Mark Bonner: 00:06

Welcome to First Draft Live. I'm Mark Bonner, business editor in chief coming to you live from New York. It's Friday, October 10. For those of you new to the program this week, this is a show where we take the mess that is commercial real estate and wrestle it into something you can actually use. But quick reality check.

Mark Bonner: 00:25

This is not the main event. The main event is our daily newsletter, the first draft. That's where the market's sharpest edges gets filed down into scoops before they hit the wires, charts before they hit the decks, and context before the speed the PR spin. It's not for the casual reader. It's for closers, the ones who measure their days in term sheets and fed minutes.

Mark Bonner: 00:49

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Mark Bonner: 01:14

Let's get into today's story. Deloitte's 2025 CRE executive survey does not sugarcoat it. The recovery hasn't been canceled, but it has hit pause. The survey, based on responses from 850 CRE executives across the globe, found capital availability has leapfrogged interest rates as the industry's top concern. That's a shift that says more about confidence than cost.

Mark Bonner: 01:41

On one hand, the data looks bullish. New loan volume is up nearly 90%. $585,000,000,000 in dry powder is waiting to to be deployed, and spreads are tightening. On the other, legacy maturities are looming, and more than half of executives face a loan coming due in the next year. For many, the math won't work.

Mark Bonner: 02:04

Office, written off by most investors, is inching back into the conversations, especially as valuations reset and cities return to work. And AI, once touted as a cure all, is showing more friction than transformation, delivering wins in leasing and tenant management, but plenty of headaches everywhere else. So here's the real question. Are we looking at a short stall before the market reaccelerates or the early signs of a longer, harder slowdown? To unpack it, we've got Sallie Anne Flood, vice chair in US real estate sector leader at Deloitte.

Mark Bonner: 02:41

It's her birthday. Happy birthday, Sallie Anne Flood. Welcome to First Draft Live.

Sally Ann Flood: 02:46

Thank you, Mark, and it is great to be here.

Mark Bonner: 02:50

Listen. Every cycle, as you know, Sallie Anne, has its stall points. Your survey found optimism is slipping as lenders are getting choosier and refi ing gets ugly, yet fresh capital is flowing.

Sally Ann Flood: 03:04

Mhmm.

Mark Bonner: 03:04

Is the pause just a timing issue, or is there something deeper at play here?

Sally Ann Flood: 03:09

Yeah. I I think it's a point of reflection. I I liked the concept of it being a pause that it's not that we've fallen off a cliff again and we're gonna spiral down. It's more the sentiment, like, really was just slightly more cautious this year. So considerably better than prior years, like, from, like, three, four years ago, absolutely better.

Sally Ann Flood: 03:34

But just compared to last year, I think it was just a softening. And, you know, when you still look at the numbers that 83% still expected their revenues to increase in the next twelve to eighteen months, I still think that that's positive. So it's just not as high as prior years. Also, they expect expenses to increase. You know?

Sally Ann Flood: 03:55

So I think that was about in the sixties. So I think the pause concept is right versus a falling off the cliff.

Mark Bonner: 04:05

Celine, do you think if the survey were conducted today that the result would be any different?

Sally Ann Flood: 04:11

Great question. I don't know if that much has changed in the last, like, four months since we took the survey. We expected interest rates to decline or take a cut at least once or twice. We've had one cut. Would have been nicer if it was bigger, but I I don't know if that much has changed.

Sally Ann Flood: 04:31

I think we're just in a period that this year is going to be continue to be challenging, And I think there's a lot of optimism for '26, as we turn the corner at the end of the year. So I I actually don't think it would have changed too much if we took it now.

Mark Bonner: 04:49

The only reason why I ask is because four months ago, we were still at the very beginning of Donald Trump's term. Right? And there's a lot of optimism, especially on Wall Street, but certainly in commercial real estate circles that that was going to breathe fresh life into what many believed was sort of a slower economy, at least here in The United States. Look, the economy fundamentally is really strong right now in a lot of areas. There's a lot of wobbliness under the surface.

Mark Bonner: 05:15

There's a lot of fear out there still about what's to come. But, you know, when I hear pause, I the the main question I think a lot of our audience will have is what does that really mean on the ground?

Sally Ann Flood: 05:26

Yeah. I you know, it's still I had 75% cent still expected to increase their investment in real estate. I take that as a win. So I think it's more people are being cautious. There we are in a period of uncertainty.

Sally Ann Flood: 05:44

But when they looked at what was the risk factors that they're concerned about, you touched on it in your opening, it's like capital availability. You know, that rose to the top. So where is that going to come from? We had some good questions about m and a deals. Like, that has slowed down.

Sally Ann Flood: 06:02

Maybe that will open up again in '26. So I think it was more a period of uncertainty. You know, tax policy is not as, concerning at the moment. It's always going to impact real estate, but I think we were happy about some of the changes that were made that did not have a dramatic impact on real estate. So I I think some of that uncertainty has actually gone away, But what's causing concern is more the capital availability, you know, interest rates.

Sally Ann Flood: 06:35

You know, there's there's still some of the the usual suspects.

Mark Bonner: 06:39

When you look at the survey and all the other data that you're pouring over, Sal ian, how do you reconcile distressed legacy loans with record new issuance?

Sally Ann Flood: 06:48

I think it is a tale of two stories. You've got the legacy loans. You know, 50 you touched on a 50% will mature within the coming year. And I think there is some challenges on refinancing, modifications, renewing that debt. So I think that that legacy debt, there's still some challenges there.

Sally Ann Flood: 07:12

But I think that gives a huge opening to the new debt. So we're seeing new sources of funding coming from high net worth individuals, insurance companies, the banks, banks, like, are opening up again. So I think it's more a source of new funding that I'm finding very exciting. So I think CRE is gonna see really a blend of the two, the legacy and new debt, to kind of take impact this year.

Mark Bonner: 07:41

You know, commercial real estate has drummed up a lot of cutesy mottos over recent years. Survive to '25, bliss in '26. Who knows what that means? You know, but the focus is now, as you point out, it's like it's all about 2026. Two questions, when?

Mark Bonner: 07:57

When in 2026 and what would you want? What would you what do you need to see to know that the market is actually restarting broadly?

Sally Ann Flood: 08:06

You know, hopefully, we'll see continued, reduction and cuts in the interest rates. I think real estate really needs that as a cut like, to jump start, activity. And 25 basis points not gonna be enough. Like, it's it's kinda we're looking for something big. I think that is impacting transaction volume a lot.

Sally Ann Flood: 08:28

But I think, you know, we are seeing more consolidation in the industry. We're seeing more joint ventures have been opened up, new structures. So I think there's that's coming together in '25. So I I am more optimistic for '26 and that we'll see a turn and probably in maybe second, third quarter next year.

Mark Bonner: 08:51

Second or third quarter. Okay. And I would I would imagine that a big part of that is gonna be this $585,000,000,000 in dry powder. Right? The story, you know, for this whole year hasn't been lack of capital.

Mark Bonner: 09:04

Right? It's been a where and how it gets deployed. So who's deploying smarter capital right now?

Sally Ann Flood: 09:13

Well, I think I'd probably more focus on where is it going. It's going to the top asset class like you saw data centers rise to the top again. Like, you can't pick up the newspaper without seeing some new announcement of either a joint venture with organizations, institutions, but data centers are on fire. You can see a 100% of data centers in nine significant markets are pre leased. That's insane.

Sally Ann Flood: 09:41

You know, so that is really good. We're also seeing the industrial, the warehouses move to two and three, and that makes a lot of sense with logistics, a lot of focus on trade in The US. And so the placement of two and three, I think, is a great reflection of The US economy coming back and volume being here. And I think that that's been kind of interesting to kind of monitor. Our top four asset classes, it kind of just shifted a little bit compared to last year, but not not any no one new came in.

Sally Ann Flood: 10:19

Multifamily is still there. Life sciences moved up into kind of the top five. And then, of course, you mentioned office. Like, office is slowly coming back. So I I'm focused more on where it's going.

Sally Ann Flood: 10:33

I think with office, like sitting here in Downtown San Francisco, I think we're we've come across the bottom, like we're turning back up, but it's gonna take a while. And I think that's gonna be more a flight to quality. And this I think, you know, you're going to you're gonna see potentially for those quality assets in office, a lot more competition, multiple bids. And so I think that will take a while, but it's coming back up, which is exciting.

Mark Bonner: 11:03

You know, yesterday when you were on the phone, we talked briefly about the capital stack. Right? Yeah. How different is that gonna look moving forward, especially as we get into 2026?

Sally Ann Flood: 11:13

I think you're gonna have multiple sources. Like, it's not that equity is dead. I think equity will be there, but I think you're going to have the debt structures being a lot more interesting and potentially giving similar returns to equity. So a lot more creativity going on there. I was just in Europe at Expo Real, earlier this week.

Sally Ann Flood: 11:36

A lot of discussions on the debt funds and how they can deploy that capital. They're very interested in like hospitality, for example, data centers, of course. But I think that's going to be the shift. They're going to have much more of a blended stack to attract kind of the money in.

Mark Bonner: 11:56

Right. You know, you you mentioned offices, you know, and it seems like offices are coming back from the ashes, but valuations are down 30 to 50% in many markets. Suddenly, are circling. Have we finally found the floor for office?

Sally Ann Flood: 12:10

I think so. I think some of the metrics we're showing that, we're seeing a couple of quarters in a row with values moving up. Work I work closely with Nacreif, and their returns are kinda showing against specific areas some some uptick. But there's also concern about, like, the metrics for evaluations, a lot of concern about the assumptions going in. There's still not a lot of transactions that you can point to.

Sally Ann Flood: 12:41

And so I think it was even 3% of survey recipients. They said they trusted the assumptions going in because there's not a lot of transactions. So I I think we have seen a turn in valuations, but until we see an uptick in transaction volume, it is extremely challenging still to come up with the key assumptions underlying those models.

Mark Bonner: 13:05

Right. I mean, we've seen this movie before. There have been a lot of predictions about this is now the new floor. We're coming back on office. I guess the question is, and I and I think I know what the answer is, which is, is this actually the true reset that we've been waiting for, or do we believe this is value hunting before more pain?

Sally Ann Flood: 13:24

It's a great question. I I think there's I think we have reached the bottom. I think we are on the uptick, but I think there's gonna be a lot more pressure on the quality of the asset. Tenants have a lot of choices, and so there's a lot more, you know, TI is gonna have to be offered. You know, it's gonna there's a lot of competition and for some of these downtown assets.

Sally Ann Flood: 13:49

And I think until we see kind of all of the foreclosures take place, you know, I think there was, you know, 12% still anticipated doing foreclosures with the this debt wall. Until all of that really irons out and those assets are then actually transacted upon, not just held, you know, by the banks with empty buildings. Until we see those assets come back out onto the market, we're not really going to see the big change. So it's I think we've started the change. Is it gonna be a quick uptick?

Sally Ann Flood: 14:23

No. I think it'll be slow, but I think it's gonna be really on these landlords developing these quality assets, looking at amenities, you know, look at even working with mayor's offices and cities as to, okay, how do you make sure my building is safe outside? How do you make sure all the amenities and entertainment zones and conference centers and convention zones? How do we participate more to help the cities be successful and not just think of yourself as a, like, a loan on an island. So I think a lot more collaboration with cities, with mayor's offices is gonna be kinda critical to maybe the odd like, the downtown office sector.

Mark Bonner: 15:08

You're just joining us. This is First Draft Live. We're unpacking Deloitte's 2025 CRE executive survey with Sally Ann Flood, who's calling in today from San Francisco. Sally, you talked about data centers. I mean, that is the secretariat of commercial real estate asset classes.

Mark Bonner: 15:23

It's unstoppable, but there's a lot of headwinds out there for data center development power, local politics. There's a lot of doomish scenarios out there about a bubble bursting at some future point in time, considering the strength of capital that's pouring into those things. The most interesting thing that I took away from the report was the survey shows that these executives that you all surveyed are cooling on AI after all of the hype from last year and obviously at this very moment. What do I make of that? What do you make of that?

Sally Ann Flood: 15:58

Well, I am in San Francisco. So, you know, while there is a risk of me being in a bubble, I am surrounded by all of the AI technology in the companies and listening to a lot of what they're saying. I think there's really two things. I think there was potentially a lot of hype last year, and in in the survey, that was reflected a lot of hope that potentially AI was going to solve everything. The reality is that it is hard to assess where it's going to make the biggest impact.

Sally Ann Flood: 16:34

Can it be transformative? Yes. But it's not just a scatter plot. You can't just throw it out and see, okay, it's gonna fix all my problems. I think this is more a reflection.

Sally Ann Flood: 16:46

The challenges are a reflection of challenging to adopt the technology and relooking at the processes was really important. Also, a culture kind of shift because who was driving the AI revolution in a company is the top management and not being really supported by those that deal with it every day. I think that's a challenge. But and the big but is I think the technology companies are finally looking at real estate. Mhmm.

Sally Ann Flood: 17:17

That's what I'm excited about. Every week, even this month, you're seeing a new alliance being announced, between a real estate company and a technology company. And that that gets me excited because you need them at the table to really look at the processes. And that's where I think we've got some great optimism.

Mark Bonner: 17:40

When you look through this survey, Sallie Anne, there's a lot of top line items. And by the way, think our producer shared the link in the chat. Please go check out the story. It's very deep. Sallie Anne's quotes are all over our reporting on this.

Mark Bonner: 17:54

What is something that is below the surface in this report that maybe doesn't make the headline but raised your eyebrow as you studied it?

Sally Ann Flood: 18:02

Think and I I touched a bit on it with connecting with, say, mayor's offices and cities, for this new kind of future of real estate. And I I think it touches on the alliances that I think real estate organizations have to participate in, either to get access to new markets. But I I think there's really something to be said about the public private partnerships, and this industry convergence with construction, with infrastructure, working with cities and states to kinda look at how you can have these long term plays in cities, ten, thirty year programs. I think cities have to learn about how to attract the institutional investments and also the real estate community. But I think that is kind of something that I did pause and have a look at a little bit more.

Sally Ann Flood: 18:55

Doesn't make always the headlines, but I think that's gonna be interested interesting to see these strategic alliances both from JVs, but also the public private partnerships.

Mark Bonner: 19:08

So every downturn, if you wanna call it a downturn, right, also is an opening. Right. And I and we and I think everyone on this call understands that, like broadly, commercial real estate isn't in one just great downturn. There's many different asset classes that are on their own cycles. Some are up, some are down, some are in the middle.

Mark Bonner: 19:27

Some are going to come back again stronger than ever. Some are going to just flatline for a little while before they can grow again or go away. But the big unknown, I think, in today's pause is it sets the stage for a stronger rebound perhaps or a longer grind. What do you think is the biggest risk for the greater commercial real estate market between now and probably for all of next year? Like, what are you looking at?

Sally Ann Flood: 19:51

Gosh. I think there's still a lot of focus on cost containment. Like, you you hit it right that no one's quite sure whether it is gonna be that slow grind out. Again, depends on the asset class because under this umbrella of real estate, we've got so many phenomenal asset classes that are on fire. But overall, I think there still is a cost containment.

Sally Ann Flood: 20:14

They organizations, I feel, order to get to that next level of efficiency, we'll have to relook at their data, relook at their processes, look at technology, it can really bring an ROI. The where we're seeing some good impacts are on tenant relationships, construction, leases, gosh, digitized leasing, phenomenal. Like that, that can actually be a game changer. Like we've seen, you know, you can digitize like 500 leases in thirty minutes. I think about that.

Sally Ann Flood: 20:54

10,000 leases, and I think it was either an hour or ninety minutes. Like okay. So now you start kinda thinking about, okay, the manual days are over and how what can you do with that with an intelligent technology platform? So I I think cost containment, technology, all of this is going to be if you if you let that pass by you, then I think you're in the slow grind. If you actually take it and embrace it and embrace kind of the technology and be bold, I think then you're going to actually take kind of a leapfrog above the rest.

Sally Ann Flood: 21:34

And because I think the opportunities are absolutely there. I know it was in our our phrasing of this, but the opportunities are there if you take it. Otherwise, you're gonna be in the slow grind.

Mark Bonner: 21:45

I completely agree. And look, the fire hose has been so strong coming out of the White House on some of our fronts. I think people forget to your point, Sallie, and that, like, that crypto legislation, which I believe came after one big beautiful bill, which stole a lot of headlines, that has the ability in 2026 even moving forward to completely revolutionize the industry in terms of how it builds capital stacks, how it deals with, property management to your perspective. I think there's some scary things that are not maybe as scary as we believe them to be in terms of job killers. The ludite fallacy comes to mind, but huge opportunities here, along those lines.

Sally Ann Flood: 22:24

Huge. You know, I think cryptocurrency, blockchain, like, are all early technologies for real estate. And I think we had this in our prior year survey that and until the big players really take a position and enter into kind of this technology and leveraging crypto and blockchain in a major way, I think we've we've a potentially a harder path to take, but it's there. So I think the deregulation is absolutely helping. It is absolutely helping, and that's going to facilitate more people being engaged, But we need the big players to engage.

Mark Bonner: 23:05

Sallie Anne, me get to a question from our audience. Data centers. Viability is highly dependent on public infrastructure, electricity, and there have been signs of strong public resistance, local politics, which I referenced earlier. Mhmm. What is the impact for CRE?

Mark Bonner: 23:22

How does that get resolved?

Sally Ann Flood: 23:24

I I don't know how you get it resolved, but it's true. The the constraint is power. And we're I think it's this industry convergence. So you have to work closely with the utility companies, the power companies, the government sector, state, local, business. And so it isn't just real estate can go alone.

Sally Ann Flood: 23:47

And you're seeing that with the top players that they are kind of really branding themselves as technology, power, real estate. It's not just real estate. So I I think this industry convergence is ultimately critical for it to work, and you can't go alone because you'll just have that backlash. But it's like, the power is the is the constraint, and so I think people have to be creative. But now really good point by one of your listeners.

Mark Bonner: 24:19

Okay. Final question, Sallie Anne. If you could leave the industry with one headline takeaway from the survey, what would it be?

Sally Ann Flood: 24:27

The technology revolution is here for real estate. I I really believe this is the time that we can embrace it, and really see improvements to the bottom line by adopting the technology. That I think is exciting, and now's the time.

Mark Bonner: 24:48

Yeah. And look for an industry that has been historically resistant to technological evolution and change, I think the pandemic really spurred that forward in a very significant way, in particular on the prop tech side of things. So, yeah, I I think I agree with you. And so I guess under the surface of what you said, Sallie Anne, it sounds like you don't think it's happening fast enough.

Sally Ann Flood: 25:10

I don't think it's happening fast enough in that but but as I said earlier, I'm very excited. I think the technology companies are now looking at real estate. I am they've been working with the banks. They've been working with the insurance companies. I think real estate has been a sector that has not got attention, and that's what I'm excited about.

Sally Ann Flood: 25:30

Just keep a lookout in all these announcements. They're with the big players in the industry. They're with the big players in AI technology. And the combination of these two cultures is, to me, super exciting because I've seen both. I work with some of the technology companies here in the Bay Area.

Sally Ann Flood: 25:49

Seeing the the combination of the two is exciting because we in real estate, we know our business so well. We know the processes. So we have to educate the tech companies as to what the roadblocks are and where the improvements can be made. And once we have them at the table, I think magic is gonna happen.

Mark Bonner: 26:10

Sally Anne, thanks so much for being here today.

Sally Ann Flood: 26:12

You're welcome. No. Thank you for having me, Mark.

Mark Bonner: 26:14

And have a happy birthday.

Sally Ann Flood: 26:16

Thank you. I will.

Mark Bonner: 26:18

If you missed any part of this episode or wanna hear earlier shows, you'll find every conversation in your favorite podcast app. Just search First Draft Live. We'll be off next Friday, but look out for upcoming conversations with JLL CEO Christian Ulbrich, Industrious CEO and cofounder Jamie Hodari, and a special in-depth interview with WeWork CEO John Santora live and on stage with me at the Cree Tech Conference in New York City on October 21. Holler at me at the Javits Center. This is First Draft Live.

Mark Bonner: 26:51

Have a great weekend y'all.