On-Demand: Real Estate Market Outlook | Philadelphia Market Issues During COVID-19

And finally, Lauren Gilchrist, senior vice president at Jones Lang LaSalle and senior director of research. Lauren is an economist with a focus on urban and regional economic development, policy research, and community development. Michael, Jake and Lauren are well known and highly regarded leaders in the Philadelphia real estate community. And rather than a formal presentation, we're going to go right to Q and A. And I've asked each of them to jump in and follow up, and ask follow-up comments and questions to other panelists on points raised, sort of like Crossfire, but not the Saturday Night Live version of Crossfire. My job is to keep things interesting, which I expect will be real easy with this panel. So Michael, how's your portfolio faring?

Michael Markman: So it's an interesting question because we're pretty diverse in the portfolio. And I'm going to get to the most interesting part at the end. But we have probably 4000 apartments, most of which are in the Philadelphia region. They're upscale apartments, expensive rents, and they're doing well. We're collecting 98% of the rents. We've given a few deferrals to some people, but generally, we're doing well. Our office portfolio's smaller because we've divested in office, so for the last 10 years, so we've got about a million and a half square feet of office, a lot of medical based, and that's doing well with almost all the rents collected.

Getting to the retail portfolio, it's interesting because in the past, I've always kind of preached that a grocery anchored shopping center is kind of pure retail. And if you have a grocery store, that kind of covers your mortgage, you have a bank that covers your economic costs, and you have 20,000 square feet of retail for your profit, you're pretty much safe. And through all these different presentations, I've always kind of said that because that's pretty much my retail religion is grocery anchored.

So 13 of our 20 shopping centers are grocery anchored centers. And out of those centers, I would say we're probably collecting 80%, 85% of the rents because our grocery stores are all doing well. In fact, I just got, I have a suburban grocery store in Philadelphia, I just got the sales report today and their sales for the first quarter. And keep in mind the first quarter didn't even include all this. We're already up 25%, so you basically had what amounted to snow days for almost all of March. And so that center and that tenant is doing incredibly well, so the grocery anchored, the basic needs, and the tenants that can actually stay open around them are paying rent.

Then you look at my other seven centers, I do have other development deals, which I'm kind of leaving out of this equation, they haven't been allowed to be open. I worked out deals with most my smaller tenants, where I've collected some rent, I've deferred some rent. And if in fact, they live up to their obligations, I'll probably forego some rent, not a lot. So the smaller tenants, I've been kind of working out deals with. And it's almost a daily chore for everybody in my organization to kind of work out deals with all the smaller tenants.

The national tenants, some of them were very proactive, like TJ Maxx stores, they did an excellent job of communicating with their landlords, working out a situation where they know they would do well. They're very concerned about having the resources to buy the merchandise when everybody floods back in their stores, so they've worked out deals with everyone that I think are respectful and good. Other national tenants have just told you they're not paying you rent, and didn't pay, a bunch of them didn't pay for April. A bunch didn't pay for May. What I'm happy to say is most of those tenants are going to pay for June. There may be some give and take with those tenants.

So you look at your national ones that are allowed to open in June, they're starting to pay. And then you get to your gyms. Gyms are a nightmare right now. You can work deals out with them. But when they can open up again, who knows? So that's really a tough spot. Sit down restaurants are a really, really tough spot. And that's going to be an issue. Luckily, I don't have that many of them. I have probably about six or seven of them. But they're all doing takeout. They're not doing well. And there's a big problem with sit down. Fast casual is doing okay, and most of them are paying rent. So overall, if you look at, if you went just by my grocery anchored shopping centers, I'd probably be about 85%. When you factor in these other tenants, and the fact that some of them aren't paying or haven't paid, I would say it dropped down to about 65% of my portfolio. But the overall portfolio is jumping up to 75% I believe for June. And it seems like there's a lot of renewed optimism in June. We kind of understand we're going into yellow phase here. These stores are going to be open. People are going to start shopping again.

So with that in mind, we're optimistic as of June first than I have been. I've gotten through the hurdles of negotiating with everyone. And I think I have a nice path going forward. So if you look overall at the portfolio for the year, if nothing changes and stores go into yellow and then gradually open, I think we'll be down. We probably won't collect 10% to 12% of our rents for this year based on where it's all going and a few tenants not coming back. But I can tell you I am definitely more optimistic than I was let's say three weeks ago at this point.

Ed Opall:But 10% to 12% can really hurt your returns. Those in line stores, even within a grocery anchored centers, they're the ones that are providing the profit margin for you. The grocery stores, they're not paying high rent.

Michael Markman:          I agree with that. And really what's changed with the pandemic my cash on cash returns are not going to be great. I'm going to make something. But what you're looking at now is really just get through this year, get through the pandemic, and look towards next year to get your profit levels up to where they've been. I think everyone has the same point. Let's just get through the storm. If you can get through this storm and be standing and strong, by you could pay your expenses, pay your mortgage, your centers survive, I think you're going to be in a great position come next year.

Well, that makes a lot of sense. Lauren, what are you seeing similar data in your world?

Lauren Gilchrist:Well, Ed, thank you, first of all. And thank you to Michael for kicking us off. You know what's really interesting I think about this particular epidemic, this particular economic headwind that we're facing is this is very different than anything else that we have seen before. So one of the ways in which economics kind of predict what a particular downturn might look like, or what a particular upmarket might look like, is to look at past trends and to try to predict future performance based on those. And what's difficult in this particular moment is that we can't really effectively compare what we're seeing today to what we've seen in past market cycles.

So the '01 recession, the dot com bust, the '08 recession, the financial crisis, they are performing very differently from first of all an unemployment perspective. So both of those cycles, we didn't really see unemployment get much higher than, call it about 8%, 9% overall across the country. We're at a place right now where we have 40 million people unemployed and we have about 14% to 15% unemployment. So that's troubling and disturbing, and at the same time, the question remains. Is that permanent unemployment? Or is that going to be sustained long-term unemployment? To Michael's point about the restaurant situation, kind of trying to work itself out. When we look at who is unemployed by income brackets, people making less than $25,000 to $35,000 a year, over 70% of all of those people are presently unemployed.

When we look at people that make $70,000 a year or more, only about 1% to 2% of those people are unemployed. So in a lot of ways, this moment is very much one about where people who need to be in person to do their jobs in entirety are suffering the most. When we look at the real estate market, I can concur a little bit more on the national to what Michael just commented on in the local level and his portfolio. So our business is predominantly office. We touch all asset classes. But when we look at the office market on a rent collection basis, we're seeing about 83% rent collection in the property management portfolio that we have with landlords across the country reporting about 90% to 92% kind of on average for call it your more mid-tier to high tier landlords in the office space. When we look at retail, one of the things I think that's most concerning is that a lot of downtowns really saw their revitalization coming in the form of, we'll call it experiential retail, or retail that you couldn't really kind of effectively do at home.

So what do I mean by that? I mean that by fitness and food. And those are really two of the most disrupted sectors right now of the retail market. And one of the biggest challenges that cities face when they depended upon fitness and food to kind of grow the retail market. Retail was really kind of ripe for disruption at this moment anyways, as we were beginning to see shifts to e-commerce, but e-commerce is still a very small part of the overall retail environment. It's definitely grown, and I think we've grown more consumers for it. It's really the only segment that we've seen grow over the last couple of weeks. We were looking at about 8.4% growth over the last call it eight to 12 weeks, so that's great because we finally have a whole new group of people who are comfortable with shopping in a virtual environment.

So I'll be completely honest, I had never ordered groceries online until the pandemic, and that was mostly kind of out of a health concern. And now that I've done it, I'm kind of like, "Wow, this is great. I don't need to spend 45 minutes at the grocery store walking up and down the aisles trying to find what I want to purchase." So I know the older consumers are doing that for the first time as well, so I would expect that segment to grow. That also being said, I recently heard this term that I wanted to mention for this group of revenge retail.

So this is kind of the notion that there's a lot of pent up demand. People shopped for fun, recreation, social connection, and we're anticipating that there is a significant amount of pent up demand. So I'm actually in Pittsburgh right now. I have another home in Pittsburgh. And we're here transitioning to green status on Friday. But even when we went into yellow status, I was driving pas a Ross, and there was a person outside with their purchases that included all this home décor. And I thought to myself, "I couldn't imagine going into a grocery store, into a home goods store right now, to make these types of purchases," especially when I know I could make them online. But this person needed to go to the store to have that experience for whatever personal reasons.

So I do think that if we can figure out the right balance of e-commerce versus in person shopping, I do think that we'll see some return of it. But I do think that there was already significant structural shift underway in the retail segment. Last thing I'll just touch on is hotel very briefly. A lot of downtowns in particular rely on hotel, rely on conventions. We do anticipate this is going to be an ongoing challenge in city markets. However, a lot of the biggest hotel chains, despite the fact that about 15% of all hotel rooms right now are not operational, a lot of the biggest hotel chains are offering significant incentives for people to travel. I don't know that people are really going to be getting on airplanes en masse anytime soon. But I do also believe to this point of pent up demand that we'll see people beginning to loosen some of their thoughts around travel to areas where the disease is not as prevalent at the moment.

So couple of high level comments there. And then industrial, I think it makes a lot of sense to folks that industrial continues to be fairly strong as it responds to the demand for e-commerce. But that pipeline of projects was kind of gearing up for a long time already.

Ed Opall:So we're really primarily worried about the retail area and the hospitality. The other areas, I mean, we've talked. A lot of people have been talking about offices. What's the new normal? Nobody's really going back to offices right now. I know in our firm, we have 13 offices around the country. We have a policy that is going to be 30 days after the local governments allow you to go back, and that will be as people feel comfortable and as needed, with lots of social distancing. What are you seeing out in the world, similar?

Lauren Gilchrist:In terms of tenant requirements, a lot of folks have put their requirements on hold during the pandemic. We've seen people shift towards short-term renewals in the market more prevalently than what they would have done in the past with the average deal term being compressed by about two years at this point and time. And what we are seeing in terms of the layouts of office, the return to work, is really kind of going in two different directions. I mean, first, I think the media headlines are a little bit sensationalized. We're having this discussion, kind of preparing for this call, whereby people are saying, "Okay, the big tech companies are never going back to offices. Twitter and Facebook are completely virtual. This is going to drive the market."

Well, they're saying that because rents in San Francisco are effectively three to five times what they are in Philadelphia. Rent is still a fraction of total operating costs, and there is something that is lost when people are not working together. In terms of social distancing, social distancing could result in an expansion of an office footprint to be able to get that additional space per person. And I think that what we've proven for knowledge workers is that people can do their jobs at home, but people are not necessarily as creative, as innovative, kind of talking to one another through a web platform as they would be if they were collaborating in person. So I really think it's too soon to say what the net effect will be. But I think the technology companies are in a different stratosphere when it comes to what their economic considerations are.

Michael Markman:So if I could just add, I mean, we've actually made a move out of class. We were suburban class B office, maybe A, B office. And we've kind of made that move over the last seven or eight years just because what we've seen is not a lot of growth. We've seen more kind of deal trading, where someone wanted to move to a new location. And as far as occupancy and the best suburban markets, it's gotten better. But in the majority of them, it's kind of lulled because people just kind of trade office buildings. But that's part of it, is there has been less space per person over time.

And for instance, the building I'm in, I'm a smaller tenant, but it's 225,000 square feet. We have 175,000 square foot tenant, who allowed their tenants, the employees to work from home before. No one has been here since the pandemic. They just told us they don't really see many people coming back before the end of the year. So I think the companies that have already started in that direction may accelerate it a little bit. I can tell you for the first time ever, my people have worked effectively from home, so I'm going to be more flexible in the future about letting people work from home than I have been in the past because we haven't missed a beat during the downturn.

So I think truthfully, there may be larger footprints because they need more space, but I think overall the office market is compressing. And with formats like this, it's not going to replace everything, but it's going to replace a lot of the meetings. So I don't see a huge office boom after this. I see where it's kind of an accelerated compression of the number of square feet of office space that are needed.

Jacob Reiter:Yeah. I agree with Michael on that, Ed. I, just to speak briefly on office, I don't think it's binary. I don't think it's yes or no. I don't think it's no office or some office. I think our view is, and similar to Michael's portfolio, our office portfolio is largely medically oriented. So they're paying, I mean, they're hospitals. So we haven't seen a diminishment of yield in that space, per se. But that was really a strategic decision some years ago that we didn't want to be in office, an asset class with tenants that could disappear, be it from migration, to other geographies and/or consolidation, that type of thing.

We too have operated virtually very successfully. And I would agree that creativity and being face to face is key in a lot of businesses. I would suggest, though, that need for people to show up in an office to feel like they're working maybe is not prevailing on a go forward basis. I mean, to Michael's point, I think we've taught ourselves that we can have these meetings. I can be in a conference in San Francisco, or I can fly to San Francisco and take two days on my calendar. So I'm going to be more thoughtful. My staff all has virtual technology at home. We meet virtually every week. I have partner lunches every week. We raise capital using these vehicles. So I don't know that office is going away. I think people are going to be more thoughtful about how they use office.

My son is in technology consulting. There are 15,000 consultants. They've been working at home. That company has figured out the kids can work at home, doesn't mean they're doing away with Silicon Valley. It just means they're going to be more thoughtful about how much space they need and how much they want to pay for that space. In terms of multifamily, we own about 10,000 units across the country. And that demographic, again, strategically tends to be the upper end of the income spectrum. So our collections have been 98.5% across the portfolio for the first, really through the end of May. And we'll just see. We'll take it month to month. While we’ve collected cash, we’ve only made limited distributions this year. We expect to make distributions this year if the pandemic doesn't start impacting that demographic of those making over $75,000 to $100,000, we'll make less distributions.

In terms of our retail portfolio, that tends to be grocery, drug store, they're essential businesses largely, so that's held up well. Convenience has not held up as well, interestingly. So we've made some rent concessions in that space. The restaurants and the nonessential businesses, we've had to renegotiate every lease, which we have. And we've taken a long-term partner approach with those tenants, which is we want to get through this with them, assuming they're long-term liability. In terms of opportunities, I have a slightly different view, which is I actually believe, and we're raising capital around the following notion, that limited service at state universities around the country, California excepted because they're not open, is going to be a tremendous buy opportunity. And while we have never seen an entire shutdown of that industry, at least in my career, kids are going back to state universities. And we own a fairly significant student housing portfolio, something I was very worried about if they didn't open, which would've been a year without coupon.

All of those universities have now said they are opening on a limited basis. We're 95% leased now for next year. In that portfolio, we've got universities coming. They want to master lease our projects. We've got sports teams that want to master lease our projects at those universities. The key to student housing is they have to be low density. They have to be singles or three to four bedrooms, where you have bathroom, bedroom parity. And so we're actually a buyer in that space now because it's viewed as a distressed space by a lot of institutional investors. So counterintuitively, I guess, we just based on our own portfolio results, are very interested and are looking at a couple of those buys now.

Ed Opall:It's very interesting that you mentioned you've suspended distributions this year. Your partners are, I guess they're suspending their distributions. And your investors are holding out.

Jacob Reiter:We've collected all the cash. And we're just looking at month to month. We expect to make full distributions or close to full distributions second, third, fourth quarter. But what we did, not knowing what this was going to look like, was we made a decision I guess in March when this hit, that we limit our distributions. So we have the cash flow. We're accumulating the cash. Obviously, there's a negative arbitrage on that. But we're looking to make distributions going forward. But we just want to be thoughtful about it. We want to make sure our debt partners are being paid. We've stressed the portfolio so we can absorb a 30% decline across the entire portfolio and still be covering debt service, which is a good story. We're not a leveraged portfolio, and we're diversified by asset class and geography and all that type of thing. I would rather not have that happen, obviously.

It hasn't happened yet. But maybe it's the depression era DNA in my system, but I just want to see the evidence of the cash, so what I'm not doing is making distributions and then making capital calls to pay debt towards the end of the year. But so far, that's the existing narrative. And from a go forward narrative, I think early 2021, we're going to see some real pain. There's already an accumulation of a huge amount of asset foreclosures with special servicers. And that's a place we're going to be spending a lot of time in the next year or two.

Ed Opall: Michael, what do you think about Jake's comment about the long-term viability of tenants that are struggling? How are you dealing with those, I'm assuming, good tenants that have always been successful, and now they've been shut down? It's going on three to four months. I'm thinking restaurants, or gyms, or any of these types of businesses that rely on in person close contact. How are you dealing with them?

Michael Markman:Well, the interesting part is the gyms, some of them are making deals. We actually have an LA Fitness in Georgia that's been able to open back up. And they're still negotiating for some rent relief. And they're generally negotiating for rent relief with all landlords, and looking for a payback really over kind of a couple of years for any kind of deferral you're giving them. So I think the gyms are going to come back. The high priced gyms might have more of an issue. I mean, some of the recent statistics show that these heavy group fitness classes. My wife, who is a fitness instructor, mentioned there's a Zumba class where the spread was incredible because they were all breathing very heavily. They were in a small room and there was 30 people. If they can transition to smaller classes where there's some social distancing, I think the gyms will come back. And people really want to go to the gym.

I think the high priced gyms might have larger issues. But the lower priced gym, and the one thing you have to remember is it's all about perspective. And if your perspective as, I just watched my kids, or I watched the younger population that works for me, you're not really seeing any of your peers or anybody else getting sick. You're not seeing your friends getting sick. You're seeing what appears to be some older people that are generally affected by this. When you're not having the direct contact and the direct sickness, they're ready to get back out. They feel like they're immune to this thing. And I think as far as that population, I would say the under 30 population, they're going to go out and they're going to hit hard. And they're going to get back to what they were doing before.

What the impact of that is, I don't know yet. But for the gyms, I mean, if you have a gym where it's 10 bucks a month, such as a Planet Fitness, I think they're going to fill up very, very quickly. The gyms that are 100 bucks a month, which are generally the older people, I think that's going to take a while longer. So yeah, some of these tenants may go out of business. But I guess once again, it's how long this is out there and how long this is in our collective psyche, the fear really, and what population. So you have to look at what population shops at this particular store, and how they're reacting to the fear of getting sick. And I think if you look at the demographics, that's probably how it's going to go.

And the one thing I just wanted to add to what Jake said, the greatest thing that's happened in this pandemic is municipal meetings. I've spent my life going to townships and getting abused by citizens who hate my projects. You get on these, it's very hard for them to abuse you on a Zoom meeting with a municipality. It is the greatest side effect of what's happened here. They get to say what they want, but it's a much more pleasant situation because they can express anger, but it's not as aggressive because it's over the Zoom platform, which I think is great.

Ed Opall:I think they should make them put it in writing and mail it to you in the mail.

Michael Markman:Yeah. I agree.

Ed Opall:Comments accepted in the mail.

Jacob Reiter:Or they can turn you down without having to look you in the eye. I mean, I guess it can cut both ways. Right?

Michael Markman:Yeah. Definitely.

Ed Opall: So Jake also made an excellent point that he believes, and a lot of people believe, that we're not out of the woods, and that next year is going to be very difficult for many properties, for many asset classes. And there are going to be a lot of restructurings, to use the nice word about it. What are your thoughts? I mean, what happens if there's a second wave? And everybody believes there will be.

Jacob Reiter:Well, I mean the reality today is that special servicers, I mean, they can look at the statistics, and Lauren probably has these at the tip of her head. But billions of dollars of assets have moved to special servicers. It's not just debt service. It's insurance, it's taxes. It's operating costs. That is the reality. So the point is, and special servicers are not going to want to manage hospitality properties. And institutional investors, which are swayed by things like a need for liquidity, public company, same thing, they need to show accretion, immediate accretion.

So, the buy market for those types of assets, and some of the large funds have raised some capital around certain asset classes. State universities are going to open. The assets are already at special servicers. It's just a matter of: What's the discount going to be? Are with going to be able to make money that's going to make sense? Understanding to, I think Michael's earlier point, that these assets aren't coming back tomorrow. If we start buying early 2021, that could be two to three years before, even if a state university Marriott, just speaking of a parent of two kids that eight years, six years at Michigan and six years at Rochester, I mean, I can't tell you how many weekends, and I'm not talking about football or parent weekend, where I'm flying up to spend a weekend or long weekend, and those things are almost impossible to get into.

So these are somewhat intuitive buys, which were very different than, hey, there's a distressed mall opportunity. And Michael's spoken about this too, as have others. If you're in a B mall space, I don't know what the pricing would have to be, and Michael's one of the few guys I know actually in the United States that has successfully re-malled a mall. I mean, that's an art form and a science. I mean, with a deep pocketbook and very, very experienced operator. And I don't know that, that space as an asset class is going to be something that's going to be particularly interesting to us for a lot of reasons, again, unless it was like with somebody with a Michael.

But hospitality is more finite. A Marriott Courtyard, a Fairfield Inn, we think there's a buy. And aligning ourselves with a national operator to operate those kinds of properties and to work directly with special servicers to buy those notes, I think is going to be generational wealth creation opportunity. And I don't think that's the only asset class. But that's, if you talk about disruption, that's a disruption. And I think if you talk about accelerants, which Lauren did, retail in certain respects, and let's keep it at B malls, I guess, or C malls, that may be a structural change that started before the pandemic and the riots, and is probably a continuing theme downward.

Lauren Gilchrist:Well, I mean, if I could jump in here for a second. First, Michael, I think that Lexi suggested you press F5 because you're frozen. So I wasn't sure if you saw her note. But I'll just state simply, I think one of the things to that point and the point about sort of the fitness space, is what I think the pandemic has taught us about our consumption patterns is that we are now comfortable, at least for some period of time, consuming just what we need to. So with regard to travel, and some of Jake's comments, I think that we're probably going to see some struggles in sort of the luxury market because people aren't going to be traveling for nonessential purposes. And I would say visiting your kids in college is essential, effectively. Right?

So you're not going to be taking that ultra-luxe trip to the Bahamas to stay at the Ritz Carlton because we just don't need to, and we're just too scared based on the virus. Right? And we're just too nervous about getting stuck somewhere. And I think the other point I wanted to make just briefly too about: How do we get out of this? When do we get out of this? What does this look like for the real estate market? I think we do have to talk a little bit about the life sciences segment and about sort of the implications of a vaccine.

So folks are kind of like, "Oh, my God. We're not going to have a vaccine. We're just going to have to get back to normal." And I think I just wanted to point out in this moment that there's currently 100 candidates worldwide approximately for a vaccine. Many of those candidates have proven in small trials to be effective. The government is starting to loosen some of the requirements around where and how to test. The challenge I think actually is not so much on the science, because we've shown that there's a large pipeline of viable candidates. The challenge I think is going to be on the manufacturing side. And it's going to be on the distribution side. And it's going to be on the ramp up side.

So in a lot of ways, I also think that's a huge opportunity for real estate because we need that space. In Philadelphia over the last two years really, one of the most explosive segments of the market has been in the life sciences space, both in the lab space, and then also the GMP space to actually manufacture the cures and therapies that we're seeing. So I do think that there's some optimism to kind of be created around that in terms of where we are in 2021 as both a region and also as a real estate industry.

Ed Opall:So, there'll be a lot of people that suffer. There's going to be roadkill along the way, but eventually we're going to get out of this through a therapeutic, or a cure, or a vaccine. But how do we get from here to there? And what's going to happen in the marketplace? That's the big question.

Jacob Reiter: I think that Lauren's touching on something really interesting. And I think it leads to if you're well capitalized and you can be patient, and history has shown this, we're going to make it. And there are going to be, to your point, roadkill, I don't know that I'd refer to it that way, but there is going to be a lot of blood in the streets, and that's occurring. And if you're well capitalized and you built your company based on modest leverage and simple capital structures and you're dealing with very good operating partners. It's an opportunity to buy. If you're low leveraged, you've got cushion, to Michael's point. So he's done the math. I've done the math. A lot of operators aren't in that space. If you were buying heavily or developing heavily very recently, and you were buying very expensive land, and your costs were high and you were taking on senior debt and mezz debt, you're having a problem. I mean, there is no cushion.

So portfolio construction, how you run the business, this isn't like a today thing. That's a 10 year, 20 year, 30 year ago. What did you learn? And how did you learn about constructing a portfolio? What did you learn about diversification, leverage, who you partnered with? And what we're seeing today is, and what you'll see over the next year or two is who survives and who doesn't, and what assets are going back to servicers, and what assets aren't.

Michael Markman:Hey, Jake, can I take off on that? I mean, when this all started, I tried to read everything I could on the 1918 flu pandemic and what happened at that point and time. And just out of the 1918 flu pandemic, which by the way, originated in Kansas, didn't originate in Spain.

Jacob Reiter:That's right.

Michael Markman:We had accelerated overall vaccine development, which led to the polio vaccine because they were able to grow viruses in fertilized eggs. We discovered the nature of genes and chemicals and how they're encoded. We discovered DNA and genetic codes. And penicillin and antibiotics came out of it because it was a way to isolate the virus. The science that came out of the last pandemic that we had, major, major pandemic, was unbelievable. And when you have the collective wisdom of so many smart people focused on one thing, there is going to be incredible science coming out of this, and to the extent that you could be part of that aspect of real estate, I think it can be very positive.

Now I'm not there, but people like the group that develops down by Penn, Wexford, or whatever, they're going to be on top of things like that. People that kind of look in that direction, there's also going to be rehab from people that are sick, so that the medical area's going to be incredible. The other thing is, and I always say about real estate, I do the best when my collective experience puts me in a position because of what I've lived through and haven't lived through allows me to see something that other people can't see. It's driving by a 25 acre piece that's not obvious, and knowing that you can do something there based on your collective wisdom.

Now that's generally hard, as it has been in the last 10 years. It's been really hard because people are all out there. They're all seeing and doing. There's going to be less players after this is all done. So as Jake said, if you can team up with good capital and use the experience of your past. I always go back to the analogy that after World War II, everybody says, "They're great. The '50s were amazing in the United States." Well, we had 65% to 75% of the world's industry. Europe was decimated. Japan was decimated. China was not in good shape. We were this island that never got attacked, so of course we were unbelievable. And we also geared up with incredible infrastructure, incredible manufacturing, so we were in a position because everybody else was basically debilitated.

So the key is get through this, stay strong. And there's going to be hard opportunities, but there's going to be easier opportunities once this is done. And if you stick to your knitting, and you kind of look and you do variations of what you've done in the past based on the collective knowledge you have, there's going to be opportunities. You just have to open up your mind to it.

The amazing thing, and it seems easier when you say it, there's opportunities all around us that we just miss because we're so focused on the wrong things. When this comes back, there's going to be opportunities out there. And sometimes you have to be contrarian, but you just have to kind of keep your eyes open. And there's going to be so many less players that if you team up with someone like Jake, or someone else, and have the capital resources, you will in fact succeed.

 And I think I'm excited about it because for me, I'm 50 years old. I'll be 52. I finally know something. I've learned enough to have experience where I've seen failures and I've seen successes. And at this point in my life, I have a little bit of knowledge. And there's going to be a landscape where the pickings are going to be much easier than they have been in the past. And I think if you take that and you go forward, there's going to be opportunities if you just stick to what you know and kind of alter it based on what we've lived through.

Jacob Reiter:Agreed.

Ed Opall:So we've just spent $3 trillion, and our national debt is around $25 trillion at this point. There's going to be a point where that becomes a problem. I think we've already passed it, but you would know better than me. How are the banks going to be dealing? What do you think the banks are going to be dealing with over the next five years in trying to dig ourselves out of this problem, so we can be back to prosperity at some point? And I'm asking you, Lauren.

Lauren Gilchrist:The banks have been very focused right now on getting out the various loans and the various government programs that have been implemented. All of my friends who work in banking, even my personal accountant, who I'm very frustrated with right now, who's not getting to my returns, has been very focused on his business clients and kind of getting them through this period of uncertainty and getting the cash into their pocket. But the national debt, I think it's a huge security concern. I think it's a huge solvency concern. It's hard to say. It's really hard to say. I think that we need to see what happens in terms of the defaults over the next couple of months, the next 18 months.

But we've known for a long time that the debt was too high. We've known for a long time that it's a systemic risk to our country. We've just made it significantly worse. And I would like to say I'm holding my breath, but I would've been holding my breath for a long time now. So I think it's just become the reality.

Ed Opall:And Jake, what are your thoughts about the lending environment over the next year or so?

Jacob Reiter:The Saint Louis fed came out with a statistic that is pretty telling, that the height of the great recession, the nonperforming assets to the equity of the banking system was peaked at 6%. It's currently roughly 10%. If you figure a bank is leveraged 10 to one, which is just a general metric, that means the banks today are close to technical insolvency. Now a lot of those nonperforming may be the deferrals, the 30 day, 60 day, 90 day, six month deferrals. So that has to be sorted out. Different banks, JP Morgan, highly diversified trading platforms. I think when you look at sort of the bread and butter bank that is largely deposit taking, lending platform, they're an index of the US economy. They're going to get hurt. And when you look at the debt funds, they're largely backed by liquidity lines from banks, insurance companies, hedge funds. They're largely out of the business.

I mean, we've had debt funds pull term sheets, not give us deferrals. The CMBS market is not entirely, but largely shut down. The agency market is open. So I think liquidity, every cycle has a trigger. Largely, these triggers have been liquidity driven, not insolvency driven. I think one of the concerns about this downturn is it could be insolvency driven. And I think we're just going to have to see how it plays out. I saw an interview with the prior CEO, Blankfein, of Goldman. The question was asked very specifically. What do you think about the financial system? And he said, "Today, we're fine. Six months from now, ask me."

 So I would say the same thing. I mean, I don't think we know yet. But I don't know unless we have a cure for the virus and people immediately go back out to restaurants, and businesses are coming back immediately and people are flying immediately. I think the banks are going to take a hit. They're not in a business of owning assets and managing assets. And so I think those assets are going to get discounted. They're going to have to clean their balance sheets. That would be my guess, but I don't know.

Ed Opall:Well, on that note, I appreciate that very much. I have a lot more questions. But unfortunately, we're out of time. Lauren, Michael and Jake, thank you so much for sharing your perspectives on what is going on out there. A note before we log off, there are networking rooms. Space was limited for our post webcast networking, so if you received a link from our team, please click that link to join your assigned room now. Thank you for listening. We hope to see you on the next upcoming webcast. Thank you, everybody.

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