Managing Principal and CEO of Peachtree Group, Greg Friedman, joins Cheddar's Dave Briggs to discuss the possibility of a recession in 2025. Watch!
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00:00An expected interest rate cut in just about two weeks time could not come soon enough for a
00:06battered commercial real estate segment. Moody's Analytics reports the office occupancy rate
00:11fell to an all-time high of 20 percent in the second quarter. Greg Friedman is the managing
00:18principal and CEO of Peachtree Group who currently has more than 10 billion in real estate assets.
00:25Greg, let's talk about that number real quick. 20 percent vacancy rate in offices. We thought
00:30that number was going to go the opposite direction the further we got from COVID. What's happening?
00:35Yeah, so I mean office, fortunately, we don't have a lot of investment in office. We've stayed
00:39away from the office sector for good reasons and it's worked out well for us. But you know,
00:43office is going through a lot of secular distress and it's just a huge, unfortunately,
00:48even before COVID, there was way too much office space out there and now coming out of COVID,
00:53just the impact of companies downsizing their office space and there's less need in a lot of
00:58people doing remote work and having hybrid work models. It's just going to put a lot of pressure
01:02on the office sector. Not all office is bad. There's still office that's working. But I mean,
01:07office has been impacted by, I mean, look at the values of office. It's down close to 40 percent
01:12from peak values going back to first quarter 2022. Down 40 percent from 2022. That's right. So in
01:19less than two years, 40 percent value dropped. The thinking was that the tightening of the labor
01:25market would pull people back to the office. Sure. But as the flip happened, to your point,
01:32bosses realized we can shrink our real estate footprint. Right. And companies are saving money,
01:38having less footprint. They have less need for office space. Now, with that said,
01:42with the economy softening, you know, and the jobs report today, you know, being soft,
01:47I think that helps to give some leverage back to different companies that want to have their
01:52teams back in the office. They have a little bit more leverage to require people to be back in the
01:56office. But still, unfortunately, I think just from when you look across companies today,
02:02there's too many companies that are still having that hybrid model or have gone fully remote. And
02:06so we just have way too much office space. Anyway, you slice it. Good to not be in that sector,
02:11as you said, Peachtree is for the most part not. Yeah, I want to hit on that jobs number,
02:15disappointing number by some aspects. Hundred forty two thousand less than one hundred and
02:20sixty thousand expected. Also, a revised number shedding twenty five thousand from the prior
02:25month to eighty nine. What does that do for the narrative that the Fed will cut rates by
02:30likely twenty five points? Right. I think it definitely gives clarity that the Fed's definitely
02:35cutting twenty five basis points. If something bad happens over the next couple of weeks,
02:39you know, maybe they cut rates by 50 bips. I personally believe because, you know,
02:44we invest across commercial real estate, commercial real estate's been when you look at
02:48commercial real estate, obviously, office is going through secular distress. All the other property
02:52types are going through this balance sheet stress. And, you know, and we're going through this
02:57economic recession or this recession within commercial real estate. And we need rates to
03:01drop pretty substantially back to the neutral rate in order for us to, you know, for real estate to
03:07thrive again on the equity side. So I believe, you know, we need to have probably 50 basis points
03:12a drop or more. We'll get it. I don't think we will. I think we'll probably be more like twenty
03:15five basis points. And I think it's going to be a slower drop back to neutral, which will probably
03:19be about 200 basis points below where we are right now for a Fed's fund rate. How much do you need
03:25rates to come down to breathe some life into the environment? Yeah, I think for real estate,
03:31for commercial real estate, you need a couple hundred basis points of rate drops. Twenty five
03:35doesn't really do much because you think about it. We were close to zero, you know, two years ago,
03:39two and a half years ago. And today we're at, you know, we're basically at over 5% on the Fed
03:45fund rate perspective. That's just very impactful to the underlying values of the assets. You look
03:50at the 10-year Treasury rate, even going back, you know, take the decade pre-2022, the 10-year
03:56Treasury averaged around 2%. Today is closer to 4%. It's, you know, I think 375 or 370 or north
04:02of 370 right now. But it's still much higher than where we were. And that's just a huge headwind to
04:08the underlying values of these assets. And even with the Fed fund rate dropping 200 basis points,
04:13if it did drop 200 basis points, theoretically, we're still substantially higher than where we
04:17were pre-pandemic, because even, you know, right before they started cutting rates in the pandemic,
04:22you know, the Fed's fund rate was in the, you know, call it low to mid twos. So we'd still
04:26would be, you know, a good 50% higher than where we were. So let me just game that out. Are we
04:30talking about 2026, theoretically, before you get interest rates where you need them? Yeah,
04:36I think, I mean, personally, I think it's going to probably be most because I think we're probably
04:40heading towards a softening economic environment, which is clear through the jobs report. So I think
04:44it's very likely the Fed will start dropping this next meeting and continue to drop. And I think
04:49we'll be closer to where we need to be by the end of 2025, going into the first part of 2026.
04:54I personally wouldn't be surprised if we end up in a recession in 2025 to give more, you know,
04:59ability for the Fed to drop rates more substantially. What signs are you seeing of that
05:03looming recession? Just the weakening of the job market and seeing consumers pull back on spending.
05:09And so it's in companies aren't hiring as many people. Obviously, the consumers drive 70% of
05:14economic activity. And as the consumer goes, obviously, the economy is going to go with it as
05:18well. So was the Fed just too late? I, you know, I wouldn't necessarily say that they're too late.
05:23They were fighting inflation. So, I mean, to a certain degree, I mean, they were very clear that,
05:27you know, they were, you know, the biggest concern they had was inflation. Now they're,
05:31you know, trying to, you know, hopefully they're going to steer us towards this soft landing.
05:34And even though we will be in a recession, I don't think it's going to be like a hard landing type
05:38recession. It's not going to be like what we experienced during the great financial crisis.
05:41It's just going to be a softening. And some people would probably argue it's a normalizing
05:45of the economy because we just had this, you know, just this inflated environment back in 2020,
05:502021, and even the first half of 2022 through all that stimulus that was put into the system.
05:55Interesting. So you mentioned the consumer struggling. You get a glimpse at that in
06:00part because of your hotel ownership. What do you see from the consumer spending?
06:05Yeah. So across our hotels, we're definitely seeing a softening of just, you know, demand.
06:10So it's not, you know, we're seeing revenue per available room is still growing across our
06:14portfolio of a hundred hotels that, you know, we currently own and operate. We're still seeing
06:18positive red part growth. It's just not at the same level that we experienced over the last
06:22couple of years. And we're still growing at a couple of points, you know, this year, we expect
06:27to have positive red part growth. A lot of that's through just driving rates. It's not through
06:31occupancy growth. So you're starting to just see that softening. And, you know, again, you're seeing
06:36a little bit of a pullback. So in lodging is well positioned right now, just for the economy,
06:41just given the fact that there's just hasn't been a lot of new supply built in the hotel,
06:46you know, industry over the last four years because of COVID. Now the credit market dislocation that
06:50we've been dealing with. So there's a lack of new supply. And, you know, so fortunately hotels are
06:55well positioned for this environment right now. As we look ahead, one of the big stories is almost
07:00a trillion in commercial real estate loans due to be paid back to the banks by the end of the year.
07:05And almost, I believe 2 trillion by 2026. What are the implications of that? Yeah. So, I mean,
07:13I think that is a catalyst to create a transaction market that should be much more active than what
07:17we've seen the last two years, commercial real estate transactions have been pretty muted. So
07:22it's down close to 50% from where it was at peak levels. And I think there's a very good chance that
07:29you're going to see the transaction market pick up substantially as these loans are maturing.
07:34It also creates a lot of opportunities for groups like us, because we're a private equity shop,
07:38that's always looking for interesting opportunities or inefficiencies in the marketplace.
07:43And we're able to go in with our credit strategy and provide capital to help refinance,
07:47recapitalize a lot of these loans that are maturing. We're able to on the equity side,
07:51because we buy assets, we're able to buy assets, we believe that more favorable pricing,
07:56because there's going to be a lot of assets that are going to be have loans that are maturing at
08:00much higher rates and a much higher rate environment than what they experienced
08:03back when these assets were acquired, you know, 3, 5, 10 years ago. You mentioned you're not
08:08in office. Where are you primarily and where are the opportunities that you see right now?
08:13Across our credit book, we're very diversified across multifamily hotels, retail, industrial.
08:19And we're also, you know, within the equity side, we're very exposed, obviously, to hotels. That's
08:24a big part of our book there. And where do you see growth over the next couple of years in commercial?
08:29Yeah, so I see, you know, I continue to believe that there's gonna be a lot of opportunities
08:32within the hotel industry. Hotels make up 7% of the commercial real estate ecosystem. It's
08:36obviously a pretty small portion of the total, you know, ecosystem of real estate or commercial
08:41real estate. I think there's a lot of, there's no question, like data centers, there's a lot
08:45of money, you know, pouring into that, you know, trade and data centers. There's a huge need in that
08:49marketplace. So I think you'll see a continuous growth there. But when you look at some of the
08:54other sectors like multifamily, I mean, there continues to be a housing shortage. There's
08:58gonna continue to be a lot of demand for multifamily. And that's a sector that we're
09:02investing more in on the credit side. And eventually we're probably gonna do more on the
09:06equity side as cap rates, you know, continue to normalize in that space as well. Are the proposals
09:10from Kamala Harris to create more supply, at least in multifamily, realistic? Helpful? Yeah, I mean,
09:18who knows, right? Like I hate to comment on her plan and I haven't fully studied it, but I mean,
09:23I think it at some level, you know, we do need more housing. So if they can find a way to
09:27incentivize and get, you know, more housing, especially, you know, for lower incomes, I think
09:31that is a, you know, a good thing for the economy. It does appear neither candidate really got the
09:35lesson that we spent too much the last several years because both want to expend an awful
09:41lot of money as we move ahead. So good stuff from Greg Friedman, Managing Principal and CEO
09:47of Peachtree Group. Appreciate you being here. Yeah. Thank you so much. I appreciate it.