Be the next big short, real estate four reasons why we are asking that question tonight. First, the jobs market jobless claims coming in worse than expected pointing to an uptick in layoffs. Plus a stimulus stalemate, Goldman Sachs slashing its numbers in half as Congress Stalls on a stimulus package many big businesses rethink the need for large office space. When you put these factors together, is real estate a house of pain . Could it be the next big short tim . Well, maybe number five are those new home Sales Numbers that came out today that showed the exodus out of the northeast into the south is very pronounced youve basically doubled the amount of new homes in the south region from april from around 330 to 630 northeast isnt growing. A lot of these are major metropolitan areas and a lot of these are a function of the work at home. With that, i think this is something thats very, very concerning also, as with markets you have to look at the commercial real estate a function of where have we come from where weve come from is a place where especially as it relates to commercial office space and as it relates to a lot of the buildouts and the attachment because of zero Interest Rates that have allowed a lot of inefficiencies in the Underlying Properties but still works out or have worked out i think its something thats very concerning, not just a little concerning. I think were still earlier in that trade because the reality is theres still a lot of people hanging on work from home is not changing i dont know that we stay in this capacity, but location independence means that Major Urban Centers do not need people in big commercial Office Buildings like they used to. No question. This question tonight, karen, is a little bit different from how we typically start the show. Its sort of a thinking question people see these trends out there. We dont normally think. One plus one plus one together, does that equal four or does it equal a five in that this could be a tradeable trend here thats why were asking this question people are sitting at home seeing all these things unfold and thinking is there pain in commercial real estate, is it time for some sort of a trade here well, tim touched on the most important point, which is zero rates. That has been the balance that has allowed the real estate trade not to completely fall apart. The lower rates are, the higher the multiple of earnings we dont know what the aernearns will be. This exodus is, i think, still early. You know, i look at the premier kind of name like a boston property it is only a little bit off its march low. Its a premier name but theyre going to own premier buildings that have higher vacancies than theyre used to. The stocks come down a lot. I dont own it the other one to me, new york city is not really where you want to be vornado has a particular emphasis on new york, a particular emphasis on hudson yard so that would be one even though its not far from the bottom, i still wouldnt buy it here ive kind of stayed away from the whole space. If rates move the wrong way, if rates move higher, there will be more pain here. Dan, you and i currently live in new york city there are other panelists who have their permanent residences there but not currently residing theres a lot of homelessness, crime is up. Ceos have written the mayor complaining about the quality of life its only a matter of time until they decide, you know what, maybe new york isnt cracked up for what its supposed to be considering how much were paying in rent and how little of a footprint we actually need. I think thats a real near term thing right now if youre on the streets of new york city in the last few weeks, you realize this city has come back to life theres a lot of residents who have come back to send their kids back to school. Let me tell you ive lived in new york city for almost 25 years. I remember what i was like after 9 11 and the Global Financial crisis these were really blips for this town for all intents and purposes i would expect the same thing to happen here. I understand this is a different nonquantifiable situation as it relates to commercial real estate, but the people of new york who have been here for decades and decades who make the city what it is, theyre not going anywhere our friends who were out there at the beach or wherever they up in the country, theyll be back. There are lower lows to come, but the one thing id say to karen is Interest Rates arent going back any time soon i expect youre going to see the google and the amazon and all these guys to come back in here and buy the lows of a lot of this real estate these hubs, wall street, hollywood, silicon valley, washington, d. C. , all of them, they are massive Innovation Centers and i just dont think that 100 years of progress are going to be transformed especially when were looking at the covid situation in the Rearview Mirror at some point in 2021. Dan is playing the role of the optimist so many people in the past have written the obituary for new york city and other urban centers and theyve all rebounded in every single instance where do you stand you started the show saying were going to start tonight with a thinking persons question that leaves me out people are fleeing the cities and Municipal Bond defaults are at the highest theyve been in ten years. I worked with Meredith Whitney for a while and she called the bank problem back in the day if you think about whats going on in terms of cities, cities are in trouble there was an article two days ago discussing exactly what were talking about now. I dont know how that manifests itself into the u. S. Equity market but its not encolonurag. Were on the precipice i think theres going to be a real problem with muni bonds Going Forward in certain cities. Karen, are low Interest Rates, is that going to be the savior of a lot of these weve talked about so many sectors managing to get to the other side is this another instance where if they can get to the other side, whether it be one, two, three years down the road, theyre in the clear because Interest Rates are still on their side yes that absolutely could happen but that doesnt mean the stocks are a good buy here. I think theres more pain to come i love new york city, but i think as tax rates go up, which they very well could, we could see more of an exodus of new york city. You read all the time about people heading to florida. Taxes are better, the weather is better i think those people are often highly paid in the Financial Services theyre leaving and maybe opening offices down there im a Firm Believer in new york coming back. I just dont think that means you need to buy the stocks right here. Lets settle the score. Is real estate the next big short . Joining us is jonathan lit what are you thoughts and specifically about new york City Real Estate . We wrote a paper on new york City Real Estate back in may where we suggested theres going to be a lot of trouble ahead we estimate office values will be down about 40 . Its really a game of stay alive to 25 i think guy said that we love new york, i love new york, the energy attracts the best and the brightest. Thats not going to change, but between now and 25 we have to get these office rents down, the occupancies are going to come down, the values are going to come down. The debt is going to have to be restructured between when the city thrives again, which it will once we get through this reset, theres going to be more pain to come. We said that in may. People a companies are trying to get people in the office theres a lot of resistance. The fundamental problem is the work from home phenomenon is here to stay it didnt work post 9 11 it works now the technology is there. In terms of hitting this trough metrics jonathan, where are we in this process how much progress have we made to go into those lows . Its just the tip of the iceberg. You dont have the reset of rent you dont have the leases expiring and people shrinking or not renewing their leases. We dont really know what the Net Operating Income of these assets is going to be. There are some parts of real estate which are seeing a major boom from covid. They were in good shape before theyre in better shape now. So real estate gets painted with a broad brush. Theres a lot of stocks which are up for the year and which have really excellent prospects. Youre long Residential Home builders, correct . Yes and then youre short what then if your thesis is so strong when it comes to being at the tip of the iceberg in terms of the pain in new york City Real Estate, is it empire state real estate, how long have you been in this short and how does this play out for you . We dont comment on what stocks are short we did in our white paper highlight empire state empire state has multiple problems they have the observatory at the top of the building. I think the Observation Deck is going to be challenged the Empire State Building is a lot of smaller, lower credit quality tenants. I think theyre going to skip or they just wont renew their leases then the retail, which is getting decimated right now, is going to see deterioration it was before the pandemic and it will post the pandemic. I love new york. Right now its not a pretty place to own office space. I love new york too new yorks not the only city in fact, theres probably folks watching our show around the country where across urban centers, commercial properties and commercial real estate, at least on the store fronts, have been empty for years you go around major cities and youve seen empty store fronts well before covid. Can you explain the dynamic of were they in pain the last couple of years or was it the idea that they were getting the rents and the rest of the yields made those overall investments very attractive . Or were they hanging in there and is that part of your thesis right now . We had strong fundamental trend precovid19 in single families for rent and warehouses and data centers and cell towers that hasnt changed. Even in a market Like Northern california, youre seeing an acceleration but for sectors challenged before covid, its gotten wors , it really is a tale of two real estates. One which is under an enormous amount of pressure, has seen a permanent impairment to value. To karens point, we are at record low rates cap rates are going lower. For assets that have good underlying fundamentals like warehouses and data centers and Single Family for rent, youre going to see a material valuation uplift and really incredible growth out of those companies. Thanks for being on what are you seeing in the commercial Mortgage Securities market what is the debt market for commercial real estate look like now . Yeah. I dont think it fully reflects the damage were going to see in the hotel and the office obviously it was well known in retail precovid but i think theres going to be a lot of trouble in the hotel and the office space out there its probably going to get worse before it gets better. In your view, is the real opportunity on the rate side of things or in the debt market were equity investors. Thats where we concentrate. For debt investors, i think there will be some interesting opportunities. Tim mentioned weve got viewers from across the country, what were seeing in new york, i know youve done a lot of work on new york city, but is this basically a microcosm of whats happening in other urban centers . Unfortunately the population was already in decline in San Francisco through covid. Thats declining were hearing apartment rents down 30 in San Francisco. Its just unfortunate. Like likewise, if you want to buy a Single Family home in Northern California or you want to rent a Single Family home, theyre few and far between and the prices are going up guy adami, a rather sober analysis what do you think . Stay alive until 25. But what do you do in 22 . There are a lot of places that arent going to be around in 25. Jonathan talks about a stock aiv. Its just not performing its fascinating how poorly the stock, the security has done on whats been a remarkable tape. If you look at it and say gee whiz, if you want sort of a barometer for how bad things are, aiv, im not suggesting you buy it or sell it but you should absolutely have it up on your screen to show you whats going on in jonathans world. Dan nathan, you were playing the role of optimist are you still after what you heard . Im not playing it. I just am. I mean, you know you guys talk about stocks go up all the time. Our cities are not crumbling theyre in the going away. People are sick of being with their families all day they want to get back to work. People in their 20s and 30s are sick of living with their parents again. Theyre going to go back to the cities where the opportunities are going to be. Theyre not going to be in rural areas. Is america overstored . Yes. Are the malls going away yes. Has retail been challenged with all of this Online Shopping thats been crushing it, especially over the last year but over the last decade yes. Talk about commercial real estate, yes theyre going to have a really hard time. I dont even know the tickers of them i dont know what to tell you whether to buy them or sell them ill buy new york and ill average down the whole way over the next year or so and i think well probably have a nice bottom at that point. In spirit i am with you, dan. But as the host of this show, karen, i will ask you after hearing what jonathan has said are you tempted to make a trade . I mean, hes very good at what he does vornado, if i had to do one, that would be it i love hearing bullish dan i amlo long new York Real Estate personally i hope it comes back, but im not excited at all about whats to come. We havent seen the rents roll over yet we havent seen the leases and what those prices will be. Its not in the debt market right now. I think thats interesting too. Coming up, we are all over the after hours action in shares of costco. Later, why sheila bair joins us. Welcome back to fast money. Weve got an earnings alert on costco shares shrinking after reporting results. Contessa we saw a solid beat on earnings and revenue, sales increasing since march when stockpiling was a favorite activity of american shoppers. Ecommerce coming in 90 higher. The traffic internationally is down 1 in the United States clearly covid is having an impact on the bottom line. Costco attributes a 281 million expense for the quarter because of premium wages and the costs associated with sanitation were getting some insight into whats driving the sales here. It is those core offerings, groceries, pharmacy and the like, Online Grocery grew several hundred percent. Fresh food was an especially strong driver of margin improvement. They mentioned reduction in spoilage still, travel is soft, though it is seeing some modest improvement. Other ancillary offerings are soft finally theyre noting some hiccups in the logistical supply chain. Theyre still having problems keeping sanitary wipes and gloves in these stores they have just started taking questions on the call right now. Keep us posted. Guy, i know you know this, you look at charts all day long. Im sure youve seen this one on costco its been an underperformer versus retail specifically during the pandemic. Yeah. Its obviously trading off here. It came smack in the middle of the range in terms of ept estimates. At that valuation its not good enough margins were okay. Everything was okay. It was not a blowout quarter so the answer is how you trade the stock. I think the stock made a prior alltime high back in february around 328 quite frankly in this environment, i think thats where you buy it 3 328 is your entry point. Tim, you like costco here i like costco i think if you look at where their ecommerce sales up over 90 , thats a great story. Relative to the marginal increase in that business for them compared to a walmart, theyre not winning the war here theyre winning some battles relative to themselves i think the pressure thats going to continue to come from walmart plus and the Pricing Power and this was nothing in the margins there that got you really excited that their business is running a lot more efficiently. I think where we may go in the fall with covid19 should continue to be constructive. This is a stock that although it had underperformed its retail peers, it was up 25 into this number off of june its had a nice run into this. Doesnt surprise me to see some profits. I like walmart heres whats coming up next time to get bullish on banks . One of our traders is starting to see light at the end of the table. Plus, sheila bair warned us of danger if ngsscore didnt pass another relief bill. What she says now after months of dead lock in front of you lik. Like its a mirror, dad. You know . Alright, okay. Hows that . Is that how you hold a mirror . [ding] power e trade gives you an awardwinning mobile app with powerful, easytouse tools and interactive charts to give you an edge, 24 7 support when you need it the most plus 0 commissions for online u. S. Listed stocks. Dont get mad. Get e trade and start trading today. How did you come up withd opened all these backstories . Tudio. Dont get mad. Get e trade i got help from a pro. 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