Transcript: Q2 Global Markets Outlook 2022

[Upbeat music playing.]

[CIBC logo.]

[CIBC Q2 Global Markets Outlook.]

>> Bob Frentzel:

Hello everyone. I'm Bob Frentzel, Co-head and President of U.S. Commercial Banking for CIBC. I am thrilled to connect with you today for another business outlook discussion. A lot has happened since our January outlook conversation, and 2022 has taken shape in some ways we had expected, in many ways that we could not have predicted. With little over 4 months of the year behind us, there is no shortage of topics to dissect and questions to answer. As economies and industries continue to reemerge from the pandemic, global markets, interest rate policy, inflation and the war in Ukraine present new challenges for all of us and our companies.

To help make sense of how these variables are shaping US businesses and industries, Ian Pollick will kick things off with a global markets update and analysis, which will include his expectation for currencies and rates moving forward, and his key takeaways for U.S. companies looking ahead. Following Ian's presentation, we will be joined by 3 members of our U.S. commercial banking team to discuss how companies are thinking about and navigating market factors today.

>> Ian Pollick:

[The left side of the screen reads: I think my GPS is broken by Ian Pollick, Managing Director and Head, Fixed Income Currency and Commodity (FICC) Strategy. A photo of 2 signs pointing the opposite direction. They’re labelled as “Lost” and “Very lost”. This image and the text remain on the screen as Ian talks.]

Thanks very much, Bob. Well, there's absolutely no shortage of topics to talk about. Hello everyone, my name's Ian Pollick. I run the research group here at CIBC Capital Markets, and I want to spend a little bit of time today talking about some of our latest updates and how we're viewing the world, in particular, how we're viewing interest rates, the US economy and what that all means to you. As you can see from the title of my presentation, “I think my GPS is broken”, there's no direction home right now. Every day in the market seems to be a wild adventure taking us further and further away from the comfort zone that we know. Now on the next slide, what I'd like to do is talk about our interest rate forecast at CIBC. Obviously, we have 2 very important dynamics occurring right now. 

[US interest rates forecast is outlined by a table.]

Number one is inflation. We see it everywhere, it's in the news, it's in our home life, it's in our business life. Because inflation is so high as a result of the pandemic, as a result of the influx of cash provided by the central bank, by the federal government, we're ending up in a situation where we have this non-demand-led inflation; and I say that because it's really the supply chain restrictions globally that have forced goods prices to be extremely high. We all have pent-up demand where we want to go out for dinner as much as we can, that's creating a lot of inflation in services, and then we have these idiosyncratic shocks such as the conflict in Eastern Europe that's contributing to higher energy prices. All this means that monetary policy makers, whether it's the Fed or the Bank of England or the European Central Bank, are all starting to take interest rates higher.

But it's not enough to take a measured approach to raising interest rates, rather, there needs to be a very fast and swift and decisive and forceful move to what central bankers call “neutral”. And it's this estimation of neutral that really causes us in the forecasting community a lot of headache. It's one of those things where we don't know if the economy's at a neutral rate of interest until after the fact. So that's why the bond market spent a considerable amount of time over the past year and a half, trying to recalibrate itself. For context, interest rates are 150 basis points higher since we started 2022, and there's an indication that we are actually getting a little bit close to the cyclical peak in interest rates that we expect.

As you can see from this table, when we do think about the Federal Reserve, we see the Federal Reserve raising rates almost at every single meeting in 2022, finishing the year off at an interest rate of about 2.5%. That's going to put them in very close proximity to the end of the cycle, which we see in December 2023, reaching rate of 275. Now in the very near term, there's an additional wrinkle to the story: It's not just that central bankers are raising interest rates, they're also utilizing their balance sheet to help tighten broader financial conditions.

What I mean by that is we've all heard of the quantitative easing program that the Fed had to do at the start of the pandemic, which really meant that they were buying various government securities, various mortgage backed securities, in an effort to keep interest rates very low. Well, pop goes the weasel, and we're now in a situation where they're now allowing their balance sheets to decline and actively in some cases. We know that the Federal Reserve will allow up to 60 billion of its balance sheet to mature every year, every month, I should say, and by the next 3 months, we'll reach a run rate of 90 billion per month. That's going to put a lot of upside pressure in term interest rates. 

[US interest rates forecast (continued) in a chart.] 

So as you can see from our forecast, we do see interest rates peaking in the second quarter of 2022. And over the balance of our forecast horizon into the end of 2023, we do see lower interest rates ahead. If there is a risk to this view, it's on the next page. And what I'd like to talk about is history. 

[The ‘real’ issue for the Fed, outlined in a chart.] 

Historically, the Federal Reserve has never finished a hiking cycle with its real interest rate in negative territory. When we think about a real interest rate, all it is, is whatever the Federal Reserve overnight rate is less headline CPI.

Now, obviously because CPI is so high right now, the real interest rate, as you can see from this chart, is minus 750 basis points. Go back through time and what you can see is the Fed has never finished a cycle with a negative real interest rate. Now, inflation is going to drop very importantly, but it's not dropping because all of a sudden, we don't want to go to stores, it's not dropping because the European conflict will suddenly go away and it's not dropping because the ESG transition is all of a sudden going away either. It's going to drop because we have base effects. Those base effects are just a year on year comparable of very high inflation in 2021, relative to inflation in 2022. That should automatically help to bring inflation down over the next year. However, in order for us to finish the cycle where we think it's going to be done, we need to see an inflation rate of two and three-quarters by the end of next year. I'm a little bit nervous about this call. And I would say that the calculus of risks are skewed much higher. 

[Oil price and recessions outlined in a chart.] 

On the next slide, what I want to talk about is a little bit about what's going on in the actual economy itself, and a great starting point is just to talk about energy prices. Obviously, energy prices have gone through 2 significant changes. Number one is everybody wants to travel again, whether it's by air, whether it's by land, we are all looking to try and make up for lost time since the start of the pandemic. The second thing of course is that we're recognizing that, as part of the ESG transition, there's a structural decline in the amount of investment going into energy production — add on top of this, these idiosyncratic risks like the European conflict, and all of a sudden energy prices are extremely expensive. What you can see, and this is no big surprise, when oil prices get very high, it begins to restrict consumption, as when we think about our net income, we're diverting more and more of it to just paying for getting to work or paying for traveling.

At the same time inflation's high as well the Federal Reserve is raising interest rates, and that's why there is a stylized relationship between higher oil prices and a slower economy. The thing I would say though, is that if we think about the amount of, for example, energy output that is needed to maintain a unit of GDP, it is much, much lower today than it was in the 1970s, the 1980s and the 1990s. 

And I think part of that is to understand that the composition of the industry in the United States has shifted, and all of a sudden we obviously think of big tech when we think about that composition.

[Higher-income earners to drive the recovery in services, outlined in 2 charts.] 

On the next slide, what I'd like to talk about is just a little bit more on the macro side. And one of the things that we saw during QE was that financial assets, or those who held financial assets, were enriched. Now, the problem is that when we think about broader income in equality, that's something that needs to be addressed because really quantitative easing did help the top 1% of the economy and inflation hurts the bottom 90% of the economy. That's an unfortunate incident, and I think over time, what that's going to do is ultimately restrict how high the Federal Reserve can actually take interest rates. But what this chart shows is the change in the asset valuations held by income quartiles.

So when we look at the top earners in the United States, we see that they have made a huge amount of money over the QE and pandemic period. Now, obviously that's really important for the service industry because when we look at the type of income quartiles that are actually buying these services well, again, it's no surprise, it's the top earners in the economy that have benefited the most from QE that are spending the most on services. And that means that higher income earners are driving the recovery.

Now, the problem is that over time you can only have dinner 7 nights a week. There needs to be other sources of growth in the economy. 

[Low wage rising faster…interesting…] 

On the next slide, one of the things that I want to talk about is just the job market. We learned last week that the US economy grew by another 450,000 jobs. There's extreme tightness in the labor market. And all of our clients are talking to us about this extreme tightness. And one of the things that we do talk a lot about is wages. Now what this chart shows you is just the median wage growth for various types of workers in various income quartiles over the past year.

And you can see that the first quartile of income earners are not the ones that are earning the most, it is actually that the low wages are rising the fastest. And that's because we are plugging labor shortages in the parts of the market where we simply cannot find workers. But what's really interesting about that is on the next slide, what I want to talk about is the people who stay in their jobs versus those who leave their jobs. There is on average a much higher bid away for people who are called job switchers than job stayers. And there's anecdotal evidence that almost 20% of people that are taking a job for the first time at a new company actually do not show up on day one. They disappear.

Well, it's not like they vanish out of thin air. What's actually happening? Is that in that intermittent period before they actually start day one of their new job, they've accepted another job for an even higher wage. Over time, that's going to contribute to our expectation that the Fed does have to take interest rates relatively high, at least on a relatively quick basis.

[Effective rate less responsive to higher policy rates in US] 

On the next slide, what's really interesting is that when we think about all of the movement in US interest rates, and we compare it to other countries like Canada, one of the things that we should immediately recognize is that most of the boring rates in the United States are very long-term in nature. For context in a country like Canada, you cannot get a mortgage that's longer than 5 years, typically. And that means that the Bank of Canada has a much easier job ahead for them because when they raise interest rates, that effective interest rate that households have to pay for all of their debt moves much, much faster. But as you can see in the United States, increases in the federal funds rate, don't actually translate into very big movements in effective interest rates to borrowers, whether it be households or corporations. That's another reason that we do expect the Fed is going to have to take rates up relatively quickly.

[Canada more sensitive to higher interest rates than the US] 

Now on the next slide, there's an interesting dynamic happening right now in the economy. What's interesting is that even though there's been more leverage in the economy in general, this kind of speaks to our last chart, is that again, in smaller markets like Canada, you have much more leverage in the economy and therefore interest rates move through the economy at a much faster pace. In contrast, when you look at the United States, we can show that the impact of a 100 basis point increase in the effective rate, actually doesn't hurt consumers spending all that much. So if you ask a bond market participant what their biggest concern is right now, they will tell you that even with everything priced for the Federal Reserve, it may not be enough. And I do believe that is the biggest risk impact in the bond market on a go forward basis. And it's one of the things that we talk about every day at CIBC.

[Inflation is a lagging indicator] 

On the next slide, this is something that I think deserves a little bit of attention. Inflation is a lagging indicator. So it's not to say that once we've reached peak inflation, that we know for sure that we're in a recession. You can be in a recession while actually inflation is rising. It's a lagging indicator. We can't see it in real time in terms of the measurement of it, and when we look back at various cycles that we've seen recessions in, it's taken almost on average 3 and a half months from the time that inflation peak, before we actually started to see the recession, that's really, really important. So again, inflation's not the only thing that we should be looking at. We don't like talking about the R word just yet. There's a lot of false precision in the media right now, where people are saying that there's absolutely going to be a recession.

We're not entirely convinced given the data that we have right now, because at the end of the day, we do see confidence that central bankers, like the Federal Reserve will be able to steer the economy into a soft-ish landing. But I do want to stress the word “-ish” because we are in such an unusual environment.

[Productivity – an inflation shield] 

On the next slide, one of the things I want to talk about really quickly is just productivity. When you think about your very first macroeconomic class, there's only 2 ways that you can grow an economy. You can either add more workers or you can make those workers more productive. And as you make workers more productive, it does provide a decent shield from inflation. The problem is that when we look at productivity trends in developed markets, in the smaller open economies like the UK and Canada, productivity is very weak. In the US, productivity has been relatively strong.

Now there is some recent indication that productivity is starting to fall. That's important because when you have a low productive economy, you need much higher interest rates to recalibrate savings and investment. 

[Early stages of labor-capital substitution?] 

On the next slide, this is what's very interesting, is that when we look at how much it's costing for people to hire workers and how high wages are rising, I do believe that we are at a very early inflection point where that decision, microeconomics 101, do you hire more labor or do you invest in capital? Well, when you have labor shortages and you're paying more for those even low skilled workers, you have to make a decision. And we do think that there could be a situation ahead of us where we're starting to see more people turn to capital expenditures to make their workers more productive.

That more productive economy does 2 things. Number 1 is, it starts to arrest the tightness in the labor market. You can actually increase the unemployment rate at a marginal pace. Number 2 is, it does help to raise productivity, which ultimately helps to shield the economy from very, very high inflation. So, if you did take anything out of our conversation today, it's really 3 things. Number 1 is interest rates are rising. We do see the peak in interest rates coming relatively soon. The risks around that are higher rather than lower.

Number 2, we don't see signs of a recession just yet, but it is very hard to calibrate in extremely soft landing, given how structural some of this inflation actually is. The third is that central bankers aren't going to be too concerned about the negative implications for various asset prices, whether it's stocks or corporate bonds, they understand that hiking interest rates is needed to cool growth and by cooling growth, we can start to tame inflation.

If we do start to see a very shaky financial market and I do mean much shakier than we've seen today, then I do think we'll see a little bit of a pause, a mid-cycle pause, which is very usual for the Federal Reserve. But when we think about the increase in costs to businesses, when we think about the weakest players that may be pushed into insolvency, I think that there's a very low sensitivity for the Fed to pay as much tribute today, as it would have in prior cycles. Now, an abrupt sell-off could do the trick. That's something that we don't foresee happening relatively soon, but it's really important that when we're talking to our customers and you're talking to your customers, understand that the dynamic that we're in right now is very different than what we're used to. That's how we think about things at CIBC. I know I've given you a lot to think about. So we look forward to speaking to you soon.

>> Bob Frentzel (15:31):

Ian, thank you for the excellent analysis and commentary. You've given us a lot of great insight and plenty to think about. To hear how companies are managing through this environment, I am pleased to have 3 commercial relationship managers with us today. Joining us from our commercial banking team in Pittsburgh is Annie Westbrook. Coming to us from sunny Southern Florida is Javier Gutierrez and representing our commercial real estate group is Shane Bowen in Dallas. We appreciate your sharing your valuable perspectives given your experience in industry knowledge. Let's get started. I'd like to kick off our round table discussion with a general reaction to Ian's presentation. Is there anything in particular that resonated with you? Annie, let's start with you.

>> Annie Westbrook (16:18):

Thanks, Bob. Ian's comments and perspective very much resonated, and in my opinion, correlated with the rumblings on main street. Input costs are increasing, whether that's commodities, labor, freight, interest or all of the above. Some of these costs are rising sharply, some with more volatility, some we've been grappling with throughout the pandemic — and I mentioned the pandemic because I think it's important to recognize that the world and global markets today are more shock prone than ever.

Annie Westbrook (16:49):

We've seen this obviously with the Ukraine conflict and the latest lockdowns in China, again. So though many of us define the last couple of years as the great resilience, we're seeing these economic indicators that Ian referenced through a shock-prone lens, and we need to shift from being reactive to proactive. We need with our clients to prepare our balance sheets, our fixed assets, our capital to be as nimble as possible in preparation for the known and unknown shock waves as Ian mentioned.

>> Bob Frentzel (17:24):

Thank you. Annie. Javier, how about you?

>> Javier Gutierrez (17:25):

Yeah, so it's great to be here and always appreciate hearing and Ian's insight on the economy. The point that he made about the Fed needing to move real interest rates by 750 bibs before we can return to break even is pretty eye-opening. The Fed is in an un-enviable position that they're managing all the intricacies of the US economy, but then you couple in the war in Ukraine, potential slow down China and inserting in the European economy, and they really have a tough task ahead in trying to orchestrate a soft landing. So what makes it crucial for the Fed to intervene has been what we're seeing inflation proliferate in some of the non-substitutable items.

So to put some numbers behind that, year-to-date in 2022, fuel is up 60%, corn and wheat are up about 40%. And to put that into perspective aluminum and some of the other cyclical metals are only up 5%, the S and P is down 15%. So you couple that with how things were in 2021, and since the pandemic where a lot of these asset classes move together, we're seeing a big divergence and a big acceleration this year in some of the core commodities that drive consumer expenses. So central bankers are going to need to look past the short term volatility we're seeing in the public markets in order to support the broader economy, and they're going to need to be careful to not overdo it. Not an easy task.

>> Bob Frentzel (18:52):

Not an easy task at all. Shane, what stands out from Ian's talk regarding commercial real estate?

>> Shane Bowen (18:58):

So from a commercial real estate perspective, we are coming into this cycle from very, very sound fundamentals. Yes, there's still a couple of impacted segments, business, hotels, suburban office that have COVID impacts. But by and large, we have high rent growth, high occupancies and a lot of tenant activity. So we're coming into this uncertain market from sound fundamentals. The issue, and the worry that we have is from the valuation standpoint. Commercial real estate valuations can indirectly be correlated to US treasuries. So when interest rates go up, cap rates go up and an inverse relationship, the values go down. For example on a hundred million dollar property, if cap rates just moved by 25 basis points, that could be a $5 million change in valuation.

And so from Ian's presentation, it was favorable to see that the long-term rates are peaking within the next six months, and the short-term rates would be peaking next year. That could take a lot of the uncertainty in the commercial real estate valuations to where that would be settled in the nearer term, and that allows owners and investors to go ahead and create a business plan and solve for that, whether it be acquisitions, dispositions, renovations of their properties and they don't have to have the uncertainty for years on end.

>> Bob Frentzel (20:25):

Okay, Shane, thank you for that. Let's stay with you for the next question: How is the institutional real estate clients managing labor, input costs and other challenges in the sector?

>> Shane Bowen (20:40):

So our developer clients are spending way more time than they want on the operations behind construction and renovations. We've seen several instances where construction budgets are up 15% to 25%. That's a substantial increase and it is driven by labor, it is driven by supplies. Right now, lumber is actually way higher up than steel. And if you think about single family homes, 2, 3 storey garden apartments, that's all lumber. And so that also creates an issue with the housing affordability in the country. So what are our clients doing? Historically, the old rule of thumb was you take your budget and you escalate cost, 1% every quarter, roughly 13 weeks. The current rule of thumb is you escalate your budget 1%, every 3 to 4 weeks. That is a dramatic change in how they're having to plan. But it's not all negative. You can deal with this.

You deal with your trusted vendors and suppliers. You order your materials early, you signed your contracts early. This increases your lead time. That does increase your stored materials, because you're buying materials before you need them. There are some financing costs, but the surety right now in this volatile market is well worth it. And on the positive news, the commercial real estate industry by and large over the last year has seen phenomenal rent growth. And that has allowed the developer clients of ours to absorb these cost increases and still make the numbers work and be able to bring successful projects to fruition.

>> Bob Frentzel (22:14):

Well, again, being able to pass along those costs is very important. Javier, as you look at the CNI clientele that you have, how's the labor market input costs and inventory challenges affected them?

>> Javier Gutierrez (22:27):

So all 3 have become pain points for clients, but what's interesting is that they're impacting the service industry and the goods industry very differently. So I have several clients in the hospitality industry and I'll use the cruise industry as an example. So the cruise industry is facing substantial inflation in labor, food prices and fuel costs. Fortunately, the good operators were disciplined enough to enter 2022 with 50% of their fuel expenses hedged. So while the rise in fuel price has been a drag, it's not nearly as bad as it could have been. Labor costs and food prices are harder to hedge, but the industry has been fortunate that people love taking cruises and that consumers are in a healthy position, given the strong labor markets, wage growth and record cash savings of circa $4 trillion in the US, which all support spending on vacation experiences.

So they've been able to pass a lot of these increased costs to consumers. Now, conversely, for our clients in the retail industry, supply chain has been the biggest issue for them over the past year since the pandemic. And while issues largely improved towards the end of last year, we started seeing clients build up inventory, expecting there to be a larger push in the holiday season. Unfortunately, that push wasn't there, demand was weaker than expected, and they came into the first quarter with excess inventory. The silver lining though, it looks like we might have some supply shock ahead with China locking down again. So fortunately, they should be able to go through this inventory, but it was key to plan for some of these unexpected increases throughout the year.

>> Bob Frentzel (24:08):

Thank you, Javier. Annie, you've got more manufacturers distributors that you work with. So, same question, how has labor input inventory cost difficulties been impacting them?

>> Annie Westbrook (24:21):

Agreed. I would agree with Javier and how he broke down goods and services. So from a goods perspective, to your point, the manufacturers and the distributors that I'm dealing with, I think their hardest part, honestly, with the input costs is the lack of transparency. So, within the supply chain, there's ebbs and flows to when they are receiving the raw materials or the partially finished goods that they need to complete their sale. Things like the newest lockdown in China is giving them another pause in terms of building that inventory, because they're trying to make sure that they're... For the most part, the demand has been there through the pandemic, and so the problem has been getting the product out the door. Most of my clients, the conversations we're having is they have record high backlogs, which is great to see that's the demand you want.

The problem is the cash is out the door in terms of building the inventory, having things sitting on barges and trying to get them here. From the service perspective, you're starting to see that demand begin to rise. The problem being that you really are having trouble with the labor and maintaining those levels. I don't know if you guys have run across the occasional restaurant, that's just closed for a few days because they just don't have enough people. So, we're starting to have conversations with our business owners to say we really need to take a hard look. You need to feel very comfortable with the health of your balance sheet. You need to have a really good sense of the book value of your assets, the market value of your assets, the collateral value of your assets, fixed assets, inventory, all of that.

And to start having those external conversations with your debt partners, your equity partners, because I really think given everything Ian said, we need to be looking at this second half of '22 and '23 as being ready with liquidity, so that we can be very nimble as again, the supply chain's going to continue to not have good transparency. And so I think we just have to be ready to absorb these shocks.

>> Bob Frentzel (26:19):

No, I completely agree. The other area that we want to talk on and get some insights on is inflation and inflationary expectations. So Annie, on that, what are your clients thinking about and talking to you about inflation and the expectation with the rise in interest rates that Ian had referenced?

>> Annie Westbrook (26:41):

So it's top of mind. I mean, Ian certainly talked about the rising of interest rates by the Central Bank being their lever to pull, to manage inflation, and we're all aware of that. I really think the question is rates have been low, consistently low for so long, that I'm not sure we've all really wrapped our heads around the possibility of them increasing and increasing, as Ian said, fast, swift. He said these decisions have to come quickly to manage inflation. And I'm just not sure we really feel the impact of that yet. I think back to just even the past 10 years, as these rates have been so low having discussions with clients right after the great recession, it was let's lock these in, this is amazing. They haven't been this low for so long. Five, six, seven years into it, do I have to even fix it? Is it even a risk? Or is the movement of interest rates even a risk?

And then obviously we had the inverted yield curve for a while. Let's do it, let's fix, I can get a long-term fixed-rate that's less than my current short-term floating rate. So, we're again in a different environment. And so we're really just trying to get in front of clients and determine what is your interest rate risk because there's very few of my clients, if any, that that's their primary operation, their primary focus. So, I want it to be a back burner for them. I need them to be able to look at their forecast, feel comfortable with how they're managing that interest rate risk so that's not yet one other input cost factor that's shrinking or putting pressure on their margins.

>> Bob Frentzel (28:19):

I mean, certainly doing the sensitivity analysis is really important to figure out what the impact could be with the rise in interest rates and certainly on the commodity side and the prices. Javier, how about you? How about your clients? How are they dealing with inflation and the rise interest rate expectations?

>> Javier Gutierrez (28:40):

So Annie brought up some good points. Most corporates grew pretty complacent that rates would just stay at these historic lows for the foreseeable future. And to be fair, I don't think anyone would've expected how fast rates have moved. And as pointed out in Ian's presentation, we got to brace it because they are probably going higher. So while it may feel like this is all a drastic change, it's also important to note that now isn't a time to panic either. We've been in a highly liquid well subsidized environment since 2009 and the stimulus received during COVID only supercharged at the tail end of what was already a historically long accommodated period.

So we need to take the foot off the accelerator and reset. Clients should be shoring their balance sheets and making sure that they have a risk management strategy in place. That doesn't necessarily mean only using derivatives, we've been successful in working with clients on having multiple tranches of debt that provide some natural hedging, and for clients that have already done some interest rate risk management over these past few years, we're already having discussions with them on how they can start taking advantage by unwinding, monetizing and recalibrating their risk management strategies.

>> Bob Frentzel (29:50):

Thanks, Javier, and Annie on the CNI side. Now I'd like to go to you Shane, looking at the institutional and commercial real estate sector, certainly cap rates are going to be impacted by the change in interest rates. Just curious how you're advising your clients.

>> Shane Bowen (30:07):

Yes. So we originally started reaching out to our clients back in December, January, February, and tried to have conversations with them at that point in time. Some were receptive and some thought of the swaps they had done in the last decade and that in risk interest rate environment over the prior decade they didn't feel like they came out winners. Look forward for the next decade though, and several clients realized that they needed to go ahead and take that interest rate risk off the table. They would do it with caps, swaps and even some brief ice. And all the ones that took action previously, they're very happy now. It wouldn't surprise me if some of them would monetize that in the coming quarters. And from a coaching standpoint, we always started with what's your business plan, a long-term hold, short-term hold.

What's your risk appetite? Do you just want to get this a cash flow asset or as a value creation asset? And most importantly, with real estate, it becomes down to your duration match. An apartment generally has one year leases. They mark to market their rent role once a year. If there's rent growth, they can easily catch up hopefully with interest rate movements. But if you're in an office building, industrial building, retail building, you sign 5, 10, 15 year leases. Your sub-market, your property could qualify for great rent bumps to keep up with interest rate rising, but you're locked into a contractual fixed-rate lease with small annual increments, and therefore, if you're stuck in that environment, you have to hedge your risk even more with regards to interest rates. And so with that, several of our clients did hedge and more and more continuing to hedge in order to manage the environment ahead.

>> Bob Frentzel (31:54):

Well boy, Annie, Javier and Shane, I really want to thank you for sharing your perspectives, and I really enjoyed our conversation. We hope everyone that's watching this took away some actionable insights from today's presentation and round table discussion. If you have any questions for us, we are happy to talk and give you some guidance and perspective as to what we're seeing in the marketplace. Again, thank you very much for joining us today and best wishes.

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