James Cook: As we kick off a new year, we thought it would be a good idea to think a little bit about the future. What should we be expecting from 2024? To find out, I asked Ben Breslau, Chief Research Officer at JLL, what he thought were the biggest risks that people in the commercial real estate community around the world were worried about right now?

Ben Breslau: So, the real estate world, the two big ones are economic growth and kind of interest rates and inflation.

Interest rates and inflation are just two of the topics that we are going to get into with Ben. Plus, we’ll be talking to Charles Myers, of Signum Global.

Ben Breslau: Ben Breslow, Chief Research Officer here at JLL. I lead a global team that tracks and analyzes real estate markets.

The biggest miss, I think for most forecasters, is the lag effects of interest rates, right?

They hit the financial markets quickly because assets reprice or start repricing, but the real economy absorbs higher costs of capital in the form of interest rates and also tighter lending standards with a significant lag, actually, empirically much more significant of a lag a year, 18 months, even two years, sometimes after rates peak that people think, once rates peak, you're either going to recession or you don't. So I think we are in the relatively early to middle stages of that higher cost of capital rippling through, certainly in the US, but also other economies where interest rates have gone significantly higher and one of the risk factors there is clearly around the maturity of existing debt and loans in the business sector and the commercial real estate sector for governments that need to roll over debt.

So that to me is probably the biggest risk factor to think about is how the next six, nine, 12 months of higher interest rates, and there's a big debate about how long we'll be at these levels, and how quickly the Fed and other central banks might bring rates back down, but how the real economy absorbs those and how well commercial real estate and others can roll those over, extend, modify, adjust and reprice portfolios accordingly.

Charles Myers: Charles Myers, Chairman and Founder of Signum Global. We are a macro and geopolitical risk firm based in New York, Washington, London, and Dubai.

One of the biggest risks and questions is, does the U.S. go into recession? And if so, is it a hard landing? Is it a soft landing? We're in the hard landing camp, we think it will be a slightly deeper recession, most likely Q1, Q2, but a short recession relative to history.

Secondly, I think the Chinese economy being as weak as it is also hurts the world economy. So, I'd say at a high level, those are the two sort of biggest macro concerns.

James Cook: A lot of things to clearly worry about. Let's look at the flip side of the coin. What are our opportunities? And Charles, I'll start with you. What are some opportunities out there for the coming year?

Charles Myers: I'm more constructive on the US than I've been in my entire career, looking out beyond some short-term pain, meaning beyond this recession that I think is coming, whether it's a soft landing or hard landing. It's a combination of three things. Over $750 billion of fiscal stimulus approved by Congress again, in the IRA Chips and Infrastructure Bill, put a private sector multiplier effect on that. You get to about a trillion and a half dollars in total of government spending plus private investment.

Secondly, the second driver of this, what I think will be a multi-year economic boom and actually well above average expansion in the US is foreign direct investment. Almost every major corporate in the world is rethinking CapEx away from Europe and Asia into the US. It's already started. It'll continue for the next several years.

And lastly, AI. If you take all the hype out of AI, and there's a lot of hype in it, if you believe that AI will be a driver of productivity and growth over the next five to 10 years, every major AI company is American and the economy that will be most restructured in a positive way, the large economies, by AI, is the US. So, we're looking at, I believe coming out of recession, a multi-year economic boom that is completely underappreciated.

James Cook: Well Charles, you had me at multiyear economic boom. I love the sound of that. So Ben, I'm sure there's some themes that overlap there with what your opportunities are.

Ben Breslau: It's interesting. We've heard, sort of some whispers in the various real estate communities, of survive till ’25, given some of the complications that both Charles and I, and the potential risk factors we talked about going into next year in real estate and in the broader macroeconomic and geopolitical realm. And I think there's probably some truth to that.

Two or three things maybe I would add on to the great list that Charles shared. One is related to this sort of maybe resetting of the global kind of industrial framework with some nearshoring and just diversification of supply chains, some probably industrials resetting production and or distribution based on where they think there will be growth, where their customers are, but also based on other risk factors, geopolitical risk factors, security risk factors, and lastly the importance of energy, stability and availability of energy resources for most industrial manufacturing, which all of those probably do favor North America to some extent, but also, other parts of the world. Despite maybe a little bit of a pause in the economy next year, we think we're in a bit of an industrial super cycle. Charles mentioned the defense super cycle, which I'd also agree with, but I think industrial logistics manufacturing, in particular, advanced manufacturing around chips and EV batteries and other similar areas, we are going to see quite a boom there that will have an impact in a bunch of places. But we're kind of looking at North America, given some of the attributes that I talked about and parts of the Sunbelt, which have some oversupply issues in the short term and real estate and just in general, but we think are well suited business friendly places.

And the other one I'll mention that piggybacks a little bit off of the point that Charles made around the AI boom, but bringing that to real estate, is data centers.

Data centers are a bit of a niche real estate asset class. They're operationally intensive. They are not as well understood by traditional real estate owners, investors, operators, but there is significant fundraising for that space. The amount of demand for data centers and compute power and storage off the back of the tremendous possibilities and potential growth rate of AI and related activities feels fairly off the charts to use a technical term. And so, we think there'll be quite a boom in that area, as well.

James Cook: You know, thinking about AI and data centers, the GPUs that you use for AI, they use a lot of electricity, right? At the same time in the US, we're trying to transition to electric vehicles. So just more and more electricity is going to be needed in the coming decades. How does creating sustainable electricity, finding sustainable sources for all that electricity, how does that play, and Charles, I'll start with you at a macro level. How does that play into the economy of the future?

Charles Myers: First on the issue clean electricity, it's a little bit of a myth. I think we're still pretty far away from being able to generate almost any energy in a really sustainable way. So, I know we've got really ambitious targets as a country, the world does. They all just gathered in Dubai for two weeks, three weeks on this, but we're still going to be a ways away. The second issue related to this though, is, I've been saying for quite a while that we're probably not going to have a green or a renewable revolution in the United States. The reason is our electoral cycle. You know potentially every four years, you could have a change in party and a change in administration and the two parties are pretty far apart when it comes to investing in and supporting the various parts of the renewables transition. So, if Biden gets reelected, I would say that's a net positive. But the truth is regardless of whether or not we have a complete renewable revolution the US, it's already well underway and that won't change regardless of who wins, or if the Republicans win in November. Most of the investment is in scalable technologies, meaning electric vehicles, and the entire sort of ecosystem around EVs, but also solar and then a few other. But I think that Europe will probably be ahead of us looking out five to 10 years on this.

Ben Breslau: There is a bit of a race for corporates to try to figure out how to green their real estate portfolios and investors for that matter. There is a huge gap between the commitments that have been made by corporations signing SBTi and other sort of net zero commitments and the reality of where they are.

And that transmission mechanism is just starting to get to the real estate people, and to other parts of the supply chain and other parts of corporations, and so one of the things that we think will be a huge opportunity again, bringing it back to our earlier conversation, is any buildings that are either net zero, or on a pathway to net zero, in the next medium term probably three to five years, will have a massive advantage in the marketplace, and those that aren't, are likely to struggle. We now have a playbook for how to make a building more green. The problem is, if it's connected to the electrical grid, you can only get so green depending upon how the power is generated for the grid. And that is a bigger challenge that I agree with Charles will take some time.

James Cook: I want to return to the topic of AI, one last time. First of all, I'm fascinated by AI. I just got back from an AI and retail conference personally and just my mind was blown. So, thinking about it a lot. Charles, from worker productivity standpoint, do you think that we can expect to find unparalleled worker productivity in coming years? And also, you know, the flip side of that, do you think we're going to see a lot of worker displacement because of AI folks losing their jobs?

Charles Myers: Yeah, I think both. But I'll do the last question first. There will be large number of jobs that are eliminated a result of AI and especially things that they’re work, or office related and that are work intensive and very sort of repetitive. But on the flip side of that, AI will create a lot of jobs, as well, and I think that we tend to focus more on the job losses than some of the opportunity in terms of a whole new subset of skills and jobs that will be created in the US and around the world because of AI. And I think that's exciting.

On the first part. I don't know anyone that doesn't think AI is incredibly interesting and exciting, but we just need to also keep in mind that there is a fair amount of hype\, as there is whenever there's any new technology that is going to be transformational. The time from the really sort of launch of that technology to an ultimately being scalable and applied in profitable ways, incredibly useful ways, can take anywhere from two to 10 years. We just all need to take a little bit of a deep breath. I do think the equity market's gotten ahead of itself, especially on its AI enthusiasm, but yes, it's truly transformational. It's going to be exciting. I think any young person today in high school and college should absolutely be spending as much time as possible learning the skill set around that.

James Cook: Right? Early stages of the hype curve. So, Ben, what do you think the impact is, in the property sector?

Ben Breslau: We're looking at it in three broad dimensions. Each one of them would probably take a whole session to unpack. We get the question quite often from our clients and people in the real estate industry, which tends to be pretty far down the chain in terms of impact. We're notoriously slow adopters of technology. Lots of parts of real estate have worked the same way for decades or even centuries. But we are in the middle of a real technological revolution for real estate and so think of AI impact in three ways. One is the AI industry is a consumer of real estate, right?

So, AI companies are growing like crazy. Interestingly, they are highly committed to having their people in the office. So those doing AI work, it's ironic in a way the whole shift away from office during COVID and also the potential for AI to disrupt typical office activities. The AI industry, although it's relatively small, big tech and a handful of very well known and some lesser well known startups are driving probably the fastest growing part of the demand growth in the office market.

And we see that in San Francisco, a particular market that has been down and out a bit since COVID for a whole variety of reasons and has had a real boost of AI activity in terms of absorption and leasing of space. And again, with a mandate to have people in the office working together to solve these big problems.

The second one is the impact of all the other industries and how they use real estate. So that goes back to what Charles was talking about. There will be additions because of AI. We think is going to be one of those things that's ultimately—we think of it as a sector right now—but it's going to be ubiquitous already is probably in a lot of ways.

Every industry is using AI; retail, healthcare, automotive, military, transportation, finance, real estate, every sector is going to adopt parts of it, and that'll change how they use real estate, maybe where they wanna locate, maybe what kind of talent they need, maybe how their portfolios from a real estate perspective or a distribution perspective, or a Retail perspective need to look around the world.

And then the third thing is actually more in the real estate itself. So just like I would say cars have become computers with wheels on them. Buildings are basically now becoming computers with four walls and a roof and windows. There is a tremendous amount of what we call prop tech property technology, both in startups and an existing established technology companies that are innovating how real estate works through sensor technology to optimize space use and to measure utilization through communications through trying to make buildings responsive and figure out when people are in the office or when they're remote and blending the physical and digital worlds together in a more seamless way through experiential type environments.

And so, we think AI is going to impact real estate from the sector itself through growth broadly across industries through the reconfiguration of space needs and locations. And then in the building, through the prop tech world and through optimization and efficiency opportunities.

James Cook: Ben, is there an opportunity there? For example, maybe you used to do manufacturing in China and now you're like, well, I want to bring manufacturing close to home. Are there real estate opportunities there?

Ben Breslau: Yeah, there are real estate opportunities. And I think it's interesting when we talk about the potential decoupling or deglobalization. There's a lot of places around the world that have capital that need to export it in order to invest in order to find return, or even in order to find safer investments. We do not think that this wave will come with a significant rationing down of capital flows for real estate or otherwise around the world. There are, as I said, many examples, at least in real estate, the whole real estate market of some places are just not big enough to capture the level of investment that might come out of some of these places.

And also, the international landscape of trade manufacturing and trade and currency for that matter is intermingle to the point where there's no easy way to pull it apart without doing significant damage to everyone involved. And I think the players involved know that despite the tensions ratcheting up.

I think we will continue to see opportunities internationally. I think we will continue to see trade and capital flow. The question is on the margin, for me, will there be shifts that create opportunity? Is there opportunity for more manufacturing in Southeast Asia given some of the challenges around the concentration of current activities in China? Is there an opportunity in Mexico nearshoring for the US as an example, or in Canada for that matter, in terms of trade and partnership? Is there opportunity in other parts of the world that have relatively good relations and that may be a conduit for trade in the future or a conduit for capital flows in the future. And I think that'll be really interesting to look at in the next few years.

James Cook: So, Ben, the biggest change in the commercial real estate world has been the use of office space and how we all left it. Now, some of us are returning. Some of us are hybrid. And the question is, what does that look like 2024? Do you see a change coming down the road?

Ben Breslau: If you think of return to office, it's very different around the world. So, in Asia, they've been back for a long time in most places. There's something cultural about that. There's partially as a result of the lack of extra space in their living quarters to have home offices and privacy and focus space probably. So, most of Asia has been back. Europe actually in many places has been almost back to pre-pandemic levels as well.

It’s really the US, which has been the laggard, trending still significantly below pre-pandemic levels in terms of office attendance. But we are at the point now where most big corporations have made significant commitments to bring people back. There are mandates to have people back in the office. Some of this is probably more policy driven than we would have thought it would have had to be or that leaders would have wanted it to be. But in fact, because of lagging productivity and concerns about culture and performance overall, most companies across industries are bringing people back, but in a hybrid environment, which means overall they need probably slightly less space.

And we have seen a trend of companies as they renew, both trade up to higher quality space but also take a little bit less of it, which is leaving a gap in terms of occupancy, especially concentrated in the lower end of the office market, which will inevitably in 2024 create some distress in the office market where some buildings will go back to lenders. There will be some workouts needed, and there will be an opportunity for repositioning conversions, alternative uses that a combination of actors need to work through. The result of that is a couple of things. One is the high end of the market, which most companies want and are concentrating their efforts on has become incredibly tight.

So, when people paint the brush of the office market with high vacancy and challenges ahead, that is true in aggregate. But in fact, the top 10, 15, in some cases, maybe 20% of the office market is incredibly tight, performing incredibly well, and we think actually might be one of the most undersupplied portions of the market if you look out two or three years, because no one's building new office right now, and there's a lack of capital to retrofit the part that's struggling.

And a secondary result of that for occupiers who generally have more space than they need and are trying to reconfigure their portfolios is that the space that they are trying to upgrade to is the same space everyone else is trying to upgrade to, which is lacking. And the space that they're trying to get rid of, in many cases, or trying to optimize, is the space that's in that lagging or maybe distressed part of the market. So, we think actually for occupiers to have real estate across industries, they should have their eyes open and be ahead of the game in terms of how they want to rethink their portfolios, land their hybrid models, optimize their space needs and be ready for some challenges in the middle part of the market in the lower part of the market where they may have leases or they may own properties and be ready for a more competitive market than they probably expect in 2024 given the headlines in that high end of the office market. So a little counterintuitive.

James Cook: Right? Yeah. Well, Ben Charles, you've given us a lot to chew on as we sit and think about what's going to come around the corner in 2024. Thank you so much for joining me. It's been a fascinating conversation.

Charles Myers: Thanks for having me.

Ben Breslau: James.

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This episode of trends and insights was produced by Bianca Montes.