He then led a brisk but wide-ranging discussion that flipped back and forth from residential to commercial real estate. Both Sean Dobson, chairman, chief executive, and chief investment officer of the Amherst Group, and Julie Ingersoll, chief investment officer of Americas Direct Real Estate Strategies at CBRE Investment Management, went deeper into why the space is staying afloat—in most places.  

Commercial real estate is vulnerable to higher interest rates, particularly following the lengthy era of cheap money, before quantitative tightening. Offices are the poster child for distress because not only are they up against higher borrowing costs, but dramatically lower demand, too. “I’m here to tell you folks that the headlines are real for office,” Ingersoll said. Bad headlines, that is.

Office vacancies are up to 18% and could be pushing 20% soon—Ingersoll emphasized. “That has never happened before,” she said, and these figures don’t even include sublease vacancy, double what it has been historically. Offices may only represent 20% of all commercial real estate, but she said this will be “a century-long phenomenon” as offices feel the pull of economically gravitational forces.

As Tully toggled between commercial and residential, the subject turned to how the former can be converted into the latter, addressing the historic inventory crisis in the space. Look at malls, Ingersoll said. “I was driving up to Rhinebeck the other day,” she said, mentioning a picturesque but rural corner of upstate New York’s Hudson Valley, “and you see these malls still by the side of the road that have weeds growing out of them right because they have not yet been knocked down and repurposed.” This told her something significant about this type of property’s underlying value. “A lot of these commodity office buildings are only worth land value, and they have to be knocked down and redeveloped,” and multifamily conversions aren’t always going to happen because of how costly they are.  

As Tully pressed for an answer on how to solve the “dearth of new construction in America,” Dobson touched on how existing home sales have frozen over due to the “lock-in” effect of many long-time homeowners having locked-in mortgage rates lower than what the current market offers. He added that this will be a “really difficult thing to thaw because of something that’s truly only American”: the 30-year mortgage. (No other developed country conducts mortgage finance quite like Americans, as President Franklin Roosevelt’s Great Depression-era firefighting produced this unique invention.)

Ingersoll cited a separate uniquely American thing for the inventory dearth: The country’s federalized nature. Housing supply is a “municipality by municipality story,” she said, and the local control baked into each city and state’s self governance has been in place since the American revolution. “And that’s where NIMBY-ism, unfortunately, has really prevented us as an industry and as a nation from providing enough housing stock—and certainly from providing enough affordable housing stock.”

NIMBY-ism, of course, is the sectorally famous acronym that stands for “not in my backyard,” a phrase that applies to all the roadblocks that plague and prevent housing development. She cited California as a sort of NIMBY homeland, and truly it has become a sort of ground zero for the housing crisis after years of policy failure and notorious NIMBY episodes. Recently, California has passed laws in an attempt to remove obstacles to building housing; it’s not always enough. 

“As Julie said, the city can pass the law but that doesn’t stop there,” Dobson said. “There’s still neighborhood associations, there’s other barriers, and they’re not really sort of desirous of having their neighborhoods densified. And it’s this tension between the cities trying to create more housing and the landowners trying to preserve what their view is of housing, is really the source of the friction.”  

Dobson then touched on another feature levitation above the gravitational pull of housing economics: Remote work, which has had such a profound effect on the real estate world. It partly fueled the pandemic housing boom, which is still playing out through skyrocketing home prices, while sparking the sea change for offices that is leading to the slow death of Class C buildings. Dobson said he doesn’t see remote work going away completely. “I think that work from home works,” he said. “And I think that the two day or three day in the office work week is with us for a long time.”

He cited the absurdity of commuting culture. At his company’s headquarters in Austin, Texas, he said, “we had people that were not in super critical, creative jobs, but critical function … Those people were driving in an hour, sitting at a desk working either by themselves or a team of two on something that wasn’t super time-sensitive, and then driving home an hour. Why make them do that?”