Phase 2 - Real Estate 101 (How to or one big idea)

Podcast - How The Tax Bill Impacts Commercial Real Estate (Part 1)

Adam Hooper
September 2, 2021
Podcast - How The Tax Bill Impacts Commercial Real Estate (Part 1)

Mitch Roschelle, a regular on Fox Business and Bloomberg TV, joins us for a two-part series to discuss how the new tax bill will impact commercial real estate.

Mitch is a Partner at PwC, and currently serves as one of the firm’s Business Development Leaders. He was a founder of PwC’s Real Estate Advisory practice, and has over 30 years of experience serving a wide array of real estate investors, foreign and domestic. Mitch is a widely-recognized commentator on real estate, housing, business trends, capital markets, the retail industry and the economy. He is a frequent public speaker, and a regular guest and panel member on Fox Business Network, and Bloomberg TV and Radio. Mitch is the creator and co-host of 7DayYield a PwC-sponsored, weekly YouTube program covering trends in the financial services industry. He is the co-publisher of Emerging Trends in Real Estate, a widely-circualted global annual market forecast.

An active proponent of corporate social responsibility, Mitch serves as a trustee of the PwC Charitable Foundation, where he leads its grant-making efforts in youth education and financial literacy. Additionally, Mitch is a member of the Board of Directors of PENCIL.

He resides in Armonk, New York, with his wife Debbie and their teenage twin boys, and their golden retriever Charlie.

Follow Mitch on Twitter: @Mitch_Roschelle

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Adam Hooper - Hey Tyler.

Tyler Stewart - Hey Adam how are you today?

Adam Hooper - Tyler it's 2018 and I'm ready to start season two of the RealCrowd Podcast.

Tyler Stewart - As am I, I'm excited.

Adam Hooper - Who do we have today?

Tyler Stewart - Today we have Mitch Rochelle partner at PwC, and he is also the founder of PwC's Real Estate Advisory Practice.

Adam Hooper - We're starting off with a heavy hitter.

Tyler Stewart - Mitch has been on Fox Business, he's been on Bloomberg TV, he's been written about in the New York Times and the Wall Street Journal, and he's also been on the RealCrowd Podcast.

Adam Hooper - The RealCrowd Podcast now, he can add that to his long list of esteemed designations.

Tyler Stewart - Yes I'm sure that will end up in his bio.

Adam Hooper - Mitch is talking with us today about this new tax bill which is a very big topic on a lot of our listeners minds. Gosh we covered a lot today, we'll probably have to split this into two episodes.

Tyler Stewart - Yeah we talked about the impact on jobs, the impact on housing, the impact on commercial real estate, there's a lot to uncover here.

Adam Hooper - There is. Mitch is also the co-publisher of PwC's Emerging Trends in Real Estate, which for listeners out there is a must read, they do that every year, just a ton of great information there, we'll link that in the podcast description here, but otherwise you can just Google PwC emerging trends in real estate, would highly recommend taking a look through that, lots of really good information.

Tyler Stewart - If you have any interest in commercial real estate, that is a great resource.

Adam Hooper - Some of the key nuggets today, one of the interesting things that he talked about, was real estate used to be location, location, location, and we'll talk about what it is now. It's different.

Tyler Stewart - It's changed.

Adam Hooper - You'll have to listen to figure that one out. And then we covered a bunch on the new tax bill, high-level dug in on some specifics around carried interest, the passthrough regulations, how that impacts investors and our listeners out there and operators, just a ton of great information.

Tyler Stewart - Yeah it was a great episode, really appreciate Mitch coming on, a lot to go over, definitely take notes on this one, and give it a couple of listens.

Adam Hooper - Well that's enough of us, as always though if you have any comments, questions, concerns, feedback, show ideas or anything of the like, please send us an email to, review, rate, Google Play, iTunes, SoundCloud, wherever you listen to us we always appreciate that as well, so with that title let's kick off episode one of season two.

RealCrowd - This podcast is brought to you by RealCrowd the leader in online real estate investing, visit to learn more about how we provide our members with direct access to commercial real estate investments, don't forget to subscribe to the podcast in iTunes, Google Music, or SoundCloud. RealCrowd, invest smarter.

Adam Hooper - Alright Mitch thank you for coming on the show today and braving this kind of unusual weather pattern you've got there in New York, we appreciate you making the time to talk with us this morning.

Mitch Roschelle - No problem and just full disclosure, I'm in my basement in a corner of a room, I know when it's on Skype you don't get the benefit of seeing me in my PJ's. With bed head, but I'm warm and safe if in the storm.

Adam Hooper - Good, that's the best way to be. I wanted to obviously take a deep dive on this tax bill, before we get there let's just do a quick check, 2018 has started, we are a few days into it now, how are we looking overall economy-wise, the Dow Jones at 25,000, things seem to be going pretty well, what's your take on just kind of macro picture of the economy right now?

Mitch Roschelle - Let me sort of take all of those in reverse order. Obviously today Dow hit or crossed the 25,000 mark, don't know if it will close the day at that, but it's certainly noteworthy, all the traders on the floor walking around with new hats that say 25K on them. What's interesting about that, is if you look at the composition, that largely driven at the S&P level by a handful of big names, big high market Tech companies that are moving it, having said that, what's really interesting is how broad the growth is and how broad the earnings are, we are about to start earnings season, the fourth quarter earnings are coming out, if you look at the patterns for the last three quarters, the number of companies that beat expectations on the top line and the bottom line, are really the signal that this economy is strong, has legs to it, has tail-winds for the first time as opposed to headwinds, maybe in the middle of the storm that metaphor gets mixed, but the fact of the matter is it's moving in the right direction, and moreover what's really interesting, as we get broader with my response, is how synchronized the economic growth is, so three consecutive quarters, of GDP growth beating expectations, the Fed came out recently and revised its go forward GDP forecast considerably, and we really have tax reform aside, and I know there's a segment on tax reform so we'll unpack that a bunch, but this tax bill is hitting the marketplace and the economy in the face of tailwinds as opposed to headwinds, and if we look at previous tax reforms, let's go back,

Mitch Roschelle - because I'm old enough, the '81 tax bill, '81 tax bill was largely about rate reduction, and not about reform, again when President Reagan got that passed, interestingly enough the Chairman of The House, and his committee was Dan Rostenkowski, who was a Democratic congressman from Chicago, so he got that through, didn't do it with a 51 vote margin in the Senate either, so the first round was tax cuts, but what he was trying to do was stimulate the economy, because the economy needed stimulus, because the economy wasn't growing, and if you look at Bush's tax cuts, if you look at some of the other tax cuts, those were done purely to turn the aircraft carrier around in the sea.

Adam Hooper - Right trying to jumpstart that stimulus.

Mitch Roschelle - Right, we don't have that now, and I'm trying to go apolitical with this, so the chances for success of this tax bill, in terms of further growing the economy, are greatly enhanced by the fact that we are moving in the right direction already.

Adam Hooper - Kind of throwing gas on the fire, things are going well and then these additional incentives, and the cuts and some of the other things we'll talk about today, further pushes headwinds in the right direction, is kind of your take on right now.

Mitch Roschelle - Yes, so the only risk there is, and I'll figure out who is Adam and Tyler by the time we're done with this, but the only risk you have is can you overheat too quickly, and the thing that the Fed is super focused on is going to be inflation, we haven't really seen inflation in so long that my kids who are studying economics in high school, both of them don't even know what the concept is, when I studied economics it existed, it was a real part of whip inflation now existed in my life, if you remember, you guys are probably too young to even know the present before we had those buttons. But the fact of the matter is you run the risk very quickly of overheating, and we'll talk more about that why, but that's the thing I think the new Fed chairman is going to have to focus on very quickly. And whether or not we now have fiscal policy taking care of in the form of tax reform, tax cuts, rate relief, et cetera, the question is will monetary policy have to step in in a different direction to try and prevent the economy from overheating, because we could very easily see four percent GDP growth, five percent GDP growth quickly, if you look at what happened 30 years ago with Reagan's cuts, cuts alone, it really got the economy jumpstarted very quickly.

Adam Hooper - And so what are some of those leading indicators, you mentioned inflation, and keep an eye on GDP growth, what are some of those leading indicators that would indicate that maybe it is accelerating at an unhealthy pace?

Mitch Roschelle - I'd focus on commodity prices, as being one that really we haven't seen a lot and that could be a place, what's interesting though, if you wanted to drag it back to real estate a little bit, so lumber prices have gone up for a variety of reasons, scarcity of the resource and trade issues across the northern border with Canada, labor prices, so wage rates have not gone up, so we haven't seen real wage growth in this country, however, if you look at construction labor costs, construction labor costs are astronomical, and that's purely a function of supply and demand for that skilled portion of labor, and the pressure of rebuilding from the hurricanes. Our housing stat numbers are probably underwhelming relative to the demand for housing, but the cost of construction labor is very high, and that's largely because we are probably still down about 1 million construction workers relative to the portfolio of construction workers that we had prior to-- The great recession.

Mitch Roschelle - Yeah, now a decade ago. Interestingly enough we have jobs numbers coming out tomorrow, but we've been sort of historically adding about 15 to 20,000 construction jobs a month, if you go back and look at where we were adding construction jobs going into '08, we were adding them at roughly the same pace, the problem is what we lost them, we were losing them at a pace of between 40 and 50,000 a month, and we're still down aa little around a little under 1 million construction jobs, so that's just driven up the cost of labor. There's all these little pockets that are inflationary, if you look at the sort of basket of goods that become part of core CPI and so forth, we may see inflation. When you talk about energy prices, were seeing a barrel hitting 50 and 60, and breaking through some resistant levels there, but if you just think about going to the supermarket and filling your cart up with stuff, when that starts to become expensive because the economy is overheating, then I think that's when the Fed starts to intervene.

Adam Hooper - Yeah you touched on just the raw construction costs, and that's something we talked about quite a bit on the show with the real estate managers that we work with, that's causing this huge imbalance between affordable, more specifically in the multi-family side, so we don't deal too much in the single family resi world, but even the ability to find class B class C workforce housing type of opportunities, you can't replace that, you can't build that new now, with how inflated these construction costs, and supplies have been over the last year or two years, and too that imbalance between CBD class A high-rise construction versus the more bulk where this demand is coming from demographically and what not in the bulk of the housing market, that imbalance still remains, we don't see anything really on the horizon to shift that, do you see anything that's going to maybe impact how that supply issue looks on a workforce bulk housing market?

Mitch Roschelle - I'll talk about single and multi together for a second if you'll indulge me. Let's just talk about household formation, so statistically speaking household formation, is when children move out of their parents house. We are creating more household statistically than we're adding to new supply, both single and multi-family residential, the gap between cumulative household formations and cumulative new net supply is about 3 1/2 million households.

Adam Hooper - You're not even talking boomers downsizing out of bigger homes, you're just talking purely about new household formation from this family units and children moving out.

Mitch Roschelle - If you are listening to this podcast and you are an investor in multi-family, I just give you the business case for why multi-family remains a big bet.

Adam Hooper - There you go.

Mitch Roschelle - Because we are not adding enough units of single family, and we do have an affordability, I'm going to use the C word crisis, as it relates to single family residential. What you have in multi-family is the ability to jam extra bodies into the unit, to solve the affordability problem, but when an individual or a couple or a family, however you want to define it, decides to buy a home, they generally don't get into the sharing economy as it relates to their single family home. There's talk about people buying a house and then sticking part of it on Airbnb or something, or some other similar platform, part of the sharing economy, but the fact of the matter is that's not happening on scale, so there's an affordability crisis that really can't be solved with massive cohabitation that you can do in the multi-family side of things and hat remains a big, big challenge, for the economy. What's interesting is, and I've commented in the media for years on the housing market, and many of my earlier appearances to talk about the housing market were taking place because the market itself, as in the stock market which is where we started talking a few minutes ago, had their eyes very very closely on construction and on housing starts and the like, because of the role that the housing market played in the economic expansion that we saw prior to the commencement of the great recession. And everybody was just hoping for that to come back, because they wanted that to turn around the economy, the fact of the matter is it's never come back the way it was,

Mitch Roschelle - we've probably leveled off at the new normal in the terms of the number of new units that are being created, the problem is because we're not creating enough units demand that I referenced, the prices are just spiraling out of control. It's really pricing people out of the market. The other day, yesterday as a matter of fact, Moody's Analytics released something talking about how the tax cuts and jobs act is going to, because of the alienation of dissolve deduction, amongst a few other faction, is going to lower housing prices, I think their estimate was four percent, but it was geographic, the fact of the matter is, is that a bad thing? If housing prices last year rose statistically at about six percent, and the year before about the same, the year before about the same, if the market gives back a portion of that, so assuming that all those estimates from Moody's are correct, and I've no reason to suggest that they're not, and we've done similar analysis ourselves early on that said it could be as high as 10 percent, but if that in fact happened, and we have an affordability crisis in the housing market, is that a bad thing?

Adam Hooper - Yeah let it.

Mitch Roschelle - Now it's bad for me and you if we do a personal balance sheet every five seconds and want to know how much net worth we've created in our house.

Adam Hooper - Especially now that we're in all this crypto.

Mitch Roschelle - Right exactly. But if you're not looking to monetize your home in the foreseeable future, and that's not a permanent impairment to the housing values, it's a temporary sort of rollback of price inflation, then maybe that's not a bad thing to get first-time homebuyers into the market.

Tyler Stewart - And then do you see the same trend in both suburban and urban markets, or is it one or the other?

Mitch Roschelle - No I don't, I'm going to go with that was Adam.

Tyler Stewart - No that was Tyler. Close.

Mitch Roschelle - We'll get there, we'll get there, and I promise I'll do like a face plant at the end of this. You know what's interesting, you have to pull New York out of urban, because New York and a couple of other gateway cities, and I'll maybe go San Francisco with another example of a gateway city. There is such an impetus of foreign buyers in the market that may buy for investment and not for use or consumption, that tend to skew, what the lodging industry would call change scale, just the scale from a 2000 dollar square foot condominium product to north of 10,000 dollars per square foot condominium product. There's just so much extra capital playing in the higher end that it tends to when you look at the numbers in those markets really skew them, but if you look at the urbanization trend, I don't think the urbanization trend is going away, that's a force of nature and that's happening. The problem is in urban areas the best you can do is infill, you really can't create land in an urban area, I'm going to come to that in a second, in suburbia you can continue to sprawl out. And what's happening in suburbia is not a new phenomena at all, it was back to when Levitt built Levittown in New York and in Philadelphia, builders find less expensive land and they build there, because they want to pass that affordability onto the buyer. What's going to become very important is commutation, and whether or not that suburban expansion allows people to go to the places where they're going to earn a living, so they can make their mortgage payments.

Mitch Roschelle - When I talk about housing affordability, and this extends to both single-family and multi-family, I often talk about the four L's or the five L's. Land is one of them, and as land appreciates in price, so does the end unit, Labor we talked about, lumbar we talked about, there's two other L's, one is a law, which is the amount of regulation and red tape that exists, at the state, if not just local municipal level, it's such an inhibiting factor for builders to build, and just adding to the cost. And the last one is lenders, which is the availability of capital lines of credit for single family builders, entrepreneurial builders, and financing, mortgage financing for multi-family developers or builders. You need all those L's to line up to keep prices affordable. But to your question, there is still demand in both the urban markets as well as the suburban markets.

Adam Hooper - Good, this is Adam here, I want to plug the Emerging Trends Report that you guys put out every year. That is a must read for all listeners out there. Just Google PwC emerging trends in real estate report, tons and tons and tons of good information in there, so thank you guys for putting up that report, a lot of interesting stuff in there, I think that came out obviously came out before this tax bill, and so let's transition into that, I know there was some commentary earlier on that, but before we do that I want to disclaim I am the son of a CPA and something about the cobbler's son having no shoes, I'm going to forgive my what will probably be some fairly stupid questions, as we dig into the tax bill here.

Mitch Roschelle - By the way, I'll tell you two things, did you ever hear the expression that there is no stupid question, the only one that stupid is not asked, I'll tell you a quick funny story, I was speaking, speaking of CPAs, the AICPA real estate conference which I speak at every year, it's not that it's in Las Vegas that gets me to speak, but they are very welcoming crowd, and I present emerging trends there every year, and I was doing a Q&A at the end, and somebody asked the question, it was one of my competitors, and I said you know people always say there's no stupid question just the one that's not asked, that one was a stupid question.

Tyler Stewart - We won't make you repeat it.

Mitch Roschelle - Now I was just picking on a guy who I've known for years he was one of my competitors, but you can ask me anything Adam don't worry.

Adam Hooper - Well let's start high-level then, we've talked a little bit about just big picture macro as it relates to owners of commercial real estate and again our audience are typically individual accredited high net worth individuals that are participating as limited partners in these LLCs. This feels like it's a pretty good thing for those profiles right?

Mitch Roschelle - Yes. You know what a little interesting thing, every time I go on Fox Business, I put notes together for the producers, and I've put on this a couple of times, I think one of the hidden little gems in the tax bill that no one has looked at, is the fact that if you're a passive investor in a REIT, so you go out and you buy hundred shares of XYZ rate tomorrow, the dividend that you get from that REIT, you can avail yourself of that 20 percent deduction passthrough income. So you're only paying tax in another way on 80 percent of the dividend. Passive investors in real estate in the form of passthrough entities, which are LLCs partnerships, really get the benefit in the income that comes to them on their K-1, or gets passed through to them of that 20 percent deduction. It's a good thing, it's funny, I talked earlier about Reagan's tax cuts of 1981. I didn't talk about Reagan's tax reform, emphasis on the word reform of 1986, which basically took away tremendous amount of incentives to invest in real estate. The whole tax shelter industry existed because of all these provisions that people would refer to as loopholes in the tax bill. We have not reintroduced those loopholes by any stretch of the imagination, but we have through the passthrough rules put in a favorable tax treatment for people who are passive investors in real estate. And I think that will be a good thing for capital formation in the real estate asset class. But the good thing about real estate, and one of the things I comment on a lot, and I'll correlate this to tax reform, is if you go back to the dawn of time,

Mitch Roschelle - there's only two ways in which wealth has been accumulated on this planet, one way is precious metals, and the other way is property. Take the basket that is precious metals thousands of years ago, those are all the trading assets, you mention crypto, crypto would fall into that basket, anything that you can settle a transaction in is a trading asset, so once upon a time it was gemstones and gold, and it ultimately became currency, and it became things that have CUSIP numbers traded on exchange, that's in the trading assets basket, but that other basket of property, is still one of the only two ways that wealth can be accumulated, and people have a penchant for wanting to accumulate wealth in real estate. This is going to end up being a good thing, because attention is going to be focused on the tremendous fundamentals that are all positive that exist in the real estate world right now, and you can ask me more about that if you like, and the fact that it's got favorable treatment, you always run the risk of too much capital getting allocated to something and it blowing up, but at least real estate is from a tax perspective gotten back some of what it lost 30 years ago in 1986.

RealCrowd - Thanks again for listening to the RealCrowd Podcast. If you like what you're hearing please visit to hear more, and subscribe at iTunes, Google Music, and SoundCloud. RealCrowd, invest smarter.

RealCrowd User (Jack) - My name is Jack and I've been in the financial services industry for over 30 years, I've been six different deals, when I first started doing these deals I was looking for sort of core real estate cash flow, I wasn't looking for a lot of upside return, I wanted more immediate yield, so I went conservative to start, and as I've gone through I've just looked at the quality of the sponsor's first and foremost and their level of experience, now I'm trying to mix in different types of properties, different geographies, I wanted some core plus and a little bit of development, so it's still in my view a conservative portfolio. It's mostly focused on sponsors, and then looking at the projections as far as how much of the return would come from current income and yield, and how much of it would be based on appreciation, and thinking through whether or not how much risk there is in the appreciation being realized. So it's really a portfolio approach for me, looking at different sponsors different geographies, different properties types, and even different types of properties as far as core, or core plus, or development. You know I'm looking for, I guess I would start with a certain level of return, because my investments are primarily in equities, and I look at the direct real estate investing through RealCrowd as being a diversification play, but I also want a pretty substantial return. I typically look for properties that have a yield of seven, eight, nine percent current income, and then IRR that's in the mid to upper teens mid 20s in some cases.

RealCrowd User (Jack) - So I start with return, I focus on sponsor, I look for property types that I don't have already invested in the portfolio, and then I finally look at geography. Well I think that diversification is important to any portfolio, I looked at a number of different crowdfunding portals, I chose RealCrowd, because I like the transparency. I like the fact that the sponsors pay a fee to be on the portal, and that there is not built-in fees for RealCrowd in the compensation structure of the deal, because these deals are fairly complicated to understand anyway, because you've got to pay a management fee and an incentive fee and things like that, and if there are embedded fees from the portal provider, it just makes the complexity so much higher. So I think the key for me is the transparency, and I just think that direct real estate is a great complement to other stock and bond portfolios, I think it provides inflation protection, current income and appreciation potential, and for me direct real estate is better than REITs which are more subject to market fluctuation and price, and I just think with the minimums that are out there now, and the quality of the sponsors, it's a really good way for a lot of investors to access direct real estate without the hassles of property management on your own. So I think it's an important advancement for a lot of investors to diversify their portfolios.

RealCrowd - Thanks again for listening to the RealCrowd Podcast. If you like what you're hearing please visit to hear more, and subscribe at iTunes, Google Music, and SoundCloud. RealCrowd, invest smarter.

Adam Hooper - With his passthrough income, not to put you on the spot here, but can we run through just a quick simple maths whole numbers what the net impact is going to be for investors. So we have got an investor on our platform, they put 100,000 dollars into a deal, it's going to be a 10 percent cash return in year one, so they're going to get 10,000 dollars of income from that hundred thousand dollar investment, what does this is passthrough now mean for them?

Mitch Roschelle - They get it, what was the number, numbers are very confusing for me guys. But if you get 10,000 dollars worth of income in a passthrough, and your passive in your investment in that passthrough, you get a deduction of 2,000 dollars to apply against the 10,000 dollar income, so you basically only pay tax on 8,000 as opposed to 10,000, that's the simple math. What we haven't seen yet, a couple of things just to wave the caution flag, what we haven't seen yet is what a tax return is going to look like for 2018's tax year. What we haven't seen is the rules, the one thing I will tell you, is if you look at the passthrough, the pages of 500 pages of legislation, the pages of the bill dedicated to passthrough, have baked into them a lot of anti-abuse provisions, because what they were worried about is people taking salary income, or taking some sort of earned income, not just earned income, salary income service income whatever you want to characterize it, and re-characterizing it as this magic stuff that gets to use the 20 percent right? The argument that Scott used in the press a lot is that if you have a doctor living next to a banker, and they both make the same amount of money, but the doctor's organized his practice as an LLC, and the banker gets a W-2 form from, sorry for the tactical tax talk there, gets a W-2 form from the bank, but they make it sound is this doctor miraculously going to pay less tax. They put a lot of words in what will ultimately get into the internal revenue code in the form of the bill. The way it works is the Treasury Department

Mitch Roschelle - is responsible for writing rules which are referred to as regulations to explain how it's all supposed to work. Here's the good news, in the three weeks that have transpired since President Trump, not even, maybe two weeks have transpired since President Trump signed the bill, the Treasury has been pretty quick to respond, around certain things where guidance was immediately needed, but typically the writing of regulations by the Treasury could take one to two years. I'm not suggesting right now that it's going to take that long, but if you just look at history, for some things that require clarification in the tax code in the past it's taken that long for regulations to get written, because there's a lot that goes into it, and there's a lot of people who weigh into it, because those regs are until amended they become final. Passthrough taxation is probably the most complicated thing, and it has CPAs and other tax professionals in every possible walk in life scratching their heads saying I'm not quite sure how this is supposed to work, so what people do is they just take a position, and they say this is the way we are going to do it until we hear otherwise. I wanted to put that big behemoth caveat around the answer to your question, because while it's simple on the level, and I try to give you a simple response, you have to realize that the rules themselves are incredibly unclear and complicated.

Adam Hooper - Generally though it's pretty well understood or accepted that the investment activity as a member of an LLC that's investing in a real estate with a third party manager though should be relatively well covered underneath that.

Mitch Roschelle - Correct, and that was the intent of the legislation. The intent was there, but the whole reason for the passthrough, which when you look at tax changes, they're either tax cuts or reform, and people try to put big rubber stamps on what is what. The two things in the tax bill that are truly transformative, is one, a new categorization of income, as being passthrough income and having it being taxed using a different tax regime, that is truly transformative, and then the shift from a worldwide tax system on the corporate side to a territorial tax system, that's truly transformative. Given the magnitude of the transformation it's going to take a while to process that, the intention was though to get main street business owners to really have an impetus to reinvest and create jobs.

Adam Hooper - Yeah that's the big thing right jobs, the tax cut and jobs, that was the 2012 Obama era jobs act was also with the intent to create jobs and increase capital for small businesses, consequentially in real estate and in our business, was one of the bigger benefits of the jobs act as it was in 2012. It seems like they've got another good jobs act here that's going to be a benefit for commercial real estate.

Mitch Roschelle - Yeah, no question.

Adam Hooper - And so I guess how does that apply for jobs, it seems like we've been in a pretty good job growth era. We mentioned maybe not so much in the construction space, but other sectors are doing well, where there's talk about making the US a more competitive tax environment on the global scale, this should in theory promote some more job growth, that was one of the main points of this.

Mitch Roschelle - I look at our client base in PwC, which is a representative of the top multinationals around the world. If you are a multinational, and you have offshore cash, and you're deemed to repatriate that cash, you're bringing that back home. Now its deemed repatriation, so that means whether you bring it back or not you're taxed as if you did, so if you're going to be taxed as if you did, you're probably going to bring it home, so that cash enters our economy, I'll talk about what happens with that. You have a lower tax rate. You also have a shift in the way you're taxed around the globe. I looked at a chart recently, if you look at where our combined federal maximum tax rate, and the maximum state tax rate on averages for all the states, we are right now along the average of other highly developed nations around the world, so we are now globally competitive and that was the intention, if we're globally competitive in our tax rate, and we have a territorial system not a worldwide system, and you're running a business that manufactures something, or you're running a business that sells a consumer product, whether you manufacture it or you don't, you think to yourself where are my manufacturing my stuff, where's my supply chain, there is an incentive now through the tax law to start shifting that supply chain to be closer to home. If the customer is in the United States, we were manufacturing around the world, part of it is the manufacturing cost, also part of it is the tax cost, and if we eliminate some of that, so I'm a half-full guy, not a half-empty guy,

Mitch Roschelle - and based upon the conversations that we have been having with clients around this tax bill, there's more and more focus on trying to figure out where is the most efficient place to manufacture. Where is the most efficient place to fill out our supply chain. Not where is the most tax efficient. Because we've taken that tax efficiency out in many respects, that is likely going to translate to jobs at home.

Tyler Stewart - And then you mentioned, this is Tyler by the way, you mentioned repatriation, we have heard the number could be as high as three trillion coming back to the US, is that what you're seeing?

Mitch Roschelle - Yhe Wall Street Journal I think threw a 2.8 trillion dollar number at it, so let's call it three. There's two pieces of it by the way, so some of its cash, because there is a rate on cash that's been deemed to be repatriated, and there's a rate on non-cash, and everybody goes what's non-cash? Well what's non-cash is money that they have offshore, that they decided to reinvest offshore in plants and equipment. There's two ways that you can invest cash, you can either invest cash in your business, like was done overseas in the case of those companies, or it can be done at home. You can take that cash and give it to shareholders in the form of share buybacks or dividends, both of which are stimulative on some level to the economy. Or you can do which is this trend, which I think is going to accelerate, which is giving it to your employees. The number of companies announcing these bonuses to their employees, is probably in the grand scheme of things of the Fortune 500, because there is more than a handful, but not a huge bucketful of companies that have made those announcements, and there's 500 companies in the Fortune 500, if you think of it that way. It's not all of them, but let's look at what's happening, so one airline did it, then another airline did it, one bank did it, then another bank did it, one telecommunications company did it, then another telecommunications company did it, why are they doing it? Because simultaneously with all of this happening, the thing we haven't talked about

Mitch Roschelle - is the skilled labor shortage we have in this country. We are at 4.1 percent unemployment. Tomorrow we are going to get a jobs number. Maybe unemployment sticks of 400, I mean 4.1 percent, maybe goes down to 4 percent, if you look across all the unemployment rate bands, because there's all the different, employment based metrics there, we are seeing the unemployment rate fall across all of them. What's interesting is being at full employment, we haven't seen wage growth, but what we are seeing is a war for talent, so if one airline does it and gives a 1,000 dollar bonus to their employees, the next airline has to do it, because if they don't people will leave and go to those other airlines. And I think what you're seeing is very very strategic responsible behavior on the part of CEOs as it relates to their workforce. This is more than just a leading indicator, not a PR stunt, a leading indicator of how CEOs and boards are going to behave relative to the benefits of this tax bill, which is going to translate to job creation, and again I'm a half-full dude, so I'm looking at it that way.

Adam Hooper - Well the retention side of it is big, of course. We're in the technology world retention and recruiting is a huge, huge competitive advantage, in a tricky environment right now. These waves are often relatively slow to roll out, again you mentioned maybe a year or two years before some of these regs are actually written. How long before we start seeing and measurable benefit, so we can see of this is actually creating jobs, how long before we are going to be able to measure that?

Mitch Roschelle - I'm going to say that was Adam.

Adam Hooper - Correct, bingo.

Mitch Roschelle - Alright and how far are we into this thing?

Adam Hooper - Probably 25-30 minutes.

Mitch Roschelle - I reserve the right to make a mistake guys, again and when you edit this, don't edit that out, because that may be the most interesting thing I've said.

Adam Hooper - It was good, it's the most accurate for sure.

Mitch Roschelle - Clearly the most accurate, it's a great question Adam and it's really hard to tell because of the positive momentum we've had.

Adam Hooper - It's hard to separate what is causing which.

Mitch Roschelle - We are going to have mid-term elections, and the news cycle and the media is going to be littered, an intentional editorial there, is going to be littered with rhetoric about whether or not this is the benefit of the tax cuts and job act. Whether or not this is a function of momentum that was created by the previous administration, there's going to be so much noise out there, that I don't think we can tell. Let's cut through the noise for a second, and I'm doing this apolitically, the fact of the matter is we do have all this positive momentum. That positive momentum tends to build more momentum, it's snowing outside in Armonk, New York where I'm sitting right now, so I'm going to go with a snow metaphor. When you roll a snowball down a hill, it just gets bigger and bigger and bigger. As it's getting bigger it often picks up speed. It's going to be very difficult to attribute on a dollar for dollar basis or on an action by action basis how much this tax bill did to become a catalyst for the outcome that we see. It's pro-business, the real estate industry does well in pro-business environments. Let's remember what the demand drivers are for real estate, its businesses that pay rent for commercial real estate, we need business to be pro, and it's the employees that work for those businesses that can afford more rent if they rent apartment or afford to buy bigger houses, or a house if they're in the home buying market. Years ago coming out of the financial crisis I said we need to stop saying location, location,

Mitch Roschelle - location were the three most important words in real estate, jobs, jobs, jobs are the three most important. That was at the time we were not creating jobs at the 200,000 monthly rate that we're creating them right now.

Adam Hooper - And the other piece of that too, you were kind of going there, is the consumer spending part of it right, there's been so much news about retail and the death of retail, it's dead, it's dying, it's changing and that was again in your Emerging Trends Report. This should hopefully increase the amount of discretionary spending money that's out there, that would hopefully bolster these negative retail trends, which again just help real estate.

Mitch Roschelle - But I'll tell you what I worry about Tyler/Adam.

Adam Hooper - Good cover there.

Mitch Roschelle - What I really worry about is household debt. I worry about credit cards, and I worry about sub-prime auto. Because as the economy grows and expands, and as consumer confidence goes up, people tend to spend more. Fantastic just coming out of the holiday season, we started year over year retail sales growth north of six percent. That's fantastic. How much of that was cash and how much was credit card? And I do worry about re-inflating any kind of bubble on the backs of credit cards with upwards of 20 percent interest, or sub-prime, I worry about it.

Tyler Stewart - Is that a trend you're currently seeing?

Mitch Roschelle - We're seeing household debt rise. Well sub-prime auto, because we don't have sub-prime mortgages any more really. I look at sub-prime auto, they exist but not in the form that they used to, not as plentiful as they used to be. But sub-prime auto still exists, sub-prime auto is that pre-recession levels. I look at that, and I also look at average credit card balances for households. If people felt optimistic and spent more, they didn't do it with cash. Those bills come in right now, from the fifth, sixth of the month of January, through 25th of January is when credit card statements come in with the bulk of people liquidating those that month, are we really growing the balance sheet of America? I worry about that, because we are going to see more and more optimism, and more rising consumer sentiment, and that does get some people to act a little irrationally. We became net savers post financial crisis, we're now not net spenders, but we are starting to borrow again. We are borrowing at the most expensive side of the borrowing curve, which is credit cards. I could bang away at my keys and pull up a chart and reference it, again waving the caution flag a little bit, something to keep an eye on. Earlier we talked about consumer prices and how the Fed may focus on consumer prices, as stewards of keeping an eye on the industry as we all do. We should keep an eye on credit cards.

Adam Hooper - We humans have awful short memories don't we?

Mitch Roschelle - The thing I always like to say is if you're driving a car, for the most part you look through the windshield when you're driving a car. You don't look through the rearview mirror, you're supposed to, but you don't drive in totality looking in the rearview mirror, because if you do you'll hit something in front of you. We are sort of programed to look forward and look ahead, and we don't often look backwards. The good news is the millennials, I said in an interview once, that the financial crisis was the millennial's world war, because most other generations grew up with some sort of a world war. From the Vietnam in the case of the baby boomers, and the Korean conflict, World War II, World War I, and so forth. They have a memory of that, it's just that it's starting to get a little fuzzier, because Dow 25,000 doesn't help. It's something to keep an eye on. You mentioned retail, I just want to touch on retail a little bit. Retail is still a challenge, even though retail sales were high this year, year over year and Christmas, retail still remains a challenge. What has to happen there is the retailers, so those are the folks inside the box, and the real estate owners who own the box, they collectively need to figure out how to solve that problem. They're still in my view too much finger-pointing, where the real estate industry points at the retailers saying they are the problem, and the retailers looking for people to blame amongst others blame their landlord saying that the landlord is the problem.

Mitch Roschelle - We are not doing well with this mall because there's something wrong with the mall and it's the landlord's problem. Somehow they need to come together, somehow ICSE and the National Retail Federation need to come together and figure this out together, because they both have big-time skin in the game,

Adam Hooper - For sure.

Mitch Roschelle - What's interesting is, I'll leave you with another nugget on this topic, and then we can move on is online sales are still under 10 percent of all retail sales. Think about the disruption that's taken place at less than 10 percent of the total sales volume. If you look at the year over year growth of digital sales as compared to year over year growth in-store sales, in-store sales were up this year. That's terrific, but look at how big the online sales were, so we need to figure that out, because there could be more shoes to drop there, as store closing announcements are happening right now as we speak.

Adam Hooper - Well listeners thanks for making it through the first part of this two-part series with Mitch Rochelle, that was a lot of information so we are going to break this into two episodes, try to hopefully make it a little bit more digestible for you out there, if you have any comments as always please send us an email to, and we always appreciate those ratings reviews, Google Play, iTunes SoundCloud, wherever you listen to us. If you're interested in checking out what we're up to, go to

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