From Where I Sit S3E3 Transcript: Ken Bernstein, President & CEO, Acadia Realty Trust

Ken Bernstein:

Of the real tailwinds for a lot of open-air retail, but even in closed A malls, is the pivot by many brands out of the department store and into their own stores. And so, we are, in many cases now, finding younger brands. They may be very successful in Europe, but unknown here, and bringing them in when historically the department stores would have been their first stop.

Tom McGee:

Welcome to From Where I Sit, the award-winning podcast where we explore the forces shaping America's built economy. I'm Tom McGee, President and CEO of ICSC. This season, I sit down on camera with the leaders shaping the future of the built world, commerce and technology. From emerging trends to groundbreaking innovations, we'll explore what's driving change across our communities and the broader economy. Let's get started.  

Today I'm very pleased to welcome a longtime friend and someone who has had a front row seat to virtually every major evolution in retail real estate over the past several decades. Ken Bernstein, President and CEO of Acadia Realty Trust. Ken co-founded Acadia in 1998 and has led the company as CEO since 2001. Acadia owns and operates street and open-air retail properties in some of the most high-growth retail corridors across the country. Over the course of his career, Ken has navigated many economic and real estate cycles, shifts in consumer behavior and some pretty significant changes in how we think about the role of physical retail. He also knows ICSC extremely well. Ken has served on ICSC’s Executive Board, Board of Trustees, and previously served as our Chairman. He brings a perspective that extends well beyond his own portfolio to the opportunities and challenges facing our industry. Ken and I have known each other for many years, and I've always appreciated his ability to look beyond where the market is today and think about where it's going next. There's a lot happening in our industry right now, from the strength of physical retail to the evolution of our cities and suburbs to shifts in capital markets. So we have plenty to talk about. Ken, welcome to the show.

Ken:

Well, thank you for having me. Great to be here.

Tom:

Well it is great to be here. And Ken and I do know each other super well and I have just really enjoyed being his friend.

Ken:

Since your earliest days as CEO of ICSC.

Tom:

Yes, Ken was on the Executive Board when I began eleven years ago, a little over eleven years ago as ICSC CEO. And shortly after that he became the Chair. And Ken and I have stayed friends—he's been the Chair of our nominating committee and Ken and I have stayed friends throughout all of that. So it's a pleasure to get to talk to you. And as I made reference to, you have had a front row seat to a lot of things that have happened both in the broader economy and in our industry. But let's start at the most basic level. You're an attorney by background. You grew up in the Upper West Side of Manhattan. I know you went to high school in Brooklyn, so you navigated from the Upper West Side down to Brooklyn, which maybe, you know, is a little bit of your love of city retail perhaps grew in those periods of time. But how'd you end up in this industry as an attorney? And now you're leading a well-respected public REIT?

Ken:

Yeah, I didn't expect to head that route when I headed into law school. It was luck and circumstance. A couple friends said, you know, while you're a summer intern at a law firm, why don't you at least try the real estate group? And I did, and it was a very powerful group at the law firm back then, it was called Battle Fowler. Today it's called Paul Hastings. and then the rest is history. I realized that as much as I liked practicing real estate law and I did, the I was more intrigued by what the business professionals were doing. So after a few years, two seminal events, I married my law school sweetheart. And if you know much about the law profession, two lawyers and one family, at least one too many. And she’s a far better attorney than I was.

Tom:

I did not know that Janet was an attorney also.

Ken:

Yes. And then second, the real estate market collapsed in the early ‘90s. And I knew just enough that, you know, get in at the bottom, as opposed to the opportunity to get in at the top. So I did. We started as a private company. Then in 1998, we took over a troubled shopping center REIT. And that's how we got into the shopping center space and into the public REIT space and been at it since 1998, as you pointed out, which now we reflect has been a long time. I prefer not to think of myself as old, just cycle tested.

Tom:

I would say you're—I wouldn't use that term. I'd say experienced. You're experienced.

Ken:

Experienced. Cycle tested and experienced, I'll take that.

Tom:

You know, I want to get into some of those different cycles that you've lived through and experienced. But you know, why don’t you start first of all, very entrepreneurial, starting this company in 1998. You know, a brave thing to do. It's part of what makes our industry and the American, you know, system so great. But when you look back, what you thought about this industry when you began this journey and what you think about it now, what were some of the big, you know, kind of misconceptions you may had then and some things that maybe proved to be right?

Ken:

Yeah, well, I mean the world has changed so dramatically, if you're saying since 1998, when we were going through the first dot-com bubble and there was real uncertainty as to where physical retail would fit in. Then the bubble burst and it became clear that physical retail had a place in the U.S. economy. And so it was a great time to build a company in 2001, let's say, until the global financial crisis, ’07, ’08, ’09, things started to become a little different. So there's been that those natural cycles in terms of, call it tenant demand, tenant performance. But simultaneously, the real estate industry has become so much more sophisticated financially compared to the 1980s, 1990s, when it was really a private industry. The securitization of commercial real estate, the role of public REITs in commercial real estate, that's really where the biggest changes have occurred.

Tom:

Yeah. I mean that's true. And there's still a lot of, you know, private family run businesses within commercial-

Ken:

And there always will be. But the level of sophistication to run a private or a public company, yeah, the different tools available, the different types of financing, the different types of investors is so much different than when the first opportunity funds arose in the early 90s.

Tom:

You know, Ken, I want to talk about some of those cycles that you've navigated through. But one of the things I want to go back to, you were an attorney, practiced law, kind of fell into fell into love with real estate, launched the business. Is your experience as an attorney something that you still leverage today?

Ken:

Probably the seven or eight very experienced lawyers that work at Acadia would argue that I have no legal skill whatsoever, and they're probably more right than not. It's an important discipline. What I tell our summer interns, college kids, saying, should I go to law school or not? It's a three-year commitment, which when you're 20 years old, sounds like a lifetime. And you and I know three years can go pretty fast but it is a real commitment, and then I would argue it really pays to then practice law for several years. If you're willing to make that commitment, that is a pathway to understanding a component of commercial real estate. And so I think then it's great. There are other pathways as well. So you've got to be ready for that commitment.

Tom:

I mean I assume outside of the knowledge of the law, it gives you kind of a disciplined thought process that you've learned through, you know, law school when practicing law.

Ken:

Yeah, those people who actually go through law school would argue the knowledge of the law is the least impactful piece by the time they graduate, you're really learning more a philosophy and a discipline. The actual law you pick up as you go after you graduate.

Tom:

So now let's go to your level of experience a little bit. And you founded the company in 1998, CEO in 2001. So, in no particular order, let's just walk through some of the big things that have happened over that period of time, and I'm sure we're missing some. The dot-com bust, 9/11, the global financial crisis, the so-called retail apocalypse, COVID, inflation, disinflation and now a very different and evolving interest rate environment. Which period was the most challenging for you, do you think?

Ken:

For me personally, it was the most recent. It was COVID. But i each of those cycles can hit different companies in different ways and different people and families different ways. COVID was horrific because it was also a health crisis. And it was very much a crisis of our major cities. And so for Acadia, how we were positioned as well just watching the country and the globe struggle through a health crisis. That was heart-wrenching. Add to that, this was the first crisis where we were all remote. And I like to be in person. So navigating through it, I give my team a lot of credit. You know, they rolled up their sleeves, we did what we had to do, and frankly we've come out of it stronger than we entered it. But, you know, each of these crises—or what I tell students again is if you aren't prepared for cycles, stay out of the real estate business. We are a cyclical industry, and this one was a uniquely painful one, but cycles are inevitable.

Tom:

I mean it was an event that really impacted in some way every single person on the globe, right? I mean, we've had, you know, obviously significant global, economic, geopolitical events, but it's very rare you have something that impacts every single person in the world, and that was certainly was COVID. Was that the, do you feel from a leadership perspective you learned the most during that period of time as well, outside of just the basics of managing a business, do you feel like that was the most formative or were other periods of time?

Ken:

I think each one, you know, hopefully you develop a worthwhile toolkit that enables you not just to fight the past war, which is what we all tend to do, but also say, okay, how are we going to be different? How are we going to be better going forward? And each one of them, and learning from my team, each one of them hopefully made me better prepared for whatever's next. And so I don't know that there was a distinction other than some are more heart wrenching than the others.

Tom:

Yeah, that one of the praises you said, Ken, learning from your team, that's a really important, you know, attribute as a leader to have. That's something that I've heard other, you know, great leaders say. I know that's something you practice a lot, just interacting with you is not just sharing your views, but listening to other views, which is important in a crisis in particular. Were there any of those when you were living through that you thought, gosh, I think this is this is the kind of issue that—we may not come out of this. You know, retail may be permanently impaired in some ways. Not the company but the industry that thought that it, it's going to be permanently impaired. We're never, never things are never going to be normal.

Ken:

Right. I mean, I like to think of myself as an optimist, but I certainly during each crisis, you get to a point for a moment in time at least where you're like, holy crap, this is the end of everything as we know it. That started in the early ‘90s crash, then the dot-com and 9/11. Each of those—what is amazing is that I can pull myself out of that rabbit hole, but also think about the resilience. Think about the resilience of New York post-9/11. Think about the resilience of our financial industry after the global financial crisis. Think of the resilience post-COVID. And so it pays to be an optimist, but you and I shared enough plane flights and otherwise where we talk about, wow, things, things are looking pretty doomy and gloomy.

Tom:

And yet resilience.

Ken:

Yeah, resilience. And we're at, you know, we'll talk a little bit more about leadership and some of those lessons a little bit later. But, you know, we're in a different place as an industry today than perhaps where people would have thought and when we were living in the depths of the pandemic and then the so-called retail apocalypse before that and the narrative around that. And we're at a point as an industry where, you know, broadly speaking, we're at kind of a supply-demand mismatch where the, you know, the supply of high quality physical retail is just not sufficient to meet the demand for it. How did we get there, in your view? How did we get to that point?

Ken:

Yeah, and there were a bunch of forces starting in the early ‘90s, but let's stick with this century that have put us to where we are today. And I would argue, I think this morning the 10-year Treasury hit a 20-year high. We're also at an interesting pivot point again.

So in the early 2000s, development capital was readily available. The housing boom was enabling retailers to forecast and sign leases in areas that the population had not yet shown up. So you had shopping centers ahead of housing. Then the housing bust that then led to the global financial crisis led us to be at least in certain areas of the country over retailed, which led to a big shock to the system during the global financial crisis, and a repricing of real estate, repricing of rents, and a reset. And 2011 to 2015, let's say, very good time for retail real estate because things were healing and tenant demand was coming back. During that entire time period, other than the 2007 spike of interest rates, we were in a lower-for-longer interest rate environment. For the entirety of this century, with one or two exceptions, including today, which is the majority of what most of our industry knows professionally. interest rates were very low. It was a very benign environment. And that enabled values to continue to increase, cap rates to come down. And we were in a very healthy position 2015-16. And then you mentioned the so-called retail armageddon, which was the rise of legitimate e-commerce. Keep in mind, in the late ‘90s, we thought it would happen and it didn't, but it was now functional. And there are a whole host of reasons that., by 2019, you and I saw that the rise of e-commerce was not going to wipe out bricks and mortar, and we can certainly get into that. And we would have been totally right, but for COVID. All of a sudden, you had an extension of the need for home delivery, e-commerce, all of that.

Fast forward to today, the real question is: what will inflation look like after two decades of very low inflation?

Tom:

Exactly.

Ken:

Where will interest rates settle and thus where will real estate value? Yeah. That's a not so concise explanation of 30 years of retail real estate.

Tom:

No, but it's a good one. And you know, obviously during that period of time, particularly since the great financial crisis to today, for a variety of reasons, you just haven't had a lot of new development. You know, you had, to your point, there was too much development, you know, that happened before the housing actually was built, before homes were built. And then, you know, since the great financial crisis, you just haven't had a lot of new construction. And in some respects COVID kind of helped accelerate a lot of things that were already taking place, including retailers using their stores for multiple purposes now as mini fulfillment centers.

Ken:

Well so here's what we got wrong in 2017, ‘18. And again, I wish we knew, you and I were both fighting the good fight.

Tom:

Good fight. But that was difficult.

Tom:

One way or another, we eventually succeeded. But go back to 2015-16. While we were fighting this fight, I don't think that in general, people appreciated that no sales tax, called out a 6% discount on online purchases mattered. Of course it did. Think about what we all would do to save 6%. And so that was easy. The second thing is, I don't think we appreciated the way we do today that the intermediaries, the Facebooks and Googles and Amazon are for profit first. And so we all assumed that they were facilitating cost-free purchasing, and they weren't. And retailers realized it, customer acquisition costs went up. Then when sales tax was through the Supreme Court, and thanks to you and many others' efforts, Tom, when the Supreme Court said, yeah, we have to level the playing field, we saw that retailers recognized by 2019 that the stores were just more profitable. And thus a re-leveling. That doesn't mean e-commerce goes away. It's here forever and it's going to continue to grow. But that omnichannel works for a lot of different reasons in ways that if we had known back then, Tom, we probably could have explained it, but we're all feeling our way through it.

Tom:

I think experience and facts kind of support it. Now people have lived it and they see it and so it's better understood. The intermediary comment and just the whole cost of shipping and so forth. I mean, as consumers we often think it's well, it's a constitutional right to have free shipping. But somebody's actually paying for that, and it's generally the retailer. So the store is where the margin is and so using, you know, the store for multiple purposes, including, you know, obviously fulfilling an online order, ideally having the customer come and pick it up. Do you think the “e-commerce will kill physical retail” debate is over? Or do you think that it's one of those things that we'll constantly have to talk about?

Ken:

Well, again, we can talk, but credit goes to our retailers, which is a fundamentally more difficult job. They're going to have to navigate it with artificial intelligence and everything else. And it won't be a one size fits all answer for some brands, for some retailers. E-commerce will be an important pathway to growth. So it's one that we'll have to balance. I think we should watch it.

For investors, I'm amazed when I meet with generalists and they still don't understand the shift to omnichannel and that bricks and mortar is alive and well. So we still have an education process and there will be an evolution. I would expect that evolution to continue for the rest of our careers.

Tom:

Yeah. I agree with that. And I think AI just represents another opportunity for that debate to take a different, you know.

Ken:

Sure.

Tom:

A different avenue. As you know, we just recently did the big report with McKinsey, “Shopping in the Age of AI,” and you know, working with them, one of the central findings was yes, AI is going to fundamentally impact, you know, retail and the growth of agentic commerce is certainly upon us. But does this store still remain central to the shopper's journey? And in many respects in the digital age, it only becomes more important.

Ken:

It certainly is trending that way. Of the retailers, when I meet with them, I ask them how much growth do they expect in stores versus online. I ask them when they open stores, do their online sales in that area go up or down? Most find when they open a store, online sales go up. Not all, but most. And then the opposite as well when they close a store. All of that makes sense, but we're at the very early stages of retailers utilizing AI to drive sales and we'll see how that plays out as well.

Tom:

I agree with you. And retail's a fiercely competitive business and it always has been and always will be. So it's constantly at the cutting edge of changes that are happening in the broader economy.

Acadia, let's transition a little bit. You own not just great retail, but you're a little different than you know, than many other retail real estate CEOs I've spoken to. While you own, you know, traditional shopping centers, you also own great retail on great streets in great cities throughout the throughout the U.S. So talk a little bit about, first of all, let's just talk about that. I mean, the strategy of owning, you know, street retail and how you identify where and what streets to own retail on.

Ken:

And it has evolved over the years. I've always been somewhat contrarian and intrigued by, you know, more difficult pathways if they can produce higher returns. And what I saw, maybe it was because I grew up as a New Yorker, acquiring, operating, financing in these key street corridors is tough.

Tom:

What is that about you, Ken?

Ken:

And so a lot of people are like, you know what, life's too short for that, and good for us. So it enabled us to get a toehold in the 2011 to 2015 period. Then we had to tap the brakes because of all the obvious reasons. And now we are well on our way to building Acadia as the premier owner operator of street retail in the U.S.

So why? We like supply constrained markets. We like moats, we like barriers to entry, and if you can acquire in the right streets where there is only a limited amount of supply, you don't have to worry about the traditional overdevelopment cycles that we go through. Second, there's a bunch of structural reasons around how leases are structured in the streets that enable us to achieve more growth. We could do a whole seminar on it. So I won't bore the audience with it, but you get higher contractual growth and fair market value resets. And why that intrigues us is if we are in a higher for longer inflationary environment right now, I want to own the kind of retail that can keep up with and exceed inflation. And it is a fundamentally better lease structure than exists in my suburban side of my portfolio. So I like that as well. And then it's fun, right? It's fun to own in Soho. It's fun to own in Melrose Place in LA. It's fun we're developing in Dallas. Neat retailers, exciting concepts. And that part doesn't escape me either. I enjoy it.

Tom:

Well, they're iconic locations. I mean, both of the two, Soho and Melrose, I mean, those are about as iconic as it gets as it relates to retail in the United States and, you know, two major metropolitan centers, New York and Los Angeles. You talked a little bit about just some of the advantages of owning street retail. One of the interesting opportunities and challenges, in street retail—you know, many of the times we talk about curating an experience for, you know, the consumer, having a shopping center fit the needs of that community. From a street retail perspective, is building a concentration of the amount of retail you have on that street something that you focus upon? And does that then lead to the ability to kind of curate the mix that's on that street?

Ken:

Yeah. So that's probably the biggest change in the last few years in my outlook compared to prior years where we were just trying to buy opportunistically in good to great locations, but we would rise and fall based on how that street was performing with no impact on it. And my team came back to me because we had a few markets where we were dominant and they were seeing that. Through their curation, they were able to put in the right tenants and raise the tenant sales volumes on that given corridor. And anyone in our industry knows that top-line sales, while not a perfect metric, is probably the best metric for what kind of rents tenants can afford to pay. And so by controlling enough of a given corridor, we could raise sales, thus improve rents. And so our mission for the last few years has been to acquire on those corridors where we can have an important role. Now, we define important role as approximately 25% of the doors. So it's not Disney World, it's not 100%. Doesn't need to be. I would argue we're better off when there are multiple different responsible owners. But once we are at about 25%, because we are active in front of our retailers every day, we have a waiting list on many of our corridors, because frankly, all almost all of our corridors are full. So we know who wants to be there. We are constantly working with our retailers of who maybe should not be there and helping them exit. And thus that curation helps the street, helps sales, and gives us additional pricing power, which is beneficial. So curation, Tom, is the main focus right now.

Tom:

Yeah, I mean, I think that makes good sense. I mean you're really creating a kind of an experience. And when you go to Soho, you expect a certain type of experience that's synonymous with Soho, same thing in Melrose Avenue, etc. You know, one of the other interesting things about that just as I'm thinking about this is the mix of kind of national brands versus local. You know, there has to be, going to Melrose, you expect a certain experience. Kind of that LA artisan kind of experience. Soho is different because they're different environments, both densely populated areas. How do you think through that mix of local versus national to maintain the identity of those communities? But at the same time, you know, people do want to have those brands they come to expect with those, you know, high street locations.

Ken:

Yeah, so you constantly try to avoid ubiquity. If every place feels the same, that's going to be a problem. But there are other factors, including financially viable retailers and all. When you own enough stores, and let me be clear, places like Soho were still in the early innings of getting anything remotely close, but on Green Street, we're beginning to get there. When you control enough, you can afford to say, you know what, for that door, we're going to keep it as a restaurant, even if the rents are lower, because it helps the overall diversification of a street. We're going to find new retailers because one of the topics you and I haven't touched on yet, but one of the real tailwinds for a lot of open-air retail, but even in closed A malls, is the pivot by many brands out of the department store and into their own stores. And so we are in many cases now finding younger brands. They may be very successful in Europe, but unknown here, and bringing them in when historically the department stores would have been their first stop. So working through all of that, and what did we say? We are cycle tested or experienced, having the humility to know that what I like and where I want to shop is not a leading indicator of what the street wants. And so we have very experienced professionals at our company constantly focused on that, working with the different types of retailers to get it right.

Tom:

Yeah, those new retail concepts, emerging retailers, online retailers, international retailers. I mean, those are things that you expect when you come to certain areas. That's what that's kind of the treasure hunt aspect of shopping in those types of locations. Before we transition from street retail and just the city in general, I mean you do have a unique perspective at your seat at Acadia of what happened to cities, you know, during COVID. As the cities now emerged out of COVID, the return, the impact of office on you know, on retail, etc. I mean, it seems to me different cities are at different points on that journey. New York in particular seems to be the farthest along, at least in my travels. I mean as someone who spends the majority of their work day in New York City, it certainly feels like New York's back. Other cities maybe not quite to the extent. What's your reflection on that?

Ken:

Well, I think for anyone to assume that any city is so resilient that their return is inevitable is too arrogant. However, betting against, let's say, New York, but I'd argue most cities, is also I think a huge mistake. Then it's a question of how long does it take and how strong does it repair?

New York, thankfully, the residential market, which was the first indicator for us of tenant sales increases. So early in COVID, when no one was in the office, that was horrible for midtown retail. But midtown retail, office retail was never particular, was not something we owned and was not particularly dynamic in the world of commercial real estate. But the residential neighborhoods came back quickly and we saw our sales follow. And that was the best indicator that, you know what, we're going to get there.

New York's not alone though, Tom. I mean, look what's going on in San Francisco.

Tom:

San Francisco, a huge comeback.

Ken:

Right. Now, some of it’s artificial intelligence, great, but you also had a change in leadership, a great mayor who helped facilitate retailers and just the general population of getting comfortable to come back. Because what I would argue is people need to feel safe, people need to feel comfortable walking the streets, and that's table stakes, that's job number one during COVID. When we were all remote, streets just didn't feel safe. You now look at almost every city, has had significant improvements in crime, in many cases, record low. And you have leadership committed. Jessica Tisch in New York City has done a fantastic job. Across the board, though, you're seeing a commitment to safety, commitment to the vibrancy of real estate.

And what's interesting, San Francisco, for instance, for decades was very anti-national retail. And they had laws in place to really make it difficult for national retailers to open. They've greatly reduced that because what they saw during COVID was when those national retailers left, it was a burden on the city, it was a burden on their tax rolls, it prevented a lot of people from being able to do their everyday shopping. And so I think you're also seeing a rebalance on that. It will always be an evolution. Some cities are later in this recovery, but in general, we like to be, especially younger people, want to be around other people and cities are conducive to that.

Tom:

Yeah, I mean for similar reasons than why people like to go shopping in physical retail is because we're, you know, social beings and the younger generation, to your point. I mean we've obviously, every study that's come out recently, including ICSC’s, have supported how the younger generation, particularly Gen Z, value those opportunities to come together and network, whether it's at a retail store or shopping center or within a city. I'm very bullish on cities. I agree with you that sometimes quite frankly, because they're densely populated and so it impacts a greater number of people and it's more visible. So crises impact cities in a more visible way. But great cities always come back. And my goodness, New York, you know, I mean what New York has gone through a lot and always comes back and recreates itself.

Ken:

Yeah. There a quote from Winston Churchill about America, always does the right thing after it exhausts all other options. And I would say during COVID we came, well, we were very exhausted. and so now it's climbing back. New York, for instance, A office space in New York City is spoken for. I had the privilege to be on the top floors of JP Morgan the other day for an event. And it's just spectacular. And you realize there's an arms race now. Firms are making five, 10, 20, 30, 50 permanent commitments to New York City to high quality space, and they're going to fill it. And young talents going to want to be there.

Tom:

Okay, so let's transition to the consumer now. You also have a unique perspective on the consumer given the breadth of your portfolio, the major cities that you're in. What's the consumer telling you right now?

Ken:

That if they feel good about their job, and then depending if you're talking about more affluent consumers, do they feel good about their home value and their stock portfolio? But across the board, if they feel good about their personal economic situation, that trumps all the other noise that's out there, and there's a lot of noise out there. So, notwithstanding inflation, which is the number one irritant to the consumer, and legitimately so, they continue to shop and they remain far more resilient than many of us feared or predicted.

Tom:

I mean, generally speaking, I mean, if you go back in time and just look at data, if the employment market is strong and people feel confident in their jobs, they continue to spend. I mean, that seems like it should be self evident and there's certainly the facts have supported that. But the consumer is becoming a little more discerning when you say, I mean, just in regards to, you mentioned inflation and you know, even higher end consumers are being a little more evaluative in how they're spending, or is that is that just speculation too? That's not supported by fact?

Ken:

I would argue that the consumer was always, has always been and always will be discerning. Two things though. When there were real supply shocks in terms of store shelves, and if you were told toilet paper is going to be gone for six months, you're not going to be so discerning. You're going to pick up as much toilet paper as you can. We're past that time period. So the consumer is now seeing prices are up 30, 40, 50% just due to inflation since 2019. And so I'm going to be more selective and I'm not just going to clean off the shelves. I think that's fine. Inflation is a real headwind for the majority of the consumers. So that's making them grumpy. They're still spending, but they're being discerning about it. But ultimately, what I've said many times is consumer sentiment tells me more about what cable channel you watch. And consumer spending tells me more about how you feel about your job, and I still think that's the case today.

Tom:

You know, there's so there's so much truth to what you just said. We had Charlie Cook at our recent Trustee meeting and Charlie talked about, you know, depending upon who's in the White House, whether you think the economy's in great shape or not, and that's been kind of a trend over the last, you know, number of decades, certainly a number of election cycles and that does speak to kind of the polarization of the country and that, you know, maybe the underlying data isn't always telling, the polls aren't always telling the truth, the full story.

Let's transition. You mentioned inflation. You and I have this had this fascination with the 10-year Treasury. A lot of people were talking about the 10-year Treasury now and what's transpiring in the market. Obviously neither of us know what's going to happen but just reflections on the last couple of weeks. I mean, there's been some dramatic changes in the bond market and rates.

Ken:

Yeah, yeah. So I think first of all, it's important to make the distinction between what it appears we're going through today and what we went through in the late ‘70s, early ‘80s. Because we can argue-

Tom:

You and I are mature and experienced in that period of time.

Ken:

To remember that, right. But what was different back then and and what's important to understand today, stagflation is our industry's kryptonite. Stagflation occurred because of the wage price spiral in the ‘70s and ‘80s, wages were growing, and the economy was not. If you look at wage growth today, it's growing, but it's in check. And a lot of this has to do with fewer labor unions, less long-term contracts, things like that. Does not appear what we are facing now is stagflation. If that changes, well, that would be very disruptive. What we are experiencing now is an unanchoring of the inflationary goal of 2%. You and I have been debating for years whether three is the new two. But one way or another, frankly, the inflation that has occurred over the last five years has been a tailwind to our rental fundamentals. I don't think the industry understands that. But when you have inflation of 30 to 40%, tenants can pay generally 30, 40% more in rent. So inflation in moderation, but in excess of the 2% goal is an irritant that we're all feeling our way through. My personal view is the multi-decade period of low and slow 10-year Treasury at two or three. We may not see that again. We need to build our businesses prepared for the Fed succeeding eventually, but it's going to take longer, and the 10-year hovering-how much higher it goes, I don't know. But hovering in the range of the last 12 to 24 months, which by the way, Tom, you know, in the last 12 to 24 months, it's been below 4% as well. And our economy is strong, is not a bad thing. It just is not great for the bond market.

Tom:

Obviously the anomaly if you look at history was really the low rate environment post global financial crisis. I mean, the numbers where the 10-year Treasury is at today is not unusual relative to history. It's just unusual relative to the last, you know, fifteen, twenty years. And so to some extent, it's the rapid pace of acceleration of rates that has, you know, impacted us more than the absolute level because it just happened in such a quick period of time. It always struck me, I will say, you know, just the inherent risk of, if I loaned you a dollar and I said, you can pay me back in ten years, it just always struck me as there's some risk in, there's just some duration risk in that. And the fact that, you know, the 10-year Treasury was at 1, 2%, it just seemed a little unusual given just the duration risk that would just be inherent in any kind of long term financing.

Ken:

A lot of folks who bought risk free treasuries thinking it meant risk free and now are trying to cash them in are realizing that they are actually--

Tom:

Yeah, certainly.

Ken:

Here's the good news. And this is somewhere between hope and prediction. Sooner or later we will get past the current energy shock around Iran. Let's hope it's sooner, but sooner or later we will. And then we will see what is, especially if it happens sooner, a fundamentally strong economy. The United States is arguably the strongest of the economies. And a fundamentally sound bond market feeling more predictable. Whether that means a 4% 10-year or a 5% 10-year Treasury, I don't know. What I tell my team is build their balance sheet, build their business model, assuming rates hover around where they are today. And our hopefulness does not include a 3% 10-year Treasury.

Tom:

You know, to the one thing that you said there, which is true quite frankly, in every business and in every industry, make sure you always focus on your balance sheet. Have a strong—It's never a bad thing to have a strong balance sheet and have excess liquidity available to you to navigate the unexpected.

Respecting time, there's a couple, there's two other topics I want to touch on. One is technology. and you know, obviously we talked about the impact of e-commerce on retail and how evolved AI is is really the topic of the day and maybe the topic of the next number of decades. And none of us know exactly where that's going to land in regards to how it's going to impact not just retail, but in general. But your reflections on that, have you seen, you know, the use of AI accelerate in the last year or two, both within your business but within your tenant businesses also?

Ken:

It's still very early days. The real estate industry is not the tip of the spear on this stuff and even Acadia, and we have several professionals and our entire senior management team focused on utilizing it, but we're going to be fast followers as an industry. That being said, it's going to have profound impact. I choose to be an AI optimist. Again, we can talk about the end of humanity, certainly a possibility. We need to be focused on the capital market side of this, which is if there is a data center bubble burst, anyone who thinks, that'll be good for the other pieces of commercial real estate, I think are being overly optimistic. So we need to watch that, even if all of the other bad stuff doesn't happen. but it will be used.

It's so exciting to think about how it could be used. without impinging on your privacy, you'll be able to walk into one of your favorite retailers and they will know you like you are their most important customer if they choose to, and if you choose to allow them. And so they'll have your size. They'll there's all these different things that retailers can use on the front end and on the back end. And then for us as real estate companies, it's going to make us smarter. It's going to make us better and it'll make us more efficient eventually. But it's measured in years, Tom, in terms of actually seeing it hit the bottom line.

Tom:

Well, there's that old saying in technology that, you know, we probably overestimate the short term impact and underestimate the long term impact. And my suspicion is AI will be similar to other technological ways where that's the case. It's very hard to predict how it's ultimately going to be adopted in the day-to-day use. There might be capabilities that exist, but they may not be the ones that people choose, you know, on a mass scale to adopt but it's going to fundamentally have an impact on our industry and society, no doubt.

Ken:

Yeah. And I think we should all bring a huge dose of humility to the process, because frankly we don't know. And let's check in every six to twelve months and see where we were right and where we were wrong and adapt accordingly.

Tom:

Let's talk about leadership. So you've been CEO of Acadia for, you know, 25 years. How different, you know, that's a long time. And as we talked, you've managed through multiple different, you know, challenges and cycles and so forth. And you did make reference to the fact that you learned from each of those. How different are you today as a CEO than when you started, when you first sat in that seat 25 years ago?

Ken:

Yeah, I mean, I suppose some of my friends and critics could say I haven't changed a bit. But it is a totally different role today for me. When I was building Acadia, I was the youngest executive. I needed to hire people with far more experience in every one of the areas. Fast forward to today, and I am, let's just say not the youngest executive. And so I'm spending more time coaching and helping a very talented team rise and achieve their goals for Acadia and for themselves, as opposed to simply kind of hanging on and hoping that the different, very experienced people I had day one knew what they were doing because I sure as heck couldn't tell them how to build a building. I had to count on them to do it. So that's change number one.

It's a different environment. It's a different world. It is in many respects a better world of the kind of talent we attract to our industry today compared to 25 years ago. 25 years ago, when it was more of a private and family industry, it looked very different than it does today. So you're getting better, brighter, more energized, different perspectives. All of that forces me to learn from them in different ways.

And then in some ways it's the same. You have lazy people, you have corrupt people, and you have energized people and ambitious. And what drives me crazy is when people from my generation say, these kids today, because that's just not the case. I work with these kids today, and there are plenty of hungry, energized, talented, young people just ready to get out there and that's pretty encouraging.

Tom:

Yeah, I share your optimism about the youth of today and not just in a professional way, but also just in a broad societal way. I find young people today to be incredibly hardworking, energetic, optimistic. I don't buy into any of that, that the young generation doesn't get it. I find it completely the opposite. I think they're I think they're wonderful and are going to have a tremendously positive impact on society. All right, quick closes.

One thing investors misunderstand about retail real estate.

Ken:

That the retail armageddon is behind us.

Tom:

One lesson that you've learned from a deal that's gone bad.

Ken:

Staying power is mission critical.

Tom:

Okay, here's the fun one. If you weren't the CEO of Acadia and you could do anything you'd like, what would you spend your time doing?

Ken:

Hosting podcasts like you're doing right now. No, that would probably that would not be my choice, but--

Tom:

Well a lot of people don't know this about you perhaps. I do, that you're actually a very skilled moderator of conversations and sessions. You do that very effectively and expertly at board meetings all the time.

Ken:

Well, I do like to learn and so I figure if I don't know the answer, there's probably people in the audience who don't as well. So go ahead, ask the question and so I was joking when I said it, but you know what, Tom? If someday I have the opportunity to interview you and we can reverse these roles, I would love that.

Tom:

Well, I'd look forward to that. We'll certainly do it for fun sometime. Well, thank you, Ken. Thanks so much for your time, my friend. It's always a pleasure to talk to you. appreciate it. And thank you to all of our listeners for tuning in.

Ken:

Great to be with all of you.

Tom:

Thanks for joining me on From Where I Sit. Follow the podcast on Apple, Spotify, YouTube, or wherever you get your podcasts, and share it with anyone interested in the future of the built world, commerce, and technology. I'm Tom McGee. Thanks for watching and listening, and I'll see you next time.