Offices and AI

Speaker A: Hello and welcome to geu, the macro podcast that delivers valuable insights into the global economy. I'm Gaurav Ganguly, Head of International Economics at Moody's analytics, my co host today, Andrew Hunter, Denise Chock, Stefan Angric and a guest. A warm welcome to Dr. Dominic Brown, head of International Research at Cushman Wakefield. Um, Dominic, it's great to have you on the show and a couple of questions for you for our listeners sake if they don't know already. Could you tell us a bit about yourself and Cushman Wakefield and of course the fact that both you and I have the title international, the word international in our titles. Could you, could you elucidate?

Speaker B: Thanks uh, Gura, and great to be here with you today. So very um, very simple terms. Let's start with the international side of things. Um, so for Cushing and Wakefield what that basically means is sort of Europe through the Middle east and into Asia Pacific. So um, I work with our uh, local research teams and also um, our regional research teams across both of those regions, um, helping drive the thought leadership outputs, uh, strategic insights, um, and our client engagement, uh, work that we do. Um, obviously um, we also have our US based team and so that's where I actually report into um, to our global head of research, uh, based in Washington D.C. kevin Thorpe. Uh, and then with his leadership team we kind of basically set the research agenda, um, working with the Cushion Wakefield business units. But um, yeah, set the research agenda of the types of things we need to be looking at. So whether it's some of that more longer lasting structural change and I'm sure we'll, we'll get on to AI at some point today or indeed whether it's some of the more faster moving cyclical change. So some of the stuff that we're seeing as a result of uh, what's going on in the Middle east at the moment. So um, nice bit of variety across all of the sectors, um, that we um, operate in good variety of geographies and also a very good variety of topics. So always something to do and never a chance to get bored.

Speaker A: And you are a geographer by training. I've looked you up. So it must be, it must be quite fascinating to have made the crossover into economics. Though you of course maintain the geographical spread. You've been, you've been an economist for four decades now haven't you? You've been, you've been a researcher in real estate for decades.

Speaker B: Uh, yeah, I've been, I've been with the company for 15 years and was doing um, urban economic consultancy before that. But by, by trade, uh, undergraduate was geography, postgraduate was quantitative geography, slash quantitative demography. Uh, um, so it's always been with numbers. Um, but then uh, yeah, when I moved more into commercial real estate, had to get a lot more into the economics and the impact of that onto commercial real estate. So um, I often do look at things a little bit differently to some of my colleagues. I'm sort of more of a ground up uh, type person, um, in, in what I look at or basically how I look at it. But whereas obviously some of my peers are sort of more top down. But um, it's always good to have a different um, viewpoint skill set so that we do complement each other.

Speaker A: I do think that some of the best economists are those that look at the world from a different lens. And you know, I have only ever looked at the world through an economic lens and hence my shortcomings. But your world, your, your world and our world are very closely intertwined. Macroeconomics affects commercial real estate quite heavily. And I, I know this also because. Well, for, for our listeners, um, we catch up with Dominus team every quarter. Cushman is client of ours. We catch up with, with Dominus team every quarter and we talk exclusively talk macroeconomics. Um, and we talk about macroeconomics in Europe, in Asia Pacific, Middle east, uh, you name it. And I know that Cushman is deeply interested in pretty much every aspect of the macro economy and all of that impacts on real estate, in commercial real estate in one way or another. And I've got a lot of questions for you on that. Uh, but let me just start with a very high level question which is really framing, I hope will frame the rest of our discussion which is the backdrop, the macroeconomic backdrop. This year when we started out felt to me like it was somewhat favorable. We were coming out of a lot of different crises, um, and the world has been hit with a number of different shocks over the past few years and we were coming out of all of these and at the same time there was a, a support to growth in some parts of the world through the build out of data centers and the AI boom. So it felt that this year would be a good year for the macro economy and no doubt also a year of recovery, reasonably good year for cre. And you can tell me whether you agree with that assessment or not. But then it felt to me something shifted and what shifted was geopolitics and the fact that a war in Iran kicked off um, towards the end of the first quarter of this year and that felt to me like it shifted a lot in the global economy. I'm wondering what did it shift in cre? So first of all, two part question. First of all, do you agree that this year started out looking pretty reasonable for the global economy and also cre, but then something shifted and I guess the second part of the question is how much has it shifted by?

Speaker B: Um, yeah, no, I would agree with that. Um, I mean there was as, as we were going through the inflationary cycle in 20, late 21, 22, 23. It was um, there was the mantra um, uh, within CRE, which will survive um, until 2025 with the view that 2025 was going to be a better year. Um, obviously we didn't quite plan on uh, global tariffs. But having said that um, I think the world actually navigated that whole sort of episode relatively well. And um, commercial real estate did continue to build um, through the year of uh 2025. And I think it's important to recognize that there are two elements, um, um, of commercial real estate. You've got the occupier side but you've also got the investor side. Now we work across both and I as an independent researcher speak to both our occupier clients and our um, and our landlord sort of investor clients as well. So um, that macroeconomic shift um, normally you see impacting the investment side first. But having said that and I was just looking at the data today, we saw continuing build um, in investment volumes through 2025, um, but equally occupier demand and certainly occupier demand uh in Asia Pacific was incredibly strong. It was the um, strongest year um, for uh, office demand we'd had since 2019. So 25 was, was still a very good year but it was a building year. Uh, each quarter got stronger, got better, there was more confidence, more optimism um, through various markets. And then as you say we, we came into 2026 feeling very strong. Uh then we had uh, uh, the Middle east and that did cause an immediate shock. But again what I would say is I've looked at sort of the numbers, we've just done our half yearly review of, of the data and certainly um, from an Asia Pacific perspective we've continued to see Occupy the mind hold up. Well it's not quite as strong as it was this time last year but as I said last year was a recent peak from 2019 but investment volumes are actually higher than they were last year. Um, so uh, it's a bit of a double sided coin there's definitely a bit of concern, bit of panic, um, early on in the conflict I think, as the global economy has actually successfully navigated it, and you and your team have written about this extensively over the last few months, um, that businesses and investors have just continued to navigate. And again we've seen similar things in uh, Europe, still seeing the investment market hold up quite well. Uh, leasing market has softened a little bit, just same as we've seen in apac, but certainly not panic stations anywhere. And I think that's sort of one key thing. Bringing you back to, I suppose one of your opening points in that, uh, commercial real estate generally lags the macroeconomy. So whenever I speak to people um, who are not, maybe not quite familiar with the subject, I always start with the macro economy because where that goes commercial real estate generally follows. And so it's held up relatively well so far. Um, there's perhaps a bit of softening yet to come which we may see come through. But certainly the viewpoint was that 2026 was going to be a building year. But whilst it hasn't unfolded how we thought it would, it's certainly not been a disaster.

Speaker A: I always have a very simple investment model in my head when I think of any asset class, um, including commercial real estate, and you'll correct me because I'm sure it's completely wrong, but I usually think of incomes as being linked to something like GDP and I think of returns as being linked to something like interest rates. And uh, that feels like the right way to go with any kind of asset return, whether you're looking at an equity or a commercial real estate. So it feels like if I look at the Middle east and what that's done to the global economy, we've had a reduction in growth expectations, um, in some parts of the world, actually, not in some other parts of the world. And I'm sure we want to talk about that in a bit. Um, we've had a rise in rates of different kinds. 10 year bond deals have gone up because inflation expectations have gone up a bit off the back of high oil prices. But also central banks turning more hawkish means that policy rate expectations have drifted up in various parts of the world. Um, so these two must be playing um, quite important roles in assessing the return on investment in commercial real estate. But what I can't get my head around, and that's why I need you here to explain it all to me, is how that all translates across different countries, across the world and that international perspective.

Speaker B: Mhm. Yeah. I mean it does get quite confusing. And we always say that commercial real estate is local, but it's probably become intensely local over the last few years and also become intensely granular. I mean it's no secret that the office sector has been talked about a lot since the pandemic. Uh, and so when investors look at the office sector they do get very, very granular now into the types of assets, the locations of assets, the markets, the that they, that they want to be in. Um, but, but you are correct in that um, in, in so far as risk premia have increased uh, uh, as a result of either just risk off um, or rising rates. Um, my home market Australia, we've had three hikes so far this, this year we did enter 2026 with a bit of an inflation problem and certainly the Middle east hasn't helped. So that's certainly taken sort of one element and we've got a product which we release every six months. Um, it's part of what we call the investment atlas. And it's got two different models that sit beneath um, it one called the time score which is a measure of when to invest and the other um, is called the fair value index which uh, is more of a measure of where to invest. And in simple terms what that pitch is is the expected return over a five year uh, a forecast horizon against the required return. And that required return is built up of bond yield plus various risk premium. And so we, in so when we did this um, for the mid year report we did see some of that gloss come off. It's still very attractive uh, to invest um, in commercial real estate across the two regions that we do this for. But the, the level of attraction has come down and it's primarily because risk premia have gone up. Now the other side of the equation m the expected return, so that's built up of your cap rate or your yield depending upon um, what you prefer uh, to use but also the capital growth going forward. So that's the change in your cap rate but also rental growth. And this is where it starts to get really interesting around uh, commercial real estate because this is being a bit of a kicker. And this is one thing that I'm looking very closely at at the moment is that we came into 2026 and this is a global phenomenon and I'll throw a couple of numbers at you, but we came into 2026 thinking this is for the office sector, uh, thinking there was going to be a bit of a new supply crunch that's certainly been exacerbated by The Middle east, the cost of construction has gone up as a result of inflation, supply chain stress, all of those kinds of things. So at the moment if I do a quick waltz around the world, if you look at the main um, markets that we track in Asia Pacific, but take out India for the time being, new office supply Construction is down 53% from peak. Europe down 46% from peak. US down 86% from peak. So what I'm telling advance is expect less supply out of the ground rather than more supply. That in turn is helping boost rental growth because corporate occupiers becoming very discerning in the types of assets they want to or buildings they want to be in, the types of locations locations they want to be in. Vacancy in those kinds of areas is becoming incredibly tight. Tokyo, 0.5% vacant at the moment. So consequently you're seeing very strong rental uh, growth. So that is helping offset some of that softness on the capital side. So whilst demand is a little bit soft at the moment, a little bit softer than we saw perhaps six or so months ago, you've still got very strong rental momentum coming through because of that lack of supply which is helping also buffer uh, that change in cap rate movement expectations. Obviously we were expecting interest rates at the start of the year to continue to track down coming off that inflationary peak. What we've now seen is perhaps rate hikes are not on the table for some central banks, they obviously have been for others. But certainly rate cuts that were being expected are ah, now perhaps being pushed further out. So that's all the machinations that we were having to go through. And then we have to look at it for all the cities that we track. Um, so there's about 120 plus cities that we track across Europe and APAC, plus all the respective bond yields, GDP growth outlooks across office, industrial, retail sectors as well. So this is kind of where you can see it gets very, very granular. But generally there's always some form of opportunity out there in the investment space if you're willing to look hard enough for it.

Speaker A: And you're making me think that you have to deal with sector specificities. So when you were talking about office space being down, I'm immediately starting to think about trend shifts in the demand for office space for instance, um, as well as the structural issue of demographics in some parts of the world, such as Europe, where aging populations simply mean that over a longer period of time there'll simply be fewer and fewer people sitting in offices and hence less demand for offices. Coupled with the fact that ever since the pandemic, there's been a clear move away from, um, sitting in an office physically in much less demand for office space. We've downsized, we've moved from um, uh, our offices in Canary Wharf to the city now. And we have very smart offices, but we are, you know, very much. Um, we have fewer people on site on any particular day. So these factors then also play out into your thinking, complicating the story yet further, I suppose. And then I just wonder how you do that, because you then have to look at it, as you were saying, in a very granular basis. Because as you go across the world, this is not just a one country problem, this is a many country problem. And then the situation changes. There are countries where the demographics are so positive. There are countries where um, there's a much greater desire and uh, expectation that people work out of offices versus others. So I suppose that all becomes very complex. And that's just one sector, right?

Speaker B: Indeed. Um, you are very correct, but equally within that. But your experience was, um, slightly less space, but much higher quality space. That, that has been a very common trend that I've heard across a number of markets and, and also a number of companies. I'm also hearing about companies taking high quality space and a lot more of it as well. And also sometimes the opposite of that. So it isn't, if sometimes it isn't even sector specific. It's, it's very company, uh, specific. But, and then as you say, you've got the underlying demographics and we've been doing some work on that with respect to AI, um, and forecasting labor markets into the future and then office demand as a result of that, etc. Etc. But I just come back from India, uh, had 12 days over there. Um, India absorbed 62 million square foot of office space last year. We track 41, 42 markets in Asia Pacific or cities in Asia Pacific that totaled 100 million square foot. The eight cities that we track in India was 62 million of that. And to put that, ah, 62 million into context, and again, I use a home, a home example, Sydney CBD is, is a bit over, uh, 50, uh, million square foot. So India's top eight cities can fill more than Sydney CBD in the past year. So still. So you've got some markets that are incredibly expansionary. Uh, you've got others that are more mature, you've got others that are slightly more cyclical. So you're. Yeah, you are correct that you do need to look at this this in a very granular way because, and I often say this, uh, to our corporate occupier clients, especially in the headline vacancy, for example, is becoming less meaningful over time. Um, if you want to be in a particular grade of building in a particular part of the city and you want for example a higher level floor, that vacancy profile and rental profile is going to look very, very different to if you don't really care where you are in the city, in the type of building that you live in. So that, so that is the level of granularity.

Speaker A: So you're tempting me to ask the obvious question, which is that we started with macroeconomics. We've gone into very granular detail of one sector and you've touched upon the intricacies of understanding different markets. So at the end of the day, um, to what extent does macroeconomics even matter anymore?

Speaker B: It certainly does because basically in simple terms where GDP goes, commercial real estate ultimately follows. Commercial real estate is a lagging indicator and people sometimes get confused that it's tied up to the equities market and things like that. If the equities market has a correction and causes a GDP correction, or if it causes growth, then sure, it starts to flow through. But again, I like to keep things really simple because otherwise I can't explain them very well. And I get confused. Um, but if you've got a, if you've got an economy that is growing, well, that is a function of business investment, business expansion, which generally means they're hiring people, which generally means that they need more space, which then generally means that there's activity in the market, vacancies coming down upwards, pressure on rents, new supply coming out of the ground. It's a system that's growing and expanding. Of course, if you've got a GDP slowdown, it isn't a like for like, it isn't going to be instantaneous. But at some point you'll likely see a slowdown in uh, demand. As you say, if you look at a, um, business confidence and consumer sentiment, two of your indices. I love these indices. They are quite volatile. Obviously they're very reactive to date day, uh, to day news. But I love them both because they capture a lot of different variables in one go and sum up in very simple terms how companies are feeling and how, and how individuals are feeling. That's then likely to say if you're an individual. Am m I going to go out and make that purchase? Am I going to buy that tv? I don't really need to upgrade. But you know, perhaps I will. Or am I going to go and upgrade my house? I'm going to need to have new appliances. Okay. That boosts the retail market, those kinds of things. Equally businesses, are they feeling confident, are they wanting to grow, are they wanting to invest, uh, either through technology or through more people that will then perhaps signals expansionary or they want to change their location. So that's how you get the transmission pathways. And we've obviously talked about inflation and the flow of inflation onto interest rates, short end of the yield curve, uh, all the way through to 10 year bonds, which is often what uh, commercial real estate gets measured against. And then lastly you've got labor markets and again they've been holding up incredibly strongly all over the world. And so that in itself has been providing good support for office demand. And obviously then you've got things like export trade which then affects, uh, the logistics market. We all know, um, about the construction of data centers the world over. Clearly that's driving the data center market, living sector around population growth and um, housing expectations and all those kind of things. So I would say that the macroeconomy does touch on commercial real estate in many, many different ways. It's just that, uh, generally there's a longer transmission period from an economic event happening before you see it show up in commercial real estate.

Speaker A: Thanks for laying that out so clearly. And thank you also for confirming my own naive view, which is, well, hey, the economy matters and any asset class, definitely any asset class that's tethered in fundamentals is just going to be linked to uh, a performance measure like GDP or an interest rate. And you've got to watch out for changes in these two, even though you completely understand, um, that the lags are not immediate and sometimes the transmission mechanism can be quite, quite complex and can take some time. But I see that Stefan, who's been unusually quiet, he isn't usually this quiet, is he, Dominic? But he can't contain himself any longer.

Speaker C: Come on, Stefan, we're doing this again. I'm going to feel super self conscious for the rest of the podcast now. But, um, anyway, Dom, I wanted to follow up on something you said about the AI boom. Um, because we've touched upon this a couple of times during the conversation so far and I was just curious how you're looking at AI and how it's affected your world because on the one hand you just, you do have this element where through automation it arguably reduces demand for office space. But on the other hand, uh, you get this massive boost in the form of the Build out for data centers. Right. But then there's also a lot of big questions around the future of the boom. Whether we handed, whether we headed into some sort of correction, whether it's going to peak, whether it's going to accelerate further from here on out. I'd just be curious to get your thoughts on all of this. How does it, how has it changed things for you and where do you see it going?

Speaker B: That is a great question. I'll try and keep the answer concise. Um, so we as a global research team over the last 12 to 18 months, well probably 18 months plus now, actually spent a lot of time in the background looking at AI, thinking about AI and how we approach it as a research team, as a topic. And so from the start of this year we've been launching um, various outputs around impacts of AI. So started off with what we call the AI Impact Barometer and we've done this for uh, the us, apac, Europe, Australia, Singapore, India and we're building it through Europe at the moment. Um, all the major economies and we've basically taken a thesis driven approach are on how is AI expected to show up in the macroeconomy and, or the built environment and is it doing so? So we've looked at about 40 different variables and we've then graded them from either positive or negative impact and whether it's rapid and intense or kind of more slow moving. Uh, and then there's a neutral. So think of it as a five point scale, um, a couple of key points out of that. All of this is freely available on our website if anyone's interested in, in exploring it. And we've laid out all of our uh, theses, um, and all the data sitting behind it so you can look at everything from the ground up in our thinking. And some of the key messages coming out is that AI is not showing up all at once in the same way with the same level of impact. I think that's number one. Number two is that we do see the US as anywhere from 12 to 24 months in front of practically every other economy that we're looking at. But we're starting to see some economists start to pick up. So that was, that was the starting point of one of the pieces of work that we did and we used that as the basis to then come up with various um, forecasts. So we took a scenario approach and we liked your S1, S2, S3 up to S6. We weren't quite that adventurous. We only had four scenarios but with a view that no One knows what the future is. And some of our clients are quite bullish on AI. Some of our clients are quite bearish on AI. So if you ever did one number it's likely to be wrong. So rather we took four scenarios. We took a baseline which was moderate adoption, moderate impacts over a period of time and we did a 10 year forecast, uh, upside scenario which is uh, rapid adoption, rapid benefits and gains. Um, those gains are uh, then plowed back into more employment so more growth etc. Etc. So upside Goldilocks scenario as I like to call it. Uh, then we had two downside scenarios. Um, AI bust. So there's an equities market correction and we all know um, that the equities market gets a little bit jittery when companies announce they're spending a certain amount on AI either because they think they're spending too much or because they're not spending enough. So the scenario was that there's a cyclical correction um, which then flows through to the macro economy. But uh, over the longer term um, it kind of returns back more towards baseline and then the dystopian jobs displacement downside scenario where rapid adoption of AI um, leads to rapid jobs displacement. And so you do get a very wide variety of outcomes as you would expect. And we've modeled this across office, industrial, retail, um, but we've also looked at it from, from the macro, macroeconomic perspective as well. So what it does to gdp, bonds, inflation, interest rates and all and all of that. So we're so we, we've done that and all that modeling has been uh, released um, out there. So we're actively talking to clients about that. And in fact that was the purpose of, of of my recent trip to India was going around markets um, and talking to them about that work um, just to quickly round this out. And the one last thing I think um, the one thing that we're looking at from an AI perspective is that you're right, automation, it's there to automate some of the more process driven tasks which if it takes, if it takes out that bottom layer of your work, you may say our ah, admin is going to be hard hit. Well all of us in our job, regardless of our level have some form of administration. Whether it's uh, organizing meetings or diary or doing your expenses or whatever that ends up getting taken out and then you end up doing the more higher level part of your work. So for me, meeting clients, coming up with new thought leadership, doing this kind of stuff, um, generally with that type of work, the type of fit out that you need in your office to accommodate that type of work has to change as well. The fit out needs to become more adaptive to new ways of working, especially as technology continues to build and build. And ultimately that ends up requiring, uh, more space per worker. So it isn't necessarily a case that AI is going to mean that every company is going to need less space. Some may do, others may need the same, others could well need more as a result. So again, we're talking through clients, um, around the macro side of things, but equally talking to them about how the nature of work changes, um, and then what that has as a transformational impact on the office itself, whether it's how space is used, how technology is embedded within the office, um, how people navigate the office and those kind of things. So it's been a really interesting topic. Um, we've still got a bit more to roll out, uh, on that, but, um, very much depending upon if you're bearish, if you're bullish. And I'll probably rub this presentation out now to well over 300 clients. And we've seen the full spectrum. We've seen some clients that are on the upside, we've seen some that are in jobs displacement. We're seeing those that are baseline, those that are AI bus. So we're seeing it absolutely everywhere. Um, but I think one of the things that's dawned on me is maybe it's a M Media thing, but, um, it's often easier to see the job displacement. AI is coming for my job. I think that's m. Maybe more of a headline at the moment, uh, that we're seeing rather than AI will create new jobs. And that's probably harder to see. But again, talking with our clients where we're hearing about new roles, Chief AI Strategy Officer. Now, that wasn't a while two, three years ago. And that's just one example. So I think we're seeing a lot of jobs churn as well underneath that macro level of net job gain or loss, depending upon which scenario, um, you want to follow.

Speaker A: Right. I hear you. On the dystopian scenario, it's always, I think it's a function of the human mind. It's natural to go for the dystopian scenario, for the negative scenario, look at the risks. But, um, AI could well create a whole number of jobs, even in areas such as regulation. So we could actually see a swathe of new jobs coming up. Right. Um, so there would be some kind of job movement across sectors, but not necessarily, uh, less of a Demand for office space. I wanted to ask you two questions. One's a bit of a cheeky question which is either from your own personal perspective or given the fact that you've just run this amazing survey and spoken to about 300 clients, which is kind of a, you know, I view it as a sort of survey, would you be able to put some probabilities on your different scenarios?

Speaker B: Uh, no, of course. Um, so um, we've, we've said about 50 for the baseline, um, hence it is baseline. Um, and then um, from there AI bust, um, is, I'm doing this from memory now. Um, AI bust is about 25% upside, 15% dystopian, 5% which every math person now on this uh, on, on, on this podcast is going. Well that's 95%. Yeah, there's a 5% probability uh, that it could be anything. That's not one of those, those four scenarios.

Speaker A: Very well. Something else open there.

Speaker B: Uh, interestingly one of my colleagues attended a um, AI conference in Sydney, um, probably about months, six weeks ago and they ran a similar survey um, of all the economists in the, in the audience. And I think it was either minimal or none took um, took the dystopian view as their baseline view that it's going to be net um, job reduction as a result of AI. That was so. And I think you know, as you would know consensus among um, amongst a bunch of economists um, is a rare thing to find. But um, that was one I used

Speaker A: to get worried when I come across consensus amongst economists. The 5% unknown unknowns. I think that's pretty wise. But my second question, um, you talked a lot about office space and how office space might be impacted by the rollout of AI. But I'm also quite interested in the build out of data centers themselves. And you said that the US is ahead by about 18 to 24 months, which is very hard to push back on. Um, but other regions also want to build out data centers. Europe keeps coming up with legislation on so many different things. It now has a proposed legislation on the build out of data centers. Um, other parts of the world also want to catch up with the build out of data centers. Um, but even there they are bottlenecks. Aren't the energy being a critical bottleneck, demand being a critical bottleneck as token costs go up, as more, as these, as these models become more and more sophisticated, what's your outlook for this, for the build out of data sectors centers? And I guess this is just a pure CRE question because this is now a New sector, an emerging sector for you, right? Well, not so emerging anymore. You've been dealing with it for a couple of years now. Uh, but this must be

Speaker B: um, very much so. Uh, and is actually one of the few sectors that I don't spend actually too much time in myself personally. I've got a very great person on, on my team who's a data center expert, lives, eats, breathes all things data centers. So as soon as there's a question about data centers I just revert to him straight away. But um, in, in general, I know optimistic around data centers. As you say, there's a huge demand, there's a lot in the pipeline under construction at the moment. Um, but as you, as you've noticed that has run into issues over the world, whether it's through community, um, concern, whether it's power availability, water availability. Obviously Singapore put a moratorium on uh, data centers, uh, for a period. Um, uh, and that's something that does need to continue to be navigated. And indeed speaking with our um, APAC head of data centers relatively recently and we got onto this topic and he was of the view that the data center community is increasingly becoming aware that they need to be part of the solution. They just can't be sitting there demanding water, demanding power. They need to be coming with ideas and uh, solutions as to how that power can be generated without um, taking away from local communities and those kinds of things. But I think at the end of the day that that demand isn't going away anytime soon. And it's not just AI, clearly that's ramping everything up. But uh, if you, if you tell people no, you can't do your online shopping or no, you can't use Instagram or Tick Tock or you can't speak to your family over Skype or Source cup doesn't work anymore. But uh, over WhatsApp or anything along those lines, people are going no, no, no, but I want that so that demand for digital data is not going to go away. Um, it's then how do you navigate um, some of those bottlenecks, some of those obstacles. So you do keep that uh, continuum of supply. Uh, I think as technology continues to advance, the location of data centers will start to increase, um, as well the possible locations that they can be located in, uh, will start and they become more innovative, um, as well. So I think it will be an evolution, uh, but I don't, yeah, I'm optimistic on it as a sector. It's high growth, it's in high demand from the investment Side, uh, so wanting stabilized standing assets, um, we're certainly seeing a lot of supply coming out of the ground, uh, all across the region still in, in the US as well. So it's just going to have to be something that needs to be navigated. Denise, you're being very patient there.

Speaker D: Yeah, no, just picking up that. I thought the moratorium in Singapore is interesting because I, it sort of encapsulates the whole issue with data centers, right, that they uh, they put a lot of strain on the energy grid and they also require a lot of land and resources, which obviously Singapore doesn't have. And I think a lot of the other data center sites, especially in Asia, are starting to recognize this concern already. I was just wondering, um, you know, so one way that we've seen, uh, them get around this is really to use our alternative energy sources. So you need to fund your data centers with like renewables rather than the traditional, you know, suck on the energy grid. Is this something you're seeing elsewhere as well?

Speaker B: Yeah, very much so. Where it's possible to do it. I mean, again, take my home market, Australia. Solar is the obvious, um, is the obvious one. But yeah, that very much is the case of if you can generate your own power or at least contribute some of your own power, uh, to the situation, then. Yeah, very much so. I would completely agree, um, with that. When you were talking about, about Singapore, it got me thinking about something else, but I've completely lost that, that thread now. But if it comes back to me, I'll, I'll jump back in again with it.

Speaker A: Well, I'm glad you actually asked that question, Denise, because I, I, when, when Dominic was talking about innovations in technology, getting around various, uh, compute problems and energy problems, I started to think about data centers in space, uh, which I guess presents a whole different cre. Opportunity. But we leave that, we leave, we leave that for another time. I want to bring the conversation back to some things you talked about earlier, Dom, which now sound a bit staid and old fashioned given this racy conversation we've had about AI. But I think it's really important to talk about these. And these are your two indices, Time and the Fed, the Time Index and the Fair Value Index. Because I can't get my head around how you actually measure commercial real estate prices and opportunities around the world. And you've done a great job in actually compiling these two indices and presenting, I guess, attempting to present a consistent view across so many different markets. And I'd love you to tell us a bit more about these Indices and their construction, how you use them.

Speaker B: Sure. I mean what they, what they're good tools for. So there uh, there's a couple of good use cases for these tools and just to sort of go back and recap again. So time is when to invest and fair value is where to invest. So a lot of our clients are multi market, even multi regional investors. So they have a similar problem where they've got pan, uh, regional mandates and they can invest in a number of different, either asset classes or a number of different locations or at times both. And it can be overwhelming, especially if you're dealing with a relatively small team. So on the one hand, these indices provide a very succinct way of um, summarizing where this sector or where the industry is at. So where commercial real estate is at at any given point in in time. So uh, from a time perspective, are we see that, are we seeing that it's uh, gone through a stabilization phase, is now starting to hit early growth? That could be a very good buy signal for our clients. So obviously you capture most of the gains early in the cycle rather than later in the cycle. So if we've gone through a contractionary phase, say for example, like we did through um, the uh, inflationary period, uh, we then hit stabilization. If you start to see markets, and as we said, not all markets move at the same pace at the same time, you see some markets in that moving from stabilization to early growth could be a pretty good buy, a buy signal. And so what are we looking at? Well, without kind of giving all of the IP away for these things, but we're looking at cyclical indicators, whether it's investment volume levels, GDP growth, business hiring sentiment, um, economic risk. Some of those, those kinds of indicators sit behind the time score and we've got something like 20 to 24 indicators that, that sit there. So there's a lot of detail and we have to get all of these on a consistent basis for all the countries that, that we look at. And we're trying to do that across uh, two regions. And then equally when you start to look at it by asset class, there's some that are then sector Pacific, sector specific. So by sector in this case I mean office, industrial, retail. So um, and so that, that, that tells you because some, some markets may have some cyclical issues. So there's been a large amount of new supply that's come on recently and vacancies maybe spiked a little bit, rental growth has slowed perhaps. Or as I was saying before, we may be in this position where there's no supply coming on and we're starting to see rental growth really take off. Combine that with our view for um, uh, interest rates for example, that all starts to give an idea that maybe there's some movement within the market. If this is a market I want to invest in, I probably need to get moving. So that's how um, time gets incorporated. Um, but it's only one side of the equation. A market may be in early growth phase in terms of its momentum, but what does it look like on a relative value basis? Um, is it, is it attractively priced, is it underpriced, is it overpriced? And so that's where fair value comes in. So that for that forward looking five year investment horizon, if I buy now, is this market and asset class that I'm looking at fairly priced, overpriced or underpriced? And that's I said is a function of the five year capital growth view which is made up of what we think is going to happen to cap rates or yields and what's going to happen to rental growth and how that compares to bond yields at the moment and various risk premia that get loaded up. Obviously investing in uh, commercial real estate is a more risky proposition than putting it into a government bond or cash. So you have to be rewarded on a relative basis for that additional risk. So that then gives you your fair value score. And then the real magic comes when you link the two two together because what you really want to find is a market that is attractively priced under fair value but is either a stabilization or early growth under, under time. And that's what we start to sort of talk to our clients um, about. So like they're the markets that we're quite interested in, we're quite excited about. From there we can then do that granular deep dive um, with our local research teams, with our local brokerage teams to really kind of get into the meat of the story of okay now what's really driving this headline picture? So it's sort of helping our clients get down a funnel where we're looking at 120, 140 markets across and sectors across the two regions and how you may get it down to 10 that you look, that you're looking at and go these interest me because of reason A, B and C. So that's sort of very much how we go about it. Certainly the feedback to us from our clients is that they do appreciate it. It's um, in, in high demand and it's, it is one of Those things that I really enjoy talking about. So whilst we have these big structural changes and everyone obviously is interested in, in AI at the same time, you still need, need to navigate a market sort of here and now, whether you're an investor or a landlord in it, or indeed whether you're a ah, corporate tenant trying to take out space or you know, take new space or, or do a new deal or, or whatever. So got that, that mixture of near and far and that's often where we're often having to help clients because they might be signing a five year lease for example or a ten year lease or a five plus five and it's like well how much space do we need over what period of time? So this is when you start to really uh, blend that pure market level analysis with some of that structural change that we were just talking about.

Speaker E: Dominic, to I guess zoom out a bit, since I think we're approaching the end of our allotted time, I was wondering um, if you could give us a sense more generally, what do you see as the key risks facing CRE as a sector right now? Is it what we're seeing in terms of global interest rates and um, I guess connected to the Middle east conflict, the possibility that we'll see a much more prolonged period of high energy prices putting further upward pressure on policy, interest rates and long term bond yields? Is it related to, to the AI boom and the sort of the bust scenario that you outlined earlier? And I guess if I could add in another slightly related question, if there was sort of one area of cre, one particular indicator that you would recommend that we should be paying attention to as macroeconomists, what would that be?

Speaker B: Oh well, some chunky questions there. Um, so risk risks, I, I just think the volatility and uncertainty which it's, it's almost been kind of perennial it feels like for the last five, six years or so there's always been something um, that that is sort of always lurking in the background. Um, and equally, I mean I do sort of say more, maybe more internally to my team but um, if you think everything is, is fantastic and the market's going great, that probably in itself is a bit of a risk, uh, as well as if a market isn't doing particularly well. Um, um, but that level of volatility makes it difficult for occupiers, uh, or investors to take a view and plan. If interest rates are high for a while we can work with that. But if interest rates are increasing but we don't know how high they're going to increase or how long they're going to be there for. As we saw through the recent inflationary cycle that starts to cause slightly more concern. Um, same with the disruption around supply chains and things like that. I'm an industrial manufacturer. Do I need to take additional space to hold greater inventory? Because I'm not entirely sure I'm going to have a surety of uh, supply in my raw materials. Uh, so they're the kind of questions that I think um, uh, that, that cause a bit of ah, that cause a bit of uncertainty or volatility or cause markets to slow down because you get to risk off scenarios and people just want greater clarity and they may have to go rethink what their investment model was or what their expansion model was and does it still make sense in, in the current economic climate. So um, they're the kind of risks out there. But what I mean what I would say is that over the last couple of years in general the market has worked it out relatively well. Has it been as strong as we, we would have hoped and back to the survive to 25 in the discussion at the start. But um, no, it perhaps hasn't been quite as as strong as everyone might have hoped but at the same time it hasn't been terrible either. So I think that's, I'm, I'm kind of a half glass full type person when I sort of look at these things. It's, I look at, I say I've just looked at the, at the raw numbers for H1 this year and it's pretty good. It is pretty good. Investment volumes are still are up year on year, demands down a little bit but you know we've seen strong rental growth etc.

Speaker A: Etc.

Speaker B: In terms of things to, to uh, look at some of my peers, all my colleagues are probably going to shudder in, in fear when I say some of these things now because everyone's got their kind of pet indicator uh, uh, uh out there. Um, I do really like looking at sentiment indicators. I know they're incredibly volatile but at the same time they do give a pretty good indication of how either businesses or individuals are feeling at this precise moment in time. And so does give a pretty good indication of what their likely next move is going to be. Whether it's I uh, probably need, need to hold fire at the moment or no no, I'm still going to plow through and obviously that decision making will vary from uh, client to client and I'm often telling our clients that I know it's uncertain out there and I know it's difficult but if you've got a mission critical decision to make, you need to be proactive and make that, that decision. You do have to get on to the front foot. But for me it's a case of maybe look through a little bit of the volatility in, in those sentiment indicators because as we know they do whipsaw on headline news and you do need to perhaps get a little bit granular in, in some of them. For example, your global business sentiment, ah, um, indicator is holding up pretty strong but when you get into a few local market ones you can see they're actually really weak. So there is a, so there is a little bit of granularity again within those in indicators. But I, I like it as a barometer of how businesses and individuals feel. So from a business perspective it's uh, you can think about is it going to be am I going to be expanding from a um, consumer perspective, am I going to be buying more, therefore producers need to manufacture more, etc. Etc. And so it does flow through those, in those indicators do flow through across most of the major sectors that we look at. So as a quick pulse of the market it is something I like to see.

Speaker A: So as you live and breathe investment decisions you get visceral confirmation of basic economic theory which tells you that uncertainty has a negative impact investment. Dominic Brown, thank you so much for joining us. Um, today it's been a fascinating discussion. Thank you Andrew, Denise and Stefan for being such um, steadfast co hosts and of course thank you to our uh, dear listeners. You've been listening to the Global Economy Unwrapped.

Speaker B: Sam m.