In this podcast, Motley Fool analyst Jason Moser and host Ricky Mulvey discuss:
- The tariffs that the Trump administration announced for imported cars and auto parts.
- How Google is trying to respond to the next era of search.
- Robinhood's quest to become the everything-finance app.
Then, Motley Fool analyst Anthony Schiavone joins Ricky to talk about the state of the office market, and one workplace REIT that investors may want to consider.
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A full transcript is below.
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Ricky Mulvey: Auto tariffs, they're coming, or they're a negotiating tactic. Who knows? You're listening to Motley Fool Money. I'm Ricky Mulvey. Sorting through this madness with me today is Jason Moser. Jason, thanks for being here.
Jason Moser: Ricky, always a pleasure, my man. How are you?
Ricky Mulvey: Oh, I'm doing pretty well. You know who's not doing pretty well. These auto manufacturers. It's been a tough day for him, Jason.
Jason Moser: Yes.
Ricky Mulvey: At the time of this recording, which I want to preface, is it about 1:50 PM. Eastern, 11:50 AM Mountain time because we never get a shout out. A 25% tariff is coming for any car entering the United States. This initially targets fully assembled vehicles. But so far, GM was down about 7%, Ford down about 3%. Auto parts supplier, Magna International, which we'll talk about more in a second, down 7%. Tesla Henow up 6%. You parse through this with me. Why are some American automakers so affected by this news, Tesla, notably not?
Jason Moser: The ultimate goal here with tariffs, in this case, is to boost domestic manufacturing more than anything, I think. That could certainly have positive impacts, but it's obviously also a very complex issue with some potential negative consequences that come with it. At least in the near term. When you consider how a car is built, there are going to be thousands of parts that are coming from outside of the country. Now that all of a sudden throws a lot of uncertainty in here. You look at some of these negative impacts with increased production costs, you could be looking at higher prices for consumers. Certainly could be seeing disruption of supply chains.
You could as for seeing, you see the potential for retaliatory tariffs, then obviously, the negative impact on companies that use imported parts. I think a lot of this just comes from that along with the fact that there is just still so much uncertainty in regard to all of this tariff talk. It's just on one day, off the next, this much one day, that much the next. It's a frustrating time for investors, but I can imagine that if you're in the auto business, it's even more frustrating because you just don't know what really is going on.
Ricky Mulvey: If you're in this spot where you're a business that's dramatically impacted by tariffs, and investors want quarterly guidance. Why wouldn't you withdraw it at this point? You have no idea if these tariffs are going to come into effect, stay into effect, if they're a negotiating tactic. If you're a leader at one of these companies, why are you issuing guidance at this point?
Jason Moser: I mean, I think that's a really good question, and in many cases, it doesn't really matter to me whether management offers guidance or not. I feel like we're better off without it, but we are where we are and investors typically insist on it, and and so we get it from most companies. I think, in this case, I think management would be wise to at least message the uncertainty if not withdrawing the guidance altogether. Now, there's some downsides that can come with that, I mean, there we go back to that word uncertainty and typically, when a management team withdraws guidance, it's not a good sign. Now, it doesn't take a genius to realize that the tariff environment is making projecting these numbers very difficult to do for investors and for management teams at the companies. But I do think, there can be a lot to be said for a company getting out there ahead of it and saying, we all know what's going on here, and there's a lot of uncertainty in this case. We provided you some numbers from a quarter ago. We just don't know the impact because I don't think really anybody knows the impact that these tariffs can have because we just don't know how this is all unfolding.
Jason Moser: It is wise, I think, for management teams to continue to communicate and just communicate the truth in a case like this, I certainly understand withdrawing guidance altogether, because it sure seems like it'd be difficult to project.
Ricky Mulvey: Then a lot of investors on edge for tariff Liberation Day coming up on April 2nd. Are you preparing as an investor? Are you breaking out the trigger? How are you celebrating?
Jason Moser: Man, you read my mind, Ricky. I'm feeling like I got to smoke something on the Trager. I mean, as an investor, it's a Sunday, I think. I'm probably just going to be hanging home, hopefully enjoying some nice weather. I'm going to maybe throw some ribs on there or get a big old pork shoulder or something.
Ricky Mulvey: I want to talk about the cover story in Bloomberg business Week for April, which I really enjoy. If I'm going to throw some mud, we also throw flowers on this show JMo. By truly I love, Dave Alba, the article is titled Google is searching for an answer to ChatGPT. The theme of it, the story is basically that Google has long had a tense relationship between the ads business, between the search business. Now you have AI answers coming in, and here's this tech giant struggling to adapt as more people on the Internet ask questions to ChatGPT.
This is where we'll take first the Lynchian step. I mean, I've noticed for a few things, I'm using ChatGPT a little bit more than Google, especially with cooking when you're looking around your kitchen and you're like, I got this, this and this. What can I put together to make it delicious? Can I sub duck fat instead of butter in this recipe? The answer is usually yes, by the way. Can I pull that off? ChatGPT incredible Su chef, much easier than searching through the recipes on these long pages. But as an Internet user, are you using ChatGPT more than Google for anything?
Jason Moser: Not really. I mean, I use ChatGPT some, but I actually use Google Gemini more. It's been really fun incorporating these tools into our research work and you're right. They're just tremendous tools that just give you a ton of information at your fingertips. Now, I still do Google search quite a bit, and I think that's just maybe old habits die hard. I'm in the apps on my phone, it's easy to use. I mean, when it comes to recipes, Ricky, you got to collect those recipes so that you can got your little recipe box on your phone, so you don't have to go searching around.
You find a good recipe, you save it, and then you always have it there. Maybe you're talking about something else, trying to make something with what you've got, that can be a little bit of a different beast there. But I do think all of these tools are getting good. I think they're becoming very helpful. I think then it's just really about figuring out which one works best for your needs because, again, ChatGPT isn't the only game in town. Obviously, a very powerful, very good game. But, I mean, there are other tools out there. I think it just boils down to what habits you end up falling into and ultimately incorporating into your workflow.
Ricky Mulvey: I'm still building up my knowledge based cooking. Not everyone has your cooking experience, Jason. I'm trying to learn as I go. I get a ChatGPT to help me out a little bit. [OVERLAPPING] Have you used your mac and cheese recipe, though before? You got it good.
Jason Moser: It's a good one.
Ricky Mulvey: Back to business. Search in Google. Google does a lot of things. It's got a cloud business. It's got a maps business. It's got some venture shots but search. The writers describe it as 'The Beating Heart,' this is true. It's about 60% of Alphabet's annual sales, about $200 billion in revenue in 2024. But now ChatGPT is becoming more popular despite your preference for Gemini JMo. When you look at this story, when you look at this trend, how big of a problem is ChatGPT proving to be for Google's business right now?
Jason Moser: I mean, it's definitely an issue. I see this as a bit like the evolution of search. It's just ultimately doing more for us, which is great, and Google has definitely been working hard to keep up. But this is becoming a far more competitive environment as we change our behavior and incorporate more of these tools into our day to day. Now, I also I wouldn't dismiss how strong Google is considering the platforms and the users. They've got at least ten platforms with a billion or more users alone. We're talking about Google search, Android Chrome, Gmail, Google Maps, YouTube, those things. I think it's something that Google will have to pay very close attention to. I mean, they have a company in ChatGPT taking eyeballs away from Google properties and onto ChatGPTs properties, and it just makes for a more competitive environment. Not that that's a bad thing. Hopefully, it pushes Google to compete harder and come up with equally good solutions.
Ricky Mulvey: Here's how Google's trying to pivot. Number 1, they got a workforce moving a little bit. Google reassigned more than 1,000 engineers, about 20% of the search engineering team. They got 5,000 people doing search engineering over at Google JMO. That's a lot. Anyway, they're putting 1,000 of them on the generative AI efforts and then there was a new vision presented for what Google is used for where the search bar becomes less prominent. Voice queries rise over time, and then also Google being used more for visual search. The example given is that you're at a coffee shop, you see someone with a cool pair of shoes. You take a photo of the shoes, and you can find out what they are to go shopping. The dark side of this is that you're taking a photo of someone and finding out who they are in public. The veil of anonymity that you have when you go walking around is gone. Anyway, what do you think of this plan?
Jason Moser: I think it's something that they ultimately would have to do. I mean, advertising is ultimately the core of this business. I mean, if you go to the 10K, you can see that 75% of total revenue comes from online advertising, and that was just in 2023. That number has come down relatively significantly over time. I think 10 years ago, it was over 90%. But as they add things like subscriptions and the Cloud services side of the business, I think they're going to start learning how to monetize Gemini from a subscription perspective, and I'm sure we'll probably see advertising inserted into that in some capacity at some point, as well. But I think the good plan is to not sit still. I mean, they're going to be things that work, and they're going to be things that don't work, but you don't know, ultimately, you don't try and how we interact with technology is always evolving. I would be much more concerned if they were just sitting still.
Ricky Mulvey: Then there's a lot of good stories in the article. I'm going to put a link in the show notes. I enjoyed reading it. I learned anything else in there, standout to you? It's OK if the answer is no. We can move on to the next topic.
Jason Moser: No, I think we can move on. I'm with you. It's a lengthy article, but just an enjoyable read makes you think about what the future of Google is ultimately going to look like from a consumer's perspective.
Ricky Mulvey: Let's get to this Robinhood story, Robinhood with a big product launch yesterday announcing Robinhood banking. Basically, this is going to allow users more private banking features, more investing analysis delivered to them. Then the big one that I think is going to make registered investment advisories sweat a little bit is they are collapsing the fees. Basically, if you have Robinhood as a Robo advisor, they start at 0.25% of a management fee, but they cap it out at 250 bucks a year. For a lot of registered investment advisories, when you have a wealth manager like that, they take a fixed percent of the fee, but their fee grows as you put more money into the pot. This seems like it would be a big problem for that business. When you were looking through those announcements, JMo, what were your takeaways?
Jason Moser: Well, I think that definitely was what stood out to me was the potential for your RIAs of the world to come under threat with this. Now, I mean, I guess it all boils down to how good the product or service that Robinhood is providing actually is, I mean, but that's also something that you introduce and you iterate and it definitely gives them the opportunity. I think they have what somewhere in the neighborhood 25 million active account holders, something like that. If you start looking at a product that they introduce that is legitimate and helpful, I mean, there should be plenty of room to continue to grow that number. But, that's the one that stood out to me. The cash delivered to the doorstep was a little bit of a different one, Ricky. I'm not so sure about what's.
Ricky Mulvey: Let's talk about that because in the announcement, they're talking about how unsafe it is to go to an ATM mentioning the rise of ATM attacks growing by 600% over the past few years. You're like, wow, I'm going to be attacked at an ATM. No, Jason, that is people robbing the ATMs themselves. That's people going up with a truck, breaking open the ATMs and then stealing all the cash inside. However, if you're positioning this, it's a little bit different. Saying, isn't it so inconvenient to go to don't you feel a little nervous when you're in a big city, going to an ATM? What if you could have physical cash delivered right to you at your doorstep? There's a fee involved. It's like I think in the demo, they gave a $7 tip, and then it's a $5 delivery fee, which is quite a lot for, like a $200 withdrawal. But anyway, have you ever needed cash delivered to your doorstep? What do you make of this announcement?
Jason Moser: I've ever that I can recall, needed to have cash delivered to me. This just doesn't sound like a very good idea. I certainly wouldn't want to be the delivery guy. I can tell you that. I mean, unless they're gonna supply, like, an armored vehicle or some protection. I mean, work gets out that you're the cash man, someone's going to come looking for you eventually. That seems like it would be a risky proposition. Honestly, I mean, how much cash do we really need these days? I mean, it's not how money I mean, I'm not saying people don't use cash don't get me wrong. I mean, of course, they do, but the need for it, I don't think is the same because you have so many different ways that you can pay now. You're like, oh, I don't have cash, but I can maybe or I could, whatever cash app or something like that. The fees seem preposterous.
I was just going to ask that. It's like you get a service fee, but then on top of that, you probably got to tip the guy. I mean, this tipping economy is getting out of control, man, and all of a sudden, you're having to pay, what, 15 bucks just to get whatever cash you want delivered to you? It seems like the juice isn't worth the squeeze.
Ricky Mulvey: I think it's the logical end. You tip at restaurants. That makes sense. Then you're tipping for takeout, then you're tip a little more for takeout. Then we're at a point where for some, like, concession areas, they want you to tip for access to the concession area and now we're at the base case, which is just getting cash, you leave a tip to get your cash, Jason. There is something interesting with this announcement, too, though, which is that Robinhood is moving to be this mega app, this everything app for finance. They're going to be doing money transfers, banking, investing, options trading, gambling/event contracts, predictions, credit cards, cash delivery, which we just mentioned. For as much fun we're having right now, the shareholders are laughing. Stocks more than doubled over the past year. We've seen this strategy of being everything app really not pan out for other companies, but so far it's working for Robinhood. Why do you think it's working for them or it's been a losing strategy for other companies?
Jason Moser: Well, I mean, I think it's because they continue to focus on services that parallel each other. I think there's a lot of overlap there with the types of services that they're offering. It's not something that's completely outside of their core competency. I think, that can also be a dangerous strategy. You can lose focus or you start not executing on all fronts and I think that would be, for me, the bigger risk there is if they try to do too much. I think that's what some companies that have tried to get into that everything app strategy. They maybe take on more than they can handle. Maybe they're doing things that they don't really need to do.
I mean, I remember PayPal wanting to introduce stock trading into their app, and I'm like, that's clever but why in the world would I care about that? I've already got a brokerage where I do my buying and selling, andplenty of people already have brokerages for things like that. I think it's just a fine balance of making sure that delivering things that your customers want and delivering things that you think can attract new customers through your universe, and they're just making sure you manage it wisely.
Ricky Mulvey: Hey, leave leave some wings and a beer for me for Liberation Day. I want to come over.
Jason Moser: I might have some ribs.
Ricky Mulvey: Appreciate your time and your insight. Thanks for joining us on Motley Fool Money.
Jason Moser: Always a pleasure.
Ricky Mulvey: You know the office building story. Everyone's working from home, and are all of these buildings going to go bankrupt? Well, now we're a few years later, and investors may be at peak pessimism. Motley Fool senior analyst Anthony Schiavone joined me to discuss the state of office space in one real estate operator that investors may want to put on their watch list. They don't ring a bell at the bottom, but there is a New York Times article that's suggesting that it may be close to that for the office market. The article is titled Signs of an office market bottom. The worst is probably over. You don't need to read the whole article. You're listening right now. Do you think this true? Is the worst over for the office real estate market?
Anthony Schiavone: I think the worst is probably over for the best located class A, highest quality office space. But for the rest of the office market at large, I don't think it's going to be so lucky. I think it's going to be more of a slow moving train wreck, if you will. You know, we've just seen a permanent demand destruction with the rise of work from home since COVID, and despite recent headlines that employers are calling workers back to the office, the amount of people working remotely or hybrid isn't really going down. Now we see office vacancy rates that are around 20% today.
One thing to keep in mind is that office has always been a bet on job growth because there's always been a positive correlation between job growth and demand for office space. That 20% vacancy rate looks even worse, considering that we currently have a pretty strong job market with an unemployment rate around 4%. I can't confidently say that the office market broadly speaking, has bottomed when vacancy rates are still rising during a strong economy. But for the new prime office assets with solid capital structures. I think we've probably seen the bottoming out process take place already. One thing I think is interesting is that every year, the Urban Land Institute and Price Waterhouse Coopers, they collaborate on an emerging transit real estate report, and one of the real estate professionals that they interviewed said something along the lines of 2025 will be a story of 20% vacancy rates, but we won't have enough space either because we have a shortage of office space that people actually want. I think that sums up the state of the office market today. It's a bifurcation between class A office buildings and essentially everything else.
Ricky Mulvey: I'm thinking of the empty office parks I've seen in some of the ex suburbs around here in Denver and when I was visiting back home in Cincinnati. One concern from earlier in the pandemic is that a lot of these office loans would go delinquent, especially in the class B space you're talking about. Work from home stays forever, which is partially true. Like many things, it's partially true, partially untrue and a lot of these buildings would end up being scooped up by bankruptcy investors. But then the question is, what do you do with an office park that folks aren't interested in leasing? How's that turned out? How's that story line turned out now that we're five years away from that? True, partially true, totally false, what's happening?
Anthony Schiavone: I'll go with the easy answer and I'll say partially true. Delinquency rates for office assets, they're still high, and they're still rising, so there's definitely some distress, but I don't think that distress has matched the market's expectations. If we go back roughly two years ago, everybody was concerned about the debt maturity wall for commercial real estate and in particular, office space. But office landlords, they still have access to a lot of liquidity, and they've been able to extend and pretend, as the industry likes to say. They've extended and modified a lot of their loans with the hope that office fundamentals will recover in a few years.
The capital markets have also been cooperating with them as well with, interest rates are now down, credit spreads are historically tight, and there's tens of billions, if not, hundreds of billions of private equity capital looking to either acquire distressed assets or lend capital to landlords to strengthen their capital structures. I think, we've all heard of private credit talk out there, and I think this is part of that. We'll see where office delinquency rates head from here, but with so much liquidity out there. So far, I think it's been much more of a controlled demolition rather than a collapse.
Ricky Mulvey: Well, let's focus on the positive side. The class A office spaces and there's a couple that I've looked at. One is BXP which says that they are about 90% leased. That's well above the 20% vacancy rate that you suggested. I'm mixing math here that would suggest 80% leased for normal office spaces. It's the largest publicly traded workplace developer. You also have Alexandria Real Estate Equities, which operates buildings for large pharma science companies, and they're at about the same, although they note that 89% of their spaces are leased or negotiating. I think that's an important distinction. But when you're looking at these breeds specifically, why are you seeing demand so strong there?
Anthony Schiavone: I just think it goes back to the flight to quality we've been talking about. Employers and employees, they want to be if they're going to be in the office, they want to be in the best assets and the best locations. They want modern, highly amenitized buildings, buildings that have a lot of natural sunlight, efficient HVAC systems, easy to get to locations, and I think most of BXP's in Alexandra's properties provide that. Like, if you're a pharmaceutical company, you probably want to lease space from Alexandria real estate because they are the premier owner of lab space in the best locations. They know how to operate these assets better than anyone. In the past, the skill of the real estate operator or the management team probably didn't matter much because, interest rates are going down every single year, and that caused asset prices to go up. That math doesn't quite work anymore. I think the bifurcation between the skilled real estate operators and for lack of a better term, not so skilled operators will continue to widen. We've seen that dynamic take place, for shopping malls recently, and I think we'll see that in office, too.
Ricky Mulvey: When I'm looking at these high occupancy rates, I do wonder, like, what's going on with the rent growth. Are the renters getting a lot of concessions to fill up the occupancy here? Like, what concessions are these renters getting?
Anthony Schiavone: I mean, this is probably one of the biggest problems, I think, for office landlords. Like, before we even get the concessions, I think it's important to note that a majority of office buildings were built before the year 2000. A lot of the office product that's out there is just functionally obsolete in the absence of major renovations that bring these properties, up to a post pandemic standard. Landlords need to invest a ton of capital that's quite speculative in nature, just to make sure that their buildings are more desirable to prospective tenants. Then if those investments ultimately work out and the landlord signs a lease with a new tenant, then we get to the concessions, and those can include, things like free rent, which can range anywhere from a few months of free rent to two years of free rent, depending on how long the lease term is.
Landlords are also offering things like tenant improvement allowances, free parking, lower security deposits. It can really be anything and those concessions add up. There's an article from the Wall Street Journal I read a few years ago that mentioned that office rental rates when adjusted for inflation and tenant concessions, we're actually negative from 1997-2021 in the 50 largest office markets in the US. These concessions can be, you know, quite meaningful.
Ricky Mulvey: There's two ways to play this game. There's the institutional investors, the private equity folks that are scooping up super distressed assets at pennies on the dollar hoping they can rent it out a little bit and make a profit. Us, retail folks don't have that option. You have to pick up the publicly traded real estate investment trusts if you're looking at this space. Are you looking at this space, or is this a better game for those institutional folks?
Anthony Schiavone: I think this would probably be a better game for the institutional folks. I think my advice to people looking to invest in office rents is to have a very big too hard pile, as Warren Buffet and Charlie Munger would say. Don't be afraid to say no to potential opportunities, because if you look at some of the office rents out there, many of them have underperformed for decades. Even before the pandemic, these office reads weren't exactly, great investments over long periods of time. Moving forward, I still see this as a challenge asset class. I mean, it's highly cyclical.
It's highly capital intensive, and it's highly leveraged. Those three things are not a great combination. Then there's the huge question mark about demand. Personally, I just don't think the risk reward opportunity is that appealing, especially compared to other real estate sectors like industrial reads, which have been beaten up recently or even mall reads, which are performing very well. There's just too many unanswered questions for office for me, so I'm putting this one into my too-hard pile.
Ricky Mulvey: I might have to change the final question because I was going to ask you if you had a favorite office rate. I've been looking at Alexandria real estate and BXP and both of them are at about 10 times funds from operation per share price. Basically, the earnings multiple for real estate companies. Do you have a favorite office rate, or do you want to close out talking about an industrial rate or a mall rate that might be better for the retail folks?
Anthony Schiavone: No, I would actually say, out of all the office rates, I would probably lean toward Alexandria real estate equities, because they are they're the go to landlord for premier lab space and their office assets, they're clustered in the largest life science markets in the US, and they lease their properties to the highest quality tenants. Work from home is still a risk for this type of asset class, but these life science tenants, they generally need to be in their office at least part of the time. I like that aspect to it and there's also some supply risk to lab space as well. But here's the thing that I really like about Alexandria.
Their balance sheet is amazing, and they can weather a lot of these risks. I think it's something like 30% of their total debt maturities don't come due until 2049 or later. That's a long time from now. One thing I really like about them is they just recently issued debt at a lower interest rate than their current given and yield. I think that's a pretty good sign that this one's trading at a pretty beat up valuation.
Ricky Mulvey: It's a good place to end it. Anthony Schiavone, thank you for your time and insight.
Anthony Schiavone: Thanks for having me.
Ricky Mulvey: As always, people on the program may have interests in the stocks they talk about, and the Motley Fool may have formal recommendations for or against. Don't buyer sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and are not approved by advertisers, The Motley Fool only picks products they would personally recommend to friends like you. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Anthony Schiavone has positions in Alexandria Real Estate Equities. Jason Moser has positions in Alphabet and PayPal. Ricky Mulvey has positions in PayPal. The Motley Fool has positions in and recommends Alexandria Real Estate Equities, Alphabet, PayPal, and Tesla. The Motley Fool recommends General Motors and Magna International and recommends the following options: long January 2027 $42.50 calls on PayPal and short March 2025 $85 calls on PayPal. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
