Critical Section of Real Estate in Focus for Wealth Managers

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2:05Here today, roam tomorrow. Join now at Sinesta.com. Terms and conditions apply. Bloomberg Audio Studios. Podcasts. Radio. News. You're listening to Bloomberg Business Week with Carol Masser and Tim Stenevek on Bloomberg Radio. All right, folks, you got casinos coming to New York City, including one by New York Mets owner Steve Cohen. Also recently on the Bloomberg, you saw the Energy Department planning to unwind a Biden era program that promoted zero emissions buildings. And then when it comes to real estate globally, which is something we certainly focus on, a story on a duplex apartment selling, Tim, for a record price in Hong Kong,$113 million U.S.

2:49in the latest sign of the luxury property sector in the city is bouncing back. But if you talk about China, they still have a real estate problem. Yeah, they do. That's fair to say. Real estate, top of mind for us always. But especially today in our weekly discussion on women, money, and power, where we explore the shifts underway in the world of money and investing and the role women are playing in influencing and investing in those shifts. Back with us is Lauren Hochfelder, co-CEO of Morgan Stanley Real Estate Investing. Got about$54 billion in assets under management. She joins us here in the studio.

3:18Welcome back. How are you?

3:19Lauren Hochfelder:Thank you. Great to see you. So it's been a couple months since we last spoke to you. go back to August and a lot has happened since then. We've had two rate cuts, another one expected tomorrow. Over that time, how has the real estate landscape changed for you? Yeah. So at this point, we're nearly four years into a real estate correction. Since August, I'd say real estate values have really been flatlining. But we look into 2026 and we feel like we're at an inflection point. We've been bouncing around this bottom for quite some time, but it feels like the conditions are on the ground. Sellers are more motivated.

3:54Lauren Hochfelder:Buyers are more interested, right? Debt markets wide open. Lots of things lead us to believe that here we sit, real estate values down 25%. This could be the transition into a recovery period. Lauren, why haven't people been buying? I mean, I was looking at REITs as a whole. They're down, no, excuse me. They're up only about two and a half percent as a group. Data center REITs, according to our index, down nearly 16 % year to date. Office REITs down about 14 % year to date. Malls are up about 4 % year to date. I just like looked at a few different things. But why is it still, as you say, there seems to be a lot of metrics out there that would be supportive of investors coming in, including depressed pricing.

4:34Why aren't they?

4:35Lauren Hochfelder:So look, I think if you went back 12 months ago, many of these things were true then, right, as we headed into 2025. But what happened is we headed into 2025, we were hit with Liberation day. And that created a lot of dislocation in the capital markets and frankly, a lot of dislocation in the occupier markets because leases tend to be pretty long term decisions for CEOs, CFOs, et cetera. And what do big decision makers do when hit with a lot of uncertainty? What is my supply chain going to look like, et cetera? They pause. And so you saw a real pause in decision making which hurt industrial real estate in particular you saw rents trend down for the first time in a very long time you know we're we use the term real estate like it's a monolith but it's it's not i mean there are so many different sectors with within real estate and certainly there are areas of strength like at least here in new york city we know that class a office buildings right if you don't have one of those you're kind of out of luck um and also data centers to a certain extent in many parts of the countries what am i leaving off that list like what is the area of strength right now.

5:44Lauren Hochfelder:Sure. Well, look, to determine what type of real estate is going to perform, you have to look at what human beings need, what infrastructure supports our daily lives. And I'd say living generally, so residential, broadly speaking, is necessity-based and it is undersupplied. So as a broad matter, it is a sector we like. But let's get more specific. Look at the population of the U.S. What do we know? We know it's aging. Yes. Senior housing is a really high conviction strategy for us. 2026. Well, you're not the first person to sit in that chair and tell us that, you know, senior housing is high conviction, which leads me to believe that there will be a lot of investment in senior housing.

6:28What's the delta between what we need and what we have right now?

6:31Lauren Hochfelder:Yeah, it is pretty dramatic. Well, let's look at essentially the 80 plus population is expected to grow by 50 percent over the next five years. So if we even keep penetration rates the same, meaning, you know, we only have a small, small fraction of that senior population in senior housing. We are under supply. We are building about half of what we need. We actually think there's a case to be made that penetration rates should increase because, look, it's not only that this is where so much of the population growth is, it's actually where so much of the wealth is concentrated. We know that, right?

7:10Lauren Hochfelder:Over half of this country's wealth is concentrated in this age cohort. So actually, if you look across different residential categories, it tracks as among the most affordable because this is a cohort that through the combination of home price appreciation, stock market appreciation, et cetera, can afford to pay for this? Well, that's what I wanted to ask you. When I think about whether it's baby boomers and the whole population that's aging and will need maybe certain types of housing, how much can really afford it? I think we always assume that everybody's going to be able to pay the bill. Yes.

7:42Is there, I mean, I do wonder about the build out. Like, is it too much? Because not everybody will be able to afford it. And whether that means they live with kids or something else, I just wonder how much, because this has certainly been an investment play we've talked about for a long time?

7:56Lauren Hochfelder:Yeah, no, look, it's a profoundly important question, both financially and socially. And I'd say the short answer is for private pay oriented assisted living, broadly speaking, yes, it tracks as much more affordable relative for more traditional residential. It's paid for by current income. Right. And we obviously are seeing some inflationary pressures, et cetera. Senior housing tends to be more paid for by savings, whether that's distribution, you know, dividends off of your savings or actual drawdown of assets. So I sell my house and that gives me N number of years to afford senior housing. And the reality is because you've seen home prices increase so dramatically over the last 30 years that many of these seniors have been in those same homes, they can actually afford it.

8:46But is there an assumption of a number that you guys think about of the aging population that 50 % of them will be able to afford some kind of senior housing? Is it 40 %? I'm just curious, because I think we make an assumption that everybody's going to get old, is going to be living in, you know, kind of nice assisted living or something. And I don't think that's the case. And I'm just curious about that.

9:07Lauren Hochfelder:Yeah, no, no, no. It goes back to the overbilled, you know? Yes. Well, I think the, I mean, it's obviously there are different segments of senior housing, different price points. Obviously the margins are a bit different. So there's a provision of services, but what I would say is in a way you have a natural hedge because there are health care provisions needed for this population. And in fact, often staying at home, even if you're living with your children, there is a cost to the health care provision there. So I think what we're seeing is the adoption of technological innovation, among other things, to bring down the cost of this provision of services that can sometimes be done more efficiently in that format.

9:51We could have an entire discussion on the economics of this. I mean, we're seeing it anecdotally. Colleagues who are leaving to actually spend time with their aging parents and take care of aging parents. I mean, this is going to hit. Leaving a job. Leaving a job. Yeah. Because they're taking their parents in.

10:06Lauren Hochfelder:Right. Which comes with a financial opportunity cost. Exactly. I mean, the elder millennials and like Gen X really living through this as we speak. It's unbelievable. Thank you for coming in. Thank you so much. Yeah, really interesting. We'll see what 2026 holds for all of us. Happy New Year. To you as well. Lauren Hochfelder, she's co-CEO of Morgan Stanley Real Estate Investing, joining us right here in studio.