“Adversity does not build character, it reveals it.

"
— James Lane Allen

“I never said half the things I said.”

—Yogi Berra

While normal folks were or should have been out shopping, watching college Bowl Games or
performing feats of strength during Festivus celebrations (for those unfamiliar, Google…or Bing, if
you must) during the recent holiday season, I was immersing myself in yet another Twilight Zone
Marathon on SyFy, one of my more suspect holiday rituals, other than consuming excessive
quantities of English toffee and whatever chocolate is within reach.

Even after watching every episode (and some multiple times), I never cease to be amazed at Rod
Serling’s prescience and brilliant commentary about human nature, good versus evil, moral and
philosophical conflict, and mass hysteria, among other fascinating themes. Maybe I simply have this
unquenched urge to send a few folks - mainly politicians and a few media personalities - to the
proverbial cornfield, or long to own a camera that takes pictures of the future or a magical stopwatch
that freezes motion. Or perhaps I am simply longing for anything that could help me make better
sense of the economy and financial markets, as I try to predict what 2024 might have in stake and
was hoping that Twilight Zone camera might be available on eBay...or anywhere.

Well, before I jump into thoughts about 2024, unaided by any magical camera, what I can say is
that I am glad to see 2023 in the rear-view mirror.

2023

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While equity markets and home prices were somehow able to withstand sharp increases in interest
rates last year, I can’t say the same about commercial real estate values, especially office buildings.
However, even multifamily and industrial assets, market leaders for years, have struggled in the face
of these higher rates, challenging capital markets and reduced liquidity, damaged investor
confidence, and increased supply, all providing meaningful headwinds. Otherwise, 2023 will mostly
be remembered for a Chinese spy balloon, the ongoing Russia-Ukraine conflict, Middle East unrest,
non-stop political theatre, college campus shenanigans, and devastating natural disasters (e.g.,
Maui). And this was before the Jeffrey Epstein travel logs were released (for the record, neither
Jimmy Kimmel nor I are mentioned).

However, a few significant themes emerged, some of which will certainly persist into and
materially impact 2024:

• Housing slowdown: 2023 witnessed a significant decline in single-family real estate

transactions (sales and financing), a trend which will persist through at least the first half of
2024 and perhaps beyond. In 2023, there were some 4.1 million single-family home sales
(existing and new construction), the lowest transaction volume since 1995 (that’s ≈28 years,
for anyone counting). As the single largest component of U.S. economic output (roughly a
third), the slowdown will present a meaningful drag on GDP and could tip us into recession
later this year.

However, while transaction volume declined sharply, housing prices were firm, up
marginally overall during the year, though some markets outperformed others, of
course. Across the twenty largest markets (Metropolitan Statistical Areas), all were
higher during the year, at least through the third quarter, including San Francisco (up
6.7%), Phoenix (up 6.1%), New York (up 7.6%), and Miami (up 7.1%). In fact, single-
family home prices were higher in virtually every market, in every month, quite a
performance given the higher mortgage rates that persisted for most of the year. And

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 with mortgage rates dropping since they peaked in late-October, housing prices
should remain firm in 2024. The latest Case-Schiller housing data, through the third
quarter is as follows:

Meanwhile, mortgage rates ended the year well off their October high of nearly 7.8%. At last
glance, Freddie Mac’s 30-year mortgage rate was 6.66%, not far from where it started the
year (6.42%), but merely looking at these two distinct time frames ignores the Space
Mountain rollercoaster-like movement in rates that characterized the year.

7.79%
10/26/23
6.42%,
12/29/22

Oh, and by the way, higher single-family housing prices are not just a U.S. phenomenon.
Housing prices have risen sharply across the globe over the last dozen years, and while prices
paused a bit last year, they rose modestly in 2023, again, despite a higher rate environment.

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 • Inflation pulls back: After hitting a peak in June 2022, when inflation exceeded
9%, food and energy prices have declined, wage growth cooled, and the cost of goods
globally have dropped. In December, the U.S. consumer price index increased 3.4%,
year-over-year, and 0.3% month-over-month. While these inflation prints exceed the
Fed’s 2.0% annual target, inflation is clearly moving in the right direction. Keep in
mind that the December 2022 CPI was 6.5%, year-over-year.

As the economy cools, layoffs in tech, finance, banking, and real estate accelerate,
shelter costs moderate, and consumers likely cut back on their breakneck spending
(see below), I expect future inflation to soften further. But with expanding global
unrest (read: expansion of Middle East conflict to Yemen, Lebanon), exogenous
events may upend the inflation apple cart. We shall see.

Of course, headline inflation data masks underlying, more granular data, and in December,
all of the principal components of inflation – housing, transportation, food and beverages –
were higher. However, “shelter costs,” the largest component of consumer prices, have
declined for three straight months and I anticipate further declines over the first half of
2024.

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 Globally, inflation rates are all over the proverbial map. While high inflation continues to
wreak havoc in Turkey (annual inflation exceeds 60%) and Argentina (annual inflation was
211.4% in December…and that is not a typo), the U.S. has one of the lowest inflation rates in
the world. Meanwhile, prices declined in China for the 15th consecutive month.

• Robust equity markets: in 2023, to my surprise, U.S. equity markets recaptured all of
2022’s losses and then some, higher rates be damned. Optimism about AI – perhaps
excessive – and surprisingly decent earnings growth drove the markets higher. If anyone had

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 told me in late 2022 that the S&P 500 and NASDAQ would be up 26.3% and 43.3%,
respectively, in 2023, I likely would have asked about their favorite tequila or suspected that
they had entered that fifth Twilight Zone dimension. I would be shocked if 2024 presents a
2023 encore, but markets have an uncanny way of revealing the unexpected, and as
mentioned below, there is still plenty of dry powder on the sidelines, with some $8 trillion
sitting in money market funds and certificates of deposit (see below).

45.00%
S&P 500
35.00% DJIA
25.00% NASDAQ
15.00%
5.00%
-5.00%
-15.00%
-25.00%
-35.00%
-45.00%
Source: Bloomberg

• Consumers continue to spend and spend….and borrow: Retail sales were

surprisingly strong in December, up 0.6% month-over-month, and 5.6% year-over-year,
above expectations. Keep in mind that these figures represent improvements over November
(up 0.4% month-over-month) and October, when retail sales declined 0.3%.

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 How are consumers funding their seemingly insatiable urge to spend? Well, it looks like good
old “OPM” (Other People’s Money), as consumers have been on a borrowing binge, at least
through the third quarter. Consumer debt now exceeds $17 trillion, a record, and year-over-
year, all forms of consumer debt increased, especially credit cards, up nearly 17% in Q3 2023
versus the prior year. And keep in mind that the APR (annual percentage rate) on this credit
debt averaged about 21.5% in Q4 2023. Yikes!

So, how much mojo does the U.S. consumer still have in the tank? December’s retail sales
results would seem to indicate the consumer is still alive and kicking. But then, I see several
headlines which give me pause. Exhibit A would be a reasonably recent announcement from
Walmart, which disclosed “concerns over consumer health” in mid-November and then, in
early December, the company disclosed that “consumer behavior would be difficult to predict
next year.” Investors did not react positively to the disclosure.

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 And then there are other conflicting data points. On the one hand, I have seen
numerous graphs and charts indicating that the “excess savings” accumulated during
Covid, and subsequent government largesse have been spent, and common sense
would indicate this is likely true, at least for most.

However, then I see this telling graph, indicating that a record $6 trillion is presently sitting
in money market funds ($8 trillion, if you include certificates of deposit), attracted to the
compelling 4.5%+ yields they are now earning. What happens to these funds if and when
interest rates decline, uncertainty around the upcoming election subsides, and consumers
begin to feel more bullish? Are these money market assets destined for the equity markets?
Commercial real estate? It’s hard to say, but consumers and investors are a fickle bunch, so
psychology and risk tolerance move fast, just like life, as Ferris Bueller keenly observed.

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 Meantime, consumers have become more confident about the economy and inflation towards
the end of 2023 and headed into 2024. According to the University of Michigan’s monthly
survey (congratulations to Big Blue fans and alums, by the way), consumer confidence is at its
highest levels since July of 2021, and up over 21% from a year ago. So, consumers may or
may not be out of spending fuel, but they are still feeling surprisingly good, nevertheless.
Maybe that is why they are so eager and willing to borrow to spend.

What is strange is how to reconcile this increase in consumer confidence with the results of a
recent CNN poll, in which 71% of Americans said that “economic conditions in the country
were poor,” and over a third (38%) labeled them “very poor.” Perhaps the silver lining is that
82% said the economy was poor last year, so I suppose we can jump for joy knowing
Americans think conditions are “less poor.” It becomes increasingly challenging to reconcile
the conflicting data points. Perhaps it is just media and politics in a very divisive environment
in an important election year. Perhaps it is the nature of a response to a particular inquirer
(e.g., CNN versus the University of Michigan) or a particular manner in which data is
gathered. Perhaps consumers themselves are having trouble squaring all the conflicting data.
I will provide my own views at the conclusion of this monstrosity.

• All eyes are on the Fed: Jerome Powell must feel like a runway model or contestant on
America’s Got Talent the way that folks hang onto every word he utters and every move he
makes, looking for clues as to what the Fed might do next. After raising rates relentlessly for
18 months, the Fed paused rate hikes in the middle of 2023 and has not raised rates since,
telegraphing that instead, it intends to reduce rates three times in 2024. In fact, what the Fed
will do in 2024 is the biggest mystery since Jimmy Hoffa went missing.

6.00%
U.S. Treasury Rates
5.00%

4.00%
12/31/2019
3.00% 12/31/2020
12/31/2021
2.00%
12/31/2022
1.00% 12/31/2023
Source: Federal Reserve
0.00%
3 Mos. 6 Mos. 2 yr. 5 yr. 10 yr. 30 yr.
Subsequent to Powell’s initial comments in mid-December, the equity markets rallied
strongly, surging to new records, and the 10-year Treasury yield dropped below 3.90%.
However, more recent economic data, including those stronger-than-expected retail sales and
a surprisingly strong job market (see below), may upend the plans of mice, men (or should I
say “people”?), and Mr. Powell. What’s curious is that the markets are expecting six or seven
rate cuts this year, based on the Fed Funds forward curve.

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 However, representatives of the Fed with last names other than Powell (e.g., New York Fed
President, John Williams; Dallas Fed President, Lorie Logan; and, Fed Governor, Michelle
Bowman) have been more circumspect about the prospects of future rate cuts, indicating they
would not hesitate to raise them should inflation take a turn and head higher. Every time
someone from the Fed speaks, it is like one of those old EF Hutton commercials, with
everyone dropping all else they may have been doing to listen closely for any clues to help
them better read the tea leaves. Severe cases of bond and investor whiplash often follow given
the inconsistent and sometimes contradictory messaging from various voices at the Fed.

• Expanding Federal deficits here, there, and everywhere: In a newsflash surprising

no one, it appears that governments everywhere have a consistent inability to balance their
budgets, routinely spending more than they collect in tax and other revenue. According to the
IMF, the U.K., France, Italy, and Japan are running deficits of about 5% of their respective
GDPs. In the U.S. 2023 saw a staggering $2 trillion deficit, representing about 7.5% of GDP
and about twice what was anticipated a year ago. With outstanding U.S. debt exceeding $34
trillion, the Fed’s Balance Sheet is in some serious need of Ozempic, and with Congress in a
state of seeming paralysis, it is unclear when, if ever, we will get our fiscal house in order.

107% in 2029

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 While our total debt is still manageable at 122.9% of nominal GDP, it is staggering to think
that the ratio was roughly 33% in 1980. Meanwhile, with those nearly $2 trillion annual
deficits (see below), the debt situation will not improve anytime soon. Who will be buying all
our debt remains to be seen, if China, Japan, and Saudi Arabia develop a chronic case of
treasurydebtitis, a unique case of financial indigestion? Perhaps it will have to be the Fed
itself, in a sequel to Quantitative Easing 3. Look for the upcoming release of “QE4: The
Reckoning” on a streaming outlet near you, to be released later this year.

So, with that 2023 backdrop, what should we expect 2024 to look like? In order to help
me gain better insight into what 2024 may hold in store, I assembled a cracker jack team of psychics,
pundits, and wizards, including Carnac, Cleo, and Dumbledore (again, Google away, or Ask Jeeves, if
he’s still around).

Frankly, after these professional psychics made some absurd predictions about the NY Jets winning
next year’s Super Bowl and the Golden Bachelor’s marriage working out, I realized I might be better
off seeing what the second string has to say, so I took note of the the following forecasts by the
Federal Reserve, Moody’s, Fannie Mae, the Mortgage Bankers Association, and the National
Association for Business Economics. Here are their predictions for GDP, CPI, and unemployment.

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One cannot help noting the wide disparity of forecasts. Fannie Mae projects a recession in 2024, a
decline in GDP by -0.4% this year, a far cry from the 1.7% in growth forecast by Moody’s. And if this
particular group of forecasters can’t agree, consider a recent Wall Street Journal survey of 100
professional economic forecasters. They expect U.S. GDP to increase by a whopping 1% (no
recession), essentially in the middle of the forecasts set forth above. The bottom line? Psychics are
useless and “professional” forecasters do not seem to agree on much.

For my part, I think 2024 is going to be a challenging year. I foresee continued weakness in real
estate - residential and commercial - especially as mortgages mature, rates on floating rate loans
reset, interest rate caps expire, and capital calls become even more pervasive. Here are a few of the
warning signals and headwinds I am watching closely in order to better gauge what is to come this
year.

• The inverted yield curve: The yield curve (e.g., rates on U.S. Treasury securities at varying
maturity dates) has been inverted for over a year, with long-term rates yielding less than
shorter-term yields. For example, at last glance, the 3-month T-Bill rate was yielding 5.4%,
while the 10-year rate stood at about 4.1%. Typically, inverted yield curves foretell economic
slowdowns, if not recessions. In fact, since all eight of the past recessions in the U.S. were
preceded by 10-year yields were less than those on 3-month securities. To be fair, there have
been false negatives when this phenomenon occurs, but not since 2000.

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 • Global growth concerns: According to the World Bank, the global economy is “headed for
the worst half-decade in 30 years,” which would translate to the weakest period of economic
growth since the early 1990’s. Let’s face it. The Russia-Ukraine conflict and Middle East
unrest, coupled with global inflation and higher interest rates, present serious economic
headwinds. FedEx recently cut profit forecasts, while the cost of sending a container from
China to Europe has climbed 114% over just the past month, as ships avoid the Red Sea,
potential attacks by the Houthi, and instead, send ships around Africa, at an incremental cost
of $1 million in fuel costs and an additional 10-day delay. China’s annual exports fell last year
for the first time since 2016. The U.S. is not immune from these global influences, of course.

• Equity markets are expensive and market breadth disappointing: While the equity
markets performed better than admirably last year, there are concerns lurking under the
hood. The “Big Seven” in tech (e.g., Nvidia, Alphabet/Google, Meta, Apple, Amazon, Tesla,
Microsoft) were up 75% in 2023 alone and now comprise 30% of the entire S&P 500’s value.

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 Maybe it is merely the “rich getting richer” or in times of uncertainty, “stick with the known,”
but the lack of breadth is concerning, especially with the market trading at some thirty-one
times earnings, levels that have not been seen in over 20 years. There is still plenty of froth
out there, and I have not even mentioned the rally in Bitcoin or Coinbase, up over 150% and
250%, respectively, since the start of 2023. The true fundamentals behind such a rise escape
me.
50 18
1981 2000
Price-Earnings Ratio (CAPE, P/E10)

45 16
40 14

Long-Term Interest Rates

35 1929
12
30 1901 30.8
Price-Earnings 1966 10
25
20
Ratio 8
6
15
10 4
5 2
1921 Long-Term Interest Rates
0 0
1860 1880 1900 1920 1940 1960 1980 2000 2020 2040

In addition, U.S. equity prices have never been so expensive as compared to international
stocks. Again, perhaps it is merely investors flocking to perceived safety, but we know how
fickle investors can be.

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 • Increasing delinquencies and defaults: It comes as no surprise that delinquencies and
defaults on auto and credit card loans are starting to creep upwards, and I expect 2024 to
witness even greater dislocation, as interest rates reset on floating-rate debt, and rate caps
and/or debt mature. So much depends on what the Fed does, which in turn, of course, rests
on how the economy performs and there is not much consensus there, as discussed. This
trend is global, to be sure.

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 Not surprisingly, banks are pulling in their lending horns in response to the rising
delinquencies and increased economic and market uncertainty. The 2024 economic drag
resulting from this credit contraction presents a consequential economic headwind.

At least recent bank earnings announcements have allayed some concerns about the health of
our banks. JPMorgan Chase just indicated that it made $50 billion last year, and collectively,
JPMorgan, Bank of America, Wells Fargo, and Citibank earned $104 billion last year, up 11%
from 2022. Obviously, we will have to see how regional and smaller banks are holding up
amidst shrinking net interest margins and increased defaults and delinquencies.

• Continued weakness in finance, tech, real estate, consulting hiring and

increasing layoffs: Overall employment figures remain robust, at least according to
headline job data. The national unemployment rate sits at 3.4% after the economy added
223,000 jobs in December, above expectations. Increased hiring does not usually portend an
economic slowdown. However, all of the economic forecasters, and even my three hired
psychics, predict that unemployment will rise above 4% in 2024, with Wells Fargo proving
the most bearish unemployment forecast of 4.5%.

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 At this point, the unemployment rate has been less than 4% for twenty-three consecutive
months. While some of this robust labor data reflects the recovery post-Covid, the last time
the labor markets experienced this sort of uninterrupted level of unemployment was over 50
years ago, so it is still noteworthy. But is this sustainable? Is the labor market as healthy as it
seems?

I find myself on the more bearish side, as I see more layoffs coming, especially among white
collar workers. Consistent with this premise, we are barely three weeks into 2024 and the
following firms have already announced fairly sizable job cuts: Amazon, Blackrock,
Google/Alphabet, Intel, Nike, Citibank, Unity Software, IBM, Xerox, and Wayfair, among
others. It may be that while white collar hiring lags, numerous job openings lurk in
hospitality, bars and restaurants, childcare, and healthcare. College, MBA, and law school
graduates are finding the employment market especially difficult, so perhaps it is once again,
a tale of contradictory data.

Consistent with this perspective, data out just last week indicates that jobless claims dropped
sharply in December, to their lowest levels in over a year (187,000), so there you go. Signs of
weaknesses in the employment market show up here and signals of strength in the labor
markets show up there.

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 And what about wages? In 2023, wages increased 4.1%, essentially matching inflation, so the
real (above inflation) wage gains that we witnessed in 2019 through the early part of 2021,
have not persisted.

Meanwhile, almost ten million workers in twenty-two states received increased

wages at the start of 2024, due to statutory hikes to the minimum wage in
twenty-two states.

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 It really is a good news, bad news story. On the one hand, I think it is critical that the blue-
collar workers and the middle class receive higher wages and achieve greater financial
independence, along with increased savings and wealth. Our tenant base, being mostly blue
collar, would benefit from higher wages, as would we. However, these pictures say it all.
Wealth inequality in the U.S. continues to expand as the rich continue their wealth-getting
ways and some rebalancing is crucial to our economic and political stability.

On the other hand (there always is that “other hand”), higher wages translate to higher
consumer spending and higher inflation, all else equal, and we would like to see moderation
of both to provide the Fed with increased incentives to cut interest rates. Hopefully, we can
have our cake and eat it too, increasing wages and wealth of the middle class, while not
placing unwanted pressure on prices and inflation.

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Let’s take a closer look at housing markets, both single- and multifamily

2023 was an odd year in the housing markets. As discussed, (arguably, ad nauseum), single-family
home prices rose despite higher interest rates, while transaction volume dropped sharply, leading to
odd headlines like “Home Prices Hit Record as Sales Fall.” The result was an ever-expanding gap
between the “cost to own” and the “cost to rent.” However, multifamily fundamentals did not
improve with these obvious tailwinds, as rents softened, albeit modestly, and vacancies ticked up.
Rents nationally decreased 0.8% in December and vacancies ticked up, to 6.5% at year end.

Rents fell in 2023 across 40% of U.S. metros – and nearly all of them (primarily in the Sun Belt,
Mountains, and West Coast) witnessed significant new supply added to the market. In stark
comparison, nearly one-third of U.S. metros (almost all in the Midwest or Northeast), witnessed rent
growth of 3% or more last year, generally in markets with limited new supply.

Indeed, supply remains the culprit and we will see increased supply this year before new supply falls
sharply in 2025. Specifically, apartment supply jumped to a 36-year high in 2023, resulting from
construction projects that started back when occupancy rates and rent growth were higher.
Approximately 440,000 units were completed last year, and even more (671,000) are scheduled to
be delivered this year. After that, completions will plunge due to the recent slowdown in starts linked
to higher financing costs and softer fundamentals. In turn, occupancy and rents should rebound
sometime in the latter part of the year, or perhaps in 2025.

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And, of course, not all markets are created equal. On the single-family front, the “hottest” markets
for 2024, according to Zillow, include Buffalo, Cincinnati, Columbus, and Indianapolis, markets
which have been mostly left behind in recent years. In fact, I can’t recall seeing the words “hot,”
“Buffalo,” and “Cincinnati” in the same sentence before, except during some NFL Playoff game. I
gather it mostly comes down to affordability, as the median home prices in each of these cities are far
lower than the national average, and the reality that these cities have been “left behind” in recent
years in terms of economic and population growth.

Meanwhile, the WSJ released its annual list of the top “emerging” housing markets this fall, which
are (drum roll, please): Topeka, Kansas; Elhart-Goshen, Indiana; Oshkosh-Neenah, Wisconsin; Fort
Wayne, Indiana; and Lafeyette-West Lafayette, Indiana. At least the WSJ didn’t say that the Topeka
housing market is “hot,” but that might change this year, so stay tuned.

Perhaps the biggest news regarding the single-family market, in a shot heard round the world (or at
least in every single-family residential brokerage office), jurors in Missouri found the National
Association of Realtors guilty of anticompetitive behavior, awarding home sellers $1.8 billion in
damages. While I am sure the case will be appealed, one has to wonder whether this is merely an
initial shot across the bow and whether those oligopolistic and sticky 4-6% commissions are finally at
risk, or whether there are some idiosyncrasies in the Missouri market or laws? In any case, we have
witnessed transaction costs declining across virtually every asset class over the last 30 years due to
technology, while the fees and costs to buy or sell real estate have remained stubbornly high…and
excessive, in my view. Maybe, at long last, the real estate brokerage industry is finally going to be
disrupted, with those lofty commissions going the way of the Dodo bird. I am not holding my breath,
but we shall see.

One other housing-related anecdote caught my attention towards the end of the year. Obviously, the
economic and housing challenges of downtown San Francisco have been well documented. Consider
one example, a high-end condominium close to City Hall, which sold for $1.25 million in 2019, in
perhaps what can now be considered the “good old days.” Well, following the pandemic and growing
homelessness and lawlessness in the area (who knew you actually are supposed to pay for items at
CVS, Walgreens, or Safeway?), that same condominium is listed for $769,000, and there seem to be
no takers. However, away from its troubled districts, the San Francisco and Bay Area housing
markets are otherwise doing very well, with prices having risen 3% in San Francisco last year and 8%
in San Jose. The story is similar across many markets: pockets of price weakness, but surprising
overall strength.

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In the multifamily market, year-over-year rent growth was highest in New York City (up 5.9% in
2023), recovering from its Covid-related downturn, while Austin’s rent declined the most (down
5.7%).

From a different perspective, the fastest growing markets for apartment renters include Huntsville,
Alabama, Sioux Falls, South Dakota, and Lakeland, Florida. Who would have guessed?

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While the fundamentals surrounding multifamily housing remain promising (single-family homes
reman out of reach for most), with rents and occupancy rates poised to rebound later this year and
next, that is not to say that the industry is not stressed as a result of rising interest rates and cap rate
expansion, and nobody in the industry is entirely immune. According to Freddie Mac, delinquencies
are rising and are at their highest levels since the Great Recession nearly 15 years ago.

Before we leave housing related news, I wanted to share a couple of forecasts regarding housing
starts, rental growth, and occupancy levels, again from the same cast of characters mentioned earlier
(no, not the psychics). Directionally, all agree, with new starts dropping sharply, as expected, and
rents and occupancy levels marginally improving. I generally agree with these forecasts, though I
think overall effective rent growth may be a tad softer than anticipated in 2024 as new projects begin
aggressive lease-up efforts and boost occupancy through expanded concessions.

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Now that you have made it this far, here is the bonus part of the quarterly memo, like
CVS Extra Bucks: “Read 20 pages, get five more.”

• The Office Dumpster Fire Continues to Burn: In news surprising absolutely no one,
the office market continues to well, implode, with rising vacancies, declining rents, and
foreclosures. Prices are down 40% from their peaks and anecdotes of distress dot the news
almost daily. At last glance, the national vacancy rate approximated 20% and that figure will
increase n coming months as existing leases roll. I sure wouldn’t want to own office buildings
in Dallas, Houston, or Austin, where vacancy rates exceed 25%.

Here are a few recent office-related headlines, which pair well with any intoxicant:

- “Distressed West LA Office Building Sells For Half Its Pre-Covid Price”:
Westwood Terrace a nearly 165,000 square foot building in Westwood, right in our
backyard, sold for about $45 million a mere two weeks ago. It was last acquired for $92.5
million by Goldman Sachs in August 2018.

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 - “Chrysler Building’s Fate Is Uncertain After Co-Owner Is Forced to Sell”: The
Chrysler Building, one of NYC’s landmark buildings, will be sold after an Austrian court
ruled that Signa Holding had to sell its stake in the building as part of a restructuring. The
news followed Signa’s insolvency (bankruptcy, essentially) filing in Austria this past
November. If there is a poster child for the office market challenges, it could be the
Chrysler Building, which sold for over $800 million in 2008 (buyer was Abu Dhabi) and
to Signa for $150 million in 2019. Ouch.

- “Alexandria sells South Boston sites for barely half $169M purchase price”:
In late December, Alexandria Real Estate Equities sold two sites in Boston that it had
acquired in November 202o for $168.5 million with an ambitious redevelopment plan,
only to scrap the plan less than three years later, finally selling the assets at year end.

- “Bankrupt WeWork to Immediately Dump 40 NYC Office Leases”: WeWork

entered Chapter 11 Bankruptcy in early November, finally concluding that WeDon’tWork.
It is hard to fathom that the company was once valued at almost $50 billion.

• Demographic Information Continues to Provide Material and Relevant Data to

the Financial and Property Markets: Over the years, I have written extensively how
changing U.S. demographics are going to impact the financial and property markets,
including wealth inequality (see above), declining marriage, birth rates, and population
growth, as well as migration from the coasts inland (Manifest Destiny in reverse). Well,
according to the most recent data, the U.S. p0pulation is set to shrink by 2100. You will note
that the big variable is immigration and unless you have been living under a rock, we know
how that political football is being handled.

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 Meanwhile, South Carolina and Florida grew fastest in 2023, as Southern states saw the
largest population inflows, while California lost about 750,000 folks, including some of its
wealthier residents seeking lower taxes. California budget analysts project a $68 billion
deficit this year because of an anticipated 25% decline in individual tax collections.

• Perhaps Twain Was Right and Youth Really Is Wasted on the Young: At the end of
the last quarterly memo, I commented briefly on the ongoing craziness on our college
campuses, where I happen to spend a decent amount of time as a long-time UCLA Anderson
School of Management faculty member (almost 30 years, as most of you know). Anyhow, a
couple of recent polls shocked me. In one, conducted by the Economist, some 20% of people
aged 18-29 here in the U.S. believe that the Holocaust is a myth. 20% and a myth! Such active
denial is far more sinister than mere ignorance or a lack of education. An even larger
percentage believe that the Holocaust has been “exaggerated” and that Jews have “too much
power in America.”

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 Another survey of protesting students at five different college campuses commissioned by the
WSJ indicated that less than half could identify the relevant river or sea from their chant
despite nearly 90% indicating their support for it. Less than a quarter of them knew who
Yasser Arafat was or what the Oslo Accords were about. The lack of understanding -
historical, geographic, and demographic – is deep…and troubling.

But there is hope. After survey respondents were shown a map and what “from the river to
the sea” means vis a vis Israel, over two-thirds went from “supporting” the chant to “rejecting
it.” My sense is that student protests reflect youthful angst, pessimism, and a lack of
education as much as anything else. Gen-Z is rightfully concerned about the cost of housing,
education, and related debt levels, an uncertain and changing job market, AI, geopolitical
unrest, political divisions, and social media, concerned that they will be materially worse off
than the generation that preceded them. As is often the case, dialogue and education remain
the likely solution.

In closing, 2024 will be an extremely important year, as we (hopefully) obtain eagerly

awaited clarity regarding inflation, interest rates, geopolitical conflicts, commercial
real estate values, and our political future.

In my career, I cannot recall a market where there was so much uncertainty and conflicting data
about so many different things. Sure, the memories of many market downturns remain close at hand
(1989-1992 recession, the 1998 global financial crisis, the dot-com implosion, the Great Recession,
and Covid), but today, so much remains uncertain about everything from the health of the consumer,
the direction of and future for the labor markets, inflation and interest rates, geo- and national
politics, the future of the office and housing markets, the value of a college (and graduate level)
education, etc.

Perhaps this chart says it best, even more clearly than the earlier forecasts I provided from various
market participants. When asked as to the probability of a recession in 2024, 84% of C-suite
executives believe one is coming versus nary a single member of the Fed. Consumers (69%), various
investment banks (15-40%), and economists (48%) find themselves in-between. Long story, short?
Consensus is nowhere to be found.

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While I am absolutely convinced that the future of housing in the U.S. and globally lay in higher
density, multifamily assets, Clear Capital and its competitors will need to work through the
significant headwinds of increased supply, higher interest rates, expiring interest rate caps, and
upcoming debt maturities, and we are very focused on doing so, and we remain grateful for your
support in the process.

Perhaps Rod Serling said it best, with some appropriate edits and insertions: “There is a fifth
dimension beyond that which is known to man, economists, or market forecasters. It is a dimension
as vast as space and as timeless as infinity. It is the middle ground between light and shadow,
between science and superstition, and it lies between the pit of man's fears and the summit of his
knowledge. This is the dimension of imagination. It is an area which we call the U.S. economy in
2024, or during various holidays and television marathons, The Twilight Zone.”

Finally, in what is a Q4 newsletter tradition, I will wrap up this memo with some additional musings
from two of my favorite philosophers and literary companions, Calvin & Hobbes:

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With that, the entire Clear Capital team and I hope that you had wonderful holiday seasons and that
2024 is a healthy and prosperous year for you and yours. Again, thank you for your ongoing support,
for which I remain appreciative and grateful.

Best,

Eric Sussman
Managing Partner

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