2030, and we’ll be looking at 10 trends in real estate that are going to shape real estate markets in the next 10 years. Maybe one day you’ll invite me back and I can talk you through those. One of them is the fluid workplace and I think that, just the COVID-19 crisis has just showed us, that not perhaps the overall demand for offices is going to go down, but people will be more fluid. They’ll work from different places. They’ll work sometime from home and sometime from the office. So it’s on our website real estate 2030. It may not be front of mind right now, but it’s got, some very interesting research on the fluid workplace and I think COVID-19 has just been a very strong nudge in that direction.

Chris Rising (55:52): Terrific. Well, I do want to have you back because I know in about three or four months, I’d love to get your view on how things have evolved and I’d love to talk about that report further. Richard, thank you so much. Very grateful for your time and your insights. I think in a very scary world, some of the ideas you just talked about can all make us feel a little bit better about where the future’s headed. Richard is active on LinkedIn, so you should follow him there to our audience. I’m so grateful to those who are listening to the real market. Please subscribe to the podcast. You can do that on any of the podcast platforms, including Apple. Thank you so much.

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