60: 2021 Outlook With Chief Economist Mark Zandi

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This is Real Estate Investing Live from New York with James Nelson, the principal and head of Avis and Young's Tri State Investment Sales Group. In this program, you'll learn about the world of commercial real estate and find out why it is one of the largest investment opportunities in New York and around the world. Now here is your host, James Nelson.

Welcome everyone, to episode number 60 of.

Real Estate Investing Live from New York.

This is your host, James Nelson. And wow, if you did not listen to the top 10 trends for 2021 in last week's episode, go and check that out. Avis and Young's own Nick Axford, who is our global head of research, gives you all macro things to think about. And continuing on with that theme today, we have a very special guest with us, Dr. Mark Zand, who is the chief economist for Moody's. And I want to encourage you all to think when investing to take a step back, look at the macro trends. Just so much going on in the world right now. We've got a new president coming into office. We have vaccines on the way. What does this all mean? What does this mean for cities? What does this mean for the suburbs? These are really things you need to consider before you invest. I would also encourage you all to maybe take some of this downtime or the holidays, clearly to spend some time with loved ones and friends. But if you do have some free time as well, we'd really encourage you to step up your reading. I make a habit of reading not only the Wall Street Journal, but the New York Times and the Post and.

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Okay, well, we are at the top of the hour and I know we still have a bunch of people who are joining us right now. So welcome everybody. I'm James Nelson, principal and head of Tri State Investment Sales, and really appreciate your joining us today for the market 2021 outlook. And just so much going on out there. And so could not be happier that we have Mark Zandi with us, who's the chief economist from Moody's analytics and Mark and Moody's are leading providers of economic research, data and analytical tools. Mark also co founded Economy.com, which Moody's purchased in 2005. So maybe Matt, we can put the link for people to sign up for the newsletter there, but some really great information there and a great tool. I know for one you've got a breakdown of the latest stimulus proposal, which I know we'll be getting into shortly. Mark is also on the board and the directors of mgic, the nation's largest private mortgage insurance company. And you're a trusted advisor to policymakers and an influential source of economic analysis for business journal and the public. You frequently testified before Congress and have had regular briefings on the economy for corporate brands, trade associations and policymakers at all levels. And you're often quoted by the news outlets and I guess on cnbc, npr, Meet the Press, cnn, and now Real Estate Investing Live from New York and the Nelson Report. So welcome and just again, I think in this time of crisis, to have such a logical voice in analyzing what's taking place out there and how we move forward is very much appreciated. So thank you again for joining us.

Thanks, James. I want to thank you. I apologize for the dog. If you hear the dog, a little older and a little senile and there's just nothing we can do about it. So.

Yeah, no worries. No worries at all. So why don't we start by kind of putting this all in context before we jump into the present. Coming off the heels of COVID the global shutdown, truly unprecedented times. Have you ever seen anything like this in the past? Can you correlate this to any crisis? And if so, what could we learn from it?

No, this stands on its own. It's like off the rails. I mean to some degree it's like a natural disaster. But obviously it's hit the entire global economy. But the same kind of dynamics, economic dynamics. A hurricane comes in to Florida, has this supply side shock. It knocks businesses out and then they get back up and running and money support comes in from the federal government, insurance companies and you get this burst of activity and over time you recover what you lost. But of course that's a very small geography, very short period of time. And the obvious big difference is with a hurricane, you know when it's going to end. In the case of the pandemic, at least early on, there was no visibility and it was obviously very scary. So yeah, no hard to draw any corollary corollaries here. One interesting thing is though, we did have the 1918 Spanish flu. And so that was a pretty good case study and don't have a whole lot of data. But the one thing that I find amazing from an academic perspective is sort of everything we are doing now we kind of did then the social distancing, the mask wearing, we kind of figured out that you needed to be outside, don't be indoors. I mean there's pictures of school kids in Boston in the middle of winter being educated outside because people figured that out. People got tired of the social distancing and the self quarantining and the closed businesses and they started going out again. And that's why we had second and third waves. So there was actually a pretty good case study there, but not a lot of economic data to fall back on. And of course we had World War I at the same time, so it made it a little more difficult to interpret.

It's great context. And I know in New York a lot of the conversation that we have talks about how we came back after 911 and when people say will we see a return to the workplace, Will we see a return to the Cities? And after 911 there was people who said companies will never want to work in office buildings above the fourth floor. And it seemed almost within a year or two things had snapped back. So we talk about, do people have short memories once there's a vaccine, once everyone's back, will it kind of go back to life as normal? But certainly we've had hardship in the past and we've figured out how to come back. But to your point, these are truly unprecedented times.

I suspect this one will be different than 911 though. I mean I suspect that the work from anywhere phenomena is a fundamental shift. Not that there won't be some pendulum swinging back here, but just to give you a statistic, prior to the pandemic, and this is data from the Bureau of Labor statistics, less than 10% of the workforce work consistently from their home in the teeth of the pandemic. April it was 35%. Obviously I'm rounding we're now back down to 20, 25%. I think that's where we're going to settle. And then over time it's going to start rising again. So I do think we will see work from anywhere be a long running structural change as a result of the pandemic. That has all kinds of implications obviously. So this feels more real to me. In the case of 9 11, I suppose that actually would have been more fundamental, more structural if there was another terrorist attack. Right. We only had that one really. And so people kind of faded away from consciousness and concern. But if you had another one or two or three of them, that might have been more fundamental as well.

Very true, very true. So I would love now to jump into the current day and age and the stimulus is on the top of everyone's mind. And I was on a call yesterday with Congressman Gregory Meeks said although the House had proposed the 2.2 trillion, I guess at one point President Trump had talked about 1.8 billion. Sounds like what we're looking at right now is 900 billion, which he did say was really for the next four month period. Based on what I saw in your report on economy.com, you said this still might not be enough. So maybe talk a little bit about the stimulus that is being contemplated now. When do you think this is going to happen and what's going to be the impact on the economy?

Well, let me say I've been wrong about this. I mean, I had expected that lawmakers would get it together before the election and pass another risk rescue package. It made good economic sense and I thought good political sense. But who am I? I'm an economist who knows how these guys are thinking. So I think it's very difficult to handicap. But I do explicit forecasts, I have to make explicit assumptions. And right now I'm assuming we're going to get roughly a $900 billion package fiscal relief package signed into law before the end of the month in the lame duck session so it gets out into the economy by January. And that's important because the remaining fiscal support to the economy had been provided by previous legislation, most notable being the CARES act back in March. That's the 2 point almost $2.2 trillion in support that's been fading away and is all gone at the end of December. I mean, the supplemental unemployment insurance, that's all gone. There's some tax credits for businesses to retain employees, that's all gone. There's a rental eviction moratoria that was put into place by President Trump under executive order that expires at the end of January. Student loan borrowers have had a moratorium on payments. That deadline was just extended to the end of February. But you know, I'm assuming we're going to get this rescue package in place in the nick of time to kind of fill the hole that is going to be created by the expiration of the remaining additional support. If that's the case, then that'll be enough. You know, I think we'll have a month or Two or three of them, job loss. Maybe unemployment will tick higher, but this period will, it'll be a pause. It won't be a double dip recession. We'll continue to move forward. I think unemployment rate with 6.7% nationwide today will stay between 6.5% and 7% for much of 2021. It won't really be until the end of the year into 2022 when we start to make progress on that. That's the $900 billion. I'm also assuming that we get one package, 900 billion deficit finance and that's it. The Congress, Senate will remain Republican. It'll be very difficult, if not impossible for the Biden administration to get any other legislation through, certainly any deficit financed fiscal policy through. And if that's the case, then it's going to take a while to get the economy back to full swing, a few years, but we'll get there. If there is no if, I'm wrong and lawmakers can't get it together and you know, we're watching what's going on today and President Trump just weighed in with his proposals and that kind of upended things a bit. So it's very possible we don't get anything. And if we don't, then we're going to get into January and things are going to feel a lot more uncomfortable. Bigger job loss, bigger increase in unemployment and we'll start talking about double dip recession again. And we probably will have a double dip. If lawmakers can't pass anything on the other side of the inauguration, if they can't get anything done, no more relief, no more fiscal support, then I think a double dip feels like a likely scenario. Obviously the second dip is not going to be anything like the first dip. I'm not arguing that. But it's going to be long enough and down enough that we're going to feel it, people are going to know it.

And what does this do to the federal deficit? I know that's a very important topic also here at the state and local level here, New York alone is talking about a $60 billion deficit for the next four years. The city 14.5 billion, the MTA 13 billion. With this kind of stimulus, I think to date we've had 2.5 trillion. What does this do to the federal deficit? And are there things that we should be concerned about? Hyperinflation? How would you comment on the long term effects of the stimulus?

Yeah, I think deficit, isn't that a problem? They're just not a problem right now. I think we need to get to the other side of the pandemic without going back into recession. Because if we do, if we go back into recession, then our deficits and debt problems will be even greater. It's a Hobson's choice, really. For lawmakers, there's no good choice. But the least bad choice is step up, provide another round of fiscal support, deficit finance, keep the economy together, not go back into recession, get to the other side, get back to full employment as fast as we can, because there's lots of obvious reasons why we can discuss. Then at that point, you pivot and you start to address the long term fiscal situation. That's going to require a lot of spending restraint and it's going to require tax increases, both of them, to do that, analogous to what the Federal Reserve has told us they're going to do. They're going to keep short term rates pinned to the 0 lower bound until we're back to full employment, until inflation is above 2% target, and they're going to keep that foot flat on the monetary accelerator until we get there. I would follow the same script on fiscal policy, but having said that, all of that, there is no free lunch, as economists are wont to say. There is a cost and we're going to have a struggle with our fiscal situation. Not in 2021, probably not in 2022. But you get into 2023 when 2024, when the economy is coming into full employment, inflationary pressures are developing, interest rates are starting to rise. I think that's when pressure to do something about our fiscal situation will be pretty intense. By the way, I don't think we can address our fiscal situation, at least politically, get the will to do it. Unless interest rates do rise in a significant way. Because it's impossible for lawmakers to connect the dots for the electorate between why are deficits and debt bad if it doesn't raise interest rates? What's the problem? What are you guys so concerned about? If that's the case, you can't generate the will, so you need those interest rates to start going up and financial pressure starting to develop and investors really saying, I'm concerned I'm not going to get paid in a timely way, you got to pay me a higher interest rate to compensate for the risk, then that'll generate the political will. But that's a 23 event, 24 event. That's not a 2020, 2021 event. We just got to get to the other side of this pandemic as gracefully as we can.

That makes a lot of Sense and I would imagine that the vaccine plays a huge part in that. And I think your report estimated there'll be 25 million vaccines delivered in the US by mid February. So with that in mind, there's a lot of talk. Is this a U shaped recovery? Is this a V shaped recovery? How do you see it?

Yeah, I mean obviously I make an assumption about the inoculations. I mean we're assuming 25 million by mid February, we're assuming 100, 125 million by the end of 2021 and combined with a like amount of people who've actually had the virus and thus have some, some immunity, presumably we're probably pretty close to herd immunity by this time next next year. And that's why can feel a lot better about things. If we had this conversation a year from now, I think we're going to feel a lot better about how things are going. But that's obviously an assumption and in that case there's downside risk. Maybe the vaccines don't work as well as we expect. You saw the news reports from the UK about allergies for a couple of the folks that received the vaccine. So maybe things don't turn out, the vaccines aren't working quite as well as we hope or adoption rates are a little lower than we hope. There's also, you know, upside risk here too. I mean, got more vaccines coming and maybe adoption's going to turn out better than we anticipate and can distribute this more effectively. So a lot of upside, downside risk around that particular assumption. But it's an important assumption, obviously, I mean to determine when the coast is clear and when the economy will kick back into high gear. Because as soon as people feel like they're safe, then I think there is going to be a lot of growth because high income households, high net worth house, you and I and everyone else on this call, we've navigated this thing pretty well. We own stocks, we own our own home, enjoyed the run up in prices, we've held onto our jobs, we've got good health care. This has been okay and we've saved a lot of money because we haven't been traveling, we haven't been going to restaurants, we haven't been going to ball games and concerts and all the things we want to do and we'll want to do them and want to do them all at once. On the other side of this, when people feel like the coast is clear, I think we will get a lot of growth and get going. But having said all of that in terms of jobs, employment, we can talk about other economic indicators like GDP or whatever you want to talk about, but in terms of jobs, which is what most people focus on, it's not a v. We're down 10 million jobs from the pre pandemic peak. We lost 22 million back in the recession. We've gotten 12 million back, we're down 10. I just argued that we might see some job loss in the next few months. It's going to take a few years to get those jobs back under almost any circumstance. The other thing to consider is of the 10 million jobs were down, I'm making this roughly up, but order of magnitude 5 million are permanent loss gone. Another 4 million people have lost jobs and stepped out of the workforce altogether. Those are jobs that aren't coming back yet. Small business establishments in the retail sector, gyms and restaurants, hotels, transportation, distribution, those things will ultimately get them back, but it's going to take a long time. So I don't think we get back those 10 million jobs. For in my baseline outlook, most likely outlook, I don't have that happening until late 2023, so three years from now. So it's going to be this is not a V, this is a slog.

And two follow up questions to that on the job market. So talking first nationally, be curious what the division is between blue collar, white collar jobs and that statistic. And then when you look at the cities and we've got mostly a New York audience here, I know the national unemployment right now you referenced was just above 6%, but in New York City we're at 13% coming down from a peak of 20%. So what's your outlook for the return of the job market in cities as well, slower?

I think big cities like New York will be diminished by this. Let me be clear. I think New York is a very vibrant, dynamic, urban center, global, urban center. And it will be a highly successful economy. I'm not arguing that at all. All I'm arguing is that it's not going to do as well as it would have done without the pandemic. And so for example, to give you a sense of that, I wish I had a chart to show you, but we do a lot of forecasting globally, US national, but also metro areas. We have a lot of folks in the real estate industry that use our employment projections by industry, by occupation down to the county level to do their absorption forecast. If you take a look at our forecast for say overall total employment in the New York City metropolitan area pre pandemic it was good line, nice slope up, headed north. And then the pandemic hit. Big decline. We got a bit of a bounce when businesses reopened after the first hit. Things are slowing now and then going forward. I have jobs coming back, but in New York, we don't get all those jobs back until five or six years from now. Remember, I said nationwide, it's going to take three years. And then if you look at the slope of the line after that, it's less positive than it was before the pandemic. And that goes to a number of forces. But work from anywhere, as I said earlier, in my view, is a fundamental development. It's not a one and done. We're going back to the way we were and it's going to. I can see it at large corporations. I can see at Moody's, right. I mean, senior management, including me, was very skeptical at working from home. They're very, very skeptical of the whole thing now, not so much. And if particularly you live in New York and you're paying high taxes and high cost of living and you're saying, do I really want to be in New York if I can be in Tampa and do what I'm doing? And by the way, I'm working harder than I ever did, so shouldn't I be able to do that? And HR departments are trying to figure that one out. One big question is, well, okay, if you go from New York to Tampa, should you still be paid New York wages or Tampa wages? The answer is not New York wages, but getting from here to there is a process. And so that's going to slow things down. But I assure you that big companies are going to figure that HR question out and a lot of other HR questions out. And I do think work from anywhere is real. And so the converse of what I just described for that picture I just described for you for New York is go take a look at our forecast for employment in places like North Carolina and South Carolina and Georgia, Texas, in the case of Californians, Californians streaming into Utah, Colorado. I've taken one trip since the pandemic. I flew out to Salt Lake City. I had the bright idea that I was going to go buy a home in Park City. I love Park City, right? And I actually went, took two of my kids. We got on a plane, by the way, I felt perfectly fine doing this. Was Delta, very empty. The whole airports were empty. We were careful. At first I had my N95 mask on, but by the end of it, I just had a simple mask on. I felt safe. Park City's like, are you out of. It's crazy. And in fact, I even thought about buying a new home there and I got the purchase agreement from the builder who by the way, I have no idea who this builder is. It seems to do good work. But the purchase agreement, I give it to you, James, you looked at it, you'd say to me, mark, you'd be crazy to sign that thing. So I didn't sign it. It's just out of control. So there's going to be again, a pendulum is going to swing back, but a very different picture. So I think big cities, big global urbanized cities, they will do fine. I'm not arguing that. But when we look back 10, 20 years from now, you're going to see the imprint of that pandemic on employment, on income, on gdp, on everything.

Wow. And I appreciate you sharing that story and I think you're probably smart maybe not to pull the trigger.

I'm bummed though. I'm bummed, James. I wanted that place, but know, geez, you know.

Well, I'm sure there's plenty of empty hotel rooms there now as well. But yeah, one of the questions on the list was this boom in the suburban home market. And it's interesting, I mean we speak to our offices across, we have 60 offices across the US and talking to some of our leasing brokers in the suburban markets, they're telling us that yes, absolutely, we are placing city offices opening up satellites, but they're small. First of all, these are five 10,000 square foot leases, usually just for a couple execs. And they're short term in nature. We are not seeing a mass exodus of large companies. I mean, you might say, well, James, what about Goldman Sachs that just announced leaving New York? And clearly there are some exceptions. And again, let me clarify. Goldman Sachs is not entirely picking up and leaving New York. It's just one, you know, what other divisions. But you know, the point being is the suburban home market, there's no denying that, has certainly picked up both on the rental side and the sale side. So what is your take on that? Do you think this is just a moment in time where you've got everyone moving out of the suburbs and once the jobs open back up in the city, they'll head right back. Do you think it's a mix of the two? How do you see that playing out?

Yeah, I mean there will be a swinging back of the pendulum, no doubt. I mean, you know, things have swung way over and you know, people were in the middle of the pandemic people have felt fearful, they did want more space, so they have moved out. But once things normalize, you know, a year from now, they're going to go back. You know, there's going to. That pendulum is going to swing back. I'm just arguing it's not going to swing all the way back and it's not going to swing back with the same force that it has historically. So suburbs, exurbs, smaller cities and towns are going to benefit from this longer run and big urban areas are going to be diminished by that. And you know, that has, we talked about the geographical implications, but it has real estate implications too. I mean I do think single family wins relative to rental. I think it does diminish office demand shifts, the kind of office that will be demanded, but also probably reduce absorption. There has been some conversation, reasonable conversation around, well, maybe you need more square footage per employee. I don't think so. In fact, just the opposite. I think people aren't going to be using spaces as much or as frequently and you're going to be able. Businesses are going to be able to reduce the amount of space per employee. It has implications for retail, obviously for the hotel industry. The other obvious in my mind fundamental shift is business travel. Again, the pendulum will swing back when people can travel, but there's no going back here. There's not. I just don't see business people traveling to the same degree because what we're doing right now we're getting really good at and it has a lot of advantages. I have two hundred and fifty economists that work for me around the globe and I would spend energy time flying. New York, London, Prague, Dubai, I'm going in that direction. Singapore, Sydney, Tokyo, Shanghai, Shanghai, Tokyo, Portland, Orange County, California, Toronto, and here at home, Westchester, Pennsylvania. I spent a boatload of time visiting those folks. And by the way, every one of those places was the culture was a little different, a little bit different. It wasn't a lot of communication. They'd even create their own software to solve problems. Now we get on a zoom call and I got everyone on the planet on the same zoom call. Not exactly right, because doing London and what is it doing Prague and Singapore at the same time is not easy. But you know, if you're sitting in the United States, on the east coast, but I got most of the world on the same zoom call and I can't tell you where they are. There's no difference. No difference. We've completely broken down these cultural differences and it has significantly improved the integration of what we do and how we do it. I would argue our productivity has been enhanced many, many times over. And so I just don't see. I know there are other anecdotes and cases where it hurts productivity. I'm sure there's cases of that, but I think net net we're just not going to be traveling as much. And so obviously that has huge implications for the accommodation industry, the travel industry, the restaurants, recreation activities, that kind of thing. So I think the pandemic has resulted in some really fundamental shifts here that has tremendous implications for the real estate. The implication of the real estate industry are as big as for any other industry, except for perhaps healthcare and technology. You know, massive change here.

No question. No question. So I'd like to now shift to the presidency. And I believe it was you or Moody's who issued a report saying that a Biden presidency will fuel our economy and job growth. So can you expand on that?

Yeah, sure. You can Google the paper. I think you say you could do. Zandi Macroeconomic Consequences of Biden v Trump and you'll get right to the paper. And we do this every four years. We take the candidates proposals as they've laid them out and then just run a scenario. It's not a forecast, it's just a scenario if the candidate gets exactly what he or she wants. There's no political fetters here, no constraints. What happens to the economy? And we run that through. And that was a little difficult to go around. It's always difficult. A little more difficult to go around because for Biden, he's got a lot of things out there and there are a lot of new things, very hard to model. It's overload on transparency. I mean, it's like really transparent, which makes it difficult as a modeler. Trump, just the opposite, obviously. No transparency. I mean, you gotta make a lot of guesses based on his previous budget because he has budgets that's. He did have a 2021 budget that's his that we used, had some things on speeches, but that lack of transparency was a problem there. But we did the best we can and we laid out the assumptions and Biden wins hands down in terms of what it means for the economy over the next four years, in large part because his policy prescription is to put the foot flat on the fiscal accelerator until we're back to full employment. Infrastructure being a big key part of that, education being a key part of that, health care, and then a sundry other things on child care, elder care, housing, more housing to support, address the affordable housing crisis. But It's a boatload of spending with some tax increases to pay for part of it. Basically taking the corporate tax rate from 21% effective rate back up to 28. And the big difference on the tax side is taxing Social Security earnings above that cap. The existing cap of, I think it's $140,000, $140,000 a year. Now, you would tax anything above $400,000 a year, but the net of all that is bigger deficits in debt, which in the current context is the right fiscal policy to generate growth and get back to the full employment as fast as possible. Because you have very high unemployment, you have very high underemployment, you have very low inflation below the Fed's target. The Fed's all about raising inflation, getting above target, and most importantly, have zero interest rates. So in that context, you want to put your foot on the accelerator, get back to full employment as fast as possible. And then if you do that, then because a lot of his spending is all front loaded, it goes away. And then you focus on getting back, addressing the fiscal issues, the deficits and debt, and then spending goes way back in. By 2024, you get those tax increases and you land in a much better place in the economy by the end of 2024, which is the end of the analysis. So that's the logic behind why his policy, if he got exactly what he wanted, would end the economy in a better place. When I say better place, what I mean by that is getting back to full employment faster is in a better place than under a Trump policy. Let me say, James, go look. It's there, it's all the gory detail, all the assumptions. One big assumption I made was, and this is an important one, is I did not consider regulatory policy. What's going to happen with fossil fuel regulation, climate change, banking regulation. You could argue, although it's hard to argue, and I haven't been able to connect the dots, but intuitively you can argue if you have less regulation, that means more growth. Maybe, but to account for that would have been a bridge too far, at least for me.

Yeah, and that answers part of my next question. And I guess it's a sign that you've arrived when the Wall Street Journal writes an op ed addressing one of your reports. But they did reference.

To put it.

Politely, they said that you underestimated the impact of higher tax rates. And I think you just mentioned the regulation piece, but yeah. And anything else you would have to say about the impact of the higher tax rates?

Yeah, well, on Regulation, I would defy anyone to point to a rigorous academic study, peer reviewed study, anywhere that has been able to connect the dots in regulation and growth. I mean, the key thing, and I'm talking now to you as a business person, I started my own company and I sold it to Moody's. So I've been a startup me, a good sized small company. I had 100 employees, roughly, if I remember correctly, when I sold to Moody's. And now I'm part of a multinational. So I am a business person also as an economist and speaking to you as a business person. And I have operations everywhere, so I know regulation from everywhere. I don't care what the regulation is. All I care about is you tell me what it is. If I got bright yellow lines, I can navigate around anything you throw at me. That's all I care about. I want certainty around the regulation. The regulations themselves, sort of maybe, but generally it's not a macro economic event. On taxes, the kind of tax rates we're talking about, on corporations particularly, but also on high income individuals, the impact is negative, all else being equal, on the economy, I would not argue that it's positive, all else being equal, it's negative, but it's a very, very small negative. And by the way, I am not outside the mainstream here. The mainstream is the Congressional Budget Office, the cbo, the budgeter, nonpartisan, nonpartisan or organization. They are consensus. They go and they took a look at all the academic studies on all these things. They bring it together and they say, okay, what's kind of sort of in the middle of the distribution of all these studies? That's what we're going to use when we do the budget forecast for the United States. They did one on the Trump tax cuts. You can go take a look at their studies. They looked at the impact on growth. They even have tables with my growth expectations, Goldman Sachs's growth expectations, Penn Wharton, Model X. Anyone who does this for a living, they brought it and put it in one table. And I tell you, we're all the same. It's a small, small negative impact. Just think about it for a second intuitively. And again, I'm speaking to you as a business person. Limit on growth isn't cash flow. I mean, businesses are awash in cash flow, particularly big companies that take advantage of that low corporate tax rate, like a Moody's. It's just cash that we don't need the cash. We got cash everywhere. So that's not a constraint on investment. And that's the link between corporate tax rates and the economy is through investment. And the constraint on investment, I assure you, is not getting cash or credit. That is not a problem. Zero interest rates, 50 bips on 50 year money. I mean, it's not a problem. So that's not the constraint. So the intuition, there's not even, no even. I can't even get my mind around what the intuition is. For someone to argue that you lower the corporate tax rate. You're going to get this massive increase, this significant big increase in investment in long term economic growth just intuitively doesn't hang together for me as well. But I'm not arguing it's not negative on the margin. It is and it is a negative, but it's a very small negative.

Perfect. Yeah. And we definitely appreciate your perspective having been an entrepreneur and a business owner yourself. So this might be a little bit too micro, but again, we have a real estate audience here and they are very focused on the Biden tax plan. I've been hearing a lot about the potential elimination of the 1031 exchange, which is a major driver of our business. Last year we tracked that 50% of our sales involved 1031 on one side of the transaction. This allows investors to go buy bigger projects, create jobs, has been a real positive. Also the effect of raising the carried interest rates. So a lot of the private equity money that's out there investing in real estate. Anything else with the proposed tax plan and what you've heard that you think would, would have an impact either positive or negative on real estate?

Yeah, first thing I say is I, you know, I wouldn't be too worried about this. I mean, let's see what happens in Georgia. But under the most likely scenario, we're going to have a divided government and a divided government, even small divided government with Senator McConnell leading the way in the Senate. I just don't envisage a major change in the tax code in the Biden administration. Pretty tough to do. So to some degree it feels academic, the conversation we're having around this. Having said that, I do think that to address our long term fiscal situation we will need spending restraint and we could talk about what that should be. But we also need tax increases. The level of taxation in aggregate across the economy is very low by any historical norm. And that goes to the tax cuts that have been put in place, the Trump tax cuts, of course, and going all the way back to the Bush tax cuts in the early 90s. So just take, just add up all tax revenue. I'm talking about the federal level, state and local, not Much different. And divide by whatever you want to divide by gdp, profits, income. It's lower today than is on average since, let's say 1960 over the past 56 years. So we need to get that back, at least get that ratio of tax revenue to GDP back up to where it was on average and probably a little bit higher because we got a deficit debt problem. And we also have to get spending down as a share of GDP to get that down sufficiently so that we start addressing our long term fiscal issues. So if that's your frame and then you're saying to yourself, okay, how am I going to do that? What is the best way to generate that tax revenue? Meaning something that's going to generate revenue, something that's going to have less of an economic impact. Of course, when you change anything in the tax code, you create winners and losers. What can I do here that ameliorates the winners and losers and puts a little bit more pain on the people who can shoulder the burden of a little bit more? That's a judgment call, obviously, in a matter of political debate. But that should be part of the discussion, right? It's part of the conversation. So if you kind of think about that, then you say, okay, okay, I can see taking the corporate tax rate back up from 21 to 28. I'm not saying going back to 35, because I do think there is some benefit to keep those corporate tax rates down. From a global competitive perspective, I can see taxing allowing the tax rate on upper income households to revert back to where they were pre Trump. I could also see an argument for taxing earnings above that 150 cap for high income households. If you look at the percent of earnings that are taxed compared to where they were when Social Security was put on the planet, it's much, much lower because of the skewing of the income in wealth distribution. Distribution. So I can see some arguments around that. And then if I really need some more revenue, maybe in the real estate sector. But now we're on the margin, right? Because we're not going to generate a whole lot of revenue. Carried interest you mentioned, I can't remember the scoring, but we're not talking 400 billion over 10, we're talking, I think we're talking 40 billion over 10 on the exchange. Do you know that the amount of revenue you would raise if you eliminated that altogether? I'm not sure. I think kind of on the margin in terms of the grants.

Yeah, it's not a big number actually. It's not A big number, relatively speaking. Yeah.

Yeah. So I mean then if you're sitting there as a policymaker in the trenches trying to craft a tax bill and you're going to use political capital for something, would you really use it for that? I'm not really sure. And then you don't.

It's not just the. Yeah, I was going to say it's not just the real estate. Yeah.

Consequences of it. Right. I mean, it could be highly disruptive. Do you really want to do that? I mean, because you don't really know. And if you really want to do something that's potentially disruptive, it's going to generate revenue, maybe you try financial transactions, tax, you know, something like that, you know, go, go somewhere like that. So I'm not, I'm not overly worried about those things. You know, I wouldn't worry about it at this point. It feels more academic to me.

Perfect. So we are happy to take questions from the group as well. I've got a couple more questions myself and then I'll open it up. But a question did come through on the chat from Dennis Sherry from our office and he asked about government spending as it relates to entitlement programs. So I don't know if you have any thoughts on that as a way to get the economy going on as well.

Yeah, I mean the key entitlement programs are Medicare and Medicaid. Right. I mean Social Security, that's not a big deal in terms of what it means long term in there. I think I would fully fund Social Security at the current level of benefits. Just because you've got some very hard pressed low income households that rely on Social Security and you can easily, if narrowly focused on that payroll tax increase for upper earnings above 400k. If you put that into place, you've paid for Social Security by itself. So let's just put that aside. I think I'd leave that alone on Medicare and Medicaid. That goes to healthcare costs. So it's really about focusing on the cost of healthcare. And there I think we need to take another crack at healthcare reform and make sure that we do that right in the context of what we've learned with the ACA in place now for coming up on a decade. So we've got enough data points to really, I think, get a better sense of what, what's been working, what's not been working when it comes to containing the cost of health care and providing good quality health care to a broad sector, to our entire population. So I think that's where the money is and where we should be focused. But I do think we need to. Entitlements, meaning Medicare and Medicaid should be, you know, we should be focused on that like a laser beam because that's where the money is and that's where if we're going to address our long term fiscal problems, that's what we're going to have to address us.

No doubt. So now I'd like to talk about what a Biden presidency will mean for the blue states and especially New York. So I believe this current stimulus, I think there was 180 billion carved out for the states, which again doesn't, I mean, I just said that the New York state's deficit alone I think is 60 billion over the next four years. But how do you see that? I mean, I would assume a net positive with the Biden presidency to states and certainly cities like New York.

Yeah, I don't know that I made a distinction between blue and red. I mean, actually there's a great piece in the New York Times earlier in the week or late last week that used a lot of our work that one of our guys, Dick guys, does on state and local government in estimating budget shortfalls. And the point of the article, and I think it's right, is the budget shortfalls are as a share as a percentage of total revenue or the state's GDP or you know, scaling it to the size of the state are bigger in red states than they are in blue states. I'm painting with a broad brush. New York has obviously been completely hammered by the pandemic and suffered as much as anyone from the pandemic, at least to date. This is still a script being written. But other states, every other state is suffering budget shortfalls and red states have been particularly hard hit, particularly states in the energy country because the collapse in oil prices and other commodity prices really is because they rely very heavily on severance taxes and other forms of taxation on the energy sector. And they've been hammered. So this is not a red blue thing, this is a nationwide thing. And I think it's very important to provide support to state and local governments because and it's tried and true support in every recession because as you know, state, local governments have restrictions on their ability to go deficit finance their activities constitutionally. So they rely on the federal government to step in and provide help to when times are tough like the current time and every recession. That's been the case and it's worked very, very well. There's a lot of academic research that shows how important that is and how effective that is in supporting economies. And there it's very intuitive, right? I mean, if state and local governments can't get money, then they have to cut people. And think about the people they're cutting. Teachers, fire, police, emergency responders, healthcare workers, people you need at any time, but particularly in a crisis like a healthcare crisis, then they, then they go and cut programs, you know, for housing and food assistance and you know, things that low income people that are, you know, on the fringes really desperately need. And then they cut services, you know, things that everyone uses, you know, police and fire and trash collection and you know, the gazillion things that people don't even realize state local governments provide until you actually need them, they're there for you. So that doesn't make a whole lot of sense. So you would think you would really want to ante up and help. And particularly given that this is ecumenical across blue and red. There's no difference here. 180 billion. If you asked me six months ago how much I probably double that. 180 billion feels on the soft side to me, but state local governments might be able to get through, get through with it given they hadn't navigated through this pandemic a little better than I say, meaningfully better than I think anyone thought, including myself six months ago. So 180 billion. If I were king for the, if I were in Congress, I sign on the dotted line, I want more. I think it makes good policy to provide more. But I wouldn't stop me from signing because at this point speed is much more important than size.

Perfect. That's great perspective and appreciate your sharing that. So I have one last question. Then we've got the question and the answer box is filling up. So I'll get to that next. But get a lot of real estate investors on the line and wondering where the opportunities are. I'll just throw out some quick stats on what we've tracked for pricing based on asset class. And this is just New York City and we look at just second and third quarter transactions. They're definitely post Covid and we compare them to their pricing in 2019. But land sales have been hit the hardest. Values down 30%. Multifamily was immediately impacted with a 29% decline in pricing. Office and retail at a 24% decline. A lot of people think there's definitely more room to go there depending on if these tenants come back. There's not enough trades for us to give a statistic on industrial and medical in New York City. But if I had to guess, I'd probably say those values have increased by 20 or 30%. So do those statistics make sense to you when you look at it through a national lens? And if you were advising investors right now, what asset classes to be thinking about, where to be thinking about, what would you say to that?

Yeah, I mean, for New York, it sounds about right. I mean, nationwide, obviously, things have held up much better. You know, we are at Moody's projecting national price declines across most of those asset class you mentioned. You didn't mention hotels. That also would be down, you know, very significantly nationally, although it's going to take a while for that to show up in the data. First of all, in you know this better than I, but when you have some kind of shock to a market, it takes a while for buyers and sellers to kind of figure out, well, what's true value. So transactions go away. And so you can't. You don't have transparency, so you don't have a price. There's a shadow price, as they say, but no actual price. And then ultimately transaction people figure it out, transactions occur, and then it takes a while to get that into the data. So my guess is, you know, we won't have a real good sense of this for a year or two, maybe even three, how much damage has been done on the commercial real estate side. The other thing I'll throw into the mix on prices and valuations, which matters a lot for places like New York and other urban centers, is global demand. Right? I mean, very significant investor demand from overseas. And I think obviously that's been under a lot of pressure as well, because global investors, they're one step removed from the markets than you and I, are more uncertain and don't really know what value is. And so they're even more reticent. The value of the dollar is very strong vis a vis other currencies. So that makes things a little bit more difficult unless that dollar continues to come down. That also has played a role in depressing New York City versus other parts of the country. But I would expect price weakness over the next couple of years as we work through all these dynamics, particularly in hotels, followed by brick and mortar retail. I'm not saying anything people don't know, followed by multifamily and then ultimately office in industrial. That obviously positive because of the online dynamic that's shifting stuff from being on store shelves to being in warehouses. So it helps absorption. There's. So I don't, you know, I don't think anything I said is kind of, you know, it's pretty much getting baked in, I think, pretty quickly. I do think, you know, urban areas, as I've been arguing, diminish relative to ex suburban, ex small cities and towns. Trying to think of anything that I would, you know, one asset class that a little more esoteric that I think has a lot of room is single family rental. So you got a lot of folks that want single family but don't have the income now with house prices rising and as soon as mortgage rates start to rise again, affordability is going to become a real issue. And so single family rental might become an even more attractive asset class. Small in the grand scheme of things, but some parts of the country, if you go down in Florida or Texas or Arizona, it's a big, big deal. So that that might matter. But other than that, I don't have any more. A lot of insight on that question.

Well, I love that and that's a great way to end with some food for thought. And Mark, we'll definitely have to welcome you back six months a year from now. We'll see how this all plays out. But I know we're all hoping for the best in 2021 and just can't thank you enough for your insight and wisdom with everything going on. You certainly are a clear voice and we can't thank you enough.

Well, James, I want to thank you and I just want to warn everyone, my goal is to be 51% right.

So just say you're like the casinos.

Yeah. There you go.

Wonderful. Thank you everyone for joining. We look forward to being in touch.

Thank you for tuning in this week to Real Estate Investing live from New York. Please join your host, James Nelson for another program next Tuesday at 7pm in New York, 4pm Pacific Time on the Voice America Business Channel. All shows are rebroadcast Wednesday mornings at 7:00am Eastern Time, 4:00pm Pacific Time, as well as always on demand. We'll talk again next week.

Sam.