Are you willing to pay 33% more for this new technology?
Ric Edelman: It's Friday, September 29th. Coming up on the show today, is real estate investing dead? Should you run away from it or jump into it? And are blockchains safe from hackers?
But first off, I want to follow up on something new from PayPal. Yesterday I told you that PayPal has launched a stablecoin, a digital coin that has a stable $1 value. You can hear all about it by listening to yesterday's podcast. The link is in the show notes. In that podcast, you might remember I said it won't be long before others in the financial services industry start launching their own stablecoins to compete with PayPal.
For sure, we're starting to see big financial institutions engage with crypto, including pension funds. Lockheed Martin's pension fund has invested in Hidden Road, a big crypto prime broker. That's the latest pension fund to reveal their crypto investments. The Ontario Teachers’ Pension Fund has invested in crypto, So has the Houston Firefighters Fund and the Fairfax County, Virginia Police Officers Pension Fund. So go ahead. Think you can ignore crypto whether you know it or not, your pension plan and your stock funds may well be investing in crypto without you even realizing it. Wouldn't it be better to learn how all this works?
That's why you should go through our certificate program. You can attain your certification in blockchain and digital assets. We have courses not just for financial advisors, but also financial professionals, back office executives, crypto professionals, and for investors, consumers and students. You can choose from the basic certificate program or the advanced program, and you get as many as 18 continuing education credits. Learn more about this at DACFP.com.
Let me switch gears now and I mean that literally. Electric vehicles or EVs are all the rage. If you don't already own one, I bet you're thinking about it. They've got the potential to cut carbon emissions in a really big way, and as a result, they're increasing global demand for the key minerals that are essential for the batteries that power these cars. I'm talking lithium, graphite, cobalt, nickel. When I say we're increasing demand, I mean, we're increasing demand like 400 to 600%. We already have 40 electric vehicle models in the US - from the Chevy Bolt that costs just 28 grand, 21 After you factor in the government rebate, to the two-door Rolls-Royce Specter with its base price of $460,000. Add in the options and you're more likely to spend over $500 grand for that Rolls-Royce. You want one? Forget it. They're already sold out. But you can order one for 2025. And no, I have not ordered one. Car for car. EVs tend to cost about a third more than their ICE cousins.
Ice: Internal combustion Engine. EV versus ICE. The average price for the top ten EVs. About $61,000. And the reason people buy them is not because... Oh, you're not trying to protect the environment... Oh, yeah, sure. Go ahead. Make the claim. No, the real reason you're buying an EV is because it's cheaper to own. They cost a third less in overall lifetime costs than ICE cars. And it's not kids who are buying these things. The average EV buyer is 54 and has an income of 100 grand.
What's stopping you from buying? Well, you know the answer to that. The range, 61% say they are concerned with where you get your EV charged. It's easy if you live in the house and you stay local. But what if you live in an apartment? What if you drive to work really far or go on the road? How many charging stations are there? More than half of those surveyed by Forbes say they are worried that driving an EV will run out of juice while they're traveling. And so far, there are not very many electric vehicles on the road. We've only sold 800,000 of them. That's out of last year's total car sales of 13 million. But it's still early. The tech's improving every year.
Toyota just announced that they've developed a battery that can go nearly 800 miles on a single charge.
And recharging takes only ten minutes. So once we get the range where we all want it, I think we'll all be driving EVs. Mercedes-Benz has already ended all of its R&D for its internal combustion engines. It's now only developing EV technology, and everybody else in the auto business is pretty much doing the same thing. So while we only sold 800,000 of these things last year, that was still a 60% increase over the prior year. By 2035, it's projected we'll have 63 million of them on the road.
So instead of buying an EV, maybe you ought to invest in the EV industry. Let me tell you about the Global X Autonomous and Electric Vehicles ETF. The symbol is DRIV; like drive. This is the largest pure electric vehicle ETF on the market. It's got $1 billion in assets already, which shows you how popular it is. Its top holdings include Apple, Toyota, Alphabet, Tesla, Intel, Honeywell, Qualcomm, Nvidia, Microsoft, Allegheny Technologies. It's got tech stocks as well as auto stocks. Check out the Global X Autonomous and Electric Vehicles ETF, symbol DRIV. Learn more at Global X ETFs.com or ask your financial advisor. And if you're not a financial advisor, ask them about it.
Invesco’s Head of Real Estate, Bert Crouch on what’s next in real estate investing
Ric Edelman: You know, I've been beating up on real estate for a while. How scared should you be? I mean, most importantly, how scared should you be about investing in real estate today? Remember, you know, falling prices. That's actually great news for investors if you're smart, because buying low is a whole lot smarter than buying high. Right. And I've told you about in the past, Invesco QQQ leadership in the world of real estate investing. And so I want to talk about all this in greater detail and to help us do it, I'm really happy to welcome on to the show Bert Crouch. He is the managing director of Portfolio Manager and head of North America for Invesco Real Estate, and Bert also serves on Invesco's Global Executive Committee. Bert, great to have you with us.
Bert Crouch: Yeah, it's great to be here, Ric. Thanks for letting me join.
Ric Edelman: So let's talk about all this. We've been reading all the headlines over the past couple of years, ever since Covid, of course, about how Office buildings are empty. Everybody's working from home. Nobody's going into the office. We've got these see through buildings. Is there another side of the coin to this, or is the office market dead?
Bert Crouch: Yeah, it's funny. So many of our investor and partner discussions start and end with office and look, it's fair. It's a sensationalist headline. It reads well and it's something that we can all equate to because at one point in the stage of our careers, we've worked in an office. So, you know, maybe set the stage Ric quickly. When you think about private institutionally owned real estate, 90% of it is not traditional office. When you think about public listed real estate investment trusts, 96% of that is not traditional office, and that's moved materially over the last two decades. I mean, it's been cut in half on the private institutional side. In 2000 and the listed universe, you know, traditional office was over 20%. So we've seen other aspects of commercial real estate really gain in size as the office universe has shrunk. So that'd be the first thing that maybe I'd note. Let's be careful about painting all things commercial real estate with a broad brush.
Ric Edelman: Does that therefore suggest that it's only the commercial office marketplace that is suffering like this and at other sectors of the real estate marketplace are not?
Bert Crouch: Generally speaking? Yes. I mean, when you think about, you know, just general commercial real estate and let's lump in residential as well. When we say commercial, let's talk about multifamily, single family rental and other. But the fundamentals tell a generally strong story. Now the second derivative is coming down Ric. And what I mean by that is you've got rental rate growth. Take single family rental. It might have been low double digit this time last year. It's fallen to 4 to 5% today, but it's still positive. It's still beating inflation. You've got take logistics or industrial. The vacancy rate may be a slightly up from last year's historic low, but it's still at 5%, still 300 basis points south of the historical average. So to your question, fundamentals outside of office and even in certain aspects of office which we can touch on are very strong. Now, the capital markets side of it tells a different story.
Ric Edelman: Well, now I'm a little confused. I think a lot of folks will be if you're not talking about commercial office buildings and you've lumped together multifamily buildings, meaning big apartment complexes, what else is there in the world of real estate? I mean, because I think that's what most people are thinking of. You're thinking of an office buildings or where I work or where I live, right? So if you take those out, say, Yeah, they stink, but everything else is okay. It's sort of like saying, Well, the play was great except for Lincoln.
Bert Crouch: Right? No, I get it. I get it. You know, when you think about the benchmarks off of which our performance is judged, historically, it had been just four major sectors. To your point, you hit on multifamily apartments, office, then you had industrial and retail that was it. And when you look at today, they just expand recently expanded, they, being Naked Reef it's an acronym for the National Property Index, went from four sectors to nine and they did that because we've seen such a significant investment outside of the traditional or kind of big four property types. When you go back to my comment earlier about the listed or publicly traded REITs, almost half of that is nontraditional meaning non major for. So your question, what are those? Well, residential is not just apartments anymore. You've got affordable housing, senior living, student housing, single family rental build to rent, manufactured housing. I mean, the world has expanded significantly, not just in where people are living, but why people are living there. And so when you think about, you know, I loved your opening comment about the best time to buy is when no one else is or prices are down. You could extrapolate that? Further to say an investing in sectors that maybe are outside the norm and or we're seeing those secular tailwinds that we really hadn't seen, at least in scale before Covid.
Ric Edelman: So okay, that sounds a little bit better. But related to that, therefore, what would you say is the story we're not hearing that we do need to be hearing?
Bert Crouch: Yeah. So a couple of things. You know, we're all focused on interest rates and what the Fed is going to do or not going to do, and are they going to raise another 25 basis points? I think a lot of the story is being missed, at least in my world, in investing in real assets, in commercial real estate specifically, is where are they going to hold interest rates over the next two years? That is a huge factor. You think about just Ric and may the terminal peak rate assumed for the secured overnight financing rate. So for the proxy for short term rates was going to peak in the mid fours. Now it's all the way out in the mid fives. That's in 90 days it's up 90 basis points. And if you look at the forward curve, we're expected to average four and one half percent, go back less than two years and that was zero. So when you think about rates, it's not or are they going to raise or not? The question is, are they going to cut and how much over what period of time? I think that's one. On interest rates, another big point is just the ten year treasury. And that's important for two reasons in commercial real estate. One, it's an alternative to financing on a floating rate basis you would fix. And over the last 12, 18 months, that's been a lot cheaper than floating rates. But just recently, really over the last, you know, call it again a couple of months, we've seen that go from the mid threes out to the low and mid fours. So suddenly you've got a ten year that's moved up significantly and that affects our exit cap rates.
Ric Edelman: Yeah. And I was, I was just going to ask. Okay, so you've given a pretty good synopsis of interest rates. What does that mean? What's the implication of all of that on real estate investors?
Bert Crouch: To oversimplify it, it's more expensive to finance and accordingly, it sells at a lower value because the required premium, the yield on that what we call a cap rate, a capitalization rate is higher because those historically plus or minus have moved in tandem.
Ric Edelman: And I think every homeowner can understand what you just said, because we know that the higher the interest rate is, the higher my mortgage payment is, which means the less of a house I can afford to buy. And that pushes my payment up and pushes prices down. And I think we all get that.
Bert Crouch: But and it's a great point because if you think about the single family rental market, which is a derivation of what you just said, which is the traditional owner occupier, market interest rates are back close to recent highs, all-time highs and the north of 7%. And you and I can laugh about, you know, in the in the 70s you know, you've got high teens mortgage rates. But at least over the last two plus decades, we're at relative highs. That said, you know, home values have not moved down nearly as much as, you know, people expected. And actually home price appreciation is to some extent back. We're a large player in the single family rental market. We own an interest in a in a company called Mynd. And what we saw was yields move out. But then they stopped. And the reason they did that was because there's more demand than supply. No one's selling everyone locked in at that, you know, three ish percent rate. And they're not moving.
Ric Edelman: Because if they move, they're going to have to pay today's mortgage prices. And they're like, I locked in at two and a quarter. I don't want to have to go buy a new house and get a new loan at four and a half because that monthly payment will be so much higher than my current monthly payment. And so you're right, homeowners don't want to sell. That means there's a dramatic reduction in inventory for would be buyers, and that's keeping prices high.
Bert Crouch: That's exactly right. And so, you know, one of the things I don't think people are paying enough attention to is apartments have been somewhat of a darling of commercial real estate. So if you have office on the four letter word category on the opposite end of the spectrum, you've got apartments and apartments were deemed very favorably because they just extremely well to inflation. We talk about commercial real estate being an inflation hedge. Historically, that's 100% accurate. It has a 0.5 correlation historically to inflation, especially in periods of hyperinflation that jumps to 0.7. And the reason for that is apartment rents reset every year so you can push those rental rates up counter to single family. In the multifamily space, we're dealing with historic high deliveries. So 200,000 units so far this year, 650,000 expected. And what we're seeing in our portfolio, we own almost 40,000 units. We're starting to see that roll over, meaning we're seeing rate rental rates not increase at the same rate and maybe even start to decline. And we've seen real pressure also on the expense side, operating expenses, you know, higher wages generally, we've seen insurance rise significantly on average as low as 15, as high as 50 plus, especially in the coastal markets. And then obviously, we just talked about interest rates, especially on the floating rate side. So we are starting to see some of those areas where you've got to be able and this is where Invesco Real Estate's portfolio in North America alone is about 170,000,000 ft², about $53 billion of assets under management. We've got to be able to pivot from the multifamily to single family rental. And that again goes to your comment about where can we buy at the lowest level and also where we're seeing demand and or fundamentals hold up better than the other even if they're in the same sector, in this case, all things residential.
Ric Edelman: You said in passing a statistic that I think is noteworthy, 40,000 units that you own this. I have to conclude that Invesco has got to be one of the largest real estate investors in the country.
Bert Crouch: That's right. We are doing anywhere from four ish billion of loan originations a year, 6 to 7 billion of acquisitions. And again, I just gave you our portfolio statistics of 170,000,000ft², 100 different markets. So, you know, the depth and breadth of our portfolio is really important and. We might talk about data or AI more in a minute but harnessing that is paramount to generating outperformance. And that's one of the things on which we're hyper focused at the moment.
Ric Edelman: So how do you determine what to buy? Is the amount of money you have such a large amount because so many investors turn to you for their real estate allocation in their portfolios that you're indiscriminately buying anything you can get your hands on?
Bert Crouch: Yeah, I sure hope not. I'd be out of a job pretty quickly from a relative and absolute performance perspective. But no, it's a great question. And, you know, we get the question all the time and you kind of led off with office and just how bad that narrative is. And it does go back to why would you invest in commercial real estate at all? We've seen a significant run up in prices and there's broad based concern and a lot of it’s warranted. Whether it's multifamily or industrial, you've got supply that's ramped up, rental rates have come down and maybe they're not growing as quickly. So, why would we or where would we, to your question, invest? It doesn't just have to be about sector. It's really a combination of sector and positioning. And what do I mean by that?
Right now when you talk about real estate, the standard mantra is location, location, location. What I would add to that in today's environment is credit, credit, credit. In my career, I have never seen a more attractive entry point for an investor than today in private credit secured by real assets. And let me just walk you through what I mean by that. So where to invest? I already told you on how we're pivoting within the residential sector, you know, whether that's to self-storage during Covid, whether that's to life science or medical office out of traditional office, you've got to pivot to where the secular trends are going and we're harnessing the debt of our portfolio. But more than that, I mentioned we're doing 3 to 4 billion of loans a year. Ric I can originate a loan today at SOFR (Secured Overnight Financing Rate) plus low three hundredths over. So that loan has the spread is widened out 100 basis points. And that's because of all the things you know, Silicon Valley failed, Signature failed. All of a sudden this light was cast on bank deposits. Or flighty risk management is weak and the regional banks are overweight, commercial real estate. And I can walk you through those stats, but that's the punch line.
So they've pulled back on lending. We've seen lending down. It's over 50% down year over year. The expectation by the Mortgage Bankers Association is it's going to be down 40% this year. So there's not a lot of homes for commercial mortgages today. Securitization, commercial mortgage-backed securities is down over 70% year over year and getting worse, not better. So we're out there making loans Ric, and we're doing that. And if you just think about what I said, SOFR was zero two years ago, it's over 5% today. I told you the curve is relatively flat. I'm getting a spread of 300 over that. What's the punch line? Punch line is we're getting an unlevered yield of over 8%, making new loans at a 30 to 35% cushion to today's value. So we have a significant insulation. Your capital is safe and you're generating your entire return and current income and you've got an inherent inflation hedge. So what do I mean by that? If rates keep going up, if the Fed has to keep battling inflation like they did in the 70s, we make more money because we're making a floating rate loan. As rates go up, our investment gets better. And what we do is we lever our investment moderately. So today we're generating 12% cash on cash, 13% IRR. I love that trade.
Ric Edelman: So in comparison to different sectors of the real estate marketplace, you're picking and choosing where you want to be based on location, based on type of property, based on credit quality. But that's all within the real estate sphere. Investors have choices beyond just real estate. They may compare to stocks, bonds, gold, crypto, oil, you name it, baseball cards. So make the case in a relative basis of real estate versus other investment opportunities that are non-real estate.
Bert Crouch: Yeah, it’s so funny. Internally, we have a number of individuals that invest professional come to me and say we've got to buy this asset because it's so much cheaper than it was 12, 18, 24 months ago. And I'm saying, you know, but your public institutional CIO or your head of a family office, they don't care about if it was cheaper than it was in real estate. They're looking to your point at the entire investable universe and they're looking at volatility. They're looking at capital preservation, current income and total return. It's that simple. So how does real estate stack up? A couple of ways to address that. One, I'm going to start with credit because that is our primary thesis today, loan losses, capital preservation. First question, I get loan losses over the last ten years in commercial real estate credit have been less than 25 basis points. That compares to corporates or high yield that are one and a quarter to 1.5%. So loan losses have been historically low. Granted, you've got to watch out for office today, which in new origination you wouldn't do. So that feels great. Number two would be risk return. So that would be a Sharpe ratio. Commercial mortgage credit has been at a six versus a high yield at a 0.5. So you don't have a lot of NAV or net asset value volatility.
Ric in commercial mortgages, you make the loan, you put it to bed. Correlations - well, third, if I like the relative value and I like a 12 cash on cash, I like the Sharpe ratio risk return. I like the capital preservation. But how does it fit in a portfolio diversification wise? It fits really well. So a lot of family offices would have maybe a significant real estate allocation already on the equity side, the correlation historically credit traditional real estate is zero. The correlation to other fixed income asset classes averages 0.15. So I think it stacks up well in, you know, on all things relative value. The last point I'd make is you go back to my point about it being an inflation hedge. If we're wrong about inflation, it's not cooling. You win. If you're right about inflation, cooling and going down and rates going down, you win. Why? Because you're going to make a three year transitional loan. The borrower is going to refinance you at a lower rate and you're going to reinvest those proceeds in another asset class that you like better. So I think that there's an inherent hedge not just to inflation, but to the broader markets. The last way I'd answer that question, let's go to real estate equity. And I want to keep coming back to your opening line today. If you're leaning into a sector that others are leaning out of, historically, you've made excess returns.
So what do I mean? If you bought real estate in 2001, that was the, dot com crash, the tech bubble or you bought in 2009 coming out of the global financial crisis, you made a five-year forward look unlevered return in traditional real estate of mid-teens 14% and the in the in the tech crash 15% and the global financial crisis. If you invested in Covid, you did even better than that. But I don't obviously have a five-year forward look yet but even with even with values going down, you did better than that. So by leaning in today, you do better than obviously you would if you bought closer to the peak. Second to that, the income durability of real estate has proven out over the last 20 years. Unlevered real estate's averaged a five and a half. That compares to fixed income and a four and one half and the S&P 500. So just traditional dividends in public equities are at south of two. So whether it's income inequities or total return or real estate equity or total return, that's also shown relatively well. Now you got to buy, right? You got to pick the right sector, you got to pick the right part of the capital structure. But that's our job.
Ric Edelman: And it's not really a question, is it, of real estate versus stocks or versus bonds or versus whatever. It's if you believe in portfolio diversification, it's a question of doing a little bit of everything. And that means deciding how much to do of each sector. So what would you say for a typical portfolio? What should the allocation be to real estate? What percentage of the portfolio?
Bert Crouch: Yeah, you know what? What I typically look to is, is the public institutions who have spent more time than necessarily anyone else in analyzing the efficient frontier and all of the different options. And I would think about them as having true access to anything on a global basis and say what percentage of their portfolio are they putting in alternatives, private markets. And then of that, what is in real estate? And the answer is right at 10%. It didn't even have its own asset class. And that's evolved over time to the point now where it has its own sector within public equities. And what that's done is it's raised the profile of real estate to the point that investors have recognized the benefit of having a real asset allocation that's primarily in traditional real estate, but now it's expanded into credit. And so what I would tell you is today it's at 10%, but many are taking it up to anywhere from 12 to 15.
Ric Edelman: And you mentioned that there were a lot of criteria in determining whether or not you should invest in real estate. And when you're comparing it to other asset classes and you cited a pretty good list of criteria such as risk and return and credit quality and such. One thing you didn't mention is liquidity. Real estate is traditionally regarded as an illiquid asset. I mean, I can sell my stocks with a text click of a button with my brokerage account. I can't sell my house that easily. And the lack of liquidity, some argue is pretty good. It prevents you from doing something dumb fast. But on the other hand, it's a cumbersome element. And in many cases, when people invest in real estate funds, there is a complete lack of liquidity. They have a lockup period where they say you put your money into this thing, such as with private equity funds, your money is locked up for 7 to 10 years. You can't get out even if you wanted to. How does Invesco address the liquidity question?
Bert Crouch: It's the right question to ask, especially given some of the headlines recently with the non-traded REIT universe. The short and simple answer, Ric, is, you know, real estate is a long-term asset class and it should be looked as a long-term investment in your portfolio. So when you're looking at real estate equity in the private space, you really shouldn't be making it on a on a short term basis. So I think that's number one. And number two is you should have a balanced portfolio within real estate. You should have public equities in the public equity or listed REIT space. You can also look at the at the credit aspects of mREITs, which are in the mortgage REITs. You can access daily liquidity and still get real estate exposure. That should be a minority in our opinion of your real estate portfolio. But if you need to maintain a certain amount of liquidity, that's the best way to do it. Now, there are hybrid vehicles that do allow some level of monthly and quarterly liquidity that we've read about. And to the dumb decision comment which was made tongue in cheek but I think resonates, what investors and managers like us have to do is we have to look at our portfolio, our fiduciary and all of our investors as a whole. And what we want to make sure that we do is we don't make snap decisions based on an interim period of time.
So to the extent that we're investing over a longer period of time, which is the horizon in a core plus mandate, we want to make sure that we maintain a certain level of liquidity to pay out on an ongoing basis. At the same time, we don't want to have to sell in periods of adversity and illiquidity capital market dislocation, which in large part is where we find ourselves today. The last part of that question that that I'd say is the best hybrid. And I go back to credit and why we like it today in making shorter term bridge loans, you get two things. One, modified duration is a concept that a lot of public institutions think about. If you look at your investment horizon, if I get zero income and I'm locked up for 7 to 10 years, there's just a higher implicit risk in that versus short term credit. That is a 2 to 5 year investment, but really more in that 3 to 4 year floating rate and you're paying out 90% of your return is current income. So that's going to shorten that repayment period and add that ongoing liquidity. So that's not only the one of the more attractive investments that we see today, but it's also a good blend of your question, which is how do you generate some liquidity at the same time, not jeopardize the risk return profile by a knee jerk?
Ric Edelman: So along those lines, Invesco offers a probably the most robust lineup of real estate funds that I've seen from any fund company. Talk about the different offerings that you make available.
Bert Crouch: Well, I'm not actually allowed to speak to specific offerings due to regulatory sensitivities, so I can't address specific funds. But what I can do is I can talk about strategies generally. And today if you look at where we're deploying capital and where that is democratized or accessible across the universe, it really is in the core plus equity space to the entry point and in the credit arena and the loans that that we're making. So again, I'd highlight where we're leaning in from a thesis or strategy perspective instead of highlighting specific vehicles.
Ric Edelman: Got it. You know, this podcast, of course, is all about disruption, exponential technologies, all of its innovations. The big topic this year that everybody is seeing front page every day is AI. It seems the only subject that anybody cares about talking about anymore. Does I have any connection or relevance to real estate?
Bert Crouch: Yeah, it does. It has a lot more than I'm willing to admit. It's funny. Ric. You know, I feel like we were having this tokenization comment. Two, three, 4 or 5 years where I was told, gosh, Bert, the fund management investment management industry is going to be by the wayside and we're going to be exchanging tokens in some sort of secure Bitcoin-esque blockchain. Et cetera. Et cetera. And look, is that innovation happening? Yes. But is it happening at a much slower pace than people expected? Yes, I would take AI, especially generative AI and flip that script. So I actually do think it's a more warranted topic given how quickly it's affecting positively our industry. So how is that happening and what does it mean? The simple answer, the short answer is it's taking us away as investment professionals from a lot of them - hate to say - menial, but a lot of the day-to-day activities that we are forced to do accounting, reporting, performance analytics, sales, comps, lease comps, legal document reviews. It's making that so much more efficient. So we're still doing the same level of work, meaning the same level of output.
But the way that we're able to do that, utilizing AI to go through and search all of these data points through a sophisticated query and kick us back. Here's what you need to know. Here's the table, here's the data, the output for then our industrial professionals to analyze and whether that's report to our investors, whether that's to report to an investment committee, make an informed investment decision to strategic pivot that is game changing. So that's one operational efficiencies.
Two would be alpha generation. So again, I go back to our portfolio. Bigger is not better. Ric bigger is better. If we can harness that data quality, control it, and then get it in the hands of our investment professionals, our portfolio managers on a real time basis, generative AI and all of our we got rid of our traditional research group four years ago. It's all data scientists now because they need to take the data and the analytics that come out of the modeling that we now have in large part through large language modeling, to then take that, analyze it and tell our investment professionals, here's what it means, here's where to go, here's where to optimize performance. And it's a huge competitive advantage for scaled investment managers like Invesco Real Estate.
Ric Edelman: So it sounds like you're all in on AI.
Bert Crouch: All in. To be otherwise, you're going to get left out.
Ric Edelman: And that's kind of the big message about AI. People think that AI is going to put people out of work. It's not. I will not put you out of work. The guy using AI is going to put you out of work.
Bert Crouch: Well, that’s incredibly well said. There are a lot of threats to our business and AI is not that; it's the opposite. And I think those that are fearful or hesitant to utilize it that stick to this. You know, it's a little fragmented - hey, I'm just the best real estate investor that no longer qualifies, you've got to see the global universe. Invesco investment real estate has 21 offices, 16 countries, over 90 billion of assets under management, 15 of that's listed real assets. The residual is in private direct. We've got to harness all of that information, all of that intel and see where capital flows are moving. I mean, Ric capital flows drive value as much as the underlying fundamentals. You've got to know where investors want to go and why. To your relative value question earlier, you've got to be looking at that. You've got to be looking at capital markets. Where is financing coming from? Where is it not? Where are spreads, where are levered yields? And then you've got to be looking at fundamentals. You've got to do all of that in a very short time period. We're seeing sector performance divergence like we've never seen it, meaning office values down, industrial values up. You've got to be able to pivot, You've got to do that efficiently. You've got to get into the single family rental space before it's popular. You've got to know how that dovetails with self-storage. You got to see student housing and senior living based on demographics. All of that is data. And if you're not harnessing that through means like AI, we think you'll get left behind.
Ric Edelman: One of the other big technological innovation conversations that has been occurring over the past oh five, six years has been tokenization, which is coming out of the blockchain world. The notion that, you know, you take a big company like IBM worth $100 billion and you slice it into tiny pieces, we call them shares, and you can buy a piece of IBM for 100 bucks, and that makes IBM affordable for any investor. And it's also liquid. I can buy and sell it on a daily basis whenever I choose. I can't do that to the Empire State Building. It, too, is $1 billion asset or multi-billion dollar, but who's got the ability to write that check? Other than institutional investors like you? And once you do write that check, how easily can you sell the property? It's not as liquid as tradable. So the notion is, thanks to blockchain technology and digital assets, we tokenize the building, We slice that building into tiny little pieces of ten bucks a piece. And now anybody can buy these otherwise expensive illiquid assets. They become affordable, they become liquid. We're democratizing and demonetizing what have otherwise been unreachable assets except for the very rich. That was the promise of tokenization. And we've seen examples of this In Dubai. A half a dozen buildings have been tokenized. The Saint Regis Hotel in Aspen was tokenized. There was an apartment condo in Manhattan tokenized in 2018. But those are simple little examples. Is tokenization just a dream or is it going to really become a thing over the next decade?
Bert Crouch: It's going to become a thing. The question is in what scale? You know, we're really focused on it is to the comment earlier about 7 to 10 year lockup in funds. Is there a better way to parse up that universe to where you could exit? There's a very large market, as you're well aware, Ric, and secondaries. So that's buying a secondary interest in a usually a closed in commingled fund vehicle. So the question is, will it democratize access further than what we're talking about to all investors, public and private, high net worth individual to your average investor and then obviously up to the large institutions. So just to add a level of transparency and liquidity, we think it will.
The question, though, is around and again, we've seen some of the headwinds, you know, blockchain and bitcoin, you know, ten, 15 years and they're still not regulations governing it. And we're seeing the SEC start to really crack down on that. Needless to say, we have to adhere to the regulatory bodies and how they're going to manage that. The tax implications are also very real. How does that how does that flow through? How does protected information and confidential information, how is that managed and harnessed through that process? So, look, we think it's going to continue to evolve. We think it will continue to add positive elements. Again, transparency and liquidity. The question is how and when. And we're focused, yes, on buildings, but more on how it would affect vehicles, especially those that are co-mingled to allow better and more efficient access to all investors.
Ric Edelman: So as the tokenization technology continues to develop, emerge, mature, what will Invesco QQQ engagement be? I'll give you three choices. Will you be a developer of this technology creating the tokenization features within your portfolios? Will you be a user, a buyer of tokenized real estate, or will you be on the sidelines saying, We're going to do neither of the above?
Bert Crouch: Yeah, I might throw in a in a fourth and it is somewhat of a hybrid between the first two. I don't see us being a “developer” of it. And that doesn't mean we're not going to be a first mover. What it means is we believe you need an exchange; you need it needs to be properly structured such that you've got not only willing buyer and seller, but you've got a process that's properly regulated and properly governed such that it creates enough of an index that thereby generating liquidity, which gets us to our end game here.
Ric Edelman: In other words, you need you need a format very similar to what the stock market uses with the New York Stock Exchange versus companies listing stocks and investors buying those stocks.
Bert Crouch: Exactly. So what do we have? We have the willingness. We have the innovation. We have the technology, We have the data spend, if you will, given our size and scale. But most importantly, Ric, we have the assets. So we've been approached by a number of groups trying to build the exchanges. These are in large part investment banks that say, look, we need you to be a first mover to contribute an ownership interest in a building to tokenize because we want to put it on a certain exchange. We have to be very careful with our fiduciary. If that owner, whether it's a fund or an individual. Will or an institution. But with that said, we want to be a contributor to that financially asset wise and a buyer and seller to help generate that liquidity. But the key is we need a broader market movement towards it. If you look at what Invesco Real Estate has done over time, whether it's the different indexes, we helped create the first core equity index in North America and then we did the same in Asia. In Europe we would do the same thing in the in the blockchain and tokenization. You just have to do it right and you have to do it on a calculated basis such that it's something that's scalable.
Ric Edelman: Okay. One last question for you, Bert. What are you most focused on in the next year?
Bert Crouch: So, you know, I think in real estate we are and maybe more broadly as investors, this soft landing scenario, I'm sure you get asked or forced to talk about it a lot. Not dissimilar to what I get beaten up on office and it seems to now be the consensus. The irony is for commercial real estate, I don't know if that's what's best for our industry. You know, having rates longer for reasons that I mentioned, I don't necessarily think is good for commercial real estate Buying cheaper clearly is the credit opportunity that I mentioned is there today and would only get bigger. So one, history has told us soft landings are tough. They very, very rarely work and or happen. And to you know, what's best for real estate would be something I'd argue that would be more dramatic where you would see short term rates come down. We'd rip the proverbial Band-Aid off to an extent, whether it's a recessionary concern or whether it's the broader outlook for commercial banks, how they lend, where their portfolios are, what they're willing to shed to clean up and start lending again. So I'm most focused on what that outlook ultimately becomes. I mentioned some of the areas from a fundamentals standpoint in the residential space, in the logistics space that we're hyper focused on. I you mentioned it. I would tell you we're taking that to the next level. What does it mean for San Francisco and the negative narrative there? That's where those jobs are being created. That's where all that venture capital funding is going. Does that change that landscape? What does it do for data centers? What does it do for traditional office use? So there's some trends, whether it's AI tokenization in the capital markets or otherwise, that I would say are driving the markets maybe even more than they traditionally have, that in the next six, nine, 12 months we'll be hyper focused on because they will help set our investment posture and outlook going forward.
Ric Edelman: Well, as you engage in your evaluation of deciding how to allocate where to allocate and including real estate in a diversified portfolio, I think you're getting a pretty good sense of the capabilities of the team at Invesco and the breadth and quality and tenure of their engagement in this sector. And now you're getting a sense as to why my real estate investing is through the Invesco funds. So I encourage you to learn more about this. You can do that at Invesco Real Estate and Invesco.com/us and of course at invesco.com. The links to those are in the show notes. Bert Crouch, head of Invesco Real Estate for North America at Invesco. Thanks so much for joining us on the podcast today.
Bert Crouch: Ric, really appreciate it. Thanks so much for the time.
Ric Edelman: You know, you understand stocks and bonds and real estate and you know how to evaluate them. You know how to choose among them. But do you know how to evaluate and choose among digital assets? Come learn how on my next webinar. It's Wednesday, October 11th at 1 p.m. Eastern. I'll be joined by Christopher Jensen, director of research at Franklin Templeton Digital Assets. And we'll show you tokenomics and how you can use this new research to make informed decisions about crypto coins and tokens. You'll get one CE credit to stay informed about the latest in the investment management field. You can register for this webinar right now. It's Wednesday, October 11th at 1 p.m. Eastern.
Why Blockchains Are Considered Unhackable
Ric Edelman: You know, we've been talking a lot on this program about blockchain and digital assets. It's a really impactful technological innovation. That's why I talk about it with you so often. One of the things you hear about blockchain, one of the big benefits is that it's unhackable. It's why it's so exciting for businesses around the world that secures their data on a blockchain very securely, unlike central databases that get hacked all the time. And you keep hearing stories of companies that are getting hacked, your personal data gets stolen, you know, your credit card info, your date of birth, your address and so on. But the Bitcoin blockchain has never been hacked since it was invented way back in 2009. How can that be?
Well, the answer is simple. A blockchain is a distributed database, not a centralized one. In other words, if you go to your bank, well, their computers are in their location. The hackers know where they are. It's sort of like bank robbers going to a bank branch. I can rob you because I know where you are and you've got all the money. But a blockchain doesn't work that way. Instead of being a centralized database, it's a decentralized database, meaning the data that is stored on a blockchain is actually stored on computers scattered all over the world, millions of them. And this is why blockchains are considered unhackable.
There is one way that they could be hacked. It's called a 51% attack. A hacker would have to gain control of more than half of all the computers all over the world that are on the blockchain. And they'd have to gain control of those computers simultaneously. That is a tall order. That's why blockchains are considered unhackable, safer ways to store and transmit data. It's just one of the reasons there's so much excitement about blockchain technology. Want to learn more about all this? Read my Amazon number one bestseller, The Truth About Crypto, available from your favorite bookseller.