Willy Walker:
Good afternoon and welcome to another Walker Webcast. It's my great pleasure to have my—I can't call him an old friend because Chris is younger than I am, but I've known Chris for a long time. My dear friend, Chris Lee, from KKR, joins me today. I've been working to have Chris join me to talk about the state of the commercial real estate market and what he sees from his perch running global real estate at KKR. And it's a real joy and pleasure to have Chris with me. Chris, welcome.
Chris Lee:
Well, Willy, it's always great to be with you, and thanks for having me back. I think the last time we did this was three and a half years ago. Not much has changed, right?
Willy Walker:
Exactly. I mentioned, Chris, that you run global real estate at KKR. You're on the U.S. operating committee. You sit on top of pretty much all of the real estate investment and credit committees at KKR. Prior to joining KKR in 2012, you were at Apollo, before that Goldman Sachs, before that Harvard Business School, before that Emory University, and before that St. Mark's School in Dallas. Quite the resume and track record, Chris.
I kind of wanted to start today with kind of an open-ended question of sort of where are we at?
Chris Lee:
I mean, the way we describe it here at KKR, and I'll quote my partner Henry McVey, is we think about it as a regime change. And if you think about what has happened over the past, kind of the post-GFC world, we all lived in a world where everyone was worried about deflation after the GFC. Most of the central banks had a mandate of: only focus on growth and re-employing the economy.
And you had central banks that were just doing incredible amounts of monetary stimulus. And you had that coming with fiscal stimulus at the same time.
For about a 10-year period up to the pandemic, you had these unusually low rates. You had these developed economies around the world healing. And you also had this very benign kind of globalization framework where you had kind of free flow of capital, labor. You didn't have any of these kind of geopolitical, some of the same geopolitical issues. Fast forward to today, you've got government balance sheets that feel very fully levered. You've got central banks that are much more worried about inflation as part of their dual mandate than they are on employment. And then you have a really complicated geopolitical backdrop. And then you have an economy that's really driven by AI capital spending around digitization. And it's just a very different environment that impacts real estate in a bunch of different ways. I think we're in a very different environment today than we were three and a half years ago when we spoke, but it almost feels like a completely different world than where we were maybe seven or eight years ago.
Willy Walker:
We'll dive into specific regions and asset classes and all that kind of stuff. But with that as the backdrop, Chris, KKR's real estate portfolio totals about $84-$85 billion. And about half of that is credit and about half of that is equity.
Given that background, are you risk-on on credit, or are you risk-on on equity, or a continued kind of combination of both and equal weighting?
Chris Lee:
I would say we're taking a pretty balanced approach right now. We're deploying in both, and we are very active. Maybe I'll start on the credit side; we're very active as a lender. We're very active buying securities through our insurance company. And across everything we're doing in lending, it's across all of our different pools of capital. We have bank capital, we have insurance capital, fixed and floating, and then we have more opportunistic lending capital. We're very active in all of those markets and we're in all those asset classes, but we're also active across the U.S. and Europe where we're seeing a lot of opportunities.
It's more competitive than it was a few years ago, so we have to pick our spots.
But there is just a tremendous amount of opportunity to lend given you have really a maturity wall that we're hitting. A lot of the five-year loans from 2021 and 2022, they're hitting their five-year maturity. There's a lot of need for capital on the refinancing side.
And then on the growth side, we're seeing a lot of demand for data center development capital and we're participating there, also picking our spots. Maybe starting there on the credit side, we're very active. I'd say on the equity side, where we're taking the last dollar of risk, we're deploying, but we're very selective. And when we think about our investment strategy, we are looking for demand trends that we think are attractive long-term. And so we start with what are the consumer trends? What are the corporate strategy trends?
What are the demographic trends that we feel very comfortable from a demand perspective? And then we, of course, overlay that with more of the micro around replacement costs and locations, and then bring in where do we have dedicated operating capability to really pick where we want to deploy capital. But I'd say we're deploying it on the equity side, but it's more selective and more opportunistic in terms of how we think about deploying there. It's not a back-up-the-truck type of market, given where I started the conversation.
Willy Walker:
If we focus in on the debt side of things, and you mentioned that you've got bank capital, insurance capital from Global Atlantic, you've got your debt funds that you've raised. Your last fund, I believe you announced, it's not a complete closing, but your last credit fund had a billion-dollar raise in Q2 of this year. You've got plenty of dry powder on your credit side of things.
You mentioned the maturity wall, and there's a big article in the Wall Street Journal today talking about the debt burden on multifamily, actually two of them, as you can imagine, given the size and scale of our multifamily lending here at Walker & Dunlop, those articles certainly make one kind of take a pause as it relates to, okay, how are we doing from a credit standpoint? Do we like the construct of being predominantly a fixed-rate lender versus a floating-rate lender? And then what's the maturity risk that we have in our portfolio today? How do you feel about that as it relates to where KKR's deployed credit, particularly into the multifamily space, and this pending wall of maturities that's going to be challenging for some people to get through?
Chris Lee:
We think it creates a tremendous amount of opportunity for us. I'd say on the lending side, there are a lot of capital structures that need to be recapitalized. They were set in an environment, and the Journal article you referenced talked about, these assets weren't necessarily over-levered at the time of origination five years ago, but they feel over-levered today because of the cost of debt service having gone up so much over that period of time.
Willy Walker:
And value's dropping.
Chris Lee:
Yeah. And then the value's dropping as well. You have capital that needs to come in. The asset needs to get sold. That creates a lending opportunity and a buying opportunity for us, or the asset needs to be refinanced and recapitalized, which creates a lending opportunity for us as well. Our pipeline on the lending side has never been this robust, and we're seeing a lot of multifamily lending opportunities. The nice thing is where asset prices are today, and then we're lending at a discount to the appraised value or the new value where someone's coming and resetting, we feel like the basis that we're lending at is very attractive.
If we think about it on a yield basis, debt yield, or we think about it relative to replacement cost, it does feel like a good entry point as a lender when we're looking at these opportunities.
Willy Walker:
And what about from just a credit perspective on the existing book? Because those opportunities, just like us, those opportunities create a huge opportunity to work with our clients to deploy new capital. But we've also at W&D, we have a $145 billion servicing portfolio that's got a ton of assets in it.
There are a couple of operators in that article today in the Wall Street Journal that were mentioned that we have some loans to. And so how do you feel as it relates to the existing book that KKR has either in the insurance sleeve, if you will, in the funds or in KREF?
Chris Lee:
I mean, we feel good about our existing book, especially as it relates to multifamily. We were never, what I'd call, a high-octane lender lending at 75%, 80%. Even in a world where we've seen prices come down, we feel pretty well margined versus today's prices.
And in some of these markets, even the ones where we've seen supply, you have seen some growth, but it's been offset by movements in cap rates. I'd say the other thing is we are very sponsor-driven in our lending business. A lot of what we do is we always say, we're not lending to collateral, we're lending to sponsors, we're lending to human beings who have wherewithal, et cetera. And I think that's been an important North Star for us because in our multifamily book, we've lent to very high-quality sponsors that have strong businesses, have reputations that they care about. And it's actually led to very few credit situations from a lending perspective in our existing multifamily book. But it's a market where there's definitely capital that needs to come in. And I think the areas that we've seen the most issues have unfortunately been in what we call more B properties, and where you're seeing more stress in the overall economy in that middle-income consumer that's more stretched by what's happening with gas prices, et cetera, and is more susceptible to the issues related to inflation. And so we've had fewer of those issues in our book.
Willy Walker:
Flipping—staying on multi, but flipping over from the debt strategies to the equity side, you bought the Quarterra portfolio in what, June of last year. You've bought about five other assets, one in San Jose, two in Seattle, and two in Dallas over the last 18 to 24 months. You like multi at today's entry point, given the characteristics that you just talked about as it relates to the lending side and on the credit?
Chris Lee:
Well, yeah, it was very good. You know everything we've done maybe better than most of the people on our team. I would say it's been different things that have driven those different deal profiles. When we bought the assets coming out of the liquidation of that fund, that was in 2024. And we were able to step in and buy those assets at a very deep discount to what we thought replacement cost was at the time. And these were newly developed assets.
And so we thought that we bought those very well. We kind of watched those assets perform nicely since we acquired them. But that was in a strategy that we could hold those assets longer. And we had the right cost of capital when that transaction was available to us.
In our opportunistic strategy, the other assets you mentioned in Seattle, in the Bay Area, in Dallas, or in our most recent opportunistic fund, a lot of that is being driven by where we're seeing strong job growth. And so ultimately we think of multifamily, really shelter in general, as a resilient asset class. You think about why real estate exists. You need shelter, ways for people to interact with goods and services, gathering, and then, of course, data. That's most of what real estate exists for.
But on the shelter side, we've seen construction starts drop pretty dramatically. And the markets you just mentioned are markets that we think are benefiting in this new economy that we're living in. Of course, the Bay Area is benefiting from AI and that job creation and that wealth creation. It's also a very expensive place to buy a single-family home. The rent-to-own math is very attractive there. And then the Puget Sound, that's also an area that's also benefiting from a lot of the technology, GDP activity that we're seeing in the country. And then Dallas has been a market that's just really, you've seen a tremendous amount of job growth over the last 20 years. But even over the last five or six post-pandemic, Dallas has been one of the top places where large companies are bringing talent. It always starts with: where are those demand trends? And then of course we do our work on the individual asset to make sure that it's the right asset in the right corner, right tenant mix. But we really started with the 30,000-foot view on the demand side.
Willy Walker:
And staying on the equity side of the business for a moment, it feels like the real focus has been on multi and industrial, not so much on retail, hospitality, or office. You've bought a bunch of retail across the country, some in coastal cities, some more in Texas and other places. Am I getting the strategy correct?
That it's really kind of beds and sheds in the sense of where on the equity side you all are most focused as it relates to deploying capital in the U.S.?
Chris Lee:
I think the one thing you're leaving out is senior housing. Actually, our highest conviction area over the past three years has been in senior housing. It's the area where we have deployed over a billion dollars of equity across our strategies into senior housing. And that has been an area that we think has very strong long-term demand trends. It's been across independent living and full continuum. And starting in 2023, we started deploying heavily coming out of the pandemic.
And so that's played out very well for us in our funds. And we're seeing very strong growth, very strong demand. And we're really just at the beginning of some of those demographic tailwinds when you think about that 80-year-old-plus cohort that is reaching that point in their life cycle where they're a consumer of senior housing.
I would say senior housing has been our largest area across the entire business, but specifically in shelter. We've done some student housing as well over the last few years. You mentioned multifamily; you mentioned industrial.
And then we've lent on office. We haven't bought anything on the office side, but we think of office as an investable asset class for sure. But you just have to realize it's a bifurcated market now. There are certain types of high-quality office assets that attract premium rent-paying tenants. And then there's more commoditized office in a lot of markets that has really struggled to differentiate and has very different cash flow valuation characteristics and liquidity profiles as well. We think about that as basically two different asset classes within the office space.
Willy Walker:
When you talk about seniors housing, Chris, it makes me think about the breadth of the KKR platform and the fact that seniors housing would be one of those asset classes that it's such an operating business. It's clearly a real estate play, but it's also an operating business. Do you gain leverage across KKR where a KKR private equity fund is investing in a seniors housing operator or supplier or whatever else that kind of then opens you all up to the opportunity from a real estate standpoint, and then you step into the sector? Because of all the commercial real estate sectors, I would think that that would be somewhere where there's that sort of cross-pollination, the private equity side of KKR into the real estate side, where that might be beneficial to you. Is that a fair comment or no?
Chris Lee:
No, it's 100% fair. And we actually think of that as our biggest differentiator as a real estate investor is the access we have to tenants. I mean, a lot of us in real estate, we spend a lot of time talking to each other, talking to other landlords, talking to other liquidity providers to landlords.
If you think about what we have at KKR, we have unbelievable access to the tenant, especially on the corporate side. We own a couple hundred companies in the U.S., employing hundreds of thousands of people that touch tens of millions of consumers. And so when we talk about consumer trends, we talk about corporate strategy trends, we're watching those every day. Those 200 companies I mentioned, that's 200 boardrooms that are making logistics decisions; they're making hiring decisions; they're making office decisions; they're making retailing decisions. And that information flows, and we can develop themes around what we're seeing and what are the trends that are impacting the overall economy. And then how does that impact the built environment?
And then to your point on something like senior housing, we're comfortable investing in asset classes that have a little bit more operational complexity. That's a little bit more of our private equity DNA. And so we think of senior housing as a hybrid. It's a real estate asset class; it's housing, but it's also you're delivering care, you're running an operating business, you're responsible for people's loved ones. We're more comfortable in those types of environments. And we spend a lot of time across our business, our public affairs team, and other parts of the firm, making sure that we're delivering that service, which is what it is, in the best way possible.
Willy Walker:
I would think then that that same strategic advantage would potentially play into hospitality, given that hospitality is also a very significant operating business. But then even more so, given what you said at the beginning, Chris, as it relates to being in an inflationary economy, you get to change the rents on hospitality every day. And as a result of that, that ability to reset your rent versus something like office, where you're locked in for a 10-year lease term, typically on an office, doesn't look that great in a high inflationary economy. Would that put more time and attention towards hospitality over the coming years?
Chris Lee:
We dabble in hospitality. But the same thing that you mentioned on the revenue side happens on the cost side. And so a lot of, you can ask people who operate in New York, RevPAR is at all-time highs, but I'm not sure NOI is at all-time highs in this market. And so it's a more nuanced asset class. And then there's also, we think about up-down, downside profile, upside profile. We think of a dispersion of returns. We have traditionally not been an aggressive hospitality investor, because at the end of the day, where it prices, where the marginal buyer prices that, the return profile is inside of where we think it should be generally risk-adjusted for that type of risk. And then also you're talking about hotels that have a lot of CapEx associated with them. There is, you have to keep them refreshed. There's always CapEx above and beyond your FF&E reserve. It's not an area that we have played as much. There's some people who are great at it and have made a living out of it, but we think these other asset classes tend to play to our strengths as a firm much more, where we can get these themes right. We can operate them well and have a liquidity profile and ability to ride through cycles that we tend to like when we're making equity investments.
Willy Walker:
You mentioned the breadth of KKR and the benefit you get from having the private equity professionals sort of sitting around the table talking thematically. It makes me think about our mutual friend, General David Petraeus, who is at KKR and has been at KKR for quite some time. And it makes me think about Europe because David obviously is about as insightful on the Ukraine war and conflict as anybody on the face of the planet. And it makes me think about the equity fund that you raised at the end of 2025 focused on Europe. I know you've been buying student housing assets over in Europe, as well as doing some build-to-rent on the single-family side of things.
Talk for a moment, Chris, about Europe. I've named two areas that you all see opportunity in, sort of, if you will, why student housing and why BFR?
Chris Lee:
Europe is a very interesting place to invest right now. And as you mentioned, we've been active. Now, you can't paint all of Europe with the same brush because you have different economies that are experiencing different levels of growth and have different government balance sheets. And there's also a pretty big difference between what's happening in the UK and continental Europe.
We have been very active as a lender there. And I'll start there. We've built out our lending business. We think, number one, we can compete well. There are kind of fewer opportunistic lenders in that market. There are a lot of the usual suspects, but it's not like it's kind of overrun with groups that can really manage across multiple jurisdictions and run a pan-European strategy. I think we benefit there. Our lending business has picked up a lot. And if you believe that things are likely to be quite stable, there's not a lot of development or supply that you're worried about. As a lender, we feel very good about our basis in these transactions that we're lending on, and we're generally lending also to many of the top sponsors and colleagues or competitors of ours on the equity side of the business. But we feel very good about that. We've been deploying there. I would say across our fund and insurance complex, we've also been deploying.
You mentioned a few areas. Clearly, housing is an area that we've been focused on. We've participated alongside our colleagues in infrastructure in a data center investment. And then we've been very active across logistics. And if you think about what's happening in Europe, there's a kind of re-industrialization and thinking about energy infrastructure, defense infrastructure, that type of build-out that's happening and needs to happen in Europe. Logistics should be a beneficiary of that activity over time. And going back to if you can buy into assets, existing assets at a discount to replacement costs, that should give you a nice buffer. That's where we've been playing. Housing, industrial—
Sorry, you mentioned student. One of the things on student housing: Europe is still really an exporter of education to many other parts of the world. If you want to go to English-speaking countries and get an education, of course, there's the UK, there's Australia, and there's the U.S. But that is an area that we've also liked over time. But you have to be sometimes cognizant of supply and also substitution if rents get to a certain point. And you have to think about shadow supply in those markets no differently than you do in the U.S.
Willy Walker:
I was just over in our London office. And one of the things that struck me is sort of the changes to the UK tax code that are really having many, many professionals who have sort of made a life in London look at potentially moving to either Madrid or Milan. And it feels like all the real activity is happening in this big out-migration from London, where it has been the finance capital of not only Europe, but right up there as far as New York and for the global position. And it just seems as if the UK government is doing everything in their power to try and drive that intellectual capital away and have people move to Madrid or Milan. And it's interesting to me, Chris, that Madrid and Milan are the two cities that people are sort of picking. But those two cities, from a residential standpoint, are just on fire right now. And it's quite something for us to kind of watch. How do we cover both companies like you, as well as the owners of assets, as the knowledge base, if you will, seems to be flowing out of London to other places in Europe? And what do we do to kind of follow those people?
Chris Lee:
I think you're making a really astute observation. And that's why you really have to follow what's happening from a policy perspective. Because post-Brexit, there have been some changes in terms of center of gravity and where the intellectual capital is going. And I think also on the policy side, some of these countries, you mentioned Spain, have really done quite a good job in terms of managing their deficits, their fiscal situation. They are attracting more capital, more immigration. And like you said, the residential sector is benefiting from that.
And so that's why we're very focused on having a strong kind of macro underpinning when we look at where we invest. And to your point, it's much more complicated in Europe than it is, I think, in the United States. And then, of course, the last piece is pacing in terms of investment and also diversification is important. You're not overly exposed to one market that makes a policy change or does something that changes how attractive that market is on a relative basis. We do think of all those things. But your point is well taken in having an impact on population and capital flows.
Willy Walker:
You mentioned that you made an investment in Europe in a data center. And I'm assuming that that's on the equity side. It feels like in the U.S., your data center strategy has been much more on the credit side than it has been on the equity side. Why do you prefer the credit side versus the equity side? Or is it just that that's presented itself and you have the structure, the capital to be able to be a big player in that space on the credit side and have, if you will, either not had the equity capital designed to go into that space or just have held back on that? But why kind of overweighting on the debt side versus on the equity side as it relates to data centers?
Chris Lee:
I mean, I think that's one of those things where it's important to take a step back and maybe talk about how we're organized. Our real estate business sits in a real assets division. And so we sit adjacent to our colleagues in infrastructure and our colleagues in energy. We lead our equity strategy on data centers out of our infrastructure business. Our real estate funds participate, but the lead investment professionals on the equity side sit in our infrastructure business.
Now, we all sit on the same floor right next to each other, but you might not see it as much from a real estate perspective; we're one of the largest digital infrastructure players in the world. We own CyrusOne. We have a lot of large investments in the data center space. We just did a large deal in Asia. We're a huge player there.
On the credit side, our pools of capital that lend tend to be in our real estate credit funds and our insurance companies. You might hear more about KKR Real Estate in digital infrastructure investing as a credit investor, but it's really dwarfed by our activity as an equity investor and owner of large hyperscale development platforms. Just wanted to get that point there.
Willy Walker:
It's a super important point. And so given that, and given sort of the political dialogue around data centers that's been going on leading up to midterms, do you think we get sort of a reversion to the kind of growth pace that we were seeing in the data center space post the elections, and that a lot of this is just sort of, if you will, rhetoric leading up to the midterms where people are afraid about it, and people like Governor Abbott in Texas and Governor Shapiro in Pennsylvania kind of reversing course and all of a sudden saying, instead of just wave it in, we actually need to put some guardrails around this. That clearly has put a little bit of concern as it relates to the growth in two very kind of accommodating states to data center development.
I should point out to those who are listening to this, most of the increased regulatory hurdles have been for the hyperscalers and not for the smaller builders of data centers. And so they've really gone after just making sure that, if you will, a Google or an Amazon isn't out there building a two-gigawatt center, and they're more focused on allowing the 40- or 50-megawatt center to be able to go and get developed.
But do you think that this is all just kind of a political sort of debate up to the midterms, and then once we get through the midterms, it kind of gets back to business as usual, Chris? Or do you think that those headwinds stay in place as we move into ’27 and ’28?
Chris Lee:
Listen, I'm going to try to stay away from the policy side of it. But I would say that the AI CapEx spend is a large part of what's driving the GDP growth in the country right now. And so it's something that we're watching, of course, very closely. We're a participant, like you said, a capital provider in the space. And then we're also a capital provider on the energy side of the business to make sure that the energy infrastructure is also growing to match the energy needs of these data centers and hyperscalers.
We're playing in a lot of different ways to make sure that it can support the growth that is in the demand that is out there to continue to grow capacity in the system. But I'm not going to make any comments on the policy side of it. But it's something we're watching closely. As I mentioned, we are a large player in the sector and are watching. But it's not surprising that this is higher on people's lists, given the size of the industry, how much the industry has grown over the past few years.
Willy Walker:
As it relates to the opportunity and the size, how have you gotten your head around the size of the checks that you need to write in the data center space? I've used as an example previously that the JPMorgan headquarters, which is probably the most expensive office building ever to have been built, and they say they built it for $3.5 billion. Let's just say that it cost them 5, whatever. It's something between $3 and $5 billion that JPMorgan did. They financed it all themselves on their balance sheet. It's not looking to anyone else's capital. But then you look at these data center projects that are $30, $40, $50 billion, 10x the size of the largest office building in the country. And we could go through other asset classes of the largest multi and the largest retail.
It redefines the dollar amounts. How have you gotten your head and your team's head around that type of concentration of risk inside of the funds that you're managing, either inside the banking sleeve, the insurance sleeve, or the fund sleeve?
Chris Lee:
I mean, listen, we're watching that. And there have been some deals of that scale that we have decided not to participate in because the insurance requirements you can't meet because it's the sheer size, like you said, of a location. There are a bunch of things that we're focused on in terms of taking single credit exposure risk. The other thing is just the volume of capital. When we look at what's happening in the bond market, that's a big part of it. If you think about the government borrowing needs around the world, the sheer amount of deficit spending, combined with this AI buildout that now needs a tremendous amount of debt capital, that's just a supply of funding that is needed. That is also part of what's pushing yields out. You have so many issuers from governments to municipalities to the private sector, that are issuing that. There's only so much capacity in the market to absorb all of that paper. I think we're seeing the impact of that. We're also watching that as we just think about the underlying macro cost of capital, etc. We haven't seen this kind of demand for paper in a long time.
Traditionally, when you see technology being built out, a lot of it's coming through equity capital sources. It's usually not coming through the bond market. But in this case, you have it either coming through CMBS, the asset-backed market, or the bank market. You have a lot of paper out there. That's one of the things that maybe people aren't as focused on, but it is one of the reasons that we're seeing some of this yield pressure.
Willy Walker:
That's a nice segue into the general capital markets and where we are after the Fed raised by 25 basis points last week. You mentioned at the top the glaring amount of U.S. debt outstanding, surpassing $40 trillion. I don't need to remind anyone who's listening into this discussion about where interest rates sit, whether it's trying to get a single-family mortgage of over 7%. In commercial real estate lending, you're really happy if you can get a five-handle on something. In most instances, you're now getting into getting a six-handle on borrowing costs.
What's that from an outlook standpoint? As Chris mentioned previously, there's a lot of debt that's turning. There's a big opportunity to deploy capital into that. From your viewpoint, do we get to a point where the cost of capital is strangling it, where a lot of this is distressed lending rather than just refinancing out?
Then, as it relates to fixed vs. float, as the holder of that debt, are you more risk-on on the floating rate side because you like where that plays out over the next three to five years? Are you much more getting your team to focus on, let's get some fixed-rate loans on here that take some of the interest rate risk out of the equation over the next five to seven years?
Chris Lee:
Listen, cost of capital is a huge input into pricing. Risk-free rate, risk premium, growth, all of those are parts of how you think about discounting cash flows back.
With the risk-free rate increasing like it's been, that definitely has, in and of itself, just a negative impact on price with nothing else changing. I think over the past few years, what has offset that cost of capital going up is risk premiums have probably come in a little bit because I think back when we were talking in 2023, people were pretty scared about what was happening, especially in the real estate market. They hadn't seen that in a long time. I think risk premiums, spreads, CMBS spreads, all of those things have come in.
It's probably offset a little bit of that base rate move.
I think the other part is this is where you really have to underwrite growth. I think if you have assets that are struggling from a demand perspective or oversupplied, and there's kind of no end in sight to demand getting back into equilibrium, those assets, I think, are really under a lot of pressure from a valuation perspective. And we've talked about that. I mean, if you start with multifamily, there's certain markets or certain kind of tenant profiles or business plan profiles that are very, very difficult. We talked about the bifurcation in the office market. You own a Class B asset in a 25% vacant market. That is a very different discount rate, cap rate someone's using than an asset that sits brand new in Hudson Yards or a building of the quality that you just mentioned, JPMorgan's building.
And so we think that this is much more of a stock picker's market. This isn't just like, hey, things are getting cheaper or things have gotten cheaper, so let's just kind of go in and buy. It's what I've said. We've been very selective about buying in markets, buying assets that we feel like have a growth profile that is attractive, but also feel like supply will be in check for the near to medium term.
And that is a huge differentiator versus you're coming out of these down markets where you just, hey, you just need to be buying and long the real estate. We do not think it's that type of market. That's how we've been approaching it, where we need to be very selective in terms of what we're buying.
Now, if we do that in the right way, we think that there are opportunities to make attractive risk-adjusted returns for our investors. But it is a market where if you miss, you could probably miss badly if you buy the wrong assets at the wrong price.
Willy Walker:
I've heard you talk about that you are seeking growth and not, if you will, distress. And so you all have not done a lot in the office space over the past couple of years. But you also, in talking about the JPMorgan headquarters, for instance, I was in New York two weeks ago talking to a big office developer owner, and we were talking about some of the leases that have been signed recently in Manhattan by private equity firms like yours and big law firms. And the comment was that we're going to see a $400-a-square-foot lease signed sometime soon. And my head sort of spun around because I think back to what we're paying at One Vanderbilt in New York, which is a lease we signed in the depths of the pandemic. I feel very, very lucky that we were able to get that space for the price that we got it at.
But with leases being signed in the $200 and $300 a square foot space, I keep scratching my head, Chris, and wondering, I mean, I know what's driving that. It's the growth in private equity. It's the lawyers who need to go and work on those deals. It's the tech sector and just the overall economy growing. But I also think about AI and how quickly the view of AI disintermediating things like law firms, for instance. A year ago, everyone was saying that AI is going to come in. They're going to wipe out all these lawyers. No one's going to need a lawyer anymore. You're going to go to ChatGPT and have it give you the brief and everything's going to take care of itself. And now we have big law firms that are taking floors and floors and floors of office space in New York at premium prices.
Talk for a moment about whether A) office is an asset class that you look at with some opportunity, either on the high end, hey, we're in the right place, right location, and these rents are going to continue to grow to the ceiling or there's enough distress there that as markets like my market in Denver kind of get back online. You're able to buy a distressed office building in the CBD for some massive discount. And that's a really good basis to go and play into the recovery of that sector over the next decade.
Chris Lee:
I mean, you said a lot there.
Willy Walker:
I know I did. I'm sorry for throwing in the AI one, but I think the AI one, I'd love to hear your thoughts on that.
Chris Lee:
I'll start there, and then I want to finish with something you said at the beginning. But on AI, we're incorporating it into really everything that we do internally. And we think it makes us more efficient, for sure, in terms of how we spend our time. But the way that we think about that efficiency is we think that we can spend more time doing things that we think only humans need to be doing, making judgments, having conversations around where the world is headed, and reducing the amount of administrative tasks associated with running our business.
I mean, there's populating things in memos. You have junior people that can actually spend time learning how to underwrite and not spend time putting all the comps or all the dots on the map into the memo. And so that's one thing. Same thing with senior people. It allows us to be more efficient in terms of how we prep for meetings, how we do a lot of the things we do on the human capital side, budgeting dashboards for our business.
But if you think about these companies that you mentioned that are very heavily reliant on high-quality human capital, they still want to recruit the best people to their firms. And how do you recruit the best people to your firms? Number one, you have to have a great culture and a great mission. It has to be an intellectually stimulating job. You have to be competitive on compensation, but then you also have to create an environment that people want to be at. And I think a lot of that when you look at these firms, I mean, you talk about a $5 billion building, but look at JPMorgan's earnings profile. And they want to have a building that people want to go there and be proud of. And they have all these different amenities and eating outlets there. That is what these types of firms are doing. And that's why you see people taking space that then can attract great people and get them to work at their most optimal levels of productivity.
And so I think that's what you're seeing, not necessarily, hey, businesses are getting more efficient and they're just going to jettison people. It's businesses are getting more efficient. How do we make sure we have the best people around? And so I think that's what you're seeing is some of these companies really investing in almost the atmosphere that their employees are operating in.
I want to come back to one thing you said about how we're investing. I wouldn't say that we're buying distressed assets, but what we're looking for that catalyzes a lot of the investment opportunities is market stresses in the market. I mean, you talked about a deal that we did a couple of years ago when a company all of a sudden has to liquidate an entire fund. That is an unnatural act that is creating an opportunity. The assets weren't distressed, but you would have argued that wasn't an ideal time for someone to put 35 apartment buildings on the market. That's what created the opportunity was some other stress in the system.
When we bought into this independent living company, the business wasn't distressed, but there was a catalyst that someone else needed to sell a large piece of the company at a time when they had other issues in their portfolio.
That's what created the opportunity. Our view is we can make attractive returns for our investors without actually buying distressed real estate, but we're looking for stresses in the system. A developer has built a building. They built it to a yield on cost. They're not going to promote. Maybe they're not incentivized to optimize the cash flow. It's not a distressed asset, but it's an unoptimized asset. And so we're buying that. We're bringing in our operating capability. We're bringing in a new reset basis, new incentives. That now gives everyone the reason to invest the CapEx, do the ROI projects to then optimize the cash flow. I just wanted to make sure you understood how we're thinking about investing because we aren't necessarily looking for broken assets, but there are a lot of conditions out there that are suboptimal that are creating a lot of interesting opportunities for us to generate returns.
Willy Walker:
You mentioned that portfolio and that it wasn't the ideal time to take it out to market. I will say a little bit of sort of our—we bid to sell that portfolio, and we pitched the seller that it wasn't going to be one wholesale of the entire portfolio, given where the markets were at that time; that it would have to be broken up into chunks and sold in different chunks. And one of our competitor firms convinced them that they were going to get one big buyer for the entire portfolio. As you well know, it ended up being broken up, and you guys bought a piece of it.
But in hindsight, that was one of those ones where we sort of said, we read the market correctly. We gave them the game plan to go do it. They ended up doing it with another competitor firm, but it was one of those ones in hindsight where I'm sitting there going, I wish they'd kind of listened to us and gone down that path rather than gone down the path that they went with the competitor. But hats off to the competitor, and also hats off to you for buying a fantastic portfolio.
Chris, as we wind down our discussion, as you look out on where KKR is going with your real estate business, we started off with kind of the combined strategy of equity and debt. We've talked through that it's more focused on growth than, if you will, value. And I'm not putting words in your mouth there.
You've been very clear in saying that it's not distress versus value, but going and following the growth drivers in the market, growth drivers in the economy. And then predominantly in the sort of industrial logistics, housing, landscape with other asset classes that you'll look at and go into. You did a mall in Portland, Oregon, a couple of years ago, which I thought was actually a very interesting play, but we didn't dive into that. But you will kind of jump out of the playbook, if you see opportunity.
What should those of us watching KKR and trying to work with you be focused on over the next year or three years as it relates to the focus on equity, debt, and then anything from either region or asset class standpoint?
Chris Lee:
I mean, the way we try to position our business is we want to be a solutions provider. And so if someone needs passive capital to help them finance a purchase, we have plenty of that. And like you said, we have fixed, we have floating, we can lend at 55% LTV to 75%. We can do construction. That's a way that we solve a lot of problems for sponsors who just need passive debt capital.
We have hybrid capital that's kind of in the middle, where we can do things a little bit more structured. And those have been things that we've done through our insurance company. We announced a transaction in Europe with Realty Income that kind of fits that bucket. We can do scaled transactions from that perspective. We think that we're well positioned at this intersection of real assets between real estate and infrastructure. We put those businesses adjacent to each other and sit together because we think there is a lot of opportunity around those sectors. We purchased and now merged into our firm, a firm called Arctos that is in GP solutions, but also in the sports investment business. And so there's a lot of things in the experiential real estate landscape that we're also spending a lot of time on. And that fits very well with our thesis that we've been investing behind as a firm for the last almost 10 years around experiences over things. People are spending much more on services, and we think that's only accelerated after everyone got stuck at home for a while during the pandemic. And we're seeing people spend a lot more, just like we were talking about before we came on, people want to experience things. And so there's a lot of real estate that can support that long-term trend that we're seeing.
And then as we think about our equity business, we have a cost of capital from kind of lower risk return up through opportunistic. And we also can be a solutions provider where we can step into situations that are a little bit more complicated, where there's kind of more trading complexity for purchase price. And then we're also thematic. And we've also built out a lot of our own operating capability in some of the living sectors in industrial. I mentioned data centers; we own a large company. We can act as a hybrid owner-operator when we're coming to situations, which a lot of counterparties like as well.
We think about it as if anyone has a real estate need or a problem, they can come to us. And I think the only thing that we always keep in mind is we like to do business with people that we like and trust. We only deal with high-integrity firms, high-integrity people, because at the end of the day, you're doing business with a person, with a firm, not with a building. And so that's how we think about the business.
Willy Walker:
Final question. As you look out a year from now, we've got big IPOs coming of a lot of the tech firms on the equity side. We've got $10 trillion of U.S. debt that needs to be rolled by the federal government. A year from now, equity markets, whether you want to pick S&P or Dow, higher or lower, and the 10-year Treasury a year from now, higher or lower?
Chris Lee:
Well, if I knew that...
Willy Walker:
I understand that one. I got to get a directional. I went to the Treasury last week—
Chris Lee:
I’ll start with the rates side. I think on rates, our view is that this is different. I think there are a lot of people in our industry that hope rates are going to go down just because they should. But if you really think about the marginal buyer, paper has to earn a real return in an environment where they're more worried about inflation. And we've just talked about the U.S., $40 trillion of debt, $2 trillion plus or minus deficits. You have a lot of mark-to-market as lower rates roll off. That would mean that the term premium should go up, not down. And if we think we're going to go back to 4.5% on the short end, that would probably put you—I wouldn't bet a lot of money personally that we're going to have a flat yield curve in a year. That would push you, we're at 5.08% today. It could be mid-fives. That wouldn't be crazy. But I think that's still an environment that we can find interesting opportunities.
On the equity market side, you still have a lot of earnings growth. Now, it's concentrated. 50% of the S&P is in the top 20 companies now. And you have 65% to 70% of EPS growth, based on our macro team, is coming from the technology sector. It'll be interesting to see how the market digests that. But if you look forward into the next year, there's still a lot of earnings growth and there's a lot of productivity growth that's coming out of this. The real question is what discount rates people are using, what multiples people are using to value that cash flow. But there are a lot of companies that are doing very, very well in this environment and are likely to continue to do well. It's just a question of what the multiple is.
Willy Walker:
Chris, as always, thank you so much. Your insights are fantastic. It's really interesting to hear what you're doing at KKR, all the things that you are investing in on both the debt as well as the equity side of things. And as one of the true leaders in our industry, it's a real honor to have you join me for this discussion. Great to see you, and I look forward to seeing you in New York next time I'm there.
Chris Lee:
No, thanks for having us. And we really enjoy doing business with you and your firm. And so thanks for having us and thanks for having me on. And we'll continue to monitor this market together.
Willy Walker:
No doubt about that. Thanks, my friend. Thanks, everyone, for joining us today.
Have a great one.
Chris Lee:
All right. Thanks a lot.
