014 – Why partnerships and joint ventures make sense in industrial real estate. Guests: Michael Gamzon, President and CEO of Indus Realty Trust and Pat Healy, Scannell Properties

(upbeat music) - Welcome and thanks for listening to Under Development with Scenel Properties, where we examine logistics and industrial real estate trends. We dig into the stories you want to hear with development executives in markets worldwide. Here's your host, Jay Tanwan. - Welcome to another episode of Scenel Properties Under Development podcast. And this month we are fortunate to welcome Michael Gamson, president and CEO of Indist Realty Trust, and Pat Healy with Scenel Properties, is our senior director in our capital markets group. So what I'm gonna do, I'll quickly share their bios and then we'll just jump right into the discussion. Michael Gamson is president and CEO of Indist Realty Trust. You joined the company in January 2008, as executive vice president, his extensive experience in background include corporate finance, strategy, private equity and public security investing. Michael is a distinguished alum of Yale University and also received his MBA from Harvard Business School. Pat Healy is a senior director at Scenel Properties. He focuses on dispositions, joint ventures and underwriting all industrial built-as-oo and speculative developments for Scenel's US industrial platform. Pat holds a Bachelor of Science in Finance from Indiana University's School of Business. And I think the football teams actually doing pretty well this year, which is pretty surprising at a kind of out of nowhere. But anyways, we'll jump right into it. So welcome Michael, officially to the Under Development podcast with Scenel Properties. You are our first guest from outside of the company. So I think you'll set a new standard for all of our podcasts moving forward. So no pressure. But now I think we can get right into this and really just start out with the background on Indist and how everything kind of came together. And I know you have a unique story on how the company started. So thought you'd like to share that with our audience. - Yeah, thank you. And thanks, Pat and Jay for having me on as the first outside guest. I guess the good news is the bar is really low for me to set. But hopefully this will go well. Indic has a long history and probably a little bit of a different one than most in coming into the industrial real estate space. Our company really started or predecessor started over 140 years ago in the tobacco, cigar tobacco industry. That company vertically integrated over time, including a series of agricultural properties to grow tobacco, have vertically integrated to manufacturer cigars and then moved on to lots of other businesses. But over that time they did have large land holdings and did do some master planning of industrial parks, residential and commercial through its history. In the mid 1990s, the company was public, was owned by a family group that had about half the stock in the company. And in the mid 1990s, decided to split the company apart and we were spun off as a small amount of industrial and commercial land, a small amount of industrial and commercial properties, several other thousands of acres of agricultural land and a bunch of other businesses. And starting from that, our company really started focused on commercial and industrial development, fairly quickly learned that commercial was probably not the place to be. This company was based in central Connecticut outside Hartford and really realized that commercial was not going to be the avenue for success. So focused on industrial development in its early days. We did a series of spec developments and select built-assuits. And then when I joined the company in 2008, there was a view to expand this company's business outside of Connecticut. We had non-core assets as part of the spin off. We had excess land. We were selling that we weren't going to develop and needed to redeploy those proceeds. So with that, we really started to move geographically across the East Coast. So into Pennsylvania, the North Carolina, and then further into the southeast. We did that initially with our own capital. And then along the way, I had a relationship with a person named Gordon Dugan. Gordon had built and run a large public recall Grammarcy Property Trust from about 2012 to 2018. Gordon sold that business or their public. They were sold to Blackstone in 2018. Gordon didn't stay with the business and decided to come over and join me as chairman of the CEO with the goal of scaling in this up further. And so with that, we ended up raising money in the public markets, growing the business, and continuing to do both acquisitions of existing buildings, select development, and growing the portfolio that way in a very strategic way. Our goal always has been to own great real estate and great locations. And that really was our focus. In 2022, we were approached by two large sources of capital, one being center bridge partners, a private equity fund that had purchased stock as part of one of our equity offerings, the other being GIC, the sovereign wealth fund of Singapore. They both separately approached us, but they also had a working relationship amongst the two of them. And ultimately took us private to be an industrial platform for GIC center bridge and center bridge brought in Adia, the Abu Dhabi Investment Authority. So that group now owns us privately as a platform for industrial. We are still a reate. So the goal is really to build a great business and a great portfolio. So it's not like a typical private equity asset by asset, by an asset, sell the asset, or to be a merchant builder in any way. Our goal is to really grow this portfolio to be a much larger, larger business with their capital and think about us as sort of a long-term vehicle. Got it. Thanks for sharing the background there, Michael. Also curious, where does the name Indus come from? Yeah, so it's an interesting story. We had a different name before, but there was another West Coast Real Estate group that had a similar name and did a confusion and other things we decided to switch it. We really just hired a brand new agency. Oh. Give up with ideas that would tie to, you saw that feels like industrial real estate, this digs or to get across it. But given our last experience with an overlapping name, we wanted something that actually wasn't really treat markable. So we didn't think it was something too proprietary for too special, but also it would get the message across it what we do. Yeah, now I like it. I like it. Well, also welcome to the podcast, and thank you for joining us and really look forward to hearing your take on the market. And I think we're going to attempt to solve all of the commercial real estate problems all in half an hour, 45 minutes of this podcast. So be great to hear your take on everything. This all kind of came together, because you and I were chatting with Angie as well, just about having one of our capital partners join us on the next podcast episode. And Michael, Gamson and industrial trust were very first name that you mentioned. So really curious how this whole partnership actually came about. Yeah, so Indus has been a tremendous partner of ours. The Scanella Indus relationship started with Bob Scanella and Indus is chairman Gordon Dugan. This all happened when Gordon was the CEO of Grammar C. And Grammar C bought a US portfolio from Scanella with this transaction. Grammar C issued OP units to Scanella. This deferred taxes gave ownership and Grammar C at that time. Ultimately, then Gordon introduced Bob to Michael. And then Michael and I met in the spring of 2021. Shortly after that, we signed up our first deal together and I say signed up because it wasn't the first one to close. But this was a forward sale for two buildings in Nashville. Getting that forward sale structure in place led to two more forward sales. One in Charleston and one in Charlotte. And as we're talking about forward sales on the spec side, you know, this was a different market back then. Vacon buildings were worth much more than stabilized buildings. Landlords didn't want to offer to lease any of their buildings until closer to completion. Things have changed quickly. Fast forward today on the spec side is hard to value what a forward sale would be today. We've done multiple structures with the indices team. But the one that has made the most sense of late has been the joint venture LPGP. We've closed two JV opportunities in the last 12 months with the indices team. This was two buildings in Atlanta and then a multi-phase development in Savannah. - Great. And then I guess now Michael, from your perspective, what do you typically look for in a general partner and what made pursuing a JV with Skinell in particular made it the right fit for Indus? - Yeah, I don't have the answer that. As I mentioned the background, we've always done some self-development ourselves and acquired properties. And as we look to really scale the business, we think about how do we leverage what we do and what we know to really grow the business. That led us to looking at forwards and now joint ventures for development. The R goals ultimately to own the property at the end. But with that, when we look for a partner, we also look for a partner who will accept that we're gonna be pretty hands on in the process. Since again, we have our own construction management team. We have, Obviously very strong opinions on projects and properties. And like we're picking the properties and projects that we think are great, a great real estate that we would be developing this project if we'd found the land first type of thing. And in the couple cases, what's gonna be us to the punch and tie it up the land sites and the opportunities and did a lot of the legwork. But we're gonna be pretty hands on. And also we need a partner who knows that our goals really grow our business. So likely we're gonna buy them out, but on the property longterm. So our philosophy is gonna be a little bit different in that we're buying this building to own forever versus just trying to maximize the early dollars and early value. We want some is gonna be a little bit flexible. So we may have some views on site plan or design. Obviously it costs more, it's something we'll pay for. If it's just tweaking a site plan, hopefully it will be like mine did. But at the end of the day with all these projects, the biggest thing is trust. And it's both trust and belief that who you're working with is gonna get the project done for the budget they committed to. But then the bigger issue is really trust that when something doesn't go quite right, and Pat and I can talk about a few of the deals where like everything something sometimes goes off schedule that you trust that there'll be a rational party and you'll act rationally and come up with a solution that works for both of you. Not to say there won't be some pain for both, but that it's sort of everyone feels they've been fairly treated ever solving that issue. And that's, you know, we think ultimately the biggest thing and why is Pat alluded to, we've done several projects together 'cause we've figured out ways that we can work together and when things aren't perfect, we figure out ways that we both leave satisfied that this will be a great project and we can work well together. - Yeah, no, I think that's great. And Pat, I think now from a Skynell's perspective, Pat, like it's no secret historically, yeah, Skynell has used its own equity for projects. So what circumstances and situations make the most sense to bring in an LP partner like in this Realty Trust and what makes them the right partner for Skynell? - Yeah, definitely. So we've hit on the debt markets and other episodes, but I think it's important to hit on it quickly here because the debt markets are ultimately a big driver of factoring into our decision making on finding an LP partner or not. When interest rates were so low, Skynell could get high leverage loans called 85% loan to cost money that was non-recourse for spec development and rates were five to five and a half percent all in. On the bill of suits I we could push leverage even higher, 90, 95% of some instances. At those levels, your equity checks are significantly less than they are today. You know, we saw interest rates rise 500 basis points over the last 24 months. Spec financing now is 55, 60, 65% leverage, depending on your recourse or its non-recourse. So you could do three spec buildings back then for the same equity check as one spec building today. So when we look at some of these larger projects or multi-fazed multi-building developments, those are the times we'll often consider LP equity. And then you ask, you know, what makes into us such a great partner and, you know, why has Skynell done so much development with them? Well, one in this is very like-minded to Skynell. They are also a developer. They're very knowledgeable not only about development, but they're knowledgeable about the markets they're in. Michael and team, they know what JV terms are, you know, what market economic terms are. They're able to make quick decisions, which really aligns well with Skynell. Our speed in the market is a competitive advantage we've always had. But I think the most important element that makes them a great partner is the relationship established. The ability to pick up the phone, one of the tough decisions needs to be made and working through it. You know, when you sign up a joint venture agreement, you aren't just negotiating, you know, the waterfall structure or major decisions, you're trying to predict and predict like what will happen during the next 10 to 12 months of that development. While Skynell and Indes, you know, we pride ourselves in delivering under budget and on time. There are things that we can't control that can delay the projects. There could be delays in materials. There could be, you know, weather delays, access to rain. You know, I've hit on the interest race, but all of a sudden race rise in your interest reserves are over budget, you know, maybe leasing is slowing. So Michael and I have had our fair share of tough conversations, but having a partner that you can trust and work through the bumps that is fair and reasonable. You're not having someone trying to ultimately screw the other partner over, that's important. And we've established that, you know, through the relationship with Bob and Gordon, through the relationship with, you know, both me and Michael. And so once you have that and once you have the Doxon place making it more programmatic and doing as many deals as possible, it's great. Got it. And our projects together with Indes and Skynell have mainly, seems like they focus so far in the Southeast. So Michael, like what types of deals are you looking for these days? And what areas as well? Yeah, so I think start with geographically, as you pointed to a lot of what we've done together has been in the Southeast and the Southeast continues to be a big focus for us, as well as we really spend a lot of time these days in Texas, Phoenix and other markets as well. I think we just have a broad thesis of really population growth as a key driver of ultimately industrial demand. It just needs sort of the chicken and egg on manufacturing as manufacturing go in there because there's population to work there or is it people are moving there because there are jobs, but we think either way it works for us. All those people need services, they need hospitals, they need food, they need retail, and so that all just leads to great industrial. So that's geographically where we're looking. And types of deals, you know, we've typically focused on buildings of 100 to 500,000 square feet. You know, we really like opportunities that are really well located. Again, ultimately for us in my view is as much as we want to grow and grow this business, we don't really want to be asset aggregators. We want to remain investors and we want to own great real estate. Because in the end, if you hit a slow market or a slow leasing environment like we've had over the last 12 months, if you have the best real estate or amongst the best real estate, ultimately that's going to work out well. And as I'm sure the skinnel teams have seen, and as we have seen, it's really hard to find good industrial real estate. It's just you have all the NIMBY issues, all the challenges of people just not wanting it where it's going to be, find an entitled land, and then find that land close to where you actually want to locate a warehouse is really challenging. So we feel if you can get things in those good locations, they're only going to be worth more over time and drive better rent growth because they can't be replaced. So in a type of deals, we really like development and the opportunity there because we just feel the returns remain good. We're not afraid of spec. Obviously you need to be measured in an environment where leasing is slow. We're also looking at existing buildings, value add or stabilized deals. But that's really where we're looking to. I think we're avoiding kind of the long least deals. We just have a tough time competing with core capital on that type of property. But otherwise are pretty open and opportunistic. If there's a way to get good real estate at a good return, we're going to try to figure out a way to do it. Yeah, and then I noticed you were mentioning Texas and Phoenix. And I was-- I'm physically located in Southern California. So I was waiting for you to also say California. So what are your thoughts on California and industrial real estate? Maybe specifically Southern California. Yeah, it's interesting. It's an area we've hired. So it has spent a lot more time there than we have in our partners as I mentioned, GIC and Center Bridge have said it's there. So we've spent a lot of time recently digging into SoCal. It's an interesting dynamic. I think most people-- and again, I'm old enough that I was around in 2008 when rents did decline. But since then, until 12 months ago, no one had seen declining rents before. And it does change your mentality how to think about things. So we're spending time there long term. Nothing's changed in the outlook for Southern California and why industrial isn't a good product there. Recent regulation is making it somewhat more challenging to develop new product. So it's a little bit there trying to avoid catching the falling knife, so to speak, and trying to be closer to the inflection point. Obviously, you can't time that perfectly. But we are spending time there because it's a big market. There's obviously a lot of product there. And it's one that long term still makes sense. You know, you kind of hit on it in terms of what's happening with lease rates overall, and we're in a period of uncertainty to some degree for industrial real estate. So what types of deals are coming across your desk that you think actually have a high likelihood of getting past your investment committee and actually ultimately getting approved? Yes, I think ultimately, as I talked about, really great real estate. And was tied to that in a world of a little more uncertainty, both on leasing and absorption, rental rate, direction, and interest rates, you know, basis, we talk about a lot more now. So what's our cost per foot? And how does that compare to replacement cost? How does that compare to what other people's basis may be nearby? And then what is the in place yield matters a little bit? You know, we view things with a longer term horizons so that, quote, negative leverage for a few years. If we buy something, we can tolerate that. That's not a deal killer. So we look often at where is sort of a yield on cost at market rents. And if-- We're sort of, I'd say, as a rule of thumb, for it is six and a half there, and it doesn't take seven years to get there, but call it four to six years to get there, four to five years, and it's six and a half today and hopefully growing. We think that gives us a good margin of error and a good sort of basis at which to buy something. Obviously that rent market rent has to be, we truly believe it's market rent, but we're taking a little bit of the guesswork out, right? We're not really guessing on what future cap rates are to drive an IRR. We're not guessing at where future interest rates are. And so that gives us some comfort. The one caveat again in today's environment is if the current leasing trends, which call it as 160 to 180 million of absorption, sort of forecast in 24A, if that's the go-forward rate, and rent growth is kind of flattened out, and we'll see what happens over the next kind of couple years. If that dynamic of strong rent growth, good absorption is really on pause for the foreseeable future, and rates stay high, that probably starts to create a relocate what yields start to make sense. But in today's environment, we feel good looking at deals that way and moving forward on that basis. - You mentioned negative leverage and you're willing this to take that on for a little bit upfront, but what timeframe is that? Is there a kind of set timeframe where it gets just too much? - Yeah, I think we can go out by four to five years, sort of matching up with that walled on the deal. What I'd say is, when rates were coming down a couple months ago, we talked about negative leverage a lot less. In the last month, it sort of starts to pencil out a little bit differently again, but we again view it as the four to five year is okay. We just want to make sure, really we're going to get paid for releasing somewhere along that way as well. - Got it, okay. And then in terms of geographical area, you mentioned a few kind of areas that you're focused on, but are there any in particular that you want to share that are really exciting that you're really keeping an eye on? - Yeah, as I mentioned, it's really Texas. We think Dallas and Houston continued to have really good fundamentals, very big markets, really good fundamentals in both. I think they're more the exception in 2024 in terms of absorption. So we've really taken note of that. We continue like markets that sort of have multiple drivers. So if you pick Houston as an example, you have the poor, you have population, you have industry. We really like that. We're closing actually today on a building in Phoenix. So we want to do more in Phoenix. Again, we like the fundamentals in that market. As a side note, what we like is there really aren't a lot of perils in that market. We own property in central Florida and in the Southeast and recent hurricanes and everything else, are impacting things like insurance and other aspects of that deal. So Phoenix, you avoid some of those issues and obviously the dynamics going on there and continuing the Southeast. So we really like Nashville where we did the project with Scanal. We really big fans of Nashville trying to find more there and continue likely to grow in markets like Charleston and Charlottet where we also did deals with Scanal. - Yeah, and some of these markets, let's say Houston, for example, what untrended yield on cost or are you solving to these days for both acquisitions and development? - Yeah, so in development, we sort of use just seven and we don't vary too much geographically. To be honest, I mean, look, I think if we had something in an A location in Miami, obviously we'd have to just things down a bit on the capri in yield expectations. But I think we feel seven feels pretty good to us today on a yield for development. When we're looking to do something like a joint venture, we probably look to push that up a little bit more 'cause hopefully it's successful and hopefully we're paying a nice promote to the developer for it, but that promote does end up diluting down our projected yields. For acquisitions, again, we'll look at that marked to market yield rather than the initial go in in yield. And if we think that to six and a half, that gets us, you know, certainly right in our bulls. Obviously we can push things around as well for something specific. If it's just truly unique location or something unique to that building that we wanna do. You know, as an example, yields are still really good there, but we're doing a project with Sknell, the joint venture in Atlanta. We just thought that was an unbelievably good in fill location. When we do an analysis of developments in particular, even buying an existing building, we spend a lot of time on pipeline and what are we gonna compete with in that sub-market? And depending on how big the market is, I thought that big a market, the overall market, in terms of existing product on the ground and future deliveries. And in that product in Atlanta, there was nothing in the pipeline delivered coming for, we could see for the foreseeable future within a pretty large radius. It just was that unique location. Do we just say we have to do the deal? I mean, it's penciled fine, but no matter what, that's the deals we take to committee and say this is a, you can't say no type of deal. Right. And then what about like equity check size? Like what size the deal is in your sweet spot and maybe what's too small? And is there anything that's beyond what you'd want to even look at? Yeah, it's really any check size. I'd say, you know, for a joint venture type thing, if the equity checks less than 10, that opportunity, it starts to question, do we want to do it or not? But the caveat being, I'd say if it's an existing partner, where it's a little bit, we can just repeat what we've done. So pick scanals example there. We'd be open to do it because the heavy lift has been done in negotiating documents and come for with the partner. So there's really nothing too small. I know we're happy to buy 100,000 square foot building. Do a development for that if it's the right, unique location and very special. And then for Maxone check size, there almost isn't one. As I mentioned, two of our partners, capital partners are sovereign wealth funds, plus a private equity fund. So we can look at anything of any size and we have joking their conversation. Isn't there a billion dollar portfolio we can go out and look and buy? On the development side, I'd say we probably wouldn't, I've looked to do something that large, but we've looked at a multi-phase development. And the one in Savannah is about a million feet total. There's an adjacent site that Skidell has under control that we could also potentially do with you all that would make that almost two million feet. I think it's really a duration issue on the larger development opportunities that I don't think we want to be in a development that's called three phases and like a seven-year buildout. Like that horizon gets a little too long. So that more would limit the check size on the development more than anything going in. - Thank you, Michael. I think that was really a good, comprehensive overview of what types of deals you're looking at, where you're focused on these days. And I think really gave a great summary of Skidell and indices relationship together. So appreciate that, but now I think it would be great time while we have you to really dive into some of these current events that are happening today that are affecting commercial real estate. And I thought like this podcast in particular is really perfect timing to discuss 'cause we had some pretty huge events, you know, just happened in the last couple weeks. I mean, we had, you know, with the Dodgers, beat the Yankees and the World Series. And it's a big baseball fan, so through that in there for him. And then we had some election. I think, I don't know, I didn't pay attention to it, but some election happened. And then, you know, the Fed, again, you know, just days after the election cut the Fed fundraate by 25 basis points. And, you know, they're talking about cutting it again in December by similar amount. So just want to get both of your takes on all these events together. And it will start with Michael. So what are your thoughts on that? And, you know, what do you think's going to happen here? Especially, you know, we heard a lot about, you know, the election, you know, once the election was over, then we'll start seeing more activity. What are you seeing on that side of things? - Yeah, so first I appreciate you bringing up the World Series, living in New York and being-- - Oh, yeah, sorry about that. (laughing) - On my life, you know, just dug the dagger in a little bit deeper, but anyway, we'll hopefully come back to fight another day. Yeah, I mean, obviously the election was fairly recent. So it's hard to say that the light switch turned on seven days or nine days after the election. But what I'd say is I think that's right. There was a lot of sort of the last couple months. Just we thought inactivity due to uncertainty. And I think it provided a little bit the capital markets, probably a little less what we saw in the capital markets than we thought, certainly on tenant activity. I think the expectation is with at least the election settled and what I'd say is probably settled much quicker than anyone thought it was going to get settled. I think it's a good thing. The rise in interest rates, I think, has people trying to figure out what's the implications. We obviously have a very pro-growth stance administration coming in. So I think that potentially is bullish for rent activity and tenant activity. So I think there's a lot of cross-currents as to what it all means. I think for sure my conversations with brokers in capital markets is there's a lot of product that wants to be sold and that will be coming to market. And I think once the election has passed and now has passed, there may be a number of deals even launching this year, recognizing they won't close by year end. But wanting to get a jump on the January convocative deals that are expected to come out. So I think it's going to be a pretty active market for people offering. opportunities. I think the question will be what how financing the people slots on financing impacts it. So far it hasn't really impacted pricing from everybody we spoke into in processes we've looked at and been involved with that so far everything is priced through the increase in debt. I mentioned earlier we're closing on a deal in Phoenix today. I think the 10 year went up from when we put in our best and final bid until closing I think the 10 year went up more than 80 basis points. We didn't change our price we felt we committed to a price and we're gonna live through what we committed but it's just an example of how much rates have really moved and it'll be interesting to see what that does on pricing. Right yeah and Pat now to you on this one you know with the election over you know you talk to buyers probably every day right so what are they saying what's what's the sentiment out there I mean what do you think they're gonna do kind of here moving forward into 2025 you know forward the lease investments sales that we bring out to the market. Yep so in 2024 we've seen increased activity and the investment sales world you know compared to 2020 and compared to 2023 the election wasn't necessarily the catalyst that you know are gonna make investors more more active it was a variable that we now have clarity on the thing that investors are hanging their hat on and buyers really want to see stability in the Treasury markets. Michael just talked about going under contract on a deal and having the Treasury move 80 pips during the process you know in August and September the 10 year got down to 3637 you saw cap rate compression really across the country and a ton of investment sales activity and you know we sit today in the 10 years 4 4 4 5 so that lack of stability is gonna keep some buyers off on the sidelines when you get a 10 year treasury around 4% or the high 3s that's when you you've got very healthy bittershees heavy competition and and that cap rate compression so it's the permanent financing is the bond markets that is really driving the activity. And Pat can you help explain to me and our audience you just mentioned how volatile the 10 year treasury has been you know last several months and we're now you know I checked we're up to almost 4 4 4 4 4 5 so why is that really happening can you explain why we're you know 4 5 today when we were just 3 6 not too long ago and it looked like it was trending down. Yeah no I'm using one. I think the first thing I'll say is you hear okay the 5 cut why did the 10 year treasury not cut. Short term floating rates are they're directly influenced by monetary policy there is a correlation between long term treasure yields and the fat funds rate but they don't move in unison so you know the fed cut 50 basis points in September the market that already price all the same you saw the 10 year at 3 6 well now the fetus cut in the additional 25 bips and the 10 year is at 4 1/2 one way to think of the 10 year treasury is it is what the fed funds is expected to average over the next 10 years plus a premium so in September the market that the fed was cutting up ultimately 2.8 percent and that's why you saw the 10 year at 3 6 today the market is backed out for you or cuss because of you know they expect inflation to be stickier you know jobs reports are stronger when they essentially think the fed will level off at like a 3 6 3 7 which is why you're seeing the 10 year at the 4 4 4 1/2 so they backed out the market is backed out fewer fed cuttings next year as the fed gradually cuss versus the cutting September and November and the expected cut in December and I'll head on this one more time but it's the key it's just the stability having the 10 year run back and forth 70 80 bips over 30 45 day period really creates heartburn for buyers so once we can stabilize at at normal level is just easier to underwrite what values are today and then that's when you'll see more capric compression and so what sort of environment needs to be in place I guess to get the 10 year treasury to be more stable yeah I mean the most volatile thing will be the jobs report I think we look at so if if we're seeing a you know unemployment take off worsening jobs economy essentially the fed will cut more to stimulate the economy and in turn you'll see the 10 year fall with you know post elections it's normal to see the 10 year be higher stock markets don't know that's pretty much been the norm for every presidential election a matter of what side of the political aisle you're on so it's really going to come down to the jobs and inflation yeah no that's great and you know this has been really fantastic really enjoyed having you Michael and Pat to join us and really share your insights on what's happening but I also before we end I want to ask I can't believe it's six weeks until we're done with 2024 so there is a phrase out there you know back in was that third quarter 2022 when pencils went down people were saying stay alive till till 25 so you know we're six weeks away to 25 so what are you guys seeing here into into next year so Michael I'll throw back to you and then Pat if you can weigh in as well yeah I guess I'd probably say stay alive until late 2025 yeah you know I think what we're seeing is today right vacancies are ticking up across most markets obviously there's pockets of strength and certain submarkets so it's not a universal thing but importantly construction starts continue have continued to come down they're sort of stabilizing here seeming like 40 to 50 million square feet a quarter but the construction pipeline looks like when you get to 2025 maybe it's 180 to 200 million square feet depending on whose statistics you use and if you look at absorption this year I think the forecass are coming in around 160 to 180 million square feet most people feel this has been a pretty soft year for leasing following sort of another soft year or previous soft year so if you look at those two numbers you sort of get into closer to equilibrium obviously vacancies are a little bit elevated so you do need to absorb the existing square footage on the ground so I think a lot of that plays out over the course of 2025 I don't think people are jumping in super strongly for lots of new spec development you know we're doing some we're doing something here with Chanel but it's not the same big avalanche of new product coming with you know short-term rates coming down a little it may help a little bit on construction financing but also I think uncertainty on the direction of rents and rents kind of flattening out generally across markets on average I think that's continuing to keep things and new supply a little bit in check so I think all that plays out over 25 and I'm optimistic as we get towards the end of 25 we'll start seeing tighter markets lot less vacancy that starts to drive rent growth and I think that really starts to get that cycle going and if the economy stays strong and that's a little bit of the wild car but the economy stays stronger gets stronger that will drive a lot of rent demand for space and there'll be just not that much space coming on lines you can really have an acceleration in rent fairly quickly to meet that demand yeah and you know you mentioned you lease rates right now are generally flat or falling in some cases and the leasing activity has been muted and I think you're corporate America needs to jump start and start getting more active and looking at expansion and that sort of thing so what do you think could spur some of that you know corporate America to kind of wake up again yeah there's pat touch that earlier I think there's just more certainty so I think the fact that we have a new you know new set of new government coming in so to speak and so I think that government has given sort of the policies they plan to implement now there is uncertainty with it there's obviously a lot of discussion about tariffs some people felt that created some pull forward of early demand this year from certain importers and 3PLs but I think just having a little more certainty of that direction is going to help I do think there was a lot of delayed decision baking over just general macroeconomic concerns and uncertainty I think some of that dissipates and companies just realize in 2025 the calendar turns their business plan calls for certain growth and certain of their product lines or certain what they're doing and they suddenly realize they need the space and they just can't wait any longer they kind of waited at the end of last year and of 24 I mean and they just start to need to move forward so I think some certainty and I think a little bit of just the economy underlying economy looks like it's going to stay reasonably strong and potentially get stronger what things for people really into action and make decisions thanks Michael and thanks for sharing that and now Pat which your thoughts on 2025 is it earlier than than late 2025 or maybe maybe even we're talking 2026 yeah I feel like capital markets will just kind of pass the baton over to the leasing side I agree with Michael I expect tenet demand to be stronger in 2025 then it has been the last 24 months in the short term I expect long term yields to kind of stay more elevated I think you'll see in Q1 and the investment sales world a lot more activity we're here and from all the broker shops POVs are up you might even see some larger portfolios I'll be more optimistic on rates just given I've got a heavy focus on dispositions these days and say that Fed will gradually cut a cut one more time and maybe the Marcus anticipated next year and 10 year maybe stabilizes around 4% later on, which I do think will get more activity, more liquidity both on the lending side and from buyers as well. The last couple years, you know, a lot of these buyers who did really well in the kind of the run up in the last decade or so have been sitting on the sidelines and, you know, what do you think's going to really, really get them going and start getting aggressive again on some of these lease investment opportunities? We're already seeing that right now. There's an obvious fight to quality. I mean, there's been pent up demand. The core money still is relatively on the sidelines, but some of our investment grade assets that are long-term leases, 15-year-plus, you're really seeing strong pricing and having competition there. It's been pent up demand. We've still not been able to get out the capital that they expected, you know, after their fundraising and they need to put dollars out. And I think a lot of the sentiment was when, you know, you look back 12 months ago and the Fed hadn't stopped hiking, there was a lot of uncertainty of when the bottom fell out. Well, we saw that when the 10-year hit 5% and probably a year ago from today, I think some buyers were a little bit of a remorse that they missed the bottom there. So we've seen increased activity and we expect that to be even greater next year. Well, great. Yeah, I think that ends on a positive note as we look into 2025 and really appreciate both of you guys for joining. I think it was a really good discussion and definitely one of our better episodes and we really appreciate you joining. So thank you, Michael and thank you, Pat. Thanks, Jay and Pat. We appreciate you inviting me onto this and look forward to doing lots more together with Scanell in the future. Thank you, Jay and thank you, Michael. Great to have you on. This was fun. Yeah, fantastic. Well, yeah, this concludes yet again another episode of Scanell Properties Under Development podcast. So we'll do this again next month and each and every month thereafter. But for those of you that would like to access our previous episodes, they're available on all of the major listing platforms where podcasts are found. So go and check out some of our previous episodes and we hope you enjoy this one as well. Thank you, everyone.