Has Real Estate Hit Rock Bottom? (Investors Round Table)

In today's episode we discuss how commercial real estate may have hit a cyclical bottom, the importance of buying with a long term hold strategy, focusing on low risk deals with strong cash flows, finding patient capital, and more.

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Key Takeaways:

• Commercial real estate may have hit a cyclical bottom based on signals from large firms like Blackstone that prices have dropped 15-25% from peaks

• It's a good time to buy real estate if you can get a good basis and hold for the long term of 7-10 year

• Investors need to focus on deals with strong historical cash flows and low-risk assumptions

• Leverage will be lower around 55-60% so investors need patient capital willing to hold for the long term

• Debt strategies are becoming more popular for large funds as an alternative to equity

About Your Host:

Tyler Cauble, Founder & President of The Cauble Group, is a commercial real estate broker and investor based in East Nashville. He’s the best selling author of Open for Business: The Insider’s Guide to Leasing Commercial Real Estate and has focused his career on serving commercial real estate investors.

Episode Transcript:

0:00

This episode of the commercial real estate investor podcast is brought to you by cre launch Pro. This online commercial real estate program is designed to take you from beginner to pro commercial real estate investor with access to all of my courses, our online community and monthly group coaching calls. Learn how to confidently buy your first commercial property today at www dot c r e launch pro.com. Welcome back to the commercial real estate investor podcast live for another investors roundtable today, you just got me in login. It's gonna be a good one on one conversation basically another mastermind, what we're kind of seeing you out there in the world as commercial real estate investors. And Logan. First of all, happy New Year, man. It's good to see you back for this series. And feels good to be back for this. I mean, it's been since Gosh, December, since we did our last episode. So January was a crazy month for everybody. As some of y'all may know, I took my 30 Day sabbatical, which ended January 15. And then we got hit by this crazy ice storm in Nashville, which prolonged my sabbatical by another eight days. So I kind of lost the month of January having to catch up on all sorts of office work. But today we're diving into has real estate hit rock bottom sounds like kind of a negative term. But in my opinion, and maybe in Logan's, that's actually a really good thing. And we're going to take that apart today and discuss it, we're gonna I'm gonna hand it over to you because this is based on an article that you found.

1:32

Absolutely, this is something that, you know, we have to track very closely is what are the biggest 800 pound gorillas doing and thinking about in the industry? Are they just telegraphing? Or are they actually putting money behind what they're saying. And it's similar to let's call it the apple effect, or the Amazon effect or the Google effect, meaning if they move their headquarters to a new city, or if they open a new distribution center, a new retail location, then you better believe that they've done their homework in regards to all the data needed to make that decision. Millions and millions of dollars of data analytics of teams diving into that data, making bets and strategic bets at that. And so when we start to see KKR, we start to see Blackstone, these other really large asset managers. I mean, Blackstone manages trillions of dollars of real estate. Do we do you even I don't even know how to count to a trillion. But I think it's 1000 billions, you know, I if I'm not mistaken. Yeah. I mean, if you if you put it in perspective, like, you know, because this goes right all the time, a million seconds ago, was 11 days, and 1 billion seconds ago, was 37 years. So I can't even comprehend what trillion is compared to that. And that's really important to understand, because these guys are legitimately holding trillions of dollars and of real estate assets. And so when they're starting to hand back keys on office buildings, when they're starting to make bets on different industries, whether that be life sciences, or manufacturing facilities, or anything that has to do with AI and the real estate behind that. And if they're saying, Man, we believe the market has, has hit bottom, and we're going to start moving dollars into assets. That's, that's extremely important to take note of. And so but that being said, we have to take the approach that that is from an asset managers perspective, real estate is hyper local. So it doesn't mean you should just go buy any real estate because they are right, they have to move funds. And that is another component to this is you must understand the way that they are their funds are operated they need to be deployed, and with where inflation has been over the last two years. If those funds are sitting in an account, they're legitimately being lit on fire and losing their value, so they need to be deployed. So that's something to be considered as well.

4:28

But when I start to see Jonathan Gray, the CEO of Blackstone say real estate values are bottoming we would expect deal activity to pick up we continue to see robust fundamentals, our real estate will emerge from this cycle even stronger than before. That is a very strong sentiment. What it takes is a book by Stephen Schwarzman, the founder and CEO of Blackstone highly recommend going and reading that. They made a huge bet with Sam Zell way back when and everybody thought it was crazy.

5:00

Izzy and Sam, you know, made all this money he did, don't get me wrong, he made a great bet to. But these guys took that portfolio, they broke it off to, you know, in pieces and then sold it and they did just, they did just fine as well. So what I'm saying is these guys have a historical perspective to keep in mind. They also said, you know, look, we'll look back at 2023 as the cyclical bottom for our firm. And so that's interesting, because if you study real estate cycles, you would know that we are in the later stages of the 18.6 year real estate cycle, it got a little bit muddy with COVID. And legitimately free money coming from, from the debt perspective. So it got a little bit funky in there. So that could have prolonged a few different things. We've had some black swan events, a few more may happen. However, if you look over the last 200 years of the United States real estate cycle, you will see a cyclical pattern of about 14 years up and four years down with a mid cycle slowdown happening around year seven. And so believe it or not COVID happened four years ago, four years ago, next month, that is wild. And

6:16

a lot has happened since then. But I tend to agree that this may be the cyclical bottom because of the 18.6 year real estate cycle because of what China is doing and what's happening in China as well as what they're doing. Look at the stock market. Broke 5000 for the s&p broke 5000 For the first time ever look at Bitcoin broke 54,000. The other day, I believe, I mean, that means asset prices are still going up. And so we have to also look at 100% bonus depreciation potentially coming back. What will that do to the real estate market? How about inflation easing? You know, I know that there was a, there was a reading that came out that you know, kind of popped back up a little bit, but we're way lower than we were the last two years, right. Potential rate hikes on the horizon, probably a whole lot less than what people think but in the markets pricing in but those least they are not going back up at this point of time. And then the big one 400 plus billion dollars being raised in sitting in dry powder, meaning they are ready to deploy $400 billion of equity into real estate. So if you look at that, and say, Okay,

7:39

those big firms alone have $400 billion. Blackstone has 202 I believe of that 400, then we need to listen to them. But that that means trillions of dollars of real estate are likely to be transacted over the next two years. When does the true crash start to happen based off of the 18.6 year real estate cycle? The reading is a little unclear but looking to be in 2026 Potentially 2027. So I am seeing real estate investors start to have more confidence, asset prices because of fundamentals are still strong. And I'm looking at the other asset prices, whether that be the stock market, Bitcoin other types of, you know, assets that people hold. I don't know what gold is doing. I don't track that, necessarily. You know, Robert Kiyosaki? Oh, yeah, absolutely.

8:37

Tracking that on a regular basis. I know Harry Dent in all of the guys as well. So lots of lots of doomsday errs out there. And

8:46

But Dr. Ed Yardeni as well as Richard Duncan and Dr. Peter Lindemann are the economists that I typically focus on because they're data driven. And they don't get paid to make forecasts, because if economists were going to be right with their forecasting, they wouldn't be economists anymore. And so

9:05

I think that the statement that we are at a cyclical bottom, meaning prices have dropped, I don't know 15 to 25%, depending on, you know, where you're looking at from the highest peaks, what asset class you're looking at, that's probably a correct statement, meaning they're gonna go back up from where they are currently, until something else happens, whether that be the real estate cycle, we've got an election year, we got a lot of geopolitical stuff going on. We've got you know, I've got my Kansas City shirt on, and we were just talking about this. Unfortunately, we got shootings going on all around. Obviously, those aren't black swan events, but they do put people's, you know, fears and nerves on edge. Long story short, lots of stuff could happen. But I do think that we have a good runway of 12 to 24 months of prices probably going back up. And so what does that mean for investors? What does that mean for

10:00

or folks that are owning real estate, looking to buy real estate. And that's the conversation that I wanted to have. And when I started to see Blackstone and KKR, saying that they're going to start deploying funds, and if they don't, they're gonna miss out. We should take note of those things, Tyler? Yeah, I think that, man, you've raised so many good points, it's tough to even pick apart where we're gonna start here. But let's, let's take it back to what would be considered in this conversation, the beginning of the down cycle 2020.

10:34

A lot of people would argue, Well, how could that be the bottom of the cycle, real estate took off prices, you know, skyrocketed, and transactions were moving faster than speed of light. So So walk us through why that was actually the the collapse, or the start of the down cycle?

10:59

Oh, well, you know, that was you.

11:08

Looks like we might have lost Logan there. Let me wait and see if he's gonna be able to rejoin. There he is.

11:17

I'm Barry are.

11:20

I was like, oh, man, he's really taken a while to think about this question.

11:25

Okay, so my question was, you know, 2020 was the beginning of the down part of the cycle. But real estate, you know, absolutely skyrocketed. It took off. You know, as a brokerage, we had a couple of our best years ever. Why? Why do you think that was actually the start of the doubt? I mean, I agree with you, but why do you think it was the start of the down cycle? Yeah, you know, obviously, there's one big component here that drives real estate. And it is not necessarily where the interest rates are, but it is capital flows, and capital flows are very dependent on where the interest rates are. And so, to keep that in mind, you know, you have capitalization rates, you have debt, you know, you have to look at where the market is in regards to what kind of debt can I put on a deal, depending on where the yield is. And so what happened were was that the debt that people could put on to real estate started get pretty well, you know, the same amount as the capitalization rate. And so you're kind of going into a lot of deals either, you know, at an equilibrium, or you might even be negatively leveraged in the sense that you're buying a deal at 7% cap rate, but your debt could be 8%. Right. And so that is kind of what impacted, I'd say the, the low in the market previous to that, though, you know, I would say that debt really fueled this kind of rise in real estate investment. But also there are some psychological components here, you have the fear of missing out, you have the rise of private real estate funds being raised and deployed, and they have not been through down markets, they have not sold and bought from Sam Zell, they had they weren't doing real estate, maybe not even born in 1980. I know, I was not. So I am a part of that camp, that you don't have this historical perspective. And so I do think that at the end of when you say that the real estate prices started to increase, you know, people don't know that they're buying at the top of the market, it's very difficult to time that and fundamentals, you know, can get kind of out of whack when you say, Well, you know, but I have this big supply and demand imbalance and, you know, rates are going to come down at some point, and rental rates will continue to just be able to be increased over time. Some things that we've talked about in the past, operating expenses have absolutely been inflated. And so insurance and other operating expenses has also really driven you know, some some really tough situations for for real estate, then you have the fear of the office market going on as well. Right? Is that going to move over to other asset classes? I don't think it is. But some people will look at commercial real estate and look at the loans that are coming due from the maturity standpoint and say, oh, man, this is gonna be a really bad scenario. What they don't understand is there's $400 billion of dry powder in rescue capital that is waiting there to be either structured as private equity, as predatory lending in the sense that they're fine putting the deal in the money in the deal, as long as they get controlled provisions and they can take over that deal. In those transactions aren't necessarily going to create price discovery. And so price discovery is what is what is what everybody's waiting on. Right? It's like what is that nice occupied 500,000 square foot industrial warehouse selling for today? You know, that is what people are kind of waiting on if Blackstone starts to make moves into those spaces, life sciences, multifamily, different types of apps

15:00

says they will start to have some big price discovery that that will then cause a trickle down effect into smaller property owners, right? Because you can't really compete with Blackstone, it's going to be difficult to do that from a data standpoint, from a money standpoint, from the brokerage relationships, that they have all of those different components. But what they can't compete on is saying, Okay, well, Blackstone is buying that 500,000 square foot building, I'm gonna go get that 50,000 square foot building, I'm gonna make the same bet. And so I think that's what's going to happen once price discovery starts to, to kind of normalize. And I think that people are also willing to put lower leverage on deals because they're seeing what's happening when you don't match up the cap stack to the timetable of the deal. And so I think that's really important. One thing that is kind of impacting transactions, at least on the multifamily side is a lot of buyers are waiting for deals that can get agency loans. And so if you don't have a strong t 394 90, if you don't have DSCR, coverage ratios above one, three, all those different components, you're gonna have a hard time getting an agency loan right now they're being pretty picky. And so then you have to go to a regional bank. And you know, they're the ones that are kind of in the, in the crosshairs from a lot of Wall Street Journal articles and have already been exposed a lot on office deals and or floating rate multifamily deals. So there are some kind of variables to be thinking about there. But 2020 really, you know, kind of started this thing where I think that people were like, man, you know, I can go buy a real estate deal, once they knew that people were going to pay rent. And once they knew that, retail shopping centers were essential businesses, they're like, Man debt is, you know, 3%, I'm gonna go buy whatever I can, right now, try to fix that rate, or maybe some of them floated it, but the smart ones fixed that rate. And they said, Man, I got an asset in the debt instrument, and I got real estate. And then that fueled this kind of just big upswing where property price values went to the highest, you know, the Green Street property price index went to the highest point it's ever been. And it has dropped down 15 to 20%. I'll make a post on that here shortly on LinkedIn, but it's still, you know, kind of around pre pandemic levels, what's different is, where the debt is and where we're at in the real estate cycle. And those are important components for investors to be thinking about right now. Yeah, I think it's really important to point out that in 2020, the start of the down cycle was artificially inflated by PPP loans, a lot of free money coming into the market, and artificially low interest rates, or even if they weren't artificially low record low interest rates. So money was unbelievably cheap.

17:37

And commercial real estate is two to three years behind the actual economic cycle. That's kind of how it always is, you know, when I, when I first got started in commercial real estate back in 2013,

17:49

a lot of residential was starting to take off. I mean, it was it was already hot in 2012, and commercial real estate and start picking up until 14 and 15. It's just kind of how long it takes for that side of the market to really pick back up and, you know, it's it's really interesting to look at the economic curves, when you're going through these down cycles. So wanted to make sure we pointed that out to Logan, let's talk about this dry powder. And it get a little further read to it. Because that's that's a term that everybody has probably heard ad nauseam for the last few years. Because we keep talking, you know, there's all this dry powder on the sidelines, dry powder on the sideline. But if you're a an investor, today, or you're a bank today, you're not really moving all that much. Even if you've got all the cash, you're still sitting in waiting. And so it seems like there's almost no money on the sidelines, because deals aren't transacting loans are not getting done. What Why do you think that is happening? Do you think it's because they are going for more of the debt fund approach? Like I want to wait until there's distressed deals or I want to get higher returns on every dollar that I put into this? So I'm gonna sit and wait. What are your thoughts? Well, there is another component here multifamily, which has been kind of the darling of the industry. Up to this point.

19:08

We have record levels of supply coming online this year. Some folks say between 650 and 750,000 units online, historically speaking, the last 10 years, we haven't eclipsed 350,000 units. So that's almost double the amount of units coming online. And it's highly concentrated in certain markets. And I think Nashville being one of those right, a lot of multifamily has been developed in in Nashville. That's why the Midwest, you know, markets like Kansas City and Des Moines, Iowa and Lincoln, Nebraska and things like that they're starting to outperform some of those coastal markets and the Sunbelt because no new supply has been developed or at least supply to that level has not been developed. So that is one component of this is you know, people are kind of waiting to see okay, and I've heard stories of developers

20:00

Developing a brand new product, getting it leased up and walking away from it at cost, because they need to move those funds into their next deal. And so I did a little bit of research before the call here, as of October of last year 14% of that dry powder globally was targeted for debt strategies. I've got to imagine, since October, that number is probably closer to 25. To 26%, for perspective in 2018 21%, was allocated for debt strategies. So I think that a lot of those funds have either repositioned the investment thesis, or they have moved funds out of certain funds, and move them into more debt strategy funds. So I think that we're going to see larger groups become the bank on a lot of these larger deals for at least a period of time. If it doesn't have assumable debt that is favorable, that to that that also being said, it's like we haven't seen and I'll say this, you know, on the brokerage side, we're starting to get some good price discovery in that $500,000 to $3 million mark. But what's tract is, you know, deals that are 10 million plus, right? I mean, Blackstone is not buying a $3 million deal. They're buying a $30 million deal. So you have to you have to kind of segment those markets out a little bit too. And I think that smaller in mom and pop investors, more retail investors are definitely seeing more price discovery than the large firms are currently. And so yeah, we have this powder on the sidelines. And I think they've been waiting for a few things. They've been waiting for the Fed to kind of telegraph where they thought they were going to go this year, I think people are pretty comfortable with that. They were trying to see you know, what's going on with the geopolitical risks and how that's going to impact supply chains going forward. They also were looking at, you know, this is an election year, and you know, Donald Trump is a shoo in for the Republican candidate. And so that's going to be a standoff between, you know, Biden and Trump. So that's one thing that they're also thinking about more or less from a policy standpoint, than I think anything else to try to make some decisions. But I think it What's that conference called Davos, you know, I think most people have gotten their head wrapped around, okay. Trump has been president, once we know what his policies were, you know, going into it, if he wins, then we know what those policies are going to be, again, that created a lot of clarity, because these big guys, you know, the 800 pound gorilla, they have to make decisions based off of policy, you know, I mean, that's not, it's not just you and I buy in a shopping center, or an office building in Nashville, or Kansas City, this is they're making, you know, billion dollar bets on certain things. So they have to feel really comfortable about that. So I'm seeing a lot more movement in the smaller transaction size. And most of that is because these owners who own those deals, we have, you know, really strategic conversations with them and just say, Look, you know, here's where I think we're at in the market. And I think that, you know, you have a good opportunity to capitalize on this on the next couple of years. If you miss that mark, you may have to hold on to that property a little bit longer. Right. So they're thinking about that. And also, the last thing I'll say, and I'll stop talking,

23:04

the United States, I believe 70% of all real estate is held by baby boomers. That means people that are, you know, 50 6070 years old, okay? So they are they are holding on to their real estate longer, because of a few different reasons. This is residential, and commercial. One, they don't know what retirements gonna look like inflation really put a damper on a lot of those folks. So they may have held on to that income producing property a little bit longer than they thought to the younger generation is not really interested in owning that real estate in a lot of different ways. And so they have to think about, okay, well, if I sell, what am I going to do? Well, if it's not a good time to purchase, then what do they What options do they have, they can go to a DST, I suppose, or something like that, or they can just pay their gains. But if they've held it for 20 plus years, that can be a huge, you know, Bill for them on the depreciation recapture side and capital gains tax. So you have that kind of component going on. And so I think that that is causing some folks to not sell their real estate as much. Because if 70% of the real estate is owned by older individuals, but they're going to get to some point where they're like, I'm just too old to do this. My wife is saying you're supposed to be retired for the last 15 years, get rid of it, they'll get to that push point where it just is like, this is enough. I'm moving on. And that might create some more price discovery. So I'm looking to kind of see if that continue eights, you know, that trend continues this year and next year, or if it's going to continue to push down the road because that will have a big impact on on real estate prices and price discovery. Yeah, and commercial is not alone on that. You know, it's the same in the residential world because a lot of these baby boomers, you know, you'd think that they'd want to downsize now that they're you know, empty nesters and probably don't want to be walking upstairs, but they're looking at and going okay, yeah, I can get more from my house than I ever thought possible. But then I'm going to turn around and put that money in

25:00

into a two bedroom condo for three quarters of the price that I'm selling my house for are more than half the price I'm selling my house for. Why would I downsize that much and pay that much? That's right. So it's there's nowhere for them to move that capital into that a lot of them can justify. And I completely understand that. I mean, it's, it's a it's a crazy market out there. Let's see Floyd is say, hey, from Nashville Floyd, good to see in here, man, hope you're doing well.

25:29

You know, to your point earlier about, you know, what's the 800 pound gorilla doing? Follow the big fish always do that. We've always recommended it and brokerage, whether you're a small tenant looking to lease space, or you're an investor, right, I mean, target spends millions of dollars a year determining where they're going to put their next location, they have so much data to back up, why they're going where they're going, just follow them, you know, if your target demographic is the same target demographic as target, go sign a lease next door to them, it's the same thing in investments, right? If Amazon is going to put a million square foot warehouse in Nashville, go buy a 10,000 square foot warehouse down the street for them. Because there's going to be a high demand for industrial in that area.

26:15

Yeah, Tyler on this, just back that statement up just a little bit is in this is back, John Gray up, the Green Street property price index is free for anybody go to green street.com/insights/cpi. And you can you can look at this information. In February of 2020. The indices was at 135. Okay, in September, sorry, July of 2020, it had dropped down to 120. And in May of 2022, we got up to 155 highest point by far of any point in time. And where we're at now is 121. So we're back to almost pandemic break, August pandemic levels of 120. But it's starting to tick back up. And that is because people are starting to feel more comfortable about making an investment. But they're also saying, Oh, wow, pre pandemic levels were at 135. At the bottom of the market, the valley, you know, was 120. Right now we're at 121, this could be a good opportunity to purchase. Even if we only normalized back to pre pandemic levels of 135, I can get a good basis and right now, put some good debt on it and maybe refinance it for if rates come down. So they're looking at this from a price per square foot basis standpoint, and the data would show that we are very low on the indices, almost to the point of where we were at during the height of the pandemic, when everybody thought the world was falling. And maybe it maybe it did, I don't know, I'm not gonna

27:46

you know prognostications on that. But at the end of the day, it's trending back up, right? And so how far does it go? We don't know. But it likely could go back at least to pre pandemic levels to the to the industry level of 135. So I just think that that is so important to understand, and, you know, in his statement is backed up by the actual data of this indices. That's right. I mean, I've been saying this, you know, left, right and center as much as I possibly can, but you can refinance out of a bad loan, you can't refinance out of a bad purchase price. And so if you're able to buy real estate today, at 10, or 15%, or hopefully more of the value of 21, or 22, or 23, then buy it, you know, put up with the interest rate for a little bit, maybe you're not going to cashflow it the first couple of years, or maybe you're barely going to cash flow. But once you refinance that loan, get it back from, you know, seven, half a percent down to five, five and a half 6% It's gonna make a huge difference on your cash flow, the valuation of the property is going to always continue to go up. And, you know, you're gonna look good. I mean, it's there's never been a period in American history where real estate values have fallen, and just continued to fall and never recovered. Right. I mean, you know, everybody loves to point out Detroit. But gosh, look at where Detroit is today. You've got billionaires that are buying up as much real estate as they possibly can in Detroit, they know something that people don't, right, right. I mean, they wouldn't be just buying land in no man's land. Yeah, there wasn't an opportunity there. Absolutely, man. I mean, in I'm tracking this, because it's really important because many big players use this index to, to make strategic bets, but it actually increased 0.3% In January, that is down to where we're at currently is down 21% below its march 2022 Peak, right. So I mean, the head of their research team says, Hey, for most property types, pricing has probably hit its low. And so that is in obviously office being the exception to that right. I mean, that's, that's a whole different conversation. There are always going to be some losers and that has everything to do with the changing cycle.

30:00

logical and actually working habits for companies. I think there's a really interesting play in office just in general, but 21% down since March 2022 peak. So, I mean, I think that you, you can look at that and say, Okay, well, we're in a good spot from a basis standpoint, if we can figure out how to make the debt work, and and or by cash for the time being, then you're probably going to be okay, for the foreseeable future. So, and that's because it's backed up by strong fundamentals. I mean, we're not looking at vacancy rates in multifamily, you know, above five to 10%. Right. We're not looking at vacancy rates. I mean, the retail shopping centers, we're purchasing sub market vacancies are 4%. And people are looking for space. I think it's even lower in the industrial space. Right. So I think those are important things to, to kind of note and keep in mind, but again, green street.com/insights/cpi is a great place to go and track that if anybody wants to. Let's, let's get to the question that I'm sure it's on everyone's minds, right? So it sounds like we're at the bottom. It sounds like it's a phenomenal time to buy. But how, how do I actually pull this deal together? How do I actually get the equity that I need? How do I actually find a winter, that's going to give me the money to do this?

31:21

Absolutely. Peter Lindemann said it best, if you have capital encourage period alongside a longer term investment hold strategy, you're going to be okay. And that is important. The game of buying and the graters fools theory is over. And so you, you realistically need to go find a deal that you feel comfortable with that the basis is there. And that you can potentially hold for 10 years, let's say maybe even just seven years, break it down even to five if you're if you want to, but there is no there is not a big opportunity, at least in the major food groups to go buy a deal at some value that you think you can go bad unless you're buying distressed and turn around and sell that to somebody else right now. Now, that could happen here in the next two years, you may be able to do that. But that game has typically been gone. So there's a couple of things that I'm seeing helped to get deals done. One, shore up cash on your balance sheet, lenders are really, really looking at what cash do you have on your balance sheet, they have to pitch to an investment committee, the idea that if this property does not get occupied, you can carry this loan and we don't have to take this property back, they do not want the property back. So that's number one. So that means lower leverage, typically as well. So you're going to be looking at lower leverage deal. 75 80% leverage is probably gone. So we're looking at 55 to 60% leverage, which means more equity. Okay. So if you have that figured out, then you have to say, well, who's willing to park money and more money into real estate deals because of something else? And to me, it is folks that have taken massive gains from the stock market. Can you imagine if somebody put a million dollars in the stock market? I don't know, five years ago, you know, and that maybe the s&p was at like 3500 or 4000? And they're like, Hey, we just hit an all time peak at 5000. I'm taking some chips off the table. Okay, great. Well do that. And what do you do with that money now? Well, those CDs, those checking accounts, those savings accounts, I don't think they're paying five 6% anymore. You know, that was a tough thing, right? I mean, I think they might be paying you a little bit more than inflation, but it's not gonna make you, you know, it's not gonna be a game changer for you. So it goes back to the old Tina argument, there is no alternative. So you have to pair your deal with patient capital. And that is a hard thing to do. But you have to find the right folks that are willing to say, Man, I don't need this for the next 510 15 years, I really, truly want to park this thing in a safe opportunity that's going to be backed by some tangible assets and has very low, risky assumptions. Right. And so I think that's important to try to find right now. That's hard for retail investors. Right? I mean, that's a hard, it's a hard, you know, sell because we have been used to, you know, being able to get in at 75% leveraged and rents are going up interest rate is low and all these things. Well, I mean, I think you have to get back to the historical perspective of real estate isn't this get rich, quick scheme, it's get wealthy, slow, and so that may make the deal harder to come by. But I if I was pitching deals right now, I would say here's how we're de risking this. Here's how it's

35:00

Very safe in regards to, you know, what the assumptions are that we're making. And you need to be willing to lock your money up for a minimum of seven years. And that needs to be the pitch. So instead of saying, hey, I can recycle this capital every two years, your equity multiples going to be two and a half, and we're gonna go do five different deals, all with your $100,000, you probably say, Hey, your $100,000 gonna be locked up for seven years, I'm gonna hit a two and a half equity multiple over that, I want to cashflow five to 6% in that period of time, and we're going to make some really low low risk adjustments in assumptions to make that make sense. Yeah, I like that. I am going to selfishly ask you a question. I wanted to kind of dive into this and get your thoughts on it. So, you know, because of the the longer term hold that we're looking at having to do with all of these assets today. You know, there are some other options out there. Right, we've we've kind of talked about debt and debt funds. And it got me actually looking into it over the past month of what would it look like if we went and started a debt fund, that was an evergreen fund, and partnered with a group, and I'm actually talking to one right now they funded over 1300, residential house flip transactions,

36:16

and partnered with them to do you know, our first debt fund. And it's the structure is really interesting, because you can place your capital when and start, you know, it would get deployed typically within like 30 to 45 days, which means within 30 to 45 days, you're making six to 8% on your money, depending on how much you're putting in, you can pull it out with 90 days notice, typically, it actually gets sent back to you within 30 to 45 days, depending on how many transactions are being done at that time.

36:46

But it's almost like a glorified savings account that's paying you 60% That you can withdraw it's relatively liquid. While you're kind of in between waiting on these deals. Yes. I mean, what are your thoughts on that? Have you thought about going in starting a debt fund? To me it's really attractive, because it's one thing that my investors can place capital in while we're waiting for the next deal. But it also helps diversify your investments and your cash flow and all that fun stuff. Absolutely. I think that this is a really good strategy, the biggest component, you have to look at is execution on the backside, right? So what is it that is allowing for those return of capital? Okay, if it's residential, okay, then what does the market look like in regards to buying a flipped house, you know, or, you know, buying the first first time homebuyer buying a home, because the Wall Street Journal does a really good job of, of detailing the challenges of buying your first home right now. Right? I mean, they spend a lot of time on it, housing is a humongous component of GDP nationally, you know, I mean, it's one of the largest, if not the largest. And so I think that you have to look at what does that market look like on an exit strategy standpoint, and I have three, four buddies that I know that have done very well, and are self funding these opportunities, and not really with a certain group, but have found their own home flippers that need capital and are funding these types of transactions. That's a different component, right? Because you're taking a little bit more risk, because if the deal does go south, you have to take it over. But a diversified strategy in regards to hey, I'm a multifamily operator, I have a connection. You know, I know buddy down in Nashville that builds houses and has something very similar. But it's like, Hey, we're going to partner with a group that either flips homes, built homes, and we have three or four groups looking to us for some rescue capital and some preferred equity opportunities that we're going to get control provisions on those projects. And we're going to be at a debt instrument instead of equity instrument, I think that is going to fall on really, really open ears right now. And let's think that there's a trend there that's happening with a larger, you know, a lot of larger groups that are they're kind of shifting from equity to debt strategies. One thing I would just just want to know is, you know, hey, as a as a sponsor as a capital allocator. In that standpoint, what am I? What control do I have if something happens? And what how do I actually go get the the investors equity back, because, you know, we talked about this, right, they raise funds, and those funds need to be deployed, and you don't want them to be deployed in, you know, bad deals, just to get deployed. So that's one thing to kind of keep in mind and keep it in perspective. The overall strategy, I think, makes a lot of sense and is a very good one. It just comes down to like any equity deal, it just comes down to the operation side and what's the exit strategy and making sure that you feel very comfortable with that? Because one thing that happens very quickly on the residential side is you know, that market is hit much faster than commercial, real

40:00

Real Estate, right, you can sell a house in 30 days, pretty quickly, you know, and I don't know very many real estate transactions on the commercial side that happened in 30 days. And so that market is highly dependent on some of the same factors that we talked about. So just equity strategies are really important, but I love the diversified portfolio strategy getting in on the debt side, I have also seen a lot of fund managers start to focus on different asset types, whether that be ATMs, or oil and gas or something along those lines, because real estate is very difficult to, you know, find opportunities, and at the least that has been the last 612 months. Yeah, the velocity of transactions on the residential side is what got me really attracted to this to this potential model that we're working on. Because,

40:48

you know, I mean, even in a down market, I mean, residential real estate agents flip out, if a house is on market for 60 days. And I look at that I'm like, Man, if I had a commercial property that, you know, our average sale time from list to sale was 60 days, we would be high fiving each other in the office and losing our minds. Absolutely.

41:08

So, you know, yeah, let's, let's talk about that a little more offline. Maybe it makes sense for us to partner up on that, or figuring out what that could look like. Because it's, it's something that I've been thinking as just as a sponsor, like, you know, I, it's great raising capital on a deal by deal basis. But when you're working on a deal, you don't have anything to raise for your investors are sitting there going, Hey, we still have cash that we need to put to work. And it's kind of nice to have something that's evergreen, that you're just always putting capital into, you know,

41:41

what, what else? What else should an investor be keeping in mind today, you know, knowing that Blackrock is making the moves that are making knowing, you know, the strategy of having to come in with 55 to 65%. loan to value what what should they be keeping in mind moving forward into 2024? Yeah, I mean, evaluating current cash flow is top of mind for me, right? It's like, you have to stress test that deals now, even stronger than you did before. And I think that historical cash flows is the most important thing to look at. Because, look, I mean, History doesn't repeat itself. But it sure does rhyme. You know, I'm tired of going in and go into a deal and saying, Man, I need to be able to sell this at this cap rate, I need to be able to push in a way that you know, this percentage, I need to make sure that capital markets are going to be here. All of those things, I can't necessarily impact. And so you always have to dumb this thing down. And I'll give you a good example. It's like buying 163 unit apartment complex, which we did. And going in, we had a very good basis. Thankfully, that's what saved us. But the when we opened up the deal, and got into it, and started to realize that oh, man, you know, people actually turn over every six to nine months here, instead of you know, even though they have 12 month leases, they just skip, they just leave. Oh, man, it's getting cold in Kansas City. This is a property on 11 acres. And they are, you know, people are starting to move into the property that don't have leases there. What do I do in that scenario? Oh, man, this property was built in 1970. And those sewer lines are getting a little bit old. And you know, this one busted that one busted, oh, shoot, you know, we had a fire at this property. And it knocked out two of the buildings, you know, it's just like, wow, those are a lot of variables to try to manage on a deal versus the $13 million industrial building that has four tenants, it's 215,000 square feet, those businesses have been there for the last 10 to 12 years. They're not planning to go anywhere, because there is no space available. And if they did it cost them $2 million to move their manufacturing equipment out of the industrial building. Those are the types of things that I'd be thinking about right now is what are the steady Eddie's and I posted about this earlier in the week about Kansas City being one of those steady Eddy markets and why? Well, it affordability in supply and demand, okay. But we also have some some really cool things going on, we're never going to see the huge boom up, you know, and we're never going to see the huge bust down it stays pretty linear over time. That could change in the near future. I saw that maker, which is a data company has dubbed Kansas City as one of the next Austin's I think that's a little bit aggressive

44:20

in a lot of different ways. It's cold here, it gets hot here, and it's in the middle of the country. So I don't think that is happening. But it has some similarities in regards to demographic profiles and the job and demand growth that has happened. But if I look at a deal right now, I want to know what the historical cash flows are. I'm probably basing my assumptions off of that. If we get some increases because of rental rates and leases renewing fine, but like I need to make sure that DSCR is your going to be strong regardless if if we don't do much at the property. And so I'm looking for less headaches. I'm looking for deals that are kind of, you know, base hits that aren't these huge wins.

45:00

that have the opportunity for somebody to come, you know, buy it for 60% more than what I paid for it two years ago, and taking more of a just a longer term approach to holding real estate. The longer I'm in this game,

45:13

the more that I'm seeing that the most successful people have bought real estate at a good basis. And they just waited. I think I said on my LinkedIn posts, invest, wait, appreciate, you know. And so I think that's really important to, to keep in mind in today's day and age. And so that's going to take that psychological. So if you go back, and you read Howard Marks book mastering the market cycle, you will understand all of the different fallacies and mental models around investing in why people continue to buy at the height, and why they don't buy at the bottom. It's the old Sam Zell approach when everybody's going right you gotta go left or Warren Buffett, when everybody's zigging, you gotta zag, that's hard to do. But the ones that get it done right now, with good basis and hold on for a long term, 510 years from now, there's that guy that we looked at that tax assessment deal that bought it for $250,000, and just put a $22 million loan on it or whatever back.

46:11

Those are game changers. And so I think psychologically, there might have to be a massive shift in regards to investors, expectations, sponsors expectations, and how this how this industry is actually done and how returns are made. Yeah, I couldn't agree more. I mean, when it comes to commercial real estate, cash flow is great. But the appreciation is even better. Just plan to be there for a little while. You know, it's, it's, it's really tough to buy a property and sit on it for 10 years and do it wrong. Right, because, I mean, you look, I've we've actually done that on this channel before. And I'm trying to remember what the video was called. But I went back and looked at properties that were last purchased in the 1990s and what they're appraised for today. And some of these properties were bought for under a million dollars downtown on Broadway, that today are valued at over 30 million. And you know, of course Yeah, did they get did they get lucky with you know, Broadway kind of taken off, of course, but at the same time, they bought in a downtown center for a million dollars. Right? You can't go wrong with that. Draping this has been an action packed episode. Thank you for doing this. Thank you to the audience for joining us for another investors roundtable. We're doing these every Wednesday now at 3:30pm Central Standard Time live on YouTube, if you want to come here and join us and ask whatever questions you have. And we will see y'all in the next one. This episode of the commercial real estate investor podcast is brought to you by cre launch Pro. This online commercial real estate program is designed to take you from beginner to pro commercial real estate investor with access to all of my courses, our online community and monthly group coaching calls on how to confidently buy your first commercial property today at www dot c r e launch pro.com