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The major disruptor of retail is not the internet, but demographics An interview with Spencer Levy, Head of Americas Research at CBRE

Face to Face

Spencer Levy

Spencer Levy is the Head of Americas Research for CBRE, the property consultancy firm. A former real estate investment banker, he has been with CBRE for 10 years. Having trained as a lawyer he moved into business as soon as he could, taking the advice of his father, a lawyer himself, whose main piece of career advice was that five years was more than enough to be doing professional legal work. After some years as an investment banker, he had recently joined CBRE’s capital markets division when Lehman Brothers went bust in 2008. Levy’s boss told him he was now running the restructuring practice. His response was, “We don’t have a restructuring practice.” His answer was, “We do now.” He has been responsible for the firm’s Americas research since 2014.

I start our interview, in the modish surroundings of the Mondrian Hotel, overlooking the Thames, just downriver from St Paul’s, by asking the obvious question. What did your father have against being a real estate lawyer?

He was a very good lawyer, a very well respected lawyer in town, but he liked being more of an advisor than being the lawyer behind the scenes writing up the deal. He liked to make the deal, not to document and facilitate the deal. So, that’s where my career has gravitated. I’m now very fortunate to be an advisor. I’m not just the Head of Americas Research, I’m also a senior economic advisor both to the company and to our clients. What I try to do is advise my clients on what to do, as well as some things not to do.

Give me an example of that, I say. Levy is a fast talker, bouncing from sentence to sentence – and thought to thought – in rapid order. He answers as follows.

In the last couple of months, we’ve had some terrible storms in North America, in Houston, Miami; and then we had the terrible earthquakes in Mexico City. There was a terrible human cost there – loss of life, loss of homes, that sort of thing. That’s the bad news. The good news is that the commercial real estate market was remarkably resilient. In the Houston office market, as an example, only about 4% of the market was down a couple of days after the storm, and then a week after the storm, only 2% percent down, and now it is very little. That was all due to telecomms and electronics, not the structural damage. It is the same story in Florida and in Mexico City.

I go to Mexico City a lot. In fact, I’m going to be there in about two weeks. When you go to Mexico City, you go in to an office building and you go to the corner of each floor of the office building, there’s something in there that looks like a giant washing machine. What it is actually is a shock absorber for earthquakes. When there’s an earthquake, it sounds like whale noises or the girders going in. But the commercial real estate sector in Mexico City was resilient. And you know what we can thank for that? The 1985 Mexico earthquake, Hurricane Andrew in the early 1990s, Hurricane Sandy in 2011. Because since then, the building codes in each of these areas has been continually upgraded so that commercial real estate is resilient.

So going back to my advisory role, when I heard people saying, “I’m never going to Florida again, I’m never going to Houston again,” I said, “Give me your number because I’m buying your stuff.” Because these markets are going to be remarkably resilient and Houston and Florida have tremendous growth characteristics to them for people flowing in – not just people that want to live there, but employers – that the commercial real estate, multi-family markets are going to be just fine in those markets because of it. They still may need some infrastructure improvements there, don’t get me wrong, but most of the real estate has proven to be resilient. That’s the key word.

Once a dealmaker, always a dealmaker, I suggest?


So now you’re trying to give people research which is not just general waffle, but practical and specific to their concerns. An example?

Sure. I was just on stage [speaking at a conference] and people asked me, “What do you like to invest in? Which markets? Where are we in the cycle?” These are the questions you always get. And I say I think we’re asking the wrong questions. The right question to be asking is, what is the cost and duration of your capital? Because if the cost and duration of your capital is short-term, I’m going to give you a very different answer than if it’s long-term, intergenerational or otherwise. Some markets have had historically low cap rates, like London. But to say, “I can’t buy. London’s very expensive,” is the wrong answer. If you are an institution that has a long-term holding period, even if we are toppy in the cycle – and I will go so far as to say that – for the five, seven, ten year hold period beyond that, this is a terrific market and there are very few markets like it in the world.

It is literally the number one international capital market in the world for a reason. The reason is, it’s large, it’s liquid, it treats foreign investors the same as it treats domestic investors, for the most part. It has its own currency, it’s got a legal system which is one of the best in the world in terms of property rights. All these things come together to make this a wonderful place.

But not without its issues at present, I interrupt.

If I could put a little ‘please don’t do this thing’ in here, there have been some concerns recently in London about pricing, particularly in the housing sector. The only thing I would suggest is please don’t put restrictions on foreign money. I say that even though short-term you might face some additional price increases. I’m not going to duck that issue. There are social issues associated with that and I’m very sensitive to them. But over the long term, the one thing that keeps markets vibrant is international capital and everything that goes with it. And the things that come with it are jobs.

The one thing that keeps markets vibrant is international capital and everything that goes with it

We’re looking out of the window right now. Look at all those cranes out there [pointing across the river to Blackfriars and the City]. To me, that’s the sign of great strength. And that comes from money, not just here, but internationally. You want more of that. It brings not just the purchase of the asset, it brings development jobs which help local people, it also brings industries. Very often if you bring foreign capital from Asia, China, they’ll bring industry with it. They’ll bring people with it as well – students or other folks who want to live here.

When I go to markets that don’t have international capital, they ask me, “What should we do?”. I say, “Open up an office in Beijing or South Korea or Singapore and start talking to the locals and bring them there. That will get you to the next level.” London is there and they should cherish that position.

Does that mean, given your long-term horizon, that Brexit is just a blip? How does it look from where you’re sitting, on the other side of the Atlantic?

The initial take on Brexit was, as you know, very negative on its impact on the UK and none of that has come to pass yet. I know the negotiations are still underway and I’m not certainly going to comment on which way the negotiations are going to go from a tactical standpoint, but from a big picture, long-term investor standpoint, all of the characteristics of London that existed before will exist tomorrow – with a couple of notable exceptions. The exceptions are the flow of people to the market. And the flow of people to the market is really significant, most notably for the tech industry – not as much for financial services, but especially for the tech industry. The financial services industry question is: will they be more efficient in Dublin or in Frankfurt rather than here? But I worry the most from a talent flow standpoint and whether it will retard long-term growth in the market.

The talent issue is enormously important. We recently came out with our Tech Thirty Report, which talks about the best markets in North America today for tech companies. They all have certain characteristics. They have large, research-oriented universities, they have 24/7 markets, they have transit-oriented developments, they have live-work-play. The markets that come in the top 30 in the US will be no surprise to you. London has all of those characteristics. But if you restrict the flow of people physically able to work here, people are going to have to make other decisions. The scarcest thing in the world is high-skilled talent.

The second scarcest thing in the world, from an investment standpoint, are large, high-yielding investments, which is another reason why London is attractive. It has a lot of those. So there are certainly some negatives to Brexit from a talent standpoint, and a question mark over the potential relocation of some elements of the financial services industry, but I do think it’s a short-term phenomenon. I think long-term the positive elements that make London a terrific market today will continue, even if in the short-term there is increased uncertainty.

So increased uncertainty, if it has an impact on property prices, would be an opportunity?

Well, yes. You would think that when the pound is weak, or the US dollar is weak, that the market would be on sale. People would flock in there. It’s actually the opposite. The London market bounced back when the pound bounced back, and in the US market, the dollar has been weak this year and sales have been down. What people like to do is go into the market with a strengthening currency. That is because a strengthening currency means a couple of things. It means a growing economy, it means increasing interest rates, it means a few things that are buoyant. Also, if you’re looking from an international investor standpoint, there is always the issue of whether they are going to hedge it or not. People who are not going to hedge their money will want to go into an appreciating currency market.

Give me a snapshot then, I say, on the dollar and commercial real estate capital flows to the States at the moment.

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