Marcus & Millichap, Inc. (MMI) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to our first 2025 Market Outlook Session. I'm Hessam Nadji, President and CEO of Marcus & Millichap. Very proud to be connecting with you via this medium. We have many thousands of investors and clients on this session. The response to this has been fantastic. We're glad to have you, and it is wonderful on behalf of the entire organization, all of our Marcus & Millichap specialists, our institutional division, IPA specialists, our financing specialists at MMCC. They're all working extremely hard to bring you the latest market information and their expertise. For 53 years, we've taken great pride in being a source of objective, grounded information to help our clients make the best decisions and help them execute it. This is just an ongoing part of that tradition, and we're very proud of the fact that the response to this session has been so great. A couple of quick housekeeping notes. Because of the larger audience, this session may freeze at times. If it does, please use your F5 key to unfreeze it. [Operator Instructions] Our Head of Research, John Chang is monitoring those questions. We might be able to get to a couple of them, but it always helps us to know what's on your mind. So please send us those questions during the session and we'll go from there. Let me start by just sharing with all of you. How touched we all are for those of us that are based in Southern California with the countless texts and e-mails, phone calls from our clients and friends around the industry related to the fires. A lot of people have been displaced. It's truly a tragedy what's happening. Some of our folks have been displaced, lost homes, many of our clients and their employees have experienced the same. And the resilience is amazing, but the response from our clients and friends in the industry has been fantastic and really motivates everyone to be strong and get through this particular phase of it. So thank you for that. I also wanted to just share with you a couple of just very brief statistics only because our scale as a company reflects on your trust in us and how we can bring a very macro and micro level execution to your business. Over the last 12 months ending September of 2024, the company closed 7,300 transactions for $43 billion of volume. Our institutional division IPA closed approximately $10 billion of sales. Our finance division closed 1,100 separate transactions on the financing side for $7 billion. And most importantly, they closed with over 300 separate lenders in this environment, which is a real reflection of the kind of value we bring to you and the collaboration we have created between our finance experts and our investment sales experts. So that is one way of looking at how much resource and how much market knowledge we can bring to you. I'm extremely proud to have this session with some industry leaders, friends of Marcus & Millichap for many years, friends of mine that are truly at the cutting edge of what is happening in our industry. Jeff, Sharon and Marc have been generous with their time in the past, joining our sessions, joining smaller client forums around the country with us to bring their perspective. They're each working tirelessly in different aspects of the business in advocacy for our industry. That includes our clients collectively, which are the renters, by the way, especially on the housing affordability side of the equation. That's a hot debate. And in the end, it starts and ends with the renter and what we can all do as an industry to create value for our clients who, in the end, are the tenants and the renters. And of course, the investors that put their trust in all of us as an industry. Jeff DeBoer is the CEO of Real Estate Roundtable, a very active group that is constantly working hard to educate lawmakers on The Hill. Of course, that's a very easy job, right, Jeff? He has had 40 years in the industry, and The Roundtable consists of 150 of the largest institutional and private owners and developers in the country. Sharon Wilson Géno is the CEO, President and CEO of National Multifamily Housing Council, the largest interest group for the multifamily industry. She has 30 years of experience in housing, and has just done a fantastic job in her 2 years as the CEO of NMHC in elevating that educational component of what the industry has to do with Washington. NMHC has over 2,000 members with 125 firms and just getting ready for the annual member meeting next week in Las Vegas with, I believe, somewhere around 10,000 attendees expected. Marc Selvitelli is the CEO, President of NAIOP. They equally work hard on the office, industrial and other product types behalf and NAIOP has over 20,000 members and has always been on the cutting edge of foreseeing trends and what is happening in those prototypes. I'm extremely grateful for you to join this and have our clients and our friends in the industry benefit from your real-time knowledge of what is happening out there. We'll talk about policy, of course, which is on everybody's mind. And of course, our featured guest is none other than Mark Zandi, another friend of the firm and friend of mine. Mark has been the Chief Economist at Moody's for 20 years. One of the most accurate economists on Wall Street and one of the most quoted on Wall Street and a trusted adviser to many institutions and policymakers. We always enjoy having him. He always challenges our thought process. John Chang and myself have really benefited from our debates with Mark. He always seems to win and he always pretty much seems to be right. So I'm delighted to have him here with us. We're going to start with Mark. We're going to get into a little bit of an overview for commercial real estate, and then there'll just be a dialogue. And before I get started, let me go back a year when we had Mark as our featured speaker, provide his forecast for 2024. This is basically the summary of that. Job growth will be slow but still positive. Unemployment will remain close to 4%. The Fed will cut rates 3x or 4x. At the time, the thinking was 6x. We never bought into that. Mark didn't bought into that. The evidence wasn't there to support 6x. And as we now know, not only was it fewer cuts, it came very late in the year versus where we had all expected it to come or hope anyway. And of course, that impacted the commercial real estate cycle dramatically. And the consumers will hang tough, just enough spending to keep the economy moving forward. Virtually all of that was accurate, came true. So we're counting on Mark to do it again, tell us exactly what's going to happen this year and where the 10-year treasury will be so we can make the investment. So with that, let me turn it over to Mark Zandi, our featured presenter. Mark?

Hessam, that was a very kind introduction. I really appreciate it. And nothing more scary for an economist and having a track record like to say. But thank goodness, it worked out. And it looks like I'm in an exact same spot as I was last year, maybe it feels like it. And -- but this year I have a little less hair. I have little less hair. I've got to do something about that. But I appreciate the opportunity. You guys are great and very kind of you to allow me to participate. And let me begin with the bottom line. The economy, and here, I'm really focused on the U.S. economy. We can talk about the global economy if you'd like. But the U.S. economy is performing exceptionally well. It's in a very good spot coming into 2025. And I think it can navigate any number of potential threats and risks that come at it. I suspect 2025 won't be quite as good a year, at least in the aggregate in all the statistics as 2024, given the uncertainty around economic policy. But I think broadly speaking, it should be another good year for the economy. And just to strike a home the point that the economy is performing well. Let me just give you a few statistics. Our GDP, that's the value of all the things that we produce. We're going to get a read on that for the fourth quarter next week from the Bureau of Economic Analysis. And that's tracking just about 3% on the nose, and that's the growth rate we're going to get for the entire year of 2024. And that's a really good year. I mean, if you ask most economists, what would be a typical year would be closer to 2% growth. But we got a lot of productivity gains, labor force growth was strong and all those things allowed the economy to grow more quickly last year without generating any inflationary pressures. Job growth, good. It throttled back, but that was by design. The reserve pushed up interest rates in an effort to cool things off and they got what they wanted. It feels like average monthly job growth is currently about 150,000 abstracting from the vagaries of the data. It goes up and down in any given month, 150,000. That's right down the strike zone. That's enough jobs to keep the economy at a 4%-ish unemployment rate. That's where we are. It's very close to full employment, consistent with flow employment, but not too many jobs that it would fan wage and price pressures and force the Fed to stop cutting rates or even at some point, raise interest rates. And I said 4%. It's been 4%-ish for 3 years. That's just an amazing performance. It's low across every demographic, age, ethnicity, gender, educational attainment. It's close -- it's low coast-to-coast from my hometown of Philly, all the way across to San Francisco, unemployment is low. The one blemish had been inflation, but that's -- it feels like that's getting back in the bottle. The Fed's favorite inflation measure, the consumer expenditure deflators just a tad north. The growth rates are just -- growth rates are just a tad north of their target of 2%. But the only difference between where we are on inflation where the Fed would like us to be. The 2% is the growth in the cost of housing services that goes back to rents and everything points to a further moderation there. So I feel really good about the economy coming into the year. And prospects are good. And the key to all of it really is the consumer. I mentioned the consumer last year, I'll mention consumer again this year. The consumer is doing their thing, doing their part, at least in the aggregate. You can see that here. This shows consumer spending, real consumer spending. So this accounts for inflation. It's an index. It's indexed to equal 100 going back to February of 2020. So that's the month before the pandemic. You can see the black dotted line that represents the spending based on trend growth and spending prior to the pandemic. So you can see overall spending is right on the nose. It's exactly where you would have expected it to be if the growth trends prior to the pandemic continued post pandemic. And we've nailed it. We're right on target. Some differences in the composition of spending, as you can see, good spending is elevated. Post-pandemic, service spending, that's everything from travel to health care and financial services, that's a little bit below where it was pre-pandemic, but all the trend lines here look pretty good. And I have to say, Hessam, that all the fundamentals feel good. Lots of jobs across the board, across all pay scales. We're seeing, as I said, low unemployment. Wage growth is solid, again, across the wage distribution, just about 3.5% to 4%. That's nominal. So after inflation, that's a real growth of 1.5% to 2%. That's real purchasing power for consumers. Stock prices today, we're going to hit another record high. So high income, high net worth households are doing fabulously well. House prices, so if you're one of the 2/3 of Americans that own their own home, you feel pretty good about the high house prices. All the homeowners' equity that's been built up is fueling stronger spending. Debt loads have risen for lower income households. They did take on more debt back a couple 3 years ago when inflation was high and they used cars and consumer finance loans to supplement their income to maintain their purchasing power. So some stress there but middle-income Americans and high-income Americans, they did a really good job of locking in the previously low interest rates, refinanced at a mortgage, refinanced the mortgage down into a mortgage of 2.5%, 3%, 3.5% to 4%. In fact, the average -- the interest rate -- the average interest rate on existing mortgage debt is currently just about 4%. So it all feels pretty good. I do want to point out -- you already alluded to it, but I do want to point out that much of the growth in spending is spending by higher-income households. They're driving the train. This shows the saving rate across different parts of the income distribution. And it's -- if you take a look at that line at the top of the chart, that's the saving rate for folks that are in the top 10% of the distribution. You can see it did rise going into the pandemic, but it's been steadily falling. Since then, it's normalized back to what it was pre-pandemic. That represents a lot of spending. Just a small decline in the saving rate given all the income earned by this group. Generates a lot of spending, and that's really driving the trend. You can see the folks in the bottom part of the distribution if you go back not too long ago, they actually had a negative saving rate. That's when they were borrowing to supplement their income. Fortunately, things have improved there. They're not saving much, but at least they're not dissaving. So just a broader point here, which I'll come back to in a minute when we talk about the risks. The American consumer large is doing very well, but a big chunk of the growth is coming from the folks in the top part of the distribution. And of course, they're being supported by good fundamentals in the labor market, but also their rising wealth and that does increase the sensitivity of consumer spending in a broader economy to what's going on in the stock market and with regard to housing value, something to consider. But bottom line, as long as the American consumer does their thing and everything suggests that, that will continue to be the case, the American economy will be just fine. Just one other quick one before I move to the risks. The American economy is driving the global economy. For the first time in many decades. If you go back to the financial crisis a generation ago or the teeth of the pandemic shutdowns 5 years ago, 4 or 5 years ago, it was the Chinese economy that was leading the way. Of course, China is having all kinds of difficulty now, and it's the American economy and led by the American consumer that's powering economic growth. So I'm optimistic about growth prospects. Now having said that, obviously, there are risks -- I should say there are upside and downside risks, but I think we tend to focus on the downside. I think that is appropriate as prudent planners and investors. In this risk matrix, I think I showed this to you last year. This is an update of the risk matrix that I showed last year. That gives you a sense of the threats to my optimism. The X axis, the horizontal axis represents the severity of the risk. And I kind of think of this like the present value of economic loss if the risks were to occur. So it accounts for the loss at the time of the risk and the timing of the risk. The Y axis, the vertical axis is the probability or likelihood of that risk. The risks that are in red, they're moving in the wrong direction in my mind. This is subjective, obviously, higher probability, higher risk. Those risks that are in green, they're moving in the right direction, lower probability, less risk in those that are blue, there are new risks to the matrix. We update this every month. But you really want to focus obviously, on the risks that are in the Northeast part of the matrix, high risk, high severity. And I do want to call out 2 of those, the 2 that are sitting there all the way up in the Northeast corner. The first is a potential for a trade war. This goes to economic policy in the tariffs that will be unveiled here, I think, over the course of the next few days, few weeks and a few months. We'll get a better sense of what the administration has in mind but we need to watch this very carefully. Higher tariffs, broad-based tariffs is inflationary, will likely lead to retaliation by the countries that are affected by our tariffs. And of course, it creates a fair amount of uncertainty as it's unclear how long the tariffs will be in place on whom, on what products. And so we need to watch this carefully. Now my sense is that this is where we will see somewhat higher tariffs, but they won't be to the degree that it will undermine my optimism, but there's a boatload of uncertainty around this, and we need to watch this very carefully. The other risk that I want to call out is the fragility of the bond market, and you can see that in interest rates, long-term interest rates. They've pushed up quite a bit over the past 4 months. I'm showing you here the cumulative change in the 10-year treasury yield back to mid-September, late September when interest rates were at their recent low. They're up as of today, 100 to 110 basis points from where they were in mid-September, over a full percentage point. And I'm decomposing that the change in the 10-year into 3 parts. The first is a real short-term interest rates. That's the part of the bar that's at the very top of the -- when you see the 3 parts of the bar, it's the top 1/3 of the chart. That goes to Fed policy. And we have seen a scaling back in expectations for rate cuts this year, in part because policymakers that Fed Reserve is concerned about the uncertainty created by economic policy around tariffs, immigration policy, what's going to happen with fiscal policy, how much of that will be deficit, financed or not, really does matter significantly to what the Fed is going to do because they don't know what's going to happen here, they're going to sit on their hands. So I think there will likely be like the market like investors, 2 rate cuts this year, but they'll be towards the end of the year. So the next 6, 9 months, I think, will be where we are with regard to the federal funds rate. And that's part of the increase in the 10-year yield. The second part of the bar is inflation. That's inflation expectations, that's expectations of investors of future inflation. That too has picked up, that goes to tariffs, that goes to the potential fallout from immigration policy, deportations and the impact that's going to have on wages and costs for certain industries like the construction trades and agriculture and other industries in which immigrants are big parts of the labor force. And then the final part of the bar that is representative is the so-called term premium. That's the difference between long rates and short rates. And while that term premium by historical standards is still very low. As you can see, it has widened significantly, and that represents a melange of issues for investors, everything from volatility with regard to future inflation expectations to potentially larger budget deficits and debt load and just a general sense of uncertainty with regard to the economic outlook that all gets embedded in the term premium. Now in my baseline optimism, I do think that we're at the peak of long-term interest rates. So for the year, I would expect the 10-year to settle in somewhere between 4.25% and 4.5%. So we're a little north of that right now. But I had to say there's a lot of risk around that. And I'm not going to go into any detail because I know we want to move on, but I just want to highlight a few concerns that I have that perhaps interest rates end up being higher. Longer term rates higher than I'm anticipating at some point in 2025, and that could do some damage. Everything from what's going on with regard to broker-dealer balance sheets to budget deficit concerns to global investors, the Chinese and Japanese investors are becoming more circumspect and they're investing. Banks are scared because of the problems they had back a couple of years ago with their underwater bond portfolios. Hedge funds are becoming bigger players. And of course, the other thing to consider is the debt limit has been triggered again as of the start of this year. That has to be increased or suspended by sometime in the summer. Otherwise, we've got a real problem. So there's a lot of issues here, a lot of concerns that could potentially result in higher interest rates, so obviously a risk. But I'm not going to end on a negative note, Hessam. I do -- I am fundamentally optimistic. I think the economy -- the U.S. economy is in a really pretty good place and should be able to navigate through this year and have a reasonably good year when it's all said and done. So with that, I'll stop and turn the conversation back to you.

Thanks, Mark. I appreciate that overview. Probably the most frequent question or pushback that I get from our clients around the country in terms of concerns or potential risk is whether the economy looks better than it really is. And that really goes back to job growth. Our clients, real estate investors are large, care a great deal about interest rates, of course, the cost of debt. Real estate is very dependent on leverage and job growth, which speaks to demand for all kinds of property types and of course, the supply side of the equation. But on the job growth side, I must say that in the last 45 to 60 days, more people have generically challenged me on the percentage of jobs that have been created by the government, which I think is fairly high over the last 2 or 3 years. And with that, maybe subsiding and the slowdown that the Fed has been trying to engineer all happening at the same time. Could we be in for a weaker labor market, maybe even a potential mild recession because of those risks? What are your thoughts there? I'm showing the degree of slowdown in actual job creation on the left. In the middle here, you can see that the slowdown in the pace of job openings and some of that may be because of labor shortage, but we know that companies are slowing down and they're hiring as well. And of course, your prediction on unemployment from the last couple of years has been very accurate. We're still at a very healthy unemployment rate around 4%. What are your thoughts in terms of what could go wrong? Is that something we need to worry about? Because I get that question often.

Yes. It's a fair question. I mean I do think we should count on job growth continuing to slow. It has, as you can see in your chart, been throttling back slowing, and that has been by design. Federal Reserve has been working hard to slow things down so that it could take some of the pressure off wages and prices altogether. And I would expect a further slowing. I mean, we are going to see less immigration into the country. It was going to happen regardless of who won the election, that was already happening. And with less labor supply, fewer immigrants coming into the country, we need to see slower job growth, less demand. Otherwise, labor markets, which are at 4% would tighten further and we get wage price pressures. And the Fed would not only not be cutting interest rate, would be raising interest rates. So if you told me by the end of this year going into 2026, that were down closer to 100,000 per month on job creation. I say that sounds about right to me. The job growth, you're right, more recently, has been more concentrated in the health care sector and government. And to some degree, mostly state and particularly local government, not the federal government, that's been unchanged. That's been unchanged for 50 years but same local. And that, to some degree, goes to the fact that those industries are slow to raise wages. I mean many other industries in other parts of the economy were quicker to raise wages to attract workers. They could do that because they didn't have unions, they didn't have long-term contracts and those kinds of things. And so that's where the job growth really was most significant early on in the wake of the reopening of the economy coming out of the pandemic. But more recently, the health care industry and the government sector, they've been able to -- the contracts have started to roll over. They've been able to pay higher wages and be competitive, and they're now filling open positions that have been open for a long, long time. But even if you look beyond health care and government, we're seeing healthy job growth in many other parts of the economy. The construction trades have been adding consistently. This goes to data centers and industrial space and retail space, we've been seeing steady job creation there. Not on the housing side, but in the public infrastructure. We're seeing it in transportation and distribution. We're seeing it in leisure hospitality, even retailing has been adding some jobs. So it's been broad-based. Now the one thing that raises a bit of a caution in my mind is hiring is down. So businesses are not hiring at the same rate. And it's actually -- the hiring rate is a little bit below what it was pre-pandemic, and we need to watch that very carefully. It could be though that it's just because people aren't quitting their jobs. We had all those quits back a few years ago. People landed in jobs that are better suited to and getting a better wage. So they're just not quitting. And if you're not quitting then businesses don't need to hire, but we need to watch that just to make sure that my explanation here is the correct one. But the thing -- and I'll end here, the thing that matters most for the labor market, the job market and job growth and the economy fundamentally is layoffs. If there are a lot of layoffs, we got a problem. Some, there is no layoffs, 0 layoffs. The layoff rate is like as low as it's ever been. It's rock solid. Businesses are very low to lay off workers, at least in on mass. Those strategically lay off workers, but on mass, very reluctant to do that given how tight labor markets have been for such a long time. So as long as that continues, and I don't see a reason why it shouldn't continue. The labor market should be fine, the economy should be fine, and we'll get my forecast.

Thank you. Thank you, Mark, for that extended commentary. Let me just move over to the macro picture of commercial real estate, set the stage for our discussion with our commercial real estate experts. And let me start with the most recent reading on the major property types fundamentals, which, by and large, are in very healthy condition. Apartments, retail, we've seen vacancies fairly steady despite a lot of construction on the multifamily side of the equation. Not so much on retail. Retail has really benefited from the resurgence in demand and the lack of multiyear lack of new supply as retail was adjusting to e-commerce and the changing consumer habits. Industrial, we've seen a little bit of a surge of new construction. So vacancies have pushed up a bit, but demand remains fairly strong. Even property types like self-storage, for example, that had an unbelievable demand boom from the pandemic, it did great. Had a resurgence of supply for the last couple of years. Vacancies went up there, but they're coming back in. Hospitality is doing well. Seniors housing, supply-constrained, industry is doing well. And overall, the industry appears to be in solid shape in terms of supply and demand. Looking at it from really a bird's eye view. The biggest challenge we have faced and continue to face as an industry is the interest rate movement and the narrowing of the gap between interest rates and cap rates and go back to the early '90s and really see how -- when the gap is the widest, that really points to an opportunity to buy commercial real estate. And as rates have skyrocketed somewhat from the lows in 2020, that's really pushing valuation. What we are seeing from just an investor strategy perspective is enough price correction in the last 2 years from the peak in 2022 and from a replacement cost perspective to our capital is coming back into the market. That is happening. Negative leverage, big concern a year ago, even 9 months ago, has been replaced by the fear of missing out. Even though interest rates have continued to be very volatile, we're still seeing the capital on the sideline wanting back into the marketplace because of those price adjustments. Interest rates higher or even longer means more pressure on values, of course. Another big concern has been the maturing loans. I think lenders and borrowers have proven that they can work things out at least temporarily. We do have a series of loans coming back for a second bite at the apple because they've already been extended, and those extensions are terming out. However, is a foregone conclusion that lenders are not motivated to mark-to-market and dump a bunch of discounted real estate on the marketplace. And I didn't mean to skip over the office sector on purpose, but I did want to point out that the most pressure on maturities waiting for the headline here is concentrated in obsolete older office product. And we'll talk about that more in the presentation. But all in all, the notion of opportunistic buying, basement pricing and blood in the water has not come to fruition with the exception of some office transactions that have to be mark-to-market with huge discounts and moved out. I have not seen it in other product types in any great way. The other big concern, of course, with that backdrop, first and foremost, our clients tell us what is going to happen with public policy and tax provisions especially when it comes to the expiration of the 2017 Tax Reduction and Jobs Act. We'll talk about that in a moment. But along with that, the new administration has brought a number of different topics to the table, tariffs and trade, immigration, deregulation. Some of it grows friendly, some of it controversial and potentially disruptive on the inflation side maybe or on the labor availability side. Cost of materials, should tariffs really take hold. And the renewal of the 2017 Tax Cuts appears to be in better shape because of the election outcome and how things lined up in Washington, which to us, as we have shared in other presentations and research reports, is a positive for commercial real estate. Because there are so many different pieces to that package, a few of them are listed here, real estate investors care a great deal about this one part of the new administration's agenda and movement forward. And no one is more qualified to comment on these than Jeff DeBoer. Jeff, it was a pleasure to be with you and everybody there in The Roundtable. I'm here in Washington. You can see an image behind me from our Washington office of Marcus & Millichap. We have a great crew of 35-plus professionals here in this office, and it's great to be out with them. And it was great to be with you and your members over the last 2 days. So why don't you give us the summary of what you think is going to transpire over the next few months. Jeff?

Well, look, I think -- well, first of all, it's obviously been very exciting here in Washington the last week, but I don't think you want me to talk about the Washington Commander, so I'll talk about the public policy shifts. I think you summarized it quite well. I mean, I think the lineup on Capitol Hill and downtown at the administration and the treasury is pro-growth, obviously. And I would expect not that many real risks upfront on public policy, particularly in the tax world for commercial real estate investors. You identify a few things, the pass-through deduction, bonus depreciation, qualified opportunity zones, tax rates, in general, you don't have on your capital gain or carried interest. But all of these things, I think, are in a position with this lineup that is stronger than it could have been in a different lineup. Now that's not to say that a different lineup was going to be the end of the world. It just changes the way that we operate here. And instead of being in a more of a defensive crouch, we're more of an offensive crouch to make sure that these things work appropriately for the economy and investors. I guess that a lot of people want to know timing on all of these things. I would expect that there's a few hurdles. It's not as easy as it may look from outside Washington. First of all, there has to be a budget agreed to here. That's going to take some time. They want to do this through a reconciliation process, which would require just a majority vote in the House and the Senate. That's going to require a budget first in the House and Senate to be agreed to. And then the committees will have to report out legislation that matches that budget. That will take a while. So under normal circumstances, given all this, I would say, late April or May time frame would be about when we would see the House Act. But on top of that, and you mentioned a couple of things, we've got issues like the debt ceiling that will come up before that. And how will that impact the timing and the direction of the tax bill when it is ultimately taken up. Because the margins are so narrow and because increasing the debt ceiling is so slim, there's a lot of people talking about, well, there needs to be a freestanding debt ceiling increase that is maybe matched up with -- and this is going to be very controversial, matched up with spending for North Carolina and California to address the fires. And both of those could come with damaging or troubling, I should say, restrictions in some way. So that could slow things down. Over in the Senate, we've got these nominations that are coming up, and that will slow the things down. The impact of these executive orders that have been issued in a blizzard could slow things down. But the bottom line is I would see a bill moving through the House in the late spring and on into the Senate. The Senate wants to do 2 bills. They want to do taxes later and do energy and immigration first, but we'll see how that shakes out. So we're going to be working to make sure that is in there, working with Sharon on the low income housing tax credit. Make sure that is as robust and helpful as possible. But I think there's a couple of other things, and Mark and you both hit on it, the risks to investors. And we know that the 10-year is so important to commercial real estate. We know what drives a lot of the tenure, fear of inflation and increasing potential risk out there. And so we'll be watching very carefully how much of this tax bill is deficit financed and how much of it isn't. And we'll also obviously be paying attention to tariffs for really 2 reasons in working on the tariff area. Tariffs will have the potential to increase construction costs quite dramatically, and we don't like that, particularly for housing. And on the other hand, it could be inflationary across the board. So you've got situations here, and then I'll stop. But basically, you've got a situation where public policy, fiscal policy, in many respects will be pro-growth, but some of the impacts of that deficit reduction, tariffs, things like that could be detrimental to the industry because of the impact on the treasury. I guess the other thing is just to say, we're very, very focused on energy. Energy policy that AI is very important to the industry and to the economy and the growth of the economy, how where is that energy going to come from? So energy policy is very important as is AI in general. And then I will end with just a general for risk for people that we're certainly watching. And over the last couple of days, talked about a lot, the general geopolitical risk, whether it's Russia, Ukraine, the Middle East, China, how is all of this going to play out? And what's really happening in the world that could create risk? So while directionally looks pretty good. There's certainly a lot of risk out there and things could pop up. And happy to talk in detail about all of this, but thank you for having me, and I look forward to the conversation.

Well, great to have you on and sharing all of this. This is basically a capsulized version of 2 days of meetings with lawmakers and industry participants. So thank you for bringing that to our clients. Let me switch gears to housing. Sharon, there's a few really interesting trends that I'd like to use just to set the stage, and that is the fact that the multifamily industry has absorbed a record amount of new units at an incredible rate. And construction starts for 2025 and 2026 are expected to drop somewhere between 30% to 50% depending on how much of the planned projects actually take off, which should give the market even more of a breather. And it's amazing to see that the starts have already begun to show up in terms of their severe pullback. This is for real. And in markets like Dallas, Austin, Phoenix, Atlanta where we normally see a lot of construction, for those markets to have significant drop in construction announcements or permitting activity is a very important development for those high beta markets. And of course, one of the most important things that is showing up in the renewal statistics for apartment renters and the rent growth associated with renewals is the housing affordability. The gap between the medium-priced home mortgage payment and an average apartment rent is as high as it's ever been. More renters are staying put. And we -- with that as kind of a big picture backdrop, tell us what's happening with multifamily and what you expect in 2025?

Sure, Hessam. And again, thank you for the opportunity to be here. I think you framed it well. This is really an interesting tale of a mixed bag, right? So we just saw this huge historic delivery of units, which has slow rent growth nationally when you look at those numbers. But as you often point out to me and you're absolutely right, that significant delivery was really only concentrated in a handful of markets where there had been very aggressive, mostly small markets where they've been very aggressive investment over the last several years. I think there was also something of a COVID hangover here effect, where a number of those deliveries were slowed due to COVID and supply chain issues and other things. So you have a huge bump of units that all came on at the same time. Then almost around the same time, you start seeing interest rates tick up. You see construction costs go up dramatically. And I think there was an expectation post COVID that construction costs would come down somewhere around prior levels, but that really hasn't happened. While we haven't seen the volatility in construction pricing that we saw during COVID, it has flatlined by and large, in most markets, but it's flatlined at a much higher level. So a lot of deals that have been in the pipeline just aren't penciling out. You asked me earlier about we've recently done one of our sentiment surveys, which we do every quarter about where people's heads. And it's really just how people are feeling. We just had one that completed in December. And it was still below our average numbers, but there is some at least anecdotal evidence that some deals are starting to move forward. And I would suggest that those are the deals that probably we're most able and people might be kept them on the shelf thinking there would be a better day and are now, as you were talking about earlier, Mark was talking about earlier, have just adjusted to the new environment and figured out that because demand continues, that they might as well find a way at a higher cost to get those things in the ground. And I think also there are some developers that are seeing just what you showed that dramatic drop off in new starts. And if they are able to stretch it and start getting some things in the ground, they will be well positioned to take advantage of what's going to be another significant shortage in housing come end of '25, '26, '27. So it's something of a mixed bag right now that we're facing. That being said, just sort of from a global perspective in terms of some of the things that Jeff talked about with the transition in the government. We had a lot of pressure over the last 1.5 years with the federal administration trying to create a more regulated environment for rental housing in my part as a response to some of the spikes we saw during COVID. With the transition we're seeing the federal part of that go away by and large, although, again, it was a huge issue for voters, but we're seeing a lot of that shift to the states. So these issues are going to continue to create somewhat of a challenging environment for rental housing providers, although I always come back to the basics, demand, demand, demand. We are in a huge demand sector, we are already facing a shortage. So ultimately, we need the product that multifamily providers provide.

Great commentary. Little bit of maybe short-term weakness, but a lot of positive forces behind that. Let me switch gears to office and industrial. This is one of the slides I was most excited about sharing with the audience today, Marc, and that is the tails of 2 absolutely different stories in the office market, where you have suburban newer vintage vacancies at around 11.3% and an urban older stock at 26% average vacancies, which really -- the laser focus is on the reality where most of the media judges commercial real estate by office. And they mostly judge office in general, by urban office, and they missed this point. I try to make a point of actually showing this as often as I can when I'm on various media outlets. And then on the industrial side, what I talked about in terms of the surgeon and construction pushing up vacancies, but that appears to be temporary. So let's get your take on the tails of 2 cities or 2 stories for the office market and what you're seeing in the industrial market. Marc?

Yes, it is a tale of 2 cities, Hessam, I mean there's an even a bifurcation within that. We're seeing some recovery in the office market, but it's slow. We're better positioned than we were 2 years ago. I don't think anybody questions that. But we're not back to pre-pandemic levels. And what's really driving this is sort of what your slide talked about here is we're seeing strong demand for Trophy and Class A space, but that B and C space is where we're really still seeing a lag. Typically, and this has been no different right now. When you are a down cycle for the office, you really see that flight to quality, and we've seen that. When we look at vacancy rates right now, in some of the bigger markets, look at New York City with Trophy or Class A, you're seeing 93% occupancy rates, which doesn't really get reported. You mentioned everybody seems to focus on office and say, "Oh, look at this number right here, and it's chicken a little the sky is falling again." But we see good demand in some of these markets. But some of this really is being driven by just a couple of sectors. One of those is the financial sector. We've seen companies like JPMorgan and others bringing their employees back 5 days a week. Amazon has done this as well, too. And this also gets driven a little bit in certain markets. I mean, as Sharon and Jeff will attest to, you can go to Downtown D.C. here on some days, and it's still quite quiet. You go to certain sections in Manhattan and you start to see that vibrancy that we remember prepandemic. But I will say again, conclude with this year when we look at it, I still think that there's some uncertainty in the office market. Part of that deals with the continued high interest rate environment. I think you touched on it a little bit earlier. There's still a lot of debt that is going to need to be refinanced in the not-too-distant future. And these vacancy rates are weighing on that. And then Jeff brought it up in his remarks as well, too. There's still economic uncertainty out there. And with that, I think that's safe to say that while the return to office has helped stabilize some of this office demand with the uncertainty that's out there, I still think we're probably looking at 2026 before we see meaningful increase in leasing activity.

Great synopsis. Let me pause here for a moment and see if John Chang has received any interesting questions for the overall discussion that we can address. John, anything?

A lot of people asking for Mark Zandi to address how he thinks tariffs and more stringent immigration enforcement could affect inflation, real estate construction and the economy as a whole.

Thank you the questions, John. Well, I think I'm going to use a little bit of jargon here. Economists would call higher tariffs, broad-based tariffs, not strategic increases in terms of broad-based tariffs across lots of countries, lots of product, and restricted in a great -- highly restricted immigration policy as a negative supply shock. So that means less supply, higher prices, diminished economic growth. So if tariffs are aggressively pursued broad-based and if immigration policy is highly restrictive, I mean, I think widespread agreement that there needs to be a very restrictive controls on immigration across the southern border but deep broad-based mass deportation, that would be highly restrictive. That would result in more inflation and weaker economic growth. There are many things that economists debate. They debate everything. But on tariffs for the most part, widespread agreement that if you have broad-based tariffs, that's going to end up raising prices and costs for American consumers, particularly lower income consumers, who got a higher share of their budget on imported product. So if those policies are pursued aggressively, I suspect that they will result in higher rates of inflation and diminished economic growth. Now having said that, it's a matter of degree, right? I mean it depends on exactly what is implemented and over what period of time. And so if these policies are pursued more directionally, but less aggressively, then the impacts were going to be much smaller. And so in fact, in our -- I do a lot of forecasting, and I produce a forecast for the U.S. economy and our forecast as a result of these policies, it raises inflation, CPI inflation, consumer price inflation by a couple of tens of percent per annum over the next couple of years. And it lowers real GDP growth over that same period, the next couple of years by a couple of tens of percent per annum. So that gives you context in terms of the degree to which I think these policies will be implemented and how -- what kind of impact they will have on the economy.

Thanks, John. Great question, very relevant. So Mark and Jeff, what is your speculation, personal opinion about the likeliness of a true trade war? Jeff, I want to start with you because you're close to so many lawmakers and you have dialogue with them every single day. Some of it is rhetoric -- some of it is negotiating tactic. So what do you think really happens in the next 12 months from tariffs...

I don't know. This is a new world with the cast of players that are on the field. But I just want to mention in Mark's comments, the impact of tariffs on consumer goods. And it may -- there may be another part of this that people aren't really thinking about in the real estate sector and for housing because if housing materials, many of which are imported, glass, steel, concrete, what have you, imported are subject to tariffs. That's going to have 2 impacts. It's going to constrain this development, I think. What is developed is going to be more costly. Both of those, it seems to me would be put pressure on increasing rents, which would be inflationary and the rent component, as we know, of measuring inflation is overstated. And I'd just throw that out that I think that if something like this did happen, it could be quite damaging in the housing, particularly sector for those reasons, constraining the supply and increasing rents. But having said that, will this happen? Boy, I don't know, but it is interesting to watch senators and congressmen from rural districts that have agriculture interest in them because typically, the ag industry would be subject to retaliation pretty fiercely if -- by a country if we impose tariffs. And the ag industry, in general, has not been terribly outspoken against or voicing concern about these tariffs. So I think there's a great deal of skepticism that this is really going to come to fruition the way it's been outlined as a broad-based tariff because it's very, I think, quite dangerous to a number of industries, and the ag people, I think, would be hit quite quickly with retaliatory measures and they're quiet right now, but we'll see. And by the way, the Congress really doesn't have much to say about tariffs. Treasury and the administration can, by and large, do much of this on their own, which has increased another bit of risk, I think.

Thanks, Jeff. It just seems to me that everyone does the math and knows this is -- in the end, a conflict nobody can win because of the volume of global trade, of course, and how it affects the globe. Mark, what do you think? What -- how do you handicap this as a potential problem?