Willy Walker: Year in Review. The one thing that we learned as a publicly traded company is that investors don't really care what you did yesterday – they care about what you're going to do tomorrow. So I'm going to spend a little bit of time running through the past year and just run through a couple of things that we've gone through and then spend most of this hour talking about what I think we might be seeing around the corner. And also have some thank you's to give out in the process of all of this.
So a year ago, we were all sitting here in Sun Valley. We knew the Fed was going to start raising rates and we all started acting like squirrels running around, gathering as many nuts as we possibly could, thinking that a very long winter was on its way. And I don't know whether you know this, but a squirrel needs to eat the equivalent of its own weight every week. And one other nice little factoid, the average squirrel buries 10,000 nuts in the fall to last through the winter. I don't know how many of you buried 10,000 nuts in the equivalent form of your businesses to get through the long winter that we've been through. But the one other thing to remember is a year ago today, the Fed funds rate was at 1.75%. Yeah, sorry about that.
Since we were here last year, rates have run and they've run and they've run. The 10-year (rate) a year ago was at 2.64%, it hit 4.22% in October. If you look at that curve, I don't need to tell anyone in this room that steepness is something that we've really never seen before. I've actually heard that a number of times. Last night, as I was going back and looking at that statement of “this is the steepest rise we've ever had,” it's actually not true. If you go back and look at what Paul Volcker did in 1980, between July of 1980 and December of 1980, the Fed funds rate went from 9% to 18%. So while we all feel like that curve was extremely steep and hard for all of us to get through, it wasn't in comparison to what Volcker did back in 1980.
The other thing to think about is this isn't the only time we've had the Fed funds rate. Many of us who've been in a low interest rate environment for as long as we have. Say, wow, when was the last time the Fed funds rate was at 5.25%? Anybody want to throw out the last month and year that the Fed funds rate was at 5.25%? Somebody's got to guess. See, it's been so long that everyone's forgotten it.
July of 2007 exactly. If you think about the expansionary economy of the second Clinton administration from 1995 to 2000, where if you think in historic perspective, that was a very robust U.S. economy, the Fed funds rate during that entire period of five years sat between 5 and 6.5%. We seem to forget because we've been in this low interest rate environment, that there have been plenty of times when the Fed funds rate has been exactly where it is today.
So we all are sitting there going, whoa, hang on a second. Let's slow down this rate rising, Jerome Powell, it's getting a little bit nasty out there. And I think the markets started to look a little bit like this hippo kind of a little dazed. As I was putting these slides together, I don't know if you know this, but hippos don't actually have sweat glands. And what hippos do is they have “blood sweat.” And I was sitting there going, that's an appropriate image for how many people have felt over the last year as our own sweat glands haven't been working and many people have been sort of “blood sweating.”
And that's the commercial real estate industry as we have been sitting there saying, wow, this really doesn't feel that good. As rates have continued to go up, if you think about those industries which are very debt dependent, such as commercial real estate. We've had such massive asset inflation that's gone on in the country since the great financial crisis that this rise in rates to try and suck some of that asset inflation out of the economy has had to be as violent as it has been. But I think it's also very important for us to realize that this environment that we're getting to, it's the transition that's so painful. It's getting from one place to the next that has caused so much pain in the economy and had our clients and ourselves, quite honestly. (In the next slide, I'll give you a little bit on that.) Had such a difficult time adjusting to this massive run up in rates.
So what did the bankers and brokers at Walker & Dunlop do? They looked at me and said, “Hey, boss, we're going on vacation.” And that's three bankers and brokers. I could name them by name, but I'll keep them disguised at the end of the year. And you'll see a slide in a little bit that shows you both where volumes have gone as well as where what volumes have done as rates have gone up. But it's no surprise to any of you as our clients were activity during Q4 of last year and Q1, Q2 of this year.
We've got the war in Ukraine. I was sitting around sort of trying to come up with an image that would sort of somehow depict what Vladimir Putin is doing in Ukraine. And I thought this nice monkey with his stick and a snake coming after him was sort of the sentiment that the world has about it. Clearly, as we all think about the world we live in today, I'm always surprised at the sense that it's a more dangerous or more uncertain world than we've ever known.
Tom Hanks gave the commencement speech at Harvard back in June, and one of the things he said was, “Here I am to tell you that you are that one class that has a very complicated world in front of you and that we're all looking to you to go solve all the world's problems.” And he said, (You know, Harvard's been around for 360 years) “I’m the 360th commencement speaker to say that,” in other words, we all think every spring this group of young students are going to go out and save the world in some unique way. We all look at the problems we're facing today and think about them in a unique way.
Tomorrow, Kirill Sokolov will be here, and he was interviewing Stan Druckenmiller about a month ago. Druckenmiller said, "I've never seen a more complicated market in the 45 years I've been investing." And I sort of sat there, and I thought, first of all, Stan Druckenmiller is one smart dude, but the variables are no different today. The world may be a little bit more dangerous or a little bit more secure. The markets might be a little bit more volatile or less. But you still just got one head of the Federal Reserve. You still got one European Central Bank. You still got one American economy that is growing and is still the strongest economy on the face of the planet. At times like this, we don't expect things like the invasion of Ukraine to come. But we all know these types of things happen.
So inflation just won't come down. Unemployment sitting at 3.5%. The one thing to keep in mind there is the CPI and how much housing is a component of the CPI. Housing is 40% of the CPI. We know that most of the housing data is lagging. There's not a person in this room who owns an apartment building who doesn't know that a lot of the rent growth data that keeps being cited in the popular press is not applicable to where rents are today.
The other component of the CPI to keep in mind is that it's bizarre. Some of you may know this, but Peter Linneman, who I do my quarterly webcast with, he was working with Milton Friedman as a PhD student when the federal (I don't know whether it was the Federal Reserve or what organization it was,) but they said we need to figure out how to put a component into the CPI that talks about single family housing, not rental housing. Easy for us to go out and look at rents, but how can we figure out what the value and the inflationary pressure on homes are? And so they came up with what I believe to be an exceedingly antiquated and extremely odd methodology, which is that they quarterly go out to homeowners and they say: What would you pay to live in your own house? And the answer to that question across a broad base of people is how they calculate inflationary pressure in the single family world.
So right now we have a CPI print that thankfully last week came down significantly, but we have a CPI that has 40% housing in the way they determine single family housing in that CPI print is as antiquated as when Peter Linneman was studying with Milton Friedman at the University of Chicago.
This is a photograph of and I hope I know that there are plenty in the room, but this is my image of what office owners have been looking like over the last six months. Office – it's complicated, right?
I think it's important to keep in mind a couple of things on office. The first thing is that there's $4.4 trillion of commercial real estate debt outstanding. That's a big number, $4.4 trillion. Half of that is multifamily debt. So half the amount of debt outstanding, commercial real estate. 2.2 trillion is on multi-family properties. Of that 4.4 trillion - office is 18%. So while a big number, relatively speaking, the amount of debt outstanding commercial real estate, it's a relatively small number.
The number to keep in mind right now is that in 2023, there's $190 billion of office loans that come due. That number was revised by the Mortgage Bankers Association last week, up from 80, because they finally have included all the bank office loans in that number. So it's $190 billion of office loans that come due by the end of the year. To give you a data point as it relates to the amount of financing activity going on in office right now, Walker & Dunlop did $2.2 billion of office financing in 2022. $2.2 billion. We've done $141 million so far in 2023.
My question is, If we're not doing it and we have plenty of competitor firms out there who work on office financing, but if we're not seeing it, what's going on? I think the bank earnings last week tell you exactly what's going on. Wells Fargo and JPMorgan both came out with loan loss provisions for commercial real estate of close to a billion dollars. I think Wells was $907M and some in change and JPM was $800M and some in change. What the regulator is allowing the banks to do is to take provisions for loan losses and then go and renegotiate those loans and extend and pretend.
Given that the banking system is so over-capitalized right now, very much unlike the great financial crisis, a lot of this paper is just going to get rolled. Because the banks are sitting there going, I don't want to foreclose on this. There's no sale market for me to get rid of it. Do I want $0.60 on the dollar today or hope that maybe I get $0.80 or $0.90 on the dollar if I allow them to hold the asset or I get worked out?
The only place where this obviously causes some problems is in the CMBS world where you don't have the flexibility because you have a special servicer who has a fiduciary responsibility to the bondholders to seize the asset. But even there, I've spoken to a number of the big special servicers. Even there, they're trying to work with the borrowers. Brookfield gave the keys back on three big office towers in L.A. and the special servicers are trying to work with Brookfield on what to do with those assets rather than just foreclosing and putting them on the market.
The final thing on office, some of you may have seen that the mayor of Boston, Massachusetts, just passed legislation that allows for them to give tax deferrals for people who convert office buildings to multifamily. There are a couple of things there. First of all, it was a 75% tax abatement rather than 100%. There are also some very significant affordability requirements to do the conversion. I believe that 20% of the units have to remain affordable during the tax abatement period. We'll see if the math works.
The thing that's really difficult about office conversions is not only the floor print or the footprint to make it so you've got external and also just the general size of the assets and the cost of converting them. But the piece to it that a lot of people forget about is that in any office building in the country - 30% to 50% of the space is still going to be occupied by somebody and they don't want to move. So to be able to take an office building and convert it, you have to go to your existing tenants who are still in the building and buy them out of their leases. And typically you've got to do it at a premium because if you're in that office building and you've been there for five years and you've got a low lease, you're like, I don't want to move. So that incremental cost to convert office buildings to multifamily is something that a lot of people sit there and say just because it's vacant, they're very rarely 100% vacant. And that cost of getting those existing tenants out is a very significant cost for many people.
That's Jerome Powell with the world squawking at him, telling him to stop raising rates and that's the seal saying goodbye to a couple of banks. And the question is, do we have more to go? SVB, Signature (Bank) into First Republic. I've said a couple of times, David Faber was nice enough to have me on CNBC and I said when I was on CNBC that this is an earnings issue, not a solvency issue. If you look at Tier 1 capital in all the banks, you stress test their losses both on office as well as across commercial real estate. There isn't a bank that has a solvency issue if looked at as a stand alone event. And that's a very significant caveat. If we end up continuing to get long losses in commercial real estate and then all of a sudden the consumer starts to fail and they start to get credit card losses and then companies start to fail and they start to get C in high losses, All of that cumulatively can take down banks. But if you look at just the exposure to commercial real estate on a standalone basis, it is an earnings issue for banks. It is not a solvency issue for banks.
The one other thing on banks pulling back from commercial real estate lending. It's not shown up yet, but it is our assumption that when banks start to provide capital back to commercial real estate, that because that 1-to-1 client-to-bank relationship in many instances is now gone because the bank pulled back at this point. Someone who had a 1-to-1 relationship with PacWest for either construction lending or for bridge lending. PacWest says we're not lending on commercial real estate right now. That individual needs to go find other banking relationships. We think it makes the role of brokers, whether it's Walker & Dunlop, CBRE, or anywhere else, much more prevalent to our clients as it relates to finding capital in the markets. And I think that will be good for the real estate services companies once the markets heal and the banks start bringing capital back to commercial real estate.
A quick look back before we go forward. You know, if you look back to where we are today from where we were a year ago, I talked about where rates have gone. And the interesting thing about it is from today's 10-year to a year ago's 10-year is up less than 100 basis points. So you've had 400 basis points into the Fed funds rate and you've only had 100 basis points in the 10-year Treasury. The S&P is up 14% from a year ago today, 14%. Think about where the talk was a year ago today. Talk a year ago, today was we were definitely going into recession. Unemployment is going to spike. Unemployment is still at 3.5%. To some people's view, not good. Feds trying to get us to 5% unemployment. That's 3 to 4 and a half million jobs that they want to be lost in America to get their, quote unquote, perfect unemployment rate. That piece of the equation I just still don't understand why the Fed wants Americans to lose their jobs. Just makes no sense from a policy sense to me. I get it from a theoretical standpoint. It makes no sense to me from a policy standpoint.
The other thing to keep in mind is oil. A year ago today, a barrel of oil was at $110 a barrel. And the day before our Sun Valley conference, an analyst at Truist wrote a research report and went on CNBC saying that it was going to be at $160 a barrel by the end of the year. If you believe that and gone long oil, you were on the wrong side of that trade. Oil's at 75 bucks a barrel.
It's really important to keep in mind, just think of where inflation would have gone had oil gone from $110 to $160, rather than going the other way down to $75. Think about where we would be if China, although not growing as fast as it has in the past, hadn't come back online and gotten its economy back going where it is. China has had a big deflationary impact on the United States and been very helpful in getting us to the most recent inflation print.
So where are we going from here? As Stan Druckenmiller said, it is a really difficult time to kind of look forward. I will tell you, I sat down with my board yesterday morning here for our board meeting thinking about the conversation we were all forward facing. But I thought the conversation was kind of going to go from point A to point B, and it went hard, right and then it went hard left and then it kind of got to the endpoint. But the point is, everyone has a different opinion. Everybody is trying to gauge when the Fed pulls out of the market. Everyone's trying to figure out when we have rate stabilization to then get cap rate stabilization to then get transaction volumes coming back.
This is my hope of where Jerome Powell is in about a month, to which he says, “Thanks, I'm done. I'm going out to the tundra.” It's probably wishful thinking. But it would be fun if that looks like Jerome Powell in a month's time. The interesting thing is that that's Jerome Powell with Janet Yellen. That's Janet Yellen saying to Jerome Powell, “You've had your day in the sun, now it's mine.” The reason it's Janet Yellen's time to be in the sun is because you all may recall in May, into early June, we were all concerned about the debt ceiling negotiation that was going on on Capitol Hill. Thankfully, we didn't default. Then we got the Fed saying we're going to pause. And then immediately after that, the Treasury Department comes out and says we need to issue $1,000,000,000,000 of treasuries between now and the end of the year to be able to pay for all of our costs at the federal level, $1,000,000,000,000.
So one of the biggest things that's pushing rates right now is Janet Yellen issuing $1,000,000,000,000 of new paper. What maturity they issue those securities at – whether it's 6 month paper, two year paper, five year paper, ten year paper will have a big impact on where you're deciding to borrow in the yield curve. So it will be interesting to see whether they go long and say, hey, this is as good as we're going to get. Let's go issue a bunch of 10-year treasuries. Whether they say no, we actually think rates are going to come down, our cost of capital is going to go down as the Fed cuts. Therefore, let's go shorter on the curve and issue your paper.
But that's a very important thing if you're a borrower between here and the end of the year to watch what impact that's going to have on overall borrowing cost.
This slide - I saw this slide and I said, pardon me, I'm going to offend everyone in the room. Joe Biden or Donald Trump? I said it last year and I'm going to say it again. Our country needs younger leadership.
The Allen & Company Conference was here last week and Warren Buffett spoke and lots of people said Warren Buffett was amazing but struggled as he talked for an hour as it relates to his overall health. He had to pause a number of times as someone just said to me, wondering how many more times Warren Buffett's going to be able to come back to Sun Valley for the Allen & Company conference. Obviously, it would be great if Warren Buffett could keep coming back here for a very long period of time. But the activity at the Allen & Company conference is around AI. It was all the heads of the big AI companies, the big tech companies talking about where technology is taking our world. And we need leadership that understands the implications of where technology is taking our world. Period, end of statement.
The leadership that we have, whether it be in the White House, whether it be on Capitol Hill is not people who understand that. And that's not to try and say that Nancy Pelosi can't sit down and try and figure out what AI is. We all know for a fact that those people, I mean, you give any one of our kids a piece of technology.
I'll never forget. We were on a bike trip with my family in Italy, and one of the guides on our bike trip got a new cell phone and was trying to figure out how to use the cell phone but didn't speak Italian and was punching all these buttons and couldn't get the cell phone going. At that time, my 12 year old son, Charlie, asked the guide for the cell phone. Charlie doesn't speak Italian. He'd never, ever used one of these cell phones before. And he goes, Bing, bing, bing, bing, bing, and hands back to the guy. And he changed the language on it and gave it back to him. His brain is wired to figure out how to go through that menu.
That's the kind of leadership we need to understand the implications of these big issues.
One thing that I do think is kind of interesting as I was doing research for Secretary Rice, she talks about the tension between Colin Powell and Don Rumsfeld, between state and defense. And she makes the point that the Defense Department had such a huge budget that there's no way that the Defense Secretary doesn't sort of have more sway just because of the size of the budget and the resources that the secretary of defense has over the Secretary of State. And while I was sitting there, I was thinking about the fact that in 2000, the Defense Department budget was just under $400 billion and the largest company in the world was General Electric and its market cap was $500 billion, half a trillion dollars.
Today, 23 years later, the defense budget is $800 billion and the market cap of Apple is $2.9 trillion. It's just really interesting to think about the private sector and the growth of the capital markets. We have a company today that is 3.5X times in value the budget that we give to the Defense Department every single year and how that's changed, it was 30% greater to now being 3.5X greater over that period of time. Commerce and technology is driving this world.
This is what I hope many of you in the room feel is a picture of a multifamily owner. The reason is that he or she is kind of smiling but doesn't really want you to know that they're smiling. They'd love you to think that times are really, really tough. But they locked in a ten year, 3.5% fixed rate mortgage in 2017 on the property. While rent growth has come down dramatically, that property is cash flowing beautifully today. The issue from a credit standpoint is that that picture for us, from a credit standpoint, we have a $60 billion, our total servicing portfolio is almost $130 billion, but our at risk portfolio is $60 billion. Inside of that $60 billion loan portfolio, 91% of our loans are fixed rate. So we like you sort of have a really good smile from a credit standpoint.
The question that all of you have in your mind, in that we have in our mind – is if rates stay where they are, when that loan comes up for refinancing, what's that step up? What are the proceeds on that take out loan and how does that then impact the cash flow on that asset? The answer to that question right now, one of the interesting things for us is we only have $300 million of loans maturing in our portfolio this year and only $1.4 billion maturing next year. So we've got $1,000,000,007 of maturities in the next 18 months. It's not a lot.
But there are a lot of people who are sitting there saying, “I've got to go refinance right now, and I'm not going to be getting the proceeds that I want and the rates are going to be significantly higher, which is going to put downward pressure on my cash flow.”
This slide: that's the market on the left laughing. And that is some steely eyed investor who's going to go buy an office building in the next six months. He or she knows that there is going to be value in office at some point. And that's a reasonably “out there” statement on my part. But here are the two things that I would put out as it relates to office. The first is that there are developers who are continuing to build trophy office buildings and the trophy space is selling. The difference between the average trophy office space per foot leasing rate in the United States today is $79 a foot. The average per foot leasing rate on A-class office is $40. $79 to $40 – people are paying up for trophy office.
So if you happen to own one, we are in One Vanderbilt in New York City, we were really lucky we signed our lease in May of 2020. In the depths of the pandemic, at $110 a square foot. Space in One Vanderbilt is going for $200 a square foot today. Trophy offices are selling because people want to be in the spot.
The other thing is back to the office. One of our bankers was out meeting with Cigna about a month ago to talk about their desire to lend on commercial real estate. At the end of the note for meeting with Cigna, he said Cigna has 70,000 employees. 7,000 are in the office today and after Labor Day, the other 63,000 will be back in the office or they won't have a job with Cigna. It's changing and it's changing quickly.
JLL put out a report last week, office leasing activity was up quarter on quarter 8.7%. Keep in mind, Q1-2023 was the depth hopefully of office leasing market as well as many other commercial real estate transaction markets. But 8.7% growth quarter on quarter and post-Labor Day – a lot of companies are going to say get back in the office or you're not working here anymore. It's going to change. So we'll see how long that takes. But I think that there's going to be an opportunity there. As Peter Linneman said on my last webcast with him, “Some people are going to make a lot of money in office.
So I'm going to run this. This is a TV station in India, which is using AI to tell the news every night.
(Video Clip) Warm greetings to everyone. Namaste. I am Odisha TV’s first AI news anchor Lisa.
Willy Walker: So that's Lisa. She is not a member of the Screen Actors Guild. She is not on strike right now, but Lisa is the reason why the Screen Actors Guild is on strike.
So in this television station in India right now, AI gather the news. AI pipes the news into Lisa and Lisa tells you the news you need to know. No human interaction. It's a scary world out there as it relates to AI.
I am interviewing a gentleman named Ezra Klein a week from yesterday on this stage for the Sun Valley Writers Conference. Ezra Klein is a writer for The New York Times, has a very popular podcast, and I listened to Ezra's podcast with Demis Hassabis, who is the head of Google's division called DeepMind. DeepMind is all the artificial intelligence action that's going on inside of Google today.
I think what's important is for all of us to remember that many of us, myself included, before I started doing this research for my interview next week, think about AI in the context of that chatbot Lisa and go in and ask one of the chatbot like ChatGPT: Give me itinerary for my summer trip to Europe. Do a loan narrative for me on a loan in Nashville, Tennessee, with X, Y, Z parameters to it and out comes a new loan narrative that an analyst used to take 3 hours to do and now it's in the chatbot that does it in 2 seconds. That's there. That's true. One thing I would caution you all on all that is to go and do some background work on the veracity of the data that comes out of the chatbot.
I asked Claude, which is this new chatbot that just came out recently. I went into Claude and said, Give me Willy Walker's bio. And first of all it said that I went to Stanford University, I wish it. It said that I was born in circa 1960, I took great offense. I'm more circa 1970, and it also said that I'm on the board of the Federal Reserve Bank of Richmond. No such honor. So I got my bio completely wrong. But the piece of pie that I think is so important for all of us to understand and in this conversation that Ezra had with the head of DeepMind was first of all, to remember that artificial intelligence has been around for quite some time. Demis talks in the interview about the fact that AI has been in video games for decades. Because video games needed to be able to react to what you as a player were doing. And so AI, to some degree, has been in video games since the 1980s.
As Google was taking DeepMind and getting it to focus on how they could expand AI in the game space, they said, let's use AI to try and win at the game Go. And I don't know if any of you in the room has played Go. But Go is one of the most widely played games across the world, and humans spend a lot of time learning how to play Go with millions and millions of iterations to how you play Go. So they took and created something called AlphaGo, and they trained with specialized knowledge, artificial intelligence to try and win at Go. And after years and years and years of watching the AI play the game millions and millions of times, AlphaGo beat the best player in the world at Go.
So then they said, well, that was specialized intelligence, focusing on a game by training the technology to understand the game. Let's see if we can take artificial intelligence and just give it no parameters and tell it what you ought to do is find a game to go learn the parameters of and then go win.
AlphaZero in the course of a couple of years figured out what Go was, how to play Go and how to beat AlphaGo. So AlphaZero with no parameters, no specialized knowledge, turned out and beat AlphaGo.
Then they said, let's go and take a look at something that is a very significant scientific problem, so they created something called AlphaFold. They wanted to take a look at something called protein folding. Proteins, which are extremely important to understanding as it relates to medical research as they mutate, they fold. And for all of our history, PhD students have spent their entire career using microscopes to study various proteins, catalog the evolution of those proteins and map, if you will, the folding of the proteins. Over the course of history, we've been able to catalog 150,000 proteins.
To give you a sense of the folding of proteins, the coronavirus protein is a spike protein. That spike is basically a mutation of the protein that's why it's so difficult to try and map proteins and understand them. But our understanding was that there were 200 million proteins out there, but we only understood 150,000 of them. They took this technology and they trained it on 150,000 known proteins. After studying those hundred 150,000 known proteins, it created a database of another 600,000 proteins. But they didn't know whether the technology was actually giving us false positives or whether the data was good. So they went in and they cut 350,000 of what they thought were the most positive results, put those back into the database with 150,000 they knew. And off that half a million proteins uncovered the entire 200 million protein, if you will, of every protein in the world. That was done last year. And what's so amazing about it is they then took that now 200 million catalog proteins, which are down to a level of specificity that meets all scientific criteria. And they've given it away to every drug manufacturer on the face of the planet. They've given away to every research center in the world to try and allow for medical research to continue to move forward with that data.
You hear about this, you see it, and it literally, at least for me, takes my breath away. This is going to have massive implications to everyone in this room, to our businesses and to our health.
One of the things that we're trying to do at W&D is use technology. We are nowhere close to what I just described as it relates to AlphaGo or AlphaZero or AlphaFold. But what we are trying to do at W&D is take the huge amount of data that we have, put in machine learning and artificial intelligence against it to make all of you more insightful into your markets.
So we bought a company called GeoPhy almost two years ago. We have been investing in taking their machine learning and artificial intelligence to take the huge amount of data that we have inside of Walker & Dunlop from our large servicing portfolio, from all the transactions we work on every single day, and to take that data to try and both become more insightful into markets and then take that data and share it with you so that you all can be more insightful to finding opportunities where you might want to go put your money. We have an appraisal company called the Prize, and one of the main reasons we're in the appraisal business is not because, quite honestly, I mean, we obviously want to compete with the likes of JLL and CBRE in their appraisal businesses, but it's the data that the appraisal business brings us that we believe is so valuable to turn around and get back to you.
That's people coming back to the office. I've already talked a little bit about office, but I think we're on our way coming back to the office.
Student debt. That's a mama teaching her child how to do something in the woods. Student debt. First of all, the Biden administration being overturned by the Supreme Court on their debt forgiveness program, that executive order as it was previously was going to add almost a half a trillion dollars to the unfunded debt to the federal government. Half a trillion dollars. It's real money. I think the big thing to keep in mind here is the payment holiday on student debt that has been in place since the pandemic expires on August 28th. So for all that cohort, that is for almost three years not been paying their student debt, they come back and they need to start paying the federal government back in September.
In my last conversation with Linnemann, Linneman was very straightforward, saying that he doesn't think anyone's going to pay. My question to him was, doesn't the federal government just feed that into the consumer rating agencies, credit agencies? And doesn't it then go on someone's credit report and then push down their FICO score and then they end up paying the federal government? Peter didn't answer that question for me, but I believe that this is going to have a big impact on the pocketbooks of those that have student debt.
the Biden administration just released $38 billion of debt, but it's nothing close to the relief program that they had in place previously. That student debt has always been a big reason why lots of Americans can't afford a single family home. And it kept them as renters rather than owners. So what happens to student debt? There's $1.7 trillion of student debt outstanding. So if the Biden administration wins at the end of the day on doing their big debt relief program, it has big implications as it relates to rental versus ownership. If it ends up staying on the course, it seems to be right now that the dynamic sort of stays outstanding as it is.
Tourism from China. Since the pandemic, China's been shut down to travel and it's going to come back once Chinese citizens start to travel and is going to have a big impact on the hospitality industry for those assets that cater to the Asian population. So while clearly, you know, hospitality in San Francisco, I can barely think of a worse asset class to be in today, particularly office hospitality or high office hotels. But once the Chinese tourist starts to travel again, those properties that typically have gotten those tourists are going to improve in performance dramatically.
This slide was put together by Costar. The reason I put it up there is not only because you will note that Walker & Dunlop will stay at the top of this slide the entire time, but watch where the banks go. So you can see some of our competitor firms, Wells Fargo is at the top and you just watch it fall down. Key Bank, Capital One. It's just interesting. And there are two things that I would posit here as it relates to banks versus commercial real estate services firms. I think this slide and it's going to get to the end and I think it's going to recycle. It recycles. Okay. Sorry. I'll just talk about it for two more seconds. But one of the things you will see here is there were a lot of banks up there, but banks can't tie investment sales in with banking. We all know that.
But that connectivity between the sale and the financing of it is something that, well, at least the three top firms on this slide have really focused on and done an extremely good job of trying to bring to you as customers, that bundling of services between the sale and bringing in the financing. The one other thing I would say on this slide as it relates to that tie in between sales and financing is that we all know that the agencies are driving the multifamily financing markets today. They are the dominant providers of capital in the market. Anyone who is selling an asset today, what is going to have a huge impact on the cap rate that you sell that asset for is how good the financing is on the buy side.
What did the buyer get as it relates to rate and terms from Fannie Mae or Freddie Mac? That right now for us as it relates to investment sales and for the other two, at the top of that list is a big driver of why people are selecting us to sell their properties is because we've got such a large presence on the other side.
This slide just came out. MSCI just put this out as they were talking about who has exposure to commercial real estate debt. I put that up there just because I have to tell you having joined this firm, and it was this teeny little firm – to be between Citigroup and Goldman Sachs as it relates to the sixth largest provider of capital to the commercial real estate industry in 2022 is an incredible honor. I've tried to figure out what I could say as it relates to being positioned between Citigroup and Goldman Sachs. As far as something that I ever thought we'd be on a list with them and I can't figure it out for the life of me, so I just put that out there.
The other thing to note is Wells Fargo, look at how much exposure they have. By far the largest exposure to commercial real estate of any institution in the country, face of the planet really out there as it relates their overall exposure to commercial real estate, where Charlie Scharf guides Wells Fargo as it relates to their strategy on commercial real estate going forward, I think is still TBD, to be honest. Wells has always had such a strong presence – when we put out our vision to be the premier commercial real estate finance company in the United States, Wells Fargo was who we were thinking about.
This is an interesting one. This is BREIT on the left, SREIT on the right. This is the amount of buying that the SREIT and the BREIT did between Q1 of 2021 and Q1 of 2023. The punchline to this slide is the SREIT and BREIT between Q4 of 2021 and Q4 2022 were responsible for $100 million of buying apartments every single day. Every day throughout that period of time. You can see here the slide is their aggregate purchasing and then how much of it was going to housing, so apartments because they were buying industrial and a couple other asset classes. But you can see the percentage of their overall buying was about 70% to 80% multifamily. And net-net, the two of them bought $70 billion of multifamily and at that rate.
So you have those two huge capital sources buying that many apartment buildings and you are going to get cap rates at a level that is distorted.
Barry Sternlich and I were at a conference in Chicago three weeks ago, and Barry said the impact that we and Blackstone had on the market as we were in our buy phase was really kind of too much. This is Barry's words, “We pushed cap rates down artificially.” And obviously now that the SREIT and the BREIT have pulled back, you understand where cap rates have gone.
Fixed-rate CMBS trades per week. (And I got to watch time because I've got Doctor Rey coming up soon, so I have a lot to get through between now and then.)The thing I wanted to show here on the left hand side of this slide is our transaction. I can't show you the actual transaction volume as it relates to dollars, so this is the number of trades that we were doing. But you can see here, many of you in the room, look at where the spikes are on the right hand side once rates have gone up. When rates get down close to 325-350. You all are buyers. You're financing. You're saying the average cap rate is 475, my all in coupon rates going to be 5 to 550. I'm good with 25 basis points to 50 basis points of negative leverage. When the 10-year spikes up and gets up above four, look at where transaction volume goes, and fall to the floor.
If the 10-year goes up and stays up above four, cap rates are going to have to adjust. If the 10-year can stay in this range of 350 to where it is today, 385? Many of you are saying I can transact at that level. There's your cap rate slide.
This is what's happened to cap rates between Q3 of 2022 and Q2 of 2023. The one that I would point out to you on the left hand side, new construction, three cap rate. Q3 of 2022 for an inside 486. Q2 of 2023. And we can send you the slide or anything else that you might want to take a look at.
The forward curve. Don't believe it. So the reason I say that is check out what happened between last week and this week as it relates to the movement in the forward curve when we come out with an inflation print that comes in below what we thought it was going to do. Look how it impacted not only what the market thinks is going to happen as far as rate increases in 2023, but how much it took out of what the forward curve says, where the rates are going to go.
So on the top one, it got down only a week ago to a 420 Fed funds rate – bada bing, bada boom this week it looks like the Fed funds rate by the middle of next year. Forward curve for the last 12 months has always been wrong. So there are a lot of people sitting there looking at that saying, I'm just going to hold on because rates are coming down. We continue to hear from the Federal Reserve: do not expect us to cut rates and people still sit there and go, well, maybe Jerome Powell changes course. They raised rates 25 basis points the week after SVB went down with the very real risk that we were going to have contagion in the banking system. If they were concerned about where they were going with rates, if they were concerned about the broader picture, they wouldn't have raised rates 25 basis points after SVB failed. They are going to get to their target inflation rate.
A bunch of people said to me last year, you talked about the weather and about the climate and the fact that Sun Valley wasn't as green as it was when you grew up and – bada bing, bada boom, you look outside and looking out at the mountains right now and it is beautiful and green. That's a photograph of playing golf on the course that many of you are going to play later on today. Only two weeks ago, those are two of my sons trying to get a ball out of the bushes. That's very usual for my sons and for me playing golf. But to have snow in the mountains at this time of year is very unusual. For Sun Valley to be as green is very unusual. It is fantastic.
But climate change is here and we're getting a wonderful reprieve. And those of you who live in California love seeing the reservoir's full. Awesome. But what you're seeing, not from a political standpoint, but from an economic standpoint, is to try and get insurance on an asset in Florida today. I can't get insurance on my home here in Sun Valley because Chubb doesn't want to insure homes in mountain towns that could burn down because of the forest fires. The economics of climate change are coming. Money is leading us to understanding that climate change is very much here and that is going to impact our society going forward. I spoke previously about AI, science and medical research. I was biking here two weeks ago and passed these two incredible women, 87 years old, out on their bikes on the bike path here. And I whipped around and I came back to them and I said, “You two are twins.” And they look at me and say, “Yeah, dumb dude. Yeah, we're twins. We look a lot like each other.” And I said, “How old are you?” They said, “We're 87.” And I said, “How often do you bike?” They say we bike every day. And then the one on the left said, “I skied 102 days this year.” Then I asked them where they live. Pause. They look at each other. “Where do we live? What's the name of the street we live on?” They couldn't even remember literally where they live here in Sun Valley. Yet they were out on their bikes getting exercise and enjoying this beautiful place. We are all going to live longer than we think.
I have these tips that I've told people in the past as far as how you take care of yourself. Do something every single day. When you travel, put your gym clothes in first. Not your suit and what color tie you're going to wear if you ever wear a tie again. And one of the other things that I would add to the list of the do's and don'ts. This is my dad's garage. And I do exercise every single day. I'm as committed as anyone you will ever meet to exercise. I would never use that exercise bike or I'd use it once and then I'd say, I'm not going to go into the cold, dreary garage and get on some bike where I'm looking at my car and think that I want to work out. If you have space to get exercise, make it fun, invest in it.
I had a friend of mine. I went to his house in Philadelphia, said, “Come look at our new home gym.” I walked upstairs. They'd taken their guest room and they'd convert it to a gym by putting the bike on the plush carpet. They had a bed on the side. You had to squeeze in like this. Make it easy and make it fun. And if you make it easy and you make it fun, it's a lot easier to do.
Final thing, I love this quote by Theodore Roosevelt talking about it's not the critic who counts. The reason I put this up there is twofold. One, because times are tough and every one of you is in the arena. Every one of you is in there getting dust on your face, whose face is marred by dust and sweat and blood. Every one of you is in there making decisions on a daily basis. You're in the arena.
But I also look at this in the sense of our political world. There are too many people who sit on the sidelines and who throw pot shots. They're the critics. And per Theodore Roosevelt, they don't count. If you care about our system, you care about our country as it relates to politics and the future of our country – get in the arena. Don't just sit on the outside and throw pot shots and make comments and things of that nature. Understand the issues. Be dedicated to the issues and act just like you act every single day of being in the arena from a business standpoint.
