U.S. Commercial Real Estate: A Time for Fear or Greed?

Greg Campion: The negative headlines are coming fast and furious. It's hard to escape the daily onslaught of concerning developments on everything from geopolitics to the economic growth picture. And while commercial real estate markets certainly offer opportunities, they are not immune, bringing real questions about capital deployment to the forefront of investors' minds.

John Ockerbloom: As time passes, as debt maturities emerge, as sellers adjust price expectations, we think that there'll be more transaction opportunity. And that the art is to say, when do you find a deal that's really attractive and that you feel like you can make real money on? And you can't wait'til you think you've timed the very bottom. I think the market's littered with examples of people trying to time market.

Greg Campion: That was John Ockerbloom, co- head of US Real Estate at Barings, and this is Streaming Income, a podcast from Barings. I'm your host, Greg Campion. Coming up on the show: is now a time for greed or fear in US commercial real estate? John, welcome back to the podcast.

John Ockerbloom: Great to be back.

Greg Campion: I'm excited to have you. There is so much to talk about. So much going on. So many negative headlines to be honest. I was actually just reviewing some of the headlines before this conversation and I was struck by the level of negativity that's out there in the market. And it's coming seemingly from kind of all sides at the moment, right? We've got a crisis brewing in the UK gilt market. We've got the Nord Stream gas pipelines ruptured in the Baltic Sea. We've got hurricanes on the US east coast, we've even got Apple seeing disappointing uptake of the new iPhone. It's coming from all angles. And of course that's against a backdrop that we already know is very challenging, decades high inflation and incredibly hawkish Fed rising rates, et cetera, et cetera.

John Ockerbloom: Yeah. But other than that though...

Greg Campion: Other than that, things are things are good.

John Ockerbloom: Other than that, yeah. So other than that, that's sort of where I come down on that question, but... Keep going.

Greg Campion: Okay. Okay. So high level, it's hard to escape the negativity right now, let's put it that way. And I guess where I want to start with you is I'm curious, all those headlines that I just mentioned, how does that match up or not match up versus what you're actually seeing in your business day to day? And then maybe for our listeners who don't know, it'd be interesting for them to hear about just the size and the scale of your business because I think that's kind of important to understand the lens through which you're seeing the world of real estate.

John Ockerbloom: Great. So I'll speak to the second question first and then I'll talk about what we're seeing. So we in the real estate equity business in the US are about$ 13 billion of assets using round numbers. We own a little over a hundred assets across the country in asset classes as diverse as self storage, hotel, as well as apartments, retail, industrial and office, which we'll talk about at some length I guess today. And so we've got a pretty wide ranging business that's a representative sampling of the commercial real estate industry as a whole.

Greg Campion: Mm- hmm.

John Ockerbloom: To answer the first question, how consistent are the headlines that you've read with what we're seeing with the sentiment? Pretty consistent. The real estate business is as susceptible as any other industry to perceptions of turbulence to I guess what I would call overreactions in both favorable and unfavorable directions.

Greg Campion: Mm- hmm. Mm-hmm.

John Ockerbloom: The latter being the in vogue direction of the day.

Greg Campion: Sure. Yep.

John Ockerbloom: But real estate is a durable asset class. It's a long dated asset class. We think in terms of ownership over years and decades as opposed to hours and minutes.

Greg Campion: Mm- hmm.

John Ockerbloom: So while we want to be responsive, we guard against being reactive and that really is a feature of the real estate industry. But to speak plainly, sentiment is negative. Certainly rising rates.

Greg Campion: Mm-hmm.

John Ockerbloom: The rising of the risk free rate obviously has a meaningful impact on any income producing asset class. Real estate is an income producing asset class as well as a value capturing asset class. So it makes sense that there would be bear sentiment. The flip side of that for real estate is that we're not a static income stream. We reprice. Hotels reprice every day.

Greg Campion: Mm- hmm.

John Ockerbloom: Apartments reprice every year. Industrial assets and office assets reprice less frequently, but they do have inflation escalators incorporated into most leases. So the income stream changes favorably over time as well.

Greg Campion: Sure, sure.

John Ockerbloom: So it's a mix, but I would say overall sentiment is negative. Sentiment is cautious and not supported by strong transaction flow.

Greg Campion: Yeah, that's what I was going to ask you, how that's kind of feeding through in terms of transaction flow? And then I guess if you feel like we're in kind of a price discovery kind of point right now.

John Ockerbloom: We are. So I look at it as sort of three phases. Phase one is everything stops. So if you looked at August, August was a very quiet month for transaction activity in our business.

Greg Campion: Mm-hmm.

John Ockerbloom: I think pretty quiet month on the debt side of our business. I should mention, I talked about our real estate equity business. We also have a 30 plus billion dollar debt book here at Barings.

Greg Campion: Mm- hmm.

John Ockerbloom: So we really see a very broad transaction volume where we're a lender and where we're an equity investor, and I think I can speak for both. August was a pretty slow month. The summer was generally speaking pretty slow. Transaction volume was arrested through June predominantly because of the spiky movement in interest rates and the resulting inability to really price the risk asset.

Greg Campion: Mm- hmm.

John Ockerbloom: So June, July, August were slow. So that's stage one. Everything stops. Stage two is a proliferation of asks without bids. So to use a bond equivalent, a bunch of people want to sell bonds and nobody wants to buy at the levels that the bids are or that the bonds are offered. We see that now. We've seen a ton of packages from real estate brokers with opportunities coming out into the market to invest in deals that really had been held off through the summer. There is an ask being made, we want to sell this property for X, we want you to invest in this property, a return of Y. A lot of asks being made, not a lot of bids.

Greg Campion: Mm-hmm. Mm-hmm.

John Ockerbloom: So that is the discovery phase. The third phase has yet to transpire. That's the phase where transactions really begin to flow in earnest as a result of predominantly extraneous circumstances, debt maturities. So therefore an owner has to make a decision, do I refinance this loan?

Greg Campion: Mm- hmm.

John Ockerbloom: Do I make a principle payment as a part of the refinancing of that loan because I can't refinance without it? Do I commit new capital to a project or do I go ahead and sell at this point?

Greg Campion: Mm- hmm.

John Ockerbloom: Sometimes that becomes involuntary. So that's stage three. We aren't seeing that yet.

Greg Campion: Mm-hmm. Mm- hmm.

John Ockerbloom: I expect that it will come over time. And the real question is how long before that happens? How significant will it be when it does? And how enduring? So it's an interesting period.

Greg Campion: Yeah, so it seems like it's almost a little bit of a standoff at the moment in terms of maybe there's a lot of wait and see. Let's see how bad this thing really gets. Let's see if inflation gets under control. Let's see how aggressive the Fed needs to continue to be, for how long? All the geopolitical risks out there, how that factors into things. So there's a lot of wait and see it seems to me. So that's a tricky environment to manage money in. Right? And that's kind of what I want to ask you about here is if you put yourself in the shoes of a client of Barings, right? So let's say an institutional investor, whether you're a pension fund, insurance company, endowment, you name it, and you're thinking about your allocation to real estate as an asset class, I guess maybe there's three options and I'd be curious to hear you talk about which one you might advise taking. One is get defensive. So you mentioned the substantial debt business that Barings has here. And I should mention also not just in the US but in Europe as well. So one is get defensive, two would be get opportunistic and be looking for dislocations in the market. And then three would be to be preparing for the worst. And I think about things like distressed assets. So I guess which one would you do? Get defensive, be opportunistic, or prepare for the worst?

John Ockerbloom: Yes. How's that? So I'll speak to the debt first. I think it's a really interesting time for debt.

Greg Campion: Yeah.

John Ockerbloom: We like being a lender.

Greg Campion: Yeah.

John Ockerbloom: You're not short the market, but you have an equity cushion that sits above you. And there is relative in illiquidity that is caused by circumstances other than straight supply and demand. So in the bank market as an example, bank lenders on an annual basis project their balance sheets. So let's say that a particular lender has a billion dollars on its books. If they expect that a half of that is going to pay off in a given year, in order to stay neutral, they need to lend half a billion dollars in order to stay neutral from a balance sheet standpoint. If they want to grow at 10%, they have to lend$ 600 million. And they make that decision in January 1 of the year, and then they deploy into that period. So all banks made that assumption at the beginning of 2022. What's happened is that very few borrowers have paid back. So in my example, I had a billion dollar balance sheet at the beginning. I wanted to grow 10%, I did$ 600 million through the course of the year. Nobody paid me back. And now my balance sheet's$1,000,000, 006.

Greg Campion: Mm- hmm.

John Ockerbloom: And my target was$ 1. 1. So what do I do?

Greg Campion: Mm- hmm.

John Ockerbloom: If I'm a bank lender what I do is I tend to stop lending until I start to see paybacks occurring. And the paybacks aren't occurring because everyone's hoping that rates spikes subside and that there's some normalcy to the market. To some extent that's self perpetuating because as people don't pay back, there's less capacity in the market. And so you have this sort of circular reference. All of that is to say that the banks, and to a lesser extent, other lenders and market participants, their capacity is limited. There is less supply of dollars available to lend, and there's more demand for loans that makes for favorable opportunity for lenders.

Greg Campion: Mm- hmm.

John Ockerbloom: So in our debt book, we remain open for business, we're cautious.

Greg Campion: Mm- hmm.

John Ockerbloom: We favor deals that have equity. New fresh equity coming into them in asset classes that we like, in geographies that we like. We're able to be very selective.

Greg Campion: Mm- hmm.

John Ockerbloom: But there's really interesting opportunity in debt. From an equity investment standpoint I'm trending toward value add where there is an opportunity, as I mentioned before, to get into assets that maybe we didn't think we could into, could get into at values that we find attractive.

Greg Campion: Okay, So let's talk about some of these areas that may be a little bit more opportunistic. And I don't know that there's a clear distinction between, okay, this is defensive, this is opportunistic, et cetera. There may be characteristics of some of these sectors that are actually quite defensive depending on how you deploy capital. But let's look at some of these sectors. I know that you and the team are looking at places like residential, office and some more specialty areas like self storage. So why don't we take each of those in turn? Let's talk about residential first. Something that probably all of our listeners are very well aware of and experience themselves day to day with their own mortgages. And so I can say just looking at mortgage rates this morning, I think the bankrate. com 30 year fixed national average was 6. 86%. A year ago today that was 3. 13%. So more than doubled. And if you are in the market, considering the purchase of a new home, you are now running the numbers and seeing that monthly payment that you thought was going to be, pick a number,$ 2, 000 a month is now a$4, 000 a month mortgage. That's pretty substantial change. And it's not surprising that we've seen a real fall off in mortgage applications along with that. So tell me about how you and the team are thinking about residential right now, and if you do think that that's an area potentially of opportunity.

John Ockerbloom: So everything you just laid out is a hundred percent accurate. I think the stat that I saw this morning was that refinance requests are at an all time low.

Greg Campion: Mm- hmm.

John Ockerbloom: Maybe it's a low sense pre- GFC.

Greg Campion: Mm- hmm.

John Ockerbloom: But it's low, whatever that number is, and it makes sense, right? Why are you refinancing now unless you have to?

Greg Campion: Yep.

John Ockerbloom: Right? To get to that voluntary/ involuntary discourse that we were talking about earlier. But we like residential, we like apartments, we've liked apartments for a long time. Supply has been strong in many of the markets that we want to operate, but demand has been stronger. And so if we look at the technology centric or the STEM centric markets that we like predominantly in the Southeast, but in other areas around the United States that have positive in migration, positive job growth, positive household formation, and where supply is reasonably contained, that's an area that we like. I would say that the one challenge that we have in that area is the challenge we have with most things, which is financing is meaningfully more difficult to get. That's good for somebody who's well capitalized like us. Because if we really like a project, we can choose to go all equity in the near term and then borrow when rates are at a more reasonable level.

Greg Campion: Mm- hmm.

John Ockerbloom: But it does affect your levered return, which is an important piece of what we consider when we buy an asset. But we like residential. For all the reasons that you said, home ownership is going to become more difficult. So we like apartments. I think we probably lean towards single family rental that is developed for the purpose of being a rental.

Greg Campion: Okay.

John Ockerbloom: As opposed to existing homes. Not to say that we wouldn't be active in purchasing existing homes. But the purchase of existing homes has challenges associated with it. That single family rental, purpose built single family rental, or build to rent doesn't have... You are adding to the overall supply of housing.

Greg Campion: Mm- hmm.

John Ockerbloom: That's a positive. You can be adding at a reasonably affordable price point.

Greg Campion: Okay. Okay. And are you seeing, I'm curious around, you mentioned that home ownership kind of gets tougher in these circumstances. Are you seeing that pressure kind of then feed through to rents as well? Because presumably if there's a faction of people who can't quite afford to buy that first home, want to rent instead, that group grows in size, that's more people looking for the same stock of housing and upward pressure on rents. Is that a consideration?

John Ockerbloom: To the extent that home ownership becomes more unattainable rents tend to go up.

Greg Campion: Mm- hmm.

John Ockerbloom: Supply and demand, fairly straightforward. It is a place where built to rent is adding new supply and that can have a mitigating effect on that circumstance.

Greg Campion: Mm- hmm.

John Ockerbloom: But as a real estate investor, we want rent growth, right? We want reasonable rent growth. We don't want to be inhumane, but we want rent growth just like we do in an industrial building or a retail center. And so the balancing act is we want strong occupancies with happy tenants at rates of rent growth that are sustainable over time. So far we've been able to strike that balance. I think as an industry, the industry confronts questions of affordability that are difficult for it to answer.

Greg Campion: Mm- hmm.

John Ockerbloom: I'll make a plug for Barings, affordable platform. We are a significant lender to the affordable housing industry.

Greg Campion: Mm- hmm.

John Ockerbloom: And that business presents opportunities for investors who might have an interest in a risk mitigated lending strategy that is enhancing to the overall supply of rental housing for persons who need an affordable rent level.

Greg Campion: Mm- hmm.

John Ockerbloom: We think there's opportunity for that business to grow over time.

Greg Campion: Yeah, that's a great business. Okay, last question for you on residential. So just thinking about specific markets within the US, you mentioned some of the markets in the Southeast as being potentially attractive, but I'm thinking as well around, okay, let's say we're heading into a recession here. Let's say we've already seen big headlines from companies across a variety of industries, trimming workforces, et cetera, et cetera. Let's say we're heading down that path. What locations look, I guess more insulated to you from that perspective?

John Ockerbloom: So I think that it plays to really the strengths of the markets that we've already determined. There are markets that people want to live in, so they're markets that tend to have favorable weather.

Greg Campion: Mm- hmm.

John Ockerbloom: People say it's a little like the color of cars, it really does determine the sale of volume. But having an hospitable climate is something that matters to people. I would say favorable business climate. So climates of all kinds. Look at a state, for example, like Tennessee, which has very favorable tax regime and favor of individuals. Very favorable incentives for businesses to relocate. A well educated workforce, particularly in the Nashville area if it takes schools like Vanderbilt and others.

Greg Campion: Mm-hmm.

John Ockerbloom: Very strong healthcare infrastructure, growing population in the entertainment industry all coalescing around conditions there. That's a classic market that we want to be investing more deeply in. Charlotte has been one of those markets over time. Raleigh has been one of those markets over time. Austin has been one of those markets over time. Our job is to figure out what's, what are the next ones? What are the next emerging markets?

Greg Campion: Mm- hmm.

John Ockerbloom: And the one that I always point to as a place where we went out searching for a market and said, what are the things that are going to drive it? Is Savannah. Savannah, Georgia. We like many, have been very significant investors in industrial. One of the questions that we had is where can we identify markets for industrial that ought to have favorable conditions that should enhance returns of assets in those markets? We looked at Savannah, we looked at what the port authority had invested in the port.

Greg Campion: Mm- hmm.

John Ockerbloom: The infrastructure spend in Savannah in order to allow bigger ships and higher throughput of goods for import really told us that the surrounding area around Savannah had to increase its supply of industrial.

Greg Campion: Mm-hmm.

John Ockerbloom: So we took a very hard look at that market, determined when do we want to get in and started looking really before many others. We're not alone. There are other smart people. But that's an area that we put a ton of money into because there are conditions other than simple supply and demand that were driving performance. We look for the same thing in markets. Who's drawing businesses? Where are headquarters emerging? Where is technology a greater percentage of the overall workforce?

Greg Campion: Mm-hmm.

John Ockerbloom: That's a really important thing to us. And science related employment and technology related employment is a big marker for us. That's part of our brand as an investor. We try to follow well educated workforces because it's where companies want to be, particularly where that intersects with favorable business conditions and a particular market like North Carolina, like Tennessee, like Texas.

Greg Campion: Yeah, I like the interplay there between... So first of all, I think that's a great example of just the importance of doing your background work on the fundamentals. And it's why we employ a large research team here to really get into the weeds, not only understand those kind of high level macro trends, but down to the city block level trends in all these different locations. But I think one thing that just occurred to me that I don't know was obvious previously, is that the work you're doing in industrial, for example, let's say using your Savannah example, is directly feeding the work that you're doing on residential, on office, et cetera, right? If one segment of the market is set to boom, there's going to be ripples through all these other parts of the market.

John Ockerbloom: It's thematic. So we try to be thematic in the way that we invest. We look for markets that are going to make sense for a lot of different asset classes where there's strong population growth and strong residential. There should be strong retail flow through after that. Where there's strong job creation, there's strong spend. So it really is thematic. And our themes really relate to strong education, strong functional government, and technology oriented employment.

Greg Campion: Mm-hmm.

John Ockerbloom: And if you look at our portfolio, most of what we own is geared toward those macro themes. And particularly over the past, let's say three to five years, most everything that we've purchased sort of fits into that.

Greg Campion: Yeah.

John Ockerbloom: Very seldom do we stray from those core themes. We monitor them over time and we're always trying to look around the corner to say," What's next?" Is it a Columbus, Ohio? Is it a Milwaukee, Wisconsin? Is it a Phoenix or a Tempe? What are those, who is putting together that combination of factors that is going to lead to that emergence of the next note. So to stay with my industrial example, Charleston may be the next point.

Greg Campion: Mm- hmm.

John Ockerbloom: Charleston, which has been meaningfully behind Savannah in terms of infrastructure spend has kind of gotten the joke that," Oh, this is a meaningful economic boost to the area."

Greg Campion: Mm- hmm.

John Ockerbloom: And is now taking steps to do dredging and to build infrastructure that can receive super ships. That really is what's necessary to make it at a competitive inbound port that can compete with Miami. Now, Savannah and others, if they follow through with that, we are likely to follow that infrastructure spend to Savannah Industrial.

Greg Campion: Mm-hmm. Mm-hmm.

John Ockerbloom: Because we know that with throughput of goods coming off ships, they have to go somewhere, they have to be assembled, they have to be set for future distribution and relatively close proximity is an important piece of the puzzle.

Greg Campion: Well, there are worse places than Charleston and Savannah to go have to kick tires and do a research trip, so.

John Ockerbloom: True.

Greg Campion: You mentioned life sciences and I want to talk about office. Office maybe has been the hardest segment of the market to call the last couple years for obvious reasons. The pandemic, work from home, all that kind of stuff. Curious to get your thoughts on if the definition of what a high quality" office" is, has changed over the last couple years? And more generally speaking how you and the team are approaching office today.

John Ockerbloom: So you mentioned earlier, do you look at investments that maybe are more defensive? Do you look at investments that are more opportunistic? Life science, which is an area that we've leaned into pretty strongly and that we continue to lean into, could be characterized as both. So life science is a really interesting example. It's defensive in so far as it really is dependent upon healthcare spend and healthcare infrastructure. Think about the development of COVID vaccines. Classic example of work that is done in labs, that has to be done in person, that cannot be remotely executed.

Greg Campion: Mm- hmm.

John Ockerbloom: And all of that was done in buildings that are what you would call life science. Not only the lab science that led to the discoveries, but then the testing that requires an incredible amount of technology, to the manufacturing, which requires buildings that are built to very exacting standards of manufacturing specificity. All of that is to solve a healthcare problem that is pervasive. And COVID is one, the flu is another, cancer is a third, Alzheimer's, you name it. And so far as those assets are geared toward healthcare, that is a counter cyclical or a more defensive asset class. Having said that, these are office buildings that may have expenditures into them of$900 to$1, 200 a square foot. Very considerable sums.

Greg Campion: Mm- hmm.

John Ockerbloom: And so the returns that we require really are more value add oriented returns. So it really does have both of those characteristics.

Greg Campion: Mm-hmm. Mm- hmm.

John Ockerbloom: It's kind of unusual to find that coexisting. So life science has both of those characteristics. To answer the second question, has the definition of what's a high quality office changed? Yes, it has. And I think that it's really stark today, well first of all I should say, I don't want to sound arrogant, this is evolving. I don't think anyone a hundred percent knows exactly what's going to make for a successful office building 10 years from now. But what I can tell you for today and for the foreseeable future, office buildings must be tools for the attraction and retention of talent. If they are not tools for the attraction and retention of talent, they are less likely to compete in the market.

Greg Campion: Mm- hmm.

John Ockerbloom: So what does that mean? They need to be current. They need to have amenities that are attractive to an employee base. They have to be healthy. I think generally speaking, they have to be ESG forward to attract a younger workforce that concerns itself with such things. They have to have strong opportunities for collaboration and public spaces and common spaces that really draw people in.

Greg Campion: Mm- hmm. Mm- hmm.

John Ockerbloom: Because that companies want to use them as a tool to bring people back, to engage their workforces, and to retain talent. Prior to interest rates rising and talk of recession the greatest challenge faced by American business was the war for talent. And that is likely to reemerge as the biggest single challenge to American business. The office building is a tool in that fight. I think it's going to make current office buildings that are well amenitized and healthy really outperform relative to those that aren't.

Greg Campion: Mm- hmm.

John Ockerbloom: I think the office market is going to emerge as a have and a have not world. And that's great for those who have capital to deploy into the haves.

Greg Campion: Mm- hmm. Yeah, yeah.

John Ockerbloom: And it's challenging for those who have to manage the have nots.

Greg Campion: Are there any kind of examples that jump out at you that are really indicative of that trend that you're talking about?

John Ockerbloom: So we are in the midst of a conversion of a life science asset in San Diego, 1155 Island. That was an asset that we had originally looked at as a potential office conversion in San Diego. It was a building that had been abandoned by a for- profit law school. It had the physical characteristics that it turns out are perfect for life science conversion. It had very high ceilings. It was overbuilt from an overall office standpoint, it's a very attractive building. It's forward from a design standpoint. It has nice outdoor space. We had that asset in our portfolio and we saw a potential window to convert it to life science. So that really levered our balance sheet because the asset already existed, our relationship set because we were able to identify a partner with whom we could execute a conversion, and our ability to deploy the capital and carry the asset for a prolonged period of time. We've now completed, largely completed the conversion. The leasing is ongoing, it's ahead of schedule, it's been very positive and all of that really is informed by our research orientation. So San Diego is one of the top three life science markets in the United States. However, life science has really existed, not so much in downtown San Diego as the periphery, Lo Hoya, Soreto Mesa, other areas around San Diego. We made a bet that downtown San Diego would be the next node to emerge.

Greg Campion: Mm- hmm.

John Ockerbloom: Very good proximity to UC San Diego through the public transportation, very strong residential infrastructure and an expectation that others would follow if we were to exhibit leadership in terms of bringing life science downtown. It's turned out to be exactly that. I won't say that anyone has moved because of us, but there's a million square feet of life science under development in the downtown area that didn't exist.

Greg Campion: Mm- hmm. Mm-hmm.

John Ockerbloom: We are ahead of the curve in terms of completion because our building already existed. So that was one where we probably were pretty good. We were also fairly lucky and others have followed who have meaningful dollars to invest.

Greg Campion: Well, that's a great example. It really brings it to life and really cool to see the development that's going on in San Diego. The last sector I wanted to ask you about is one that's I guess a little more niche and that's self storage. So I don't know whether or not to think of this as a cyclical business, a counter cyclical business, having nothing to do with the cycle, or just representative of a bull market in Americans not being able to throw stuff away. I'm not sure which one it is, but tell me about what you're seeing out there in self storage.

John Ockerbloom: All of the above. We've been storage investors for a while now and we've invested in a handful of different ways. We most recently have announced a deal with a group in Charlotte that is in sort of secondary market storage, existing assets with some development, with some value add characteristics where we think there's really interesting returns to be had with execution risk that we think is manageable. It's really important who you're in business with. But storage as an asset class has been one of the best performing assets in real estate for 30 years. This isn't a new phenomenon.

Greg Campion: Mm- hmm.

John Ockerbloom: If you think about it. Yes, Americans can't throw their stuff away. I'm one of them, and I alone can drive meaningful demand for a storage industry. But I think it is agnostic to cycle as people move into apartments and have less room because they're not as ready to move into homes. There's demand driven by that as aging baby boomers downsize store facilities emerge as a need. As people gather boats and RVs and motor homes and things of this kind. Storage, storage, storage.

Greg Campion: Mm-hmm.

John Ockerbloom: It's a really strong demand and pretty consistent over time. The other thing that storage is particularly good at is producing cash flow.

Greg Campion: Mm-hmm.

John Ockerbloom: And it's efficiency in converting revenue to cash flow. The cost structure at storage is pretty modest and probably growing leaner over time. As you looked 25 years ago at a storage facility, there might have been three to five people working at any given point in time.

Greg Campion: Mm- hmm.

John Ockerbloom: There was a pretty hands on touch. Today, a lot of the leasing is call center oriented. Revenue management is pervasive in the storage industry. There is a very high degree of automation in terms of access. And so the efficiency of storage has gone up meaningfully. And CapEx is the minimus. When a tenant rolls out of a storage facility, we don't change carpet, we don't paint the rooms, we don't have to refresh the countertops or the cabinets and we don't have to build office finishes, right?

Greg Campion: Mm-hmm.

John Ockerbloom: It's a square box.

Greg Campion: Mm- hmm.

John Ockerbloom: And it's the same square box that I rent today that I would've rented 10 years ago. We have to maintain the roof and the parking lots and the lighting and the security features. But the NOI to cash flow conversion, the net operating income to cashflow conversion is as solid in storage as it is at inning. So we believe that strong cash flowing opportunities are attractive. And so we are investing in storage and informing products to offer storage opportunities to our investors. And we expect that to continue. I think we will be diversified in our storage approach. We will work with a handful of really good operators that we get to know and like, in whom we have great confidence. And so we think there's really interesting opportunity. And it does tend to be resilient in downturns.

Greg Campion: Okay. Okay. Okay. So we've talked about, I guess maybe on the more defensive end, some opportunities that we're seeing in debt. We've talked about some of the sectors where you're seeing specific opportunities build to rent, multi- family, the life science office and self storage space. Maybe just to finish up, and again, kind of going back to the beginning of this conversation when we're talking about getting defensive or being opportunistic or preparing for the worst, and you said yes to all of them, let's talk about that last one. Preparing for the worst. And so let's talk about distressed assets and curious how you're assessing that space today after you're already seeing opportunities or if you are, it's more something you're preparing to see if things get worse for the economy.

John Ockerbloom: So I guess what I would say about distress is I think, and we think that there will be opportunities. It's not today. So I would say our overall transaction volume of regular way business has slowed meaningfully. And I think that that will continue. The message that we've given to our team from an acquisition standpoint is continue to look at opportunities, but the deals that we're going to do have to have characteristics that make them particularly attractive. Regular way deals, we are going to be pretty cautious about approaching. We don't have to deploy capital into deals that don't make sense. And so we're going to be patient. The opportunities are going to emerge through the passage of time. As time passes, as debt maturities emerge, as sellers adjust price expectations, we think that there'll be more transaction opportunity and that opportunity will get better before it gets worse. So it's the reverse of the classic that gets worse before it gets better. We think that there will be more distress as we reach year end 2022 into early 2023. The art is to say, when do you find a deal that's really attractive and that you feel like you can make real money on? And you can't wait'til you think you've timed the very bottom. I think the market's littered with examples of people trying to time markets. But what we do think is the market's still sorting itself out today. We're open for business, but we're not anxious to deploy capital today.

Greg Campion: Mm- hmm.

John Ockerbloom: As opportunity presents itself, we'll begin to sharpen our pencils and say," Where can we act?" Most important thing I think that we want to do, and the thing that we want to distinguish us is we want to get the calls from market participants who have need. We want to get those calls because they trust us, because they trust us to execute, because they believe that we will follow through on what we promise and because we will treat them decently even in difficult circumstances. I think that's our reputation and I think that's our area of strength. And it's a part of what comes from having the lineage of Mass Mutual. We're not here to rip the faces off of vulnerable counterparties. We're here to earn money for our investors, to do well, but to have enduring relationships with our counterparties that encourage them to call us at moments of need. And so that really is what the message is to our acquisitions people. Make sure that we get the call when the call comes. The best example I always give is when Wells Fargo needed x billion dollars to shore up it's liquidity in the face of the global financial crisis they made one call and it was to Warren Buffet. We're not Warren Buffet. But we want to be in a position to get the call that is, a counterparty, knows that we will perform and knows that we're going to act in our investor's best interest, create a transaction that creates the most favorable outcome. And that's a real balancing act. I don't want to say we want to be the good guys, but we want to be the better guys.

Greg Campion: Mm- hmm. Mm- hmm.

John Ockerbloom: And that is a big piece of the puzzle. That's who we are, that's our brand.

Greg Campion: Mm- hmm.

John Ockerbloom: And we're going to make money as we do that. But I think if you do that, you have a longer enduring pipeline of opportunity than if you go for the jugular at every turn.

Greg Campion: Yeah. Yeah. Well, well, Warren Buffet said it's important to be fearful when others are greedy and to be greedy when others are fearful. And I think you've given us some great context today on where to be on that fear to greed spectrum. And I think your point is well taken just around the idea of patience and watching this market develop, not being in a rush to deploy capital into deals that don't make sense. And that your team are in somewhat luxurious position of being backed by a strong parent company, a Mass Mutual. Not to make this too much of an advertisement here, but to be able to take that long term kind of through the cycle approach because it seems like that's where true differentiated returns can be made over that long term time horizon.

John Ockerbloom: Yeah, I think that's right. I mean, everyone will say that they're not anxious to deploy capital, but if you're in a fund and it as a six month, a six month remaining investible life, your incentive is to deploy that capital, is to deploy that capital.

Greg Campion: Mm- hmm. Yeah.

John Ockerbloom: Gratefully, we're not in that position and with respect to any of the vehicles that we have out there. And we're fortunate and our objective is to be measured in our approach and to make good smart decisions that endure over time and that create better relationships with participants in the market. If we do the right things over and over and we make good decisions, we're going to make money for our clients and they're going to come back to us time and again. That's the goal.

Greg Campion: Yeah, yeah. Makes sense. Well, listen, John, we started this conversation on a negative note due to me reading out headlines, but I think we finished it on a positive note here and I think it's a realistic look at what's going on and a great insight into how you and the team are seeing the markets today. But it's interesting to me that you're seeing opportunities out there and you expect to see opportunities out here. So this has been really great for me. I hope our listeners learned a thing or two. I certainly have. But appreciate your time today, John.

John Ockerbloom: Great. Thanks very much.

Greg Campion: Thanks for listening to episode number three of season seven of Streaming Income. If you'd like to stay up to date on our latest thoughts on asset classes ranging from high yield and private credit to real estate and emerging markets, make sure to follow us and leave a review on your favorite podcast platform. We're on Apple Podcasts, Spotify, Google Podcasts, and more. We publish a new episode every other week, and if you have specific feedback, you can email us at podcasts @ barings. com. That's podcast at B- A- R- I- N- G- S. com. Thanks again for listening and see you next time.