Season 3 of the No Cap Podcast is here, and our co-hosts Jack Stone and Alex Gornik are kicking things off with a conversation with Tom Kennedy, Head of Research and Investment Strategy for Real Estate Americas at JP Morgan.
A former New York Fed economist, Tom now leads JPMorgan’s global investment strategy and drops data-backed takes that could impact half of America.
Tom, Jack and Alex dive into where the US economy is headed, what investors are getting wrong about alternatives, how AI and immigration are shaping productivity, recession, rate cuts and much more.
Conversation Highlights
Alex: Why don’t you tell us what is it that you do day to day?
Tom Kennedy: The data day is hitting the main objective of our business, which is to have best in class commercial real estate investing… I’m spending a lot of my time with JP Morgan and Chase data… what is happening in specific parts of the country for wage growth… asset value growth, what’s happening with migration patterns.
Sunbelt migration in America, 5 years in the rearview mirror, unbelievable everyone moving to the Sunbelt right? But that migration pattern is actually changing and now increasingly you’re seeing folks move towards the Midwest.
The discussion moved to the current market.
Jack: Is this a good time to be getting into real estate?
Tom Kennedy: It’s a very odd time for real estate… prices came down on average almost 20% yet net income or operating growth at the properties actually grew… Covid was so unique in that rates came up a lot but the economy didn’t slow down. We wrote a paper on calling the bottom in commercial real estate last summer [Summer 2023]… it’s aging well I think so far. Aggregate starts in the CR market in the US are down about 75% from the peak.
Jack: And when you say 75% from the peak like you’re talking about every asset class all macro level?
Tom Kennedy: Macro level, every asset class. You’re getting this environment where demand held up more than you thought… and we know there’s more demand.
Since March, we’re seeing net operating income growth of about three and a half percent across our portfolio. That is the highest growth rate in rental income we’ve seen since summer of 2023. So the market’s turning. You’re ending up in this world with haves and have nots for real estate… the office market is the most obvious one… In a high interest rate environment… high quality properties versus low quality, there’s firm differentiation.
Jack: What are you seeing as the most interesting right now… which asset class has had the most change?
Tom Kennedy: The changing industrial sector is most interesting to me… but then what’s also most the obvious place to be investing is multi.
On industrial, he gave a striking statistic.
Tom Kennedy: Since China joined the WTO in… 2001, the warehouse and distribution square footage in America has gone up about four and a half billion square feet. Over that time, manufacturing space has gone up about 300 million square feet. When we wake up today as an American, what we know is this phone does not work without China… 90% of the world’s refined rare earths that go into this phone… come from China.
Multifamily is the obvious place to be investing.
The median person buying a single family home right now, first time home buyer is 38 years old… when I bought my house 10 years ago I was 28.
We’ve seen wages grow for the last two to three years but rental incomes haven’t kept up… if for the next six quarters we’re unlikely to get more supply and your wages have gone up… I can push on you [for higher rents].
Alex: What about data centers?
Tom Kennedy: Data centers… from our perspective is not real estate… more like infrastructure… Average industrial traded in 2024 something like 180 bucks a square foot… average data center trades at 450 to 500 a square foot. What’s the difference? Well, the difference is the tech that’s inside. Google in one of their data centers had to change the cooling system 7 times in 3 years… tech obsolescence is a real thing.
The conversation broadened to deglobalization.
Alex: What impact is that having on real estate right now?
Tom Kennedy: For the last three years the inverse correlation between stocks and bonds has not existed… I quite honestly don’t think it’s going to come back. We did a survey last year about the… wealthiest family offices… they had 45% of their assets in alternatives… and of that… 20% is in real estate… The average person walking around… less than 5% of it is in alternatives. So there’s big growth there.
AI and immigration were next.
Alex: Just the impact AI is having on jobs and also… tightening of the border. Where do you see that impacting real estate?
Tom Kennedy: 2023 was a once in a hundred year surge in immigration to America… three and a half million people… Fast forward to today though, immigration into this country is at a standstill… you’re gonna see a contraction in the workforce,” particularly impacting construction. Regarding AI, the productivity benefits from AI I don’t see them yet… I don’t see us [JP Morgan] we’re not laying people off with AI. But it is a tool. We’re using AI to pull out of all of those [deal proposals] the most important indicators that I want to track… you get the pulse of where the market is.
Jack: Similar to the the multi asset class BFR SFR, whatever you want to call it, where’s where’s that place within JP Morgan’s portfolio or outlook? What are you thinking about that market?
Tom Kennedy: For the last few years… we’ve been investing heavily in the space… The critical thing for us was to do it in places where… owning was at least 20% more expensive than renting… and if the rents there were too high, we weren’t buying properties there.
Jack: Isn’t that interesting if the rents were too high you don’t buy properties there… that’s like such an inverse thought for 99% of investors right?
Tom Kennedy: There’s no insulation… but there’s also no outlook for pushing the rent higher.
Alex: Let’s talk about the thing that literally I get calls about every day… interest rates. Where are they, what’s gonna happen in a baseline scenario?
I don’t think we’ll have a recession.
Tom Kennedy: The Fed will probably cut a couple of times in the next 12 or 18 months, maybe a 10 year treasure rate comes down to like 4%… this new higher for longer interest rate world… I think it’s real.
Alex: I think you made some really interesting points and like you changed my perspective about the world a couple of times throughout this talk.
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