Kim Hourihan:

Right in the beginning of a cycle, my view is you should be buying core because you can take core with good credit and cash flow at higher cap rates and a nice risk-adjusted return. When you get into the 2011s, 2012s, when Bernanke was saying, "Green shoots," and everyone's like, "Where? What green shoots?" That's when you start to go up the risk curve, because it takes a while to turn a building around or build a building or do whatever, and then you're leasing into rising rates and that is better timing.

Nancy Lashine:

Hello, and thanks for tuning in to Real Estate Capital. I'm your host, Nancy Lashine of Park Madison Partners. Capital is the lifeblood of the real estate industry, but the decisions on where and how it's allocated are driven by people and personalities. Who are they? What motivates them? What can we learn from their experiences? On this show, we introduce you to some of the real estate industry's most influential thought leaders and decision-makers, and we talk about what is important to them, how they make critical decisions, who has influenced them, and a lot more. Kim, it's fantastic to have you on the podcast. Thanks so much for joining us.

Kim Hourihan:

It's a pleasure, Nancy. It's so great to be here with you.

Nancy Lashine:

Well, I'm really excited that, as I was doing a little preparation for this, I've known about CBRE, of course, forever, and so I started doing a little background check and I didn't appreciate that the company started at 1906 back in San Francisco and was owned by Sears. I'm amazed that it's just been an aggregation of so many, many firms, and on the investment management side, of course, I knew about Westmark and LJ Melody & Co, Richard Ellis, which kind of brought you to Europe, and then, more recently, well, and then Insignia, which of course in New York, was such a huge services business. Then, the public IPO and then Trammel Crow, and then the ING investment management business. What I didn't appreciate is how many countless awards the company has gotten as just one of the best firms to work for, one of the best firms in DEI, which is number one stock pick from so many analysts, so now, I'm just a little intimidated, so this is really fun.

Well, I'd love to start, real estate is such a massive business, and so CBRE of course, is a different, the services business and what you call global workplace solutions, as well as the investment management business. Could you talk a little bit first about the big picture and then how your piece of it fits into the overall business?

Kim Hourihan:

Yeah, absolutely. I think, really, we have three legs to the stool, if you will, three main lines of business. The first one is the one where I think most people think of us, which is the advisory business, where you see that "For Lease" sign up, you see that property management, so the advisory business overall, where you see sales, so forth and so on. That's a big part of the foundation of us, as you mentioned, some of the purchases we've made through the years. That's stool number one.

Stool number two is global workspace solutions, as you mentioned, GWS. That's been a really fast-growing avenue for us. It's around facilities management, project management. We bought Turner & Townsend, that was announced a year ago plus, time flies when you're having fun. That was a big, big purchase. A lot of just to conceptualize that a lot of large global companies will hire CBRE to manage their space. Engineers and whatnot who are making sure everything's working properly, that type of thing. Big bank to make sure all of those ATMs and those little corner pieces are working properly and everything's integrated. A really global solution to their specific real estate and their specific real estate needs and bringing in the project management counter, Townsend and Turner is a big piece of where that business is going and growing as well.

Then, the final piece is what we call REI or real estate investments. Under that umbrella, we have Trammell Crow Company, which is a developer here in the US. Really founded here in the US and has expanded into Europe most recently over the last four or five years, and then, CBRE Investment Management, which is where I sit. We have about $144 billion of assets under management, and that is across the globe and across real assets. Within CBRE Investment Management, we have a direct real estate investment business and the US in EMEA and APAC. Then, we have an indirect real estate business which invests on behalf of clients and funds or programmatic joint ventures and whatnot. We have an infrastructure business and we have a listed business as well. Together REITs and packages of REITs.

Nancy Lashine:

Are there Chinese walls between any of these legs of the stool, if you will, or is the information porous?

Kim Hourihan:

It's porous except for between indirect and everywhere else in the business. Obviously, we're colleagues and we work together, but they're almost like a sister company in that they're making investments on behalf of their clients. They do invest in some of our products that they invest in with other firms as well. There's a bit of a wall there, but if we're looking at something and saying, "Gee, what's the industry standard for fees on this type of fund?" They would put together anonymized, but here's what we're seeing in the marketplace.

Nancy Lashine:

When you think about the benefits of having an investment management business that has all this access to all this information on the server side and the operating side, does that get you to data analytics and AI and the next gen of how people invest or are you already doing it?

Kim Hourihan:

We're already doing it, but it's definitely a work in progress. Now, just like ChatGPT, six months ago, you would ask it something and then you'd go four or five questions deep and you'd get rubbish pretty quickly. Now, it's getting better and better and better. Well, I would describe us as the same. Certainly, an advantage when it comes to data and how we use the data, but like anything, getting it clean, up-to-date, continually up-to-date is hard. That is the hardest piece of the puzzle. That's something that we've been, CBRE in particular, has been very, very focused on this in terms of how do they harness all of the data that they get.

Then, we've been very focused on this, because I really feel, in particular, I should say, I really pound the table on this, that if there's a way for us to figure out how to use the data where we, as portfolio managers and fund managers, can make better decisions, we really want that. I always say 51%, because that's better than according to us, number one. And number two, while I appreciate your gut instincts, I'd much rather have data.

Nancy Lashine:

Well, it's such a big focus of the industry now to aggregate the data that we have. As I was thinking about CBRE's business relative to many others, the fact that you are on the front lines in leasing and services gives you potentially a data edge. Is there anything you can share with us about how CBRE is aggregating that data today? How many engineers you might have working on it? How you're thinking about building a database? Is it strictly proprietary? Might you be building it to sell it? Anything along those lines?

Kim Hourihan:

I can only really speak with great knowledge within the IM business, Nancy, but I can get you how much, I'm sure it's public knowledge, how much money we spend on tech and the whole infrastructure around that and how many engineers we have, it's a lot. Within the IM business, really, what I've been focused on is how do we harness just even $144 billion of assets management? Let's start there and let's harness that. We've done a lot of work around that, where you can just type in Amazon and you can see how many buildings we have Amazon in, where, what percentage of their volume is in our portfolio, all of that. It's as fundamental as that. Also, using it to help us think about, for a long time, we've had great research on our platform, on Investment Management platform. Let alone CBRE has tons of research too with each of the markets and you get some of those flyers saying, "Here's what absorption was in this or that sector."

IM has its own research where we have been publishing our house views for, gosh, maybe 15 years now. We started to develop what markets, where in the world and what asset class in a meat package that we call risk-adjusted real estate or RARE. That's another piece of the puzzle, and those are pretty public. We'll host webcasts. We'll talk about, with our clients, how we think about using those RARE markets, and how to think about what your allocations are and why.

The one that I won't talk about, that is what I would call our secret sauce, is using quant, how we think about using factor analysis in the private markets to give us an edge. What it means is when we take a look at all of the data we have and bring in our research data and start putting in assumptions around what are some factors that could drive like rent growth? What do we think rent growth is going to be in what market in future forecasts?

Starting to bring in factor, what are cap rates? Where are cap rates going? What are interest rates? When you start bringing in certain factors and asking it, "Okay, if we put a screen in here, what pops up?" That is what I'm talking about. That gets us to really focus on what asset classes and what markets we think will give us an edge. Also, within our portfolios to think about, "Okay, in a perfect world, here's the portfolio. Where do we need to move it in order to outperform? Do we need to add an asset class? Do we need to take, dispositions are a huge thing, so do we just need to sell this now? Because for all kinds of factors, it doesn't make sense anymore."

Nancy Lashine:

Based on what you're doing today, do you feel you're really able to generate alpha from all those data analytics that you're doing?

Kim Hourihan:

Yeah. We've been working on this project specifically for three years. We've used a test case, and the test case is now live, and we'll be rolling it out globally and it's going to be a work in progress. It's like a painting where we mix the colors together, we put off the canvas, and so we have everything ready to go and we've started painting, but then, we're going to say, "Oh yeah, that's a mistake. Let's put a glob over that and repaint that person's hand," or whatever it may be. It's definitely going to be a work in progress. We certainly can see it on the listed side, but they have much more going and much more data. On the private side, we've had really positive back testing and results, and so now, we'll be rolling it out across the globe amongst our funds.

Nancy Lashine:

Difference between sitting, say in, CBRE Investment Management versus another firm that's also public that is just an investment management firm, like a Blackstone for example, or TPG, many of the others.

Kim Hourihan:

I'd say probably our day-to-day is the same. We have our own business that we run that every day we're working with clients and buying and selling buildings and doing what we do, and also buying and selling infrastructure assets or listed. We've got our individual lines of business. Our day-to-day probably looks exactly the same as a Blackstone or a TPG. But then, we also are owned by the largest real estate services company in the world. We are a public company, so we have public company pressures the way Blackstone would. But my view, being part of CBRE gives us so many pluses when it comes to just capabilities of doing whatever we need to do across the board for real assets. CBRE has been working, moving with CBRE IM in terms of moving into infrastructure and moving into different lines of businesses that are, I'd call them real estate-adjacent.

Nancy Lashine:

Let's talk about that. Why move into anything else? Real estate itself is a massive asset class. Why do infrastructure or any of the other things you might be doing today?

Kim Hourihan:

I think there's more and more overlap with infrastructure. I get the question on data center all the time. Is it real estate? Is it infrastructure? That's the obvious one.

Nancy Lashine:

What's the answer?

Kim Hourihan:

The answer is the operations in a building are infrastructure and the four walls and the roof are real estate.

Nancy Lashine:

Oh, I like that answer actually. I figured you'd say both, but I haven't heard it distinguished that way before. That makes sense.

Kim Hourihan:

In my view, and back when I was a portfolio manager, we started investing in data centers and started really thinking about it around 2015, 2016. I would say to clients, "We're going into data center and here's why and apps. You have to think in terms of energy and energy consumption, and that's really what your tenant is paying for." But I have no business being in the data center business. Nothing to me, I just understand electricity coming in that they need certain amount of energy, and so I'm focused on the location, the four walls and the roots, and who has the electric contracts and how we secure those.

Nancy Lashine:

Since we're talking about data centers, the question that we get asked all the time is, are they being overbuilt? Does it make sense to own these hyperscale facilities that may have 20-year leases, but will the building be obsolete after 20 years? Will everything have moved to the cloud? How do you think about data centers as an investment thesis?

Kim Hourihan:

I really think it is real. I'll tell you an embarrassing moment that I had. I've got lots, so we can share. Every year we have investor-client symposiums. We have them in different locations for the Americas or offshore infrastructure or wherever, or Europe or whatever it may be. In the US symposium last November, we were getting questions about data centers and I said, "Look, I've been a big believer since 2015, 2016, really started to get my attention and talking to our securities folks and our listed folks about what they're seeing in the marketplace. I really do believe that private follows public in a pretty close way." I said, "That being said, and now we have AI," and AI was, ChatGPT was a little bit on the starting to get into people's language and whatnot, but I said, "Look, there's two and a half times the development that we've ever seen historically all about to hit in 2024 into 2025."

As a real estate person, that gives me pause to say, "All of this is going up spec or a lot of it is going up spec. It's a huge number. It gives me a little bit of heartburn as I think about that, and it's something to really keep your eye on, but I think it's a short-term problem and that you're going to see more and more growth, and you've seen huge, huge growth." I'm not that worried about the technology at this point, because electricity is electricity. I do not see people saying, "Okay, in my neighborhood, it's bad enough I am the data center, but now I want a little mini-nuclear reactor."

Nancy Lashine:

What was embarrassing about that?

Kim Hourihan:

No. I said, "I'm a little bit cautious in 2024 as we go in to see how that absorbs." Literally, three weeks later the whole thing explodes and within two months, 80% of that is leased.

Nancy Lashine:

But Kim, maybe you're just a little early.

Kim Hourihan:

Or a little late, one or the other.

Nancy Lashine:

It's really hard to predict.

Kim Hourihan:

It's hard to predict, but I do think it absolutely is real. Let's say the next 5 to 10-year horizon, I'm not that concerned about some big disruptor coming in because the need is going to be so high.

Nancy Lashine:

Would you hold these things though in a core vehicle for the term of the lease, or do you want to be the developer and develop them and sell them? Where do you think the best opportunity is for the hyperscale data centers?

Kim Hourihan:

At the moment, and I wouldn't just limit it to hyperscale, I would say just data centers holistically. Our infrastructure funds, invests in a couple of data center companies, and we've been early investors and adopters into that. We're really focused on, "Okay, we know for sure, at least we feel for sure, that getting electricity to land is a very good thing." Even just selling the powered land to developers from, as a step one, we think that's interesting. We're more on the develop-to-sell, but that's a big dollar proposition. We do like it, but we'll be more selective. Then, last I would say, buy it to hold it. There's reasons to do it in certain markets, and so we would look in those markets. We bought and, actually just recently, sold three data centers in Northern Virginia and right in the bullseye. Phoenix is a big one of course. Silicon Valley, it's another big one, Santa Clara, so yeah, there's some areas there we can go around the globe and talk about it.

Nancy Lashine:

Yeah, I was going to ask you, because you're, of course, such an important global investor. Are there countries where you'd like data centers more than say others?

Kim Hourihan:

We're developing right now a huge 8-story data center in the center of Tokyo, right under the Tokyo Tower.

Nancy Lashine:

Right, right. The concept of an 8-story data center is a little mind-blowing, but of course in Tokyo.

Kim Hourihan:

Then you say, "Oh, okay, that makes perfect sense because they've already had three and 4-story industrial building." That's a big project that we have ongoing. Europe is so anti-data center, yet they want the technology and they want the AI and they want everything, so they're not going to be able to have it all.

Nancy Lashine:

Is it because they don't like lighting the landscape or the energy issues?

Kim Hourihan:

The energy issues and the ESG, green, sustainability issues around that.

Nancy Lashine:

It's hard to run a data center on a solar farm.

Kim Hourihan:

Yeah. I think there's so many opportunities in so many markets because in order to be productive from a GDP perspective, you're going to have to have these. I just think there's a lot of opportunities in so many markets around the globe for different reasons, there's just a shortage of power.

Nancy Lashine:

As I were talking about this, I thought it may be helpful for our listeners to know. Of the $144 billion that you manage, what percentage of that is core real estate?

Kim Hourihan:

I want to say it's about 75% core, core plus.

Nancy Lashine:

Of the $144 billion that CBRE is managing, about 75% is core and core plus. What percentage of your investors are dollar-dominated. I'm thinking about risk-adjusted return obviously, and if you're coming back to dollars, I think you think about it differently than if you were a Euro investor or a yen investor for example.

Kim Hourihan:

Right. That really depends on the client. We don't do any FX hedging at all. Have a lot of our funds, like take our APAC fund for instance. It's dollar-denominated ultimately, because we have investors, a lot of investors in APAC, but we have US investors and European investors as well, and so you have to pick a currency. Then, we have a European fund, for instance, and that's Euro-denominated. You could be a UK investor, you could be a US investor, and you've got to deal with your own impact issues.

Nancy Lashine:

Well, before the financial crisis when globalization was such an important part of people's portfolios, I think investors were looking at investing in core, core plus around the globe. Are you still finding that investors want to invest globally just for diversification and they're willing to accept core returns to do that?

Kim Hourihan:

Yeah. It's an interesting question where I spend quite a bit of time with clients. They really think, in certain terms based on where they think we are in the cycle, they'll always ask me, "Where are we?" I'm glad I don't have to answer what inning are we in because we kind of know, so that's good. I won't have that question for a couple of years, so I'll relish that. There's a lot of talk because of the disruption in the real estate markets globally. We're going up the risk curve, we want value add, we want opportunistic. If you just look at the facts and say, "Okay, I'm going with Warren Buffett," and compounded interest is a beautiful thing from the universe. You're in an open-end core fund, pick place in the world you want to be, let's say the US.

You're in an open-ended core fund and you look at the wealth creation over the last 10, 15 years. Can you say, "Okay, I've put a dollar in and now I've got X dollars out and I kept reinvesting that money in a dividend program. How much money would I have?" Then, you look at timing, value add and opportunistic and saying, "Okay, I've got the J curve, I've got the opportunity costs, all of that, what kind of a return would I need?" We use this against our own funds just to think about that, and the answer is a high teens return net.

Nancy Lashine:

Even if you were to invest through some of the real down cycles, I just happen to see today the Odyssey numbers came out for the last quarter, I'm sure you know them, but they're still negative.

Kim Hourihan:

They're still negative. Even through that, over time all of these things, you have an average return over 10 years, and it's going to be whatever that number is. You could depict a bad vintage for value add. You're going to have to deal with those things as well. It's really interesting. There's psychologies around somehow value add is more sexy, and we have value add funds. They're fun and you're doing all kinds of great things with different buildings. There's something to be said for Warren Buffett and your plain vanilla compounded interest, let's stay the course.

Nancy Lashine:

He's certainly done very well with it. I think some people are starting to ... look, obviously, it's too late to get out of real estate today if you were going to try to "time the market." It does amaze me though, as somebody who talks to dozens, if not hundreds of managers, how many people stopped buying office a few years ago or sold their whole portfolio just before the GFC. History does have a way of making people very smart.

Kim Hourihan:

It is interesting because we made a residential call in 2008 in the [inaudible 00:28:11] residential team and said, "We really see supply-demand issues and it's back." Then, in 2011, our house seat call was for logistics. Personally, I love working on office, it's really fun. From a real estate person perspective, offices can be really fun and the Rubik's cube of how do you fit everybody together and how do you think about that? But as an investor, I've never liked it, because you can be 95% leased and get no cash flow out of the building. We were overweight, resilient logistics, and then we just watched other people and things moving and moving, and today, you mentioned Odyssey, you look at Odyssey and it was 15% logistics and now it's 3%. You watched all of that change. I listen to all kinds of managers and they say, "We don't have any office," I'm thinking, "Who owns an office building?" Clearly, no one owns an office building, doesn't everyone?

Nancy Lashine:

Well, maybe the banks own them all and they're being the silent majority at the moment. What do you think? Do you think there'll be a wholesale reckoning by the banks and we'll start to see some loan sales from the bigger banks beyond what we've seen today and there'll be some DPOs and those sorts of things?

Kim Hourihan:

Not to the degree that people are talking about. I just think about my career and what's happened with real estate and distress in real estate. I started a very, very long time ago in the 90s. There was the savings and loan disaster, and that was a true real estate supply depression. You had the RTC. As a real estate person, you didn't have to put any money down, you just had to say, and the bank would make the loan to you, just had to say, "I'll manage this and take it off your books." You can take a whole lot of talent to make money.

Nancy Lashine:

Very hard to make a mistake back then.

Kim Hourihan:

Very, very hard. Really, when I started even slightly before all of that crashed down, I would joke and say, "Everything's at a 10 cap because us real estate folks, we're not that great at math. Make our own value at the 10 cap." Real estate was not institutional. You had one family that owned four buildings and they leveraged it to the hilt and they put the equity from one building into the next building into the next building and it was all kind of a big, big crash then.

Then, through the 90s, it started to get a little more institutional and most institutions had maybe 5% of their allocation or 2% or 3%, and it became more institutional and you had the tech rec, and it was a shallow kind of reckoning. There were a lot of people saying, "This is going to be like the 90," and it wasn't at all. Then, the GFC, I was in so many panels. It was just like, "This is going to be the best. There's just going to be nothing but blood in the streets. It's going to be great. All kinds of distress everywhere," and there was and there wasn't. There were pockets of issues, but we really didn't see a whole lot of fire sales and those kinds of issues. There were opportunities, don't get me wrong, and there was opportunities after the tech rec and there will be opportunities now.

Nancy Lashine:

Wasn't the real opportunity in 2011, 2012, 2013 to buy with free money to buy with, use a lot of debt?

Kim Hourihan:

It was zero interest rates and very interesting buys. When I think about it, a cycle, I think about it in terms of, right in the beginning of a cycle, my view is you should be buying core, because you can take core with good credit and cash flow at higher cap rates and a nice risk-adjusted return. When you get into the 2011s, 2012s, when Bernanke was saying, "Green shoots," and everyone's like, "Where? What green shoots?" That's when you start to go up the risk curve because it takes a while to turn a building around or build a building or do whatever, and then you're leasing into rising rates and that is better timing, and you see that through every cycle.

Nancy Lashine:

Are we at the core? Are we at the beginning of the cycle now? Is this the time to buy core?

Kim Hourihan:

Yeah, this is the time to buy. This is the time to buy core, but that is not popular. Really popular right now is let's go up the risk curve, let's get value add and opportunistic, and there's opportunities there too. Because you hit a correction, you're going to have lots of opportunities across the risk spectrum.

Nancy Lashine:

Kim, if it's a correction and there's good assets that have distressed capital structures and there's a core opportunity, how do you think about pricing it today?

Kim Hourihan:

You've got a interest rate and a certain number, and so you don't want negative leverage. Let's just start there fundamentally and have some people and by view, they're getting over their steeze of, "I'm counting on long-term interest rates being back to 2.5% or 3%, so I'll take the negative leverage now."

Nancy Lashine:

Would you buy multi-family or industrial at 5.25% today cap rates?

Kim Hourihan:

No.

Nancy Lashine:

5.5%?

Kim Hourihan:

No.

Nancy Lashine:

I am going to auction it off here. Where do I stop?

Kim Hourihan:

Right. Look, if you can find it, it depends on what it is, right?

Nancy Lashine:

Sure. But assuming it's a good asset, stabilized.

Kim Hourihan:

Stabilized asset, yeah, you're probably looking at a 5.5%.

Nancy Lashine:

Okay. We see people, the sellers want 5.25%, they'll get bids at 5.5%e, oftentimes, it doesn't trade. For something that's not as core, cold storage, where would you trade it?

Kim Hourihan:

Yeah, cold storage was always a hundred shifty pips higher than your plain old, so maybe in a more risky environment, you're up another 50 pips on that and maybe you're looking at 200 spread. The trouble is, and I say trouble, this is why I said I'm not sure there's going to be all that distress out there, is that real estate is institutional. You're that seller and you want 5.25% and you're not going to sell at 5.5%, you don't sell it. You don't have to sell it.

Nancy Lashine:

Unless you're in a closed end fund and your debt is up and you can't call capital from DLPs and you don't have a deep balance sheet.

Kim Hourihan:

Yep, then that's a problem, but you'll work with your investors and the banks and you might find a solution.

Nancy Lashine:

Right, like a NAV loan or something like that. But if you're a high net worth person, you may not be able to do that, a seller, yeah.

Kim Hourihan:

Right. Correct. That's why I said there'll be pockets of opportunity, but it's just not going to be the wild west like it was in the 90s. Then, it was less and tech rank, less at GFC. At COVID, it was about six weeks long of distress. That window is going to be very short. Sadly, GFC was sharp down, sharp back up. Why? Because capital started coming in and buying opportunities and then institutional bankers and the bankers started to come in and that created solidity and there you go. I think we're going to see more of the same in this correction of, yeah, you'll see some distress, banks will work through with their borrowers, institutional folks, of which there's a lot, will be holding on to things. Closed debt funds will get an extra year or two out of life because people will say, "Hey, this isn't a great time to sell," and things just we heard kick the can all the time at the GFC. Why would we think kick the can doesn't still exist today?

Nancy Lashine:

Oh, it sounds so boring. All right. Let's find something exciting to do, Kim. If you had $500 million to invest today, de novo, brand-new portfolio, looking for best opportunities, and obviously, you choose risk return, but where are the best, what would you say, best opportunities, best risk-adjusted return around the globe today?

Kim Hourihan:

I would do a hybrid kind of portfolio. That's a global portfolio that has a pretty hefty amount of infrastructure in it. Let's call it 30% to 40% infrastructure. I think there's great opportunities in the public markets right now. The REITs have been just hammered and they made a little bit of recovery, but I think there's more recovery to be had.

Nancy Lashine:

What property type in the REITs?

Kim Hourihan:

That depends on the month. Obviously, in the public markets, you can be nimble, but I would take just a broad, broad sweep. Maybe I want to overweight something or underweight and have flexibility there. I'd take maybe 5% to 10% in the public markets to give myself a chance to take some advantage there. Then, I still think there's room to run in logistics, and I think residential, especially in things like students in over-55 housing have some room to run as well, and Europe and the US, both residential. Japan, I think, is interesting as well, so a fair amount of residential. I would love to be able to buy tons of residential in Australia, because it's so fragmented, but it's such a horrible tax problem there for a foreign investor that you can't do it. You have nothing but mom and pups owning little bits and bobs and you don't see the big multi-family buildings that you would enjoy in other parts of the world, but we will leave that aside. Then, I'd have a sleeve for, there's some interesting retail opportunities that have popped up over the last year or so since COVID.

Nancy Lashine:

Uh-huh, like such as?

Kim Hourihan:

In Europe, you're seeing shopping malls that are very interesting, open-air stops that are selling at very high cap rates. People are going back to shopping. They want to touch and feel, they want an experience. They're ordering online too, but I think we're starting to see some pretty good retail rent growth in the US and in Europe over the course of the last year, and some occupancy is moving and cap rates are still very, very high there. I think there's interesting opportunities in retail, so I'd put a little sleeve in there for retail.

[inaudible 00:40:26]. I like working on it. I don't like investing in it and never have. There might be the best building, the one best building in any city. Maybe I'd look at, but it's pretty high bar. It has nothing to do with work-from-home or anything else. It's more just the fundamentals of it are just tough. We talked about data center, so there'd be a sleeve of what I'd call the other asset classes. Student, data center, over-55, living. Self-storage has been hammered, and the reason is because people aren't moving right now. Interest rates popped up. You're stuck in your house, nobody's moving.

It's really interesting because I think there could be an interesting buying here as we come into this market, because if interest rates are going down, which we think it is, people are then going to start to move and these are all on 30-day contracts. You'll start to see it bounce pretty quickly in self-storage. People aren't really talking about self-storage right now because it's been a little bit depressed. But I think the timing could start to get interesting there.

Nancy Lashine:

The concept being that if people start moving, they're going to have to put stuff in storage and use storage more.

Kim Hourihan:

Yep.

Nancy Lashine:

In your new $500 million very cool portfolio, what would your projected return look like?

Kim Hourihan:

I would say that your projected returns are around net 13%, 14%. A nice combination of, there's some value-add opportunity, but you're getting higher returns on your core and core plus opportunities. You're getting nice growth on the infrastructure side of the business and you look at how infrastructure we need in 2023 versus real estate and it's positive returns versus negative returns.

Nancy Lashine:

I'm a real estate person and I think I would know how I would answer this, but how would you answer a client who says, "That's great, Kim, but why don't I just put it all in debt for now? I can get something very close with less risk."

Kim Hourihan:

Yeah. In an environment where interest rates are coming down, I just don't like debt as much. I think it starts to get into a time of equity. I'd say a year ago or two years ago, that was a good play. I just listened to Ray Dalio go on and on in CNBC for two hours and that guy can talk, right? He said, "I'm getting completely out of fixed income, full stop. Because it's just not the place to be in this kind of an environment."

Nancy Lashine:

It's interesting. It is kind of a time where a lot of people are saying, "I'm getting out of dot, dot, dot. Getting out of the big seven tech stocks." People are starting to feel like the equity market is overbought.

Kim Hourihan:

Yep. Hedge funds are going now more into shorts than long. It's interesting to watch the market. Debt is a good investment. It has a place in every portfolio, in every part of the cycle.

Nancy Lashine:

As a global investor, you take risk, strong risk views based on political movements. As you see what's going on in different countries, and let's use China as an example, do you decide to exit? Do you decide to put less capital there? Does that become part of your risk return equation?

Kim Hourihan:

That is the hardest one, my position as global CIO, to try and figure out geopolitical any, even just in the last month.

Nancy Lashine:

It is surprising. We all thought that October would be the month where people would pause because of political risk and just uncertainty. Nobody really anticipated it would be July.

Kim Hourihan:

Absolutely. But China, you asked about China, we have an office in China. Our clients have just, any client who's not in China has had no interest in China for the last couple of years. Our business there is really in China, for China. We have Chinese investors who are investing domestically. Obviously, they were investing a lot outside of China, and that got clamped down on even pre-COVID, start getting clamped down on. I try to sift through the geopolitics and say, "What are the drivers of GDP in the country? How much trouble are they or aren't they in?" I really don't know how to handicap who's going to get voted and where. This year, there's more elections than any other year in history. Obviously, countries like the UK and Brexit, they're self-inflicted wounds. But for the most part, it really doesn't matter. These economies are big enough that they're moving in the direction that they're moving in and it's moving in small degrees, it's not going to be a big 180.

Nancy Lashine:

How do you build a staff? What have you learned, as global CIO, about hiring people in countries around the world maybe where you don't speak the language and you have to rely on somebody to translate for you or body language? How has that informed how you manage people?

Kim Hourihan:

I think at the end of the day, it's the same. People are people. You can do background, just make some phone calls saying, "Okay, I must know somebody somewhere or one of our, someone who I work with or someone in CBRE knows someone somewhere to get and form opinions on people." But for the most part, if we're hiring in Japan, for instance, have to be fluent in English, just have to be. That narrows your employee pool. But at the same time, just as being able to function together as a group, you really have to be fluent in English. You can translate that through any country that that is one of the criteria.

Nancy Lashine:

Then, how important is renewable energy, ESG factors? Again, somewhat politically whipsawed over the last few years in the investment process for you. Is it very different in the US versus other parts of the world?

Kim Hourihan:

It is different in the US than other places in the world. Europe is very ESG-conscious. Australia, very ESG-conscious, so depending on the country, it's more or less. Then, in the US, there are some places that are very ESG-conscious and some places that don't even mention those three little letters.

Nancy Lashine:

Right. Are you using some of the technology that CBRE has invested in to help figure out and measure how well these buildings are performing?

Kim Hourihan:

Yeah, we definitely do. My view is that I'm a fiduciary and I want to make money for my clients. I think that, for a tenant to be competitive with a tenant, you need a certain amount of electricity in a building, you need a certain amount of backup, you need a certain amount, you have to think about the cost, because it's not just rent, they're also paying utility costs and they're paying other things. And so to be competitive, you want to make sure your costs are lower. How do you do that? Well, you have better insulation or you have solar or you have all of these things, your tenants are asking me for, and to be competitive and to get the highest rent, you better have it. There's a lot of noise around ESG, but to me, it's all about highest rents you can get, most competitive you can be, what do you need to do to do that? And a lot of it is around saving money, costs for utilities, and that's just a fact.

Nancy Lashine:

We've been going on, but I wanted to ask you a few questions just quickly about you. If you could tell your younger self anything that you've learned now, what would you tell her?

Kim Hourihan:

I would tell her be a little more patient with people. I'm highly competitive. My younger self was, "Go, go, go, go," and everyone must think the way I think. But I've learned through the years that I have strengths and I have weaknesses. I want to align myself with people who have strengths that are my weaknesses. To be much more patient and think about the bigger picture, I would say that's a big lesson learned over time, the value of teams. You have people who are detail-oriented and always thinking about this one thing, it's great because they keep reminding you about this one thing. I think that's an important thing.

Nancy Lashine:

Is there anything about having a global job versus say a US-centric job, anything that has particularly prepared you for that?

Kim Hourihan:

I think the best thing that could have happened to me for a global role is living in another country. I lived in London for five years, but I worked for, strangely enough, out of business school, a Malaysian company. Publicly-traded. I lived in London while working for them, but I spent a lot of time in KL and Singapore in particular. I probably almost got fired a hundred times in my first year. I somehow survived. When the boss would ask me a question, I thought he really wanted to know the answer, and that wasn't necessarily true. They wanted me to confirm what they had told me was the answer. There was just a whole bunch of, and I love a global job because the cultural differences are real and they're really interesting. It got me out of my American self to think about how to get from A to B, because that is the point here. The point is not to get your point across and that you have to figure out a way to make your argument convincing in a way that someone can understand.

Nancy Lashine:

Right, and how to really hear the question that's being asked, not what you think is being asked. Such a great lesson. Who has been the greatest influence on your life?

Kim Hourihan:

The greatest influence of my life, probably would be my grandfather. I always just admired. He was not well-educated, but he just had this leadership quality about him and rose to, he was running a leather factory, speaking of not ESG. I can't even imagine what they were pouring into the riggers. He rose to running that factory and he was so beloved. I remember his retirement party and people were crying, and "We were going to miss you." He just had this way about him that connected people that I always just thought, "This is how I want to be when I grow up."

Nancy Lashine:

Wow. Oh, that's amazing. That's fantastic. I remember, what you just said sort of crystallized for me one day when someone said, "People don't remember what you say, they remember how you made them feel." It sounds like he was somebody who made people feel very special. Kim, what a great conversation. We could keep going on and on. You have such a broad background and so many fun things to talk about. Thank you so much for joining us.

Kim Hourihan:

Absolutely.

Nancy Lashine:

I hope you enjoyed this episode of Real Estate Capital. Before you go, I have a quick favor to ask. We put a lot of thought and effort into this show and making sure we bring you insights from real estate leaders that you don't normally find in the mainstream media. If you're enjoying the show, please remember to follow it on your favorite podcasting app, so you never miss an episode. We'd also love for you to share it with others or give us a review on Apple Podcasts so others can find us. Thanks again for tuning in. For more information about our firm, please visit our website at ParkMadisonPartners.com.