A View from the Top is a Q & A series exclusively available on CNBC Pro . CNBC reporters will regularly speak with a business leader about decision-making, investing and industry news. Land & Buildings Investment Management founder and CIO Jonathan Litt has been closely tracking the ups and downs in the real estate industry, including office, industrial, retail, residential and hotel space, during the coronavirus pandemic . Litt has grown L & B, founded in 2008, into a prominent activist hedge fund in the real estate world. In more recent years, he has waged battles with the high-end shopping mall owner Taubman Centers , Forest City Realty Trust (now owned by Brookfield Properties ) and office and multifamily property owner Mack-Cali Realty Corp. In 2017, he targeted Saks Fifth Avenue owner Hudson's Bay, arguing the best use of Hudson's Bay's real estate was not as department stores. During the pandemic, his firm has reportedly taken short positions in some of New York City's biggest office owners — Empire State Realty Trust, SL Green Realty and Vornado Realty Trust. And in late September, Litt came out against the real estate company Apartment Investment & Management Co. 's plans to split into two public entities, saying he would call a special meeting if AIMCO did not let shareholders vote on the move. In this interview with CNBC in late September, Litt said: "Real estate touches every part of the economy. There are sectors where dividends are up, stocks are up, and you're making a lot of money in them. Then there are the sectors which are struggling, like regional malls and shopping centers which reduced their dividends. So I think that it's a misnomer to think that [the real estate industry] is a homogeneous group. The point is, there are a lot of different sectors within it." Here's the full Q & A: (This interview has been lightly edited for length and clarity.) Lauren Thomas: As you think about all the asset classes within real estate, which ones are you honed in on more during this pandemic, and are there a few different sectors that you're watching more closely day-to-day? Jonathan Litt, Land & Buildings founder and CIO: The mega-trends in real estate that were in place pre-Covid were turbocharged due to Covid-19, and those are the places where I think you're going to look back in five years, and you're going to have made a lot of money in real estate. When people look at the [real estate] index, it's not that exciting. That might be the case, but real estate covers everything, from a mall which is struggling to a data center which is booming so you have to find what the real estate trends are and where you want to be. And what we identified here in our mega-trends piece was: You want to be in single-family housing, whether it's a home builder or is a single family for rent company because we already saw the suburban population is already [booming]. The population has been declining for several years in the major cities and now that millennials are in their prime childbearing years, they are making the leap from urban to suburban. Covid has accelerated this move to suburbia because people are saying, 'We don't need to wait. Let's get going.' And we saw that in the single-family home numbers. This trend that was already in place, and for at least the next five years we believe people are going to continue to buy homes and rent homes. How much of that do you think there are trends that are just cyclical in nature? And you could argue Covid comes along and accelerates it, obviously, but it is cyclical. I just wonder, with what's happening in housing, for example, do you see that as more of a cyclical thing, or is it becoming more permanent? Yeah, it feels more like the tip of the iceberg. But it's not the hangover we had back in the financial crisis when you had cab drivers and shoe-shiners owning homes, flipping homes and making money. This is true demand. We've been under-building the housing space for 10 years. People have been staying in apartments longer than staying with their families and now they want to be in homes. Now, we have to watch it, monitor it, and see what happens. And, ultimately, it's the interest rates, right? If interest rates go up, you're going to see people hesitate. Now you can buy a lot more home and you can pay a lot more for a home than you could pre-Covid because rates are down 100 to 150 basis points. So I think this is going to continue and it's not going to be a flash in the pan. To pivot a bit, I did want to ask you about office space. We've discussed that in the past, and I think you're seeing a similar exodus there. Maybe one trend being companies are opening more satellite offices and avoiding kind of the flagship model. But what are your thoughts on the future of office space, especially in a city like New York? I think that Covid is very disruptive. The office market was facing headwinds going into the crisis. And this just compounded work from home, so the genie is out of the bottle. It's not going to change. We're going to have a lower number of people in office buildings than we have pre-Covid, because the work from home is going to be here to stay at a bigger scale than it was before. And look, I love New York. I love the energy in New York. It's always going to attract the best and the brightest. It's just that right now we've got to go through a resetting, like lower vacancy rates. You're going to see values probably fall 40% for office buildings, but we're going to get to the other side of it, and then it's going to be a phenomenal investment opportunity. What are your thoughts on these comments from some of the big office landlords, like Related Cos. being one of them, coming out and pushing everyone to get back to the office? It's really fascinating. We've been out at a lot of conferences and talking with a lot of management teams, and public companies, and the office CEOs say, 'You know, companies want to come back.' But then when you listen to other companies and other [sectors] where their workforces are working from home, they're saying, 'We're happy. We don't need everybody to come back.' [CEOs] are looking at this as a business decision. Is this going to work? Is this going to be a permanent part of our structure going forward? And they're saying it is. And I don't know if it's representative, but my office is in Stamford, and we've been looking to move our offices to Greenwich, which Connecticut has been booming as people are moving out of the city. So, you would think the office market would be booming. In fact, what I saw over the past six to nine months is more availability of space than there was before. And I think what's happening is leases are expiring, and occupiers are saying, 'Let it expire.' So there's more availability of good [office] space than there was pre-Covid, which I would have thought it would have been the opposite. What about, on the office topic, co-working? That was so hot. But what's going to happen now? Really the only reason occupancies in Manhattan didn't go down a lot the past several years is because co-working was growing so fast, whether they had a money-making model or not. And so, the question would be, how do you make it a money-making model? But I do think that if they shrink their footprints, we'll still use co-working. And I think that there will be some positive outcomes for co-working in all of this. I don't know if that means co-working will make money. We need to see a shrinking of the co-working space, in order for it to be able to grow and make money. But I do think you're going to see some of the demand shift to co-working from traditional office. To pivot a bit to another sector, retail. I cover the mall space pretty closely, and I would love to get your thoughts on the future of the mall model. How many malls do you think really merit a place in this country? The mall industry continues to shrink. There are, say, 100 highly productive malls in the United States. I suspect the 100 will survive and thrive, and for the rest of the mall universe it has to reinvent itself, or shut its doors and find alternative uses. I don't think we're anywhere near the point where enough retail capacity has come out of the system. You mentioned alternative uses. A lot of ideas get thrown around and, in particular, a hot topic of late has been converting retail space into industrial space. Do you think that will become more commonplace as some of these dead malls look for a new life? Certain malls are locations where you can build a new state-of-the-art warehouse and some portion of them might lend themselves to a warehouse user such as an Amazon . But I don't think that is going to be the savior of all of these assets in that box. I think that some of them are just set to shutter. I've been to a few where they put in a Department of Motor Vehicles or a library. You get anybody in there that can pay rent. I don't think that the department-store footprint is great for a warehouse. But I think we certainly see that happening because the Amazons of the world desperately need [more] locations. We talked about one of the mega-trends is housing, right? The number two mega-trend is technology driven real estate. The cloud isn't actually in the cloud. It's in the data center or cellular tower, and it's the same with e-commerce. So as investors, we have a large part of our assets in warehouses, data centers and cell towers. They're growing like weeds. The next three to five years are going to be very strong. What was the third mega-trend? The third one is interest rates. In my career, if somebody asked me the question what I wish I knew 30 years ago when I started my career I said, 'Interest rates would go from 30% to zero'. That would have made investing quite easy. When you have low interest rates, as we saw coming out of the financial crisis, real estate is a capital-intensive business. They use a lot of leverage. And when you have this reduction in interest rates, you're going to see a very substantial increase in values. And so, the third mega-trend, which has been in place for 30 years, is the decline in interest rates. I think real-estate valuations are going to go up. And we're going to look back in 18, 24, 36 months and there's going to be a lot of money to make in real estate. That begs the question of, how could the upcoming election impact this? I feel like there could be some pretty big implications for the real estate industry. When Trump got elected, he reduced corporate interest rates, and that was a great boom for companies that pay taxes, right? But if we get Biden in office, traditional public companies are going to face higher corporate taxes. Since real estate touches every part of the economy, the real estate industry will face opportunities and challenges no matter who is elected. For example, today, there are sectors which are enjoying the mega-trends. Dividend earnings are up and stocks are up. And investors are making a lot of money in them. And then there are the sectors which are struggling, like regional malls and shopping centers who reduced their dividends. So, I think that it's a misnomer to think that [the real estate industry] is a homogeneous group which will go up or down based on who is elected. The point is, there are a lot of different sectors within [real estate] and lots of opportunities within it. We talked about malls. I wanted to ask you about department stores. You used to be an activist in Hudson's Bay. What do you think of some of these chains' real estate value? The department stores are going to be a challenge. I think the value of all retail real estate is being impaired every day when people go on Amazon. And as long as that's going to continue, I think that department stores, in particular, are going to struggle, because basically Amazon is a department store. So I think they're going to continue to struggle, they're going to continue to close. I think the value of the real estate has declined. And now, you have to think about what else can you do with it. If you can convert it into something else. How much money do you have to invest in it, and is there a decent return on that? And there might not be. And so that's really the challenge. If you have a great mall with great sales in your in-line shops, you can probably redevelop that [department store] and make an OK return. But if you're not, those boxes are probably going to get boarded up and take a very long time, if ever, to be used for something else. Within the different types of real estate, the one we didn't really discuss yet is hotels. Yeah, it's the one sector where the trends that were in place before were really impacted by Covid. Shopping centers, travel, data centers, warehouses is where those trends were already established and they got exaggerated, right? But now people are accustomed and more comfortable doing meetings, via Zoom. Not planning to go from New York to LA for lunch. And I think that's probably permanent. Anybody that looks into at hotels in 2022 and says we're going to be back to 2019 levels, I think that's going to be really hard, because I don't think we're going to travel the way we did. Now, the other side of it is people want to travel and it'll come back, but it just won't come back to where it was. These companies are down, 50, 60, 70%. Once [traveling] comes back, the [hotel stocks] might be at the right valuation, but to say their stock prices are going to come back because demand is going to bounce right back, I think is a stretch. Before we go, I wanted to ask you one question for fun. During Covid, when you're not working, what have you done to stay busy or just entertain yourself? We didn't think we'd have four kids back in the house. It's been awesome, because we got to spend a lot more time with them, and the kind of time we would never have gotten. So that has been absolutely awesome. Doing the dishes and cooking the meals and doing the wash has not been so much fun, which is a by-product. But it's just been awesome having the kids back and spending time with them.
