Exploring the Potential of Credit Trade and Hotel Development in Commercial Real Estate

Today’s guest is Greg Friedman.

 

Greg has more than 23 years’ hospitality experience with an emphasis on deal-structure and financing. He successfully has led Peachtree in more than $8 Billion in hotel acquisitions, investments and development since co-founding the company. 

 

Show summary:

In this podcast episode, Greg Friedman shares his insights on the commercial real estate landscape, focusing on the lucrative opportunities in credit trade for financing acquisitions, developments, and recapitalizations. He recounts Peachtree's adept navigation through economic downturns like the Great Financial Crisis and the pandemic, crediting proactive investment strategies. Greg also discusses the hotel industry's potential, driven by favorable supply-demand dynamics.

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Introduction (00:00:00)

 

Greg Friedman's Background (00:01:07)

 

Influence of Family and Entrepreneurship (00:02:00)

 

Navigating the Great Financial Crisis (00:04:29)

 

Investing During Market Disruption (00:06:39)

 

Hotel Investment Strategies (00:09:23)

 

Opportunities in the Hospitality Space (00:12:11)

 

Investment Risks and Opportunities (00:13:17)

 

Lending and Financing Strategies (00:16:58)

 

Target Audience and Demand Profile (00:18:44)

 

Conclusion and Contact Information (00:20:30)

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Connect with Greg:

Web: https://www.peachtreegroup.com/

 

Connect with Sam:

I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns.  

 

Facebook: https://www.facebook.com/HowtoscaleCRE/

LinkedIn: https://www.linkedin.com/in/samwilsonhowtoscalecre/

Email me → [email protected]

 

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Want to read the full show notes of the episode? Check it out below:

Greg Friedman (00:00:00) - Across all commercial real estate. I think the best opportunity set is on the credit side. The credit trade me hands down, is the most compelling trade today. And if you're doing direct lending, you know where you're financing groups to go out and acquire and develop assets or even recapitalize existing assets. And a lot of cases were, you know, ultimately driving from a standpoint of the investments we're making, we're getting, you know, outcomes that are very similar to what we would be getting if we were investing on the equity side.

 

Intro (00:00:29) - Welcome to the how to Scale commercial real estate show. Whether you are an active or passive investor, we'll teach you how to scale your real estate investing business into something big.

 

Sam Wilson (00:00:42) - Greg Friedman, thank you for taking the time to come on the show today. I certainly appreciate having you. Come on.

 

Greg Friedman (00:00:48) - Yeah. Thank you Sam. I appreciate the opportunity to be on the show with you today.

 

Sam Wilson (00:00:51) - Absolutely. Greg, as our listeners know, normally I give the guest bio there in the beginning, telling all about the guest and where they come from.

 

Sam Wilson (00:00:58) - But instead, we're going to skip straight to the same question I ask every guest who comes on the show in 90s or less. Can you tell me, where did you start? Where are you now, and how did you get there?

 

Greg Friedman (00:01:07) - Definitely. so, you know, I graduated from University of Texas at Austin back in 1999. I spent, you know, about eight, you know, 8 or 9 years in banking before I started Peachtree going back, you know, to 2007. And, you know, Peachtree, when I originally started it, it was a, you know, small family office that we were focused on going out and acquiring and developing hotel assets. And like all businesses, we've transitioned through the years and we've transitioned into a vertically integrated private equity firm that invests across, you know, all commercial real estate property type. So we invest, you know, still very heavily across the hotel space. But we also have investments across all commercial property types as well as we have investments outside of real estate as well.

 

Greg Friedman (00:01:49) - And then as I mentioned, we're vertically integrated. So we own an operation development lending asset management company, so forth.

 

Sam Wilson (00:01:56) - That is fantastic. Did you grow up in a family of entrepreneurs?

 

Greg Friedman (00:02:00) - You know, I did. So my my grandfather was a huge entrepreneur. He was a doctor by trade. And he, he also owned a bunch of real estate, like any good doctor that lived in a small town in Alabama, because I grew up right outside Tuscaloosa. He was, you know, he was very focused on not only being a doctor. He was an eye doctor. He was also focused on doing everything from owning commercial real estate, you know, to owning a home building business to owning movie theaters. So he was, you know, very entrepreneurial. So he was a huge influence on my life. And he, you know, owned hotel properties. And that was, you know, that's how I sort of got into the business because he owned a business that owned hotels, but also owned a hotel lending business.

 

Greg Friedman (00:02:43) - So I personally grew up around the business before, you know, professionally getting into the, hospitality business on the lending side, when I graduated college.

 

Sam Wilson (00:02:51) - Got it. And so was that. I guess maybe that's the answer, the question that's kind of what gave you the bug early on that said, hey, this is this is kind of the direction we're going to take, but what did you decide to do differently? Maybe, you know, when you launched Peachtree that your family wasn't already involved in.

 

Greg Friedman (00:03:08) - Yeah. So, you know, at this point in time, when I launched Peachtree, my family was pretty much out of the hotel business outside of, you know, some limited investments. So it was, you know, my grandfather, unfortunately, he was, you know, at this point in time, he passed away shortly after I started Peachtree, but didn't have a lot of, you know, he had sold off most of his investments. And same for my mom, who was a big influence as well.

 

Greg Friedman (00:03:29) - But, but really went in and, you know, initially thought I was going to, you know, just focus because I knew the hotel business from a professional perspective that was out there financing, capitalizing hotel projects and have financing capitalized over 300 hotel projects across the US when I was on the banking side, so I wasn't necessarily looking to duplicate what the family business had done. I was trying to really create my own legacy. And, you know, with myself and I had a partner that still is involved in the business today. The two of us both wanted to create our own legacies, to go out, you know, acquire and develop hotel properties. And we had, you know, our own capital that we were investing. So, you know, personally was using my capital along with my partner. And then our family members were investing heavily. So my grandfather, my mom and so forth were big investors. Initially when we went out and acquired developed assets, when we set up a business.

 

Sam Wilson (00:04:20) - Got it.

 

Sam Wilson (00:04:20) - You launched that in 2007. That seems like the prime time to, get heavily into commercial real estate. How did you weather the next 3 or 4 years?

 

Greg Friedman (00:04:29) - Yeah. So we're good at picking timing here. So we picked it in May of 2007 when we formed Peachtree. And and that was probably the absolute peak before the great financial crisis. And so we, you know, so we went out and, you know, made about eight, 8 or 9 investments across the lodging space, in 2007 timeframe where we bought some land parcels that we ended up developing into hotels shortly thereafter, or we bought actual hotel assets. And it was, it was sort of interesting, just as I reflect on it, because, you know, it was probably the best lesson, you know, for us on the business side, because we quickly went from, you know, being able to play offense, meaning we were able to make investments to happen to play, you know, truly play defense because we were going through one of the, you know, worst economic situations of all time.

 

Greg Friedman (00:05:17) - With the great financial crisis that really took hold by the mid part of 2008. And, and we successfully navigated through that environment, not only do we end up producing, you know, decent returns, we, you know, all those investments we made, we actually made positive returns on every investment we made pre, great financial crisis. But we were we were super active. We were, you know, very good about not only playing defense but being able to go out and play offense and buy a lot of distressed debt during the great financial crisis. You know, where we bought over, you know, 50 loans. We bought a lot of hotels that were in distress on the real estate side as well. And we bought, you know, we developed a bunch of hotels from the ground up in the middle of the great financial crisis. So we had a lot of success making new investments as well as playing defense. And, you know, being able to, you know, really optimize and drive the returns across our, you know, our existing investments at that point in time during the great financial crisis.

 

Sam Wilson (00:06:13) - It sounds like you guys were. What? Let's be brave when others are fearful. Like you guys were brave when others were fearful in in this time. What? What did you guys do differently that able you know, that allowed you guys to go out and buy distressed hotel assets and say or distressed debt, whatever it was and say, hey, we're able to do something better than the previous operator has done.

 

Greg Friedman (00:06:39) - Sure. So I think, you know, I think a couple different things. I think it's just part, you know, at this point in time, I think it's part of our DNA, of our organization. And when you look at just the culture here, we're not afraid of chaos. We're not afraid of, you know, operating in tough environments. And we've had a lot of success doing that, obviously through the great financial crisis. And then even through the pandemic, we were one of the most, you know, active buyers of distressed debt. We bought over, you know, 180 loans in 2020 and 2021.

 

Greg Friedman (00:07:06) - In the middle of the pandemic, we bought a bunch of hotel distressed hotel assets, even during the pandemic, as well as, you know, we made a lot of, direct loans to groups that needed rescue capital made over, you know, 29 loans to different groups that needed rescue capital to make it through the pandemic. So I think it's it's one of those components where we're willing to be decisive when the market pulls back, you know, you find a lot of groups, become, you know, very timid when there's a, you know, when there's a chaotic environment, when there's disruption in the marketplace. And we're very proactive in the sense that we, you know, like what we did during the great financial crisis, we were very proactive in asset managing our current investments and really setting those investments up to be successful. And then simultaneously, we were able to, you know, shift our mindset because it's hard to play defense and offense at the same time. And you have to sort of, you know, you have to bifurcate those two strategies.

 

Greg Friedman (00:08:02) - And that's something we did successfully during the GFC. And then as we grew our company because we were much larger, you know, you know, before the pandemic started and we're even larger today than before the pandemic. But, you know, we were able to split our team where we had a certain part of our team focus on playing defense and really optimizing the performance of our existing investments. And then we had another team focused on going out and making new investments in finding and sourcing opportunities. And a lot of cases, what you find in the especially in the hotel industry, there's a lot of inefficiencies from one operator to another. And we've you know, we internalize the operations side going back to 2008 and Peachtree, we did it in order to play defense during the great financial crisis. And having our own internal hotel operation platform has paid dividends for us, not only being able to identify opportunities, but truly being able to outperform, you know, how other operators operate. And unfortunately, when there is disruption in the marketplace, like a pandemic or a great financial crisis, you can quickly see who's good at operating and who's, you know, who's been struggling, but you know, has had the benefit of the, you know, economic conditions before that disruption.

 

Sam Wilson (00:09:13) - What are some telltale things that you guys look for in an operation where you say, man, that would be a great buy because we can implement X and make this so much better.

 

Greg Friedman (00:09:23) - Yeah. So a lot of it is looking at revenue management strategies, like you find that a lot of hotels don't really optimize their actual revenue management strategies, being able to maximize rates that they're charging and simultaneously driving the occupancy. So being able to drive those revenues into the asset, you find that other operators are really good at revenue managing. But when you get these revenues, they just overspend and you know, you want to drive. Great guest experience. And we pride ourselves on being able to do that across our portfolio. But you want to be able to, you know, simultaneously because you're making you know, you're making investments in these assets because you're a for profit enterprise. You know, usually and for us, we're for profit. So we want to make sure we're able to control expenses. And we keep a very tight budget on, on what we're spending on the operations side, but we're doing it at a level where we don't want to impact the guest experience.

 

Greg Friedman (00:10:15) - So being able to balance that out is usually where you can find those opportunity sets. And then, you know, I would say from a more just high level value add strategy that we've been able to implement. When you look at the hundreds and hundreds of, you know, investments we made on the equity side across hotels we've acquired, you know, what you find is a lot of times hotels are undercapitalized from a CapEx perspective. So we'll buy an asset and go in and spend a lot of money to renovate that asset and actually bring it into a level where it can be competitive with the other hotels in its comp set to be able to charge higher rates and be able to drive occupancy. And, you know, other cases, you know, you find that, you know, we're able to, not only, you know, spend money to drive performance from a standpoint of renovating the asset, but change the brand and going from one brand to another brand. There's a lot of value that could be, you know, that could be created by making those brand changes.

 

Greg Friedman (00:11:11) - And we've had a lot of success in doing that, taking something that's maybe unbranded and putting a marriott or Hilton brand into it. So it has a strong reservation system to help drive that performance.

 

Sam Wilson (00:11:22) - No, that's really, really excellent. I love the insight there. And I know probably of all commercial real estate asset classes, I know the least about hotels. So this is this is kind of a fun conversation for me to learn, from you. So. Well, Greg, let me ask you this. Like, where is the opportunity that you guys? In hotels today. I mean, it's something where, you know, the traveler preferences have changed. We've seen a lot of, I think, shift in the in the market. you you mentioned here even before we started hitting record that you saw that there's chaos in commercial real estate. So I'm sure having weathered 2007, you know, been through that, built an enormous company up until now. You guys are constantly reassessing where opportunity lies. So give us kind of the insight on what you think and where you guys are positioning yourselves as it pertains to the hospitality space as a whole.

 

Greg Friedman (00:12:11) - Yeah. So and we we love the hotel space. And we also, you know, we still think there's a lot of opportunities within commercial real estate outside of hotels as well. But across all commercial real estate in general, hands down, the best opportunity set today is not to go out and acquire assets. You know, we think there's a better opportunity set actually on the development side across hotels today, although I think there will be a better opportunity to buy hotels more opportunistically later this year. But we're finding, you know, a better opportunity set if you are investing on the equity side, on the development side versus actually acquiring assets. But going back to my original point, though, across all commercial real estate, I think the best opportunity set is on the credit side. The credit trade me hands down is the most compelling trade today. And if you're doing direct lending, you know where you're financing groups to go out and acquire and develop assets or even recapitalize existing assets. And a lot of cases where, you know, ultimately driving from a standpoint of the investments we're making, we're getting, you know, outcomes that are very similar to what we would be getting if we were investing on the equity side.

 

Greg Friedman (00:13:17) - Yet we're in a, you know, position that you could argue that's protected because we're in a lower leverage position because we're financing 60 to 75% of the, you know, acquisition costs, development costs, you know, the current value of the assets. To recap. So to me, that's the best opportunity set right now, is to invest through credit versus taking on the last dollar risk on the equity side. But if you are going to take on Las or equity risk across hotels, I you know, I believe the, you know, the development side to be super compelling because there's a lot of markets, you know, when you look at hotels in general, you know, supplies down roughly about 30 to 40% from historic averages. So supply is growing at less than 1% a year. That's projected to be the case for the next five years or so. And that's just a, you know, that's a you know, that's really the outcome of what happened during Covid, where supply pipelines were shut down because nobody wanted to build new hotels when no one was traveling.

 

Greg Friedman (00:14:13) - And then all of a sudden we transition as travel started coming back, you know, back in, you know, 2022, we started transitioning into this environment where the credit markets became dislocated. So it became more and more challenging to finance construction or new construction assets. And and that's created that constraint of new supply. And simultaneously, there continues to be robust demand. Drivers like demand continues to grow from where, you know, where we were even last year across our industry. And, you know, we're still expecting over the next five years, demand is going to be, you know, growing at historic levels at 2% or higher per year. So demand's way outpacing supply. And there's a lot of markets that, you know, could support new hotels be built in. That's one reason why we do favor development. The other, you know, just sort of interesting component to hotels compared to other property types. Today, if you wanted to invest across, you know, any property type hotels trade at higher cap rates.

 

Greg Friedman (00:15:08) - And part of the reason, you know, I'm probably a little bit, you know, negative towards equity investments in general right now is I still think we're going through this whole repricing, across all asset types, especially, you know, commercial real estate because interest rates are much higher today than where we've been over the last decade. You know, we've averaged like use the ten year Treasury rate as the risk free rate, the ten year Treasury rates, you know, averaged around 2% over the last 12 years or so. And, you know, you look at today, the ten year Treasury rates around four, you know, 4.3%. So the ten year Treasury is almost double where it's been over the last 10 or 12 years. And, you know, I believe that the ten year Treasury is going to stay elevated. And if it does stay elevated, when you start applying risk premium spreads, which the ten year treasury rate is, from my viewpoint, the risk free rate. And if you applied the, you know, risk premium spreads on top of it for what commercial real estate typically is, which is on average about 275 basis points above that risk free rate.

 

Greg Friedman (00:16:07) - You know, you start to realize a lot of, you know, assets, a lot of these assets that are trading at a 5% cap rate or even a low 6% cap rate, you could argue you could see, you know, continue to see a cap rate expansion from where they're trading out right now. And that's the risk of making equity investments. I'm not sure if the market's fully, reset. Whereas hotels, you know, are trading around 8% cap rates. So you have higher risk premium spreads, you have less repricing risk. And that's why hotels are. More compelling on the equity side than some of the other property types that you see out there.

 

Sam Wilson (00:16:42) - I love that explanation. Thank you for taking the time to, to do that on that, on that credit side of things, what are people building now that today's that? Yeah, I guess what are people building right now that makes sense for you guys to be the lender on?

 

Greg Friedman (00:16:58) - Yeah. So I mean, on the development side, we're financing a lot of new hotels that are being built.

 

Greg Friedman (00:17:03) - So we're doing a fair amount of construction loans. We're doing a lot of acquisition loans, as you can imagine, outside of construction. We're actually doing some multifamily construction loans. You know, you have a record amount of supply getting delivered in multifamily. So we are very selective on the markets that we are financing. But we are doing some multifamily construction loans, some stuff on the industrial side as well on construction lending, but by far the majority of the type of loans we're making today are, you know, going out and providing acquisition financing or recapitalizing existing assets. And we are starting to ramp back up on buying loans. You know, we bought four loans in the month of December alone. We're buying we're in the process of buying several loans as we speak today. And when we buy loans, this isn't you know, our credit strategy is not a loan to own strategy. Our strategy is to go in and buy loans or even make loans with the idea of helping the borrower be successful. You know, that's what we're our focus is on.

 

Greg Friedman (00:17:59) - As we buy these loans, we typically buy them with the idea we're going to restructure the loans and hopefully allow the borrower to have runway to be successful and get us paid off over the next couple of years as the market normalizes back out.

 

Sam Wilson (00:18:13) - Right? No. And that's I mean, that's a lot of moving pieces there and a lot of different strategies I think that you guys are employing all at once. So it's it's a lot of fun to hear you just talk. I know you you probably stay at the 30,000 foot level with a lot of people making a lot of these things happen. I think that's that's really, really cool. I guess, maybe even a more direct question is on the construction loans that you guys are doing. I guess I'm trying to understand the type of traveler today that the hospitality space needs, not the type of traveler that we're building for today. Where is what is that.

 

Sam Wilson (00:18:42) - Yeah. So we yeah, typically we're.

 

Greg Friedman (00:18:44) - Focused, you know, on just to sort of put to scale what we're looking at is typically select service limited service compact full service extended stay hotels with 100 to 250 rooms.

 

Greg Friedman (00:18:57) - Right. So typically the type of guess we're going after are the, you know, corporate travelers. In some cases it's leisure demand. And because each of these submarkets have different, you know, demand drivers that are driving who's actually utilizing these hotels. But I would say the majority of the demand is coming from corporate and group demand as well. As, you know, there's a decent amount of leisure demand, which usually makes up about 20 to 30% of the hotels that, you know, we invest into, have about, you know, have a leisure component to it as well. Sure.

 

Sam Wilson (00:19:27) - No. That answers the question that that was. Yeah, that's that's super insightful because that's that's kind of the answer I was expecting because I think I've just we've just seen kind of the, the, demand profile change I think slightly over the years. And that was that was the answer I probably expected right now was that more select service? yeah. Corporate traveler sort of sort of clientele at those hotels. So that's really, really cool.

 

Sam Wilson (00:19:50) - Greg, we've talked about a lot of different things today. I mean, you guys have grown an enormous company here over the last. What is that? Oh seven? 17 years.

 

Sam Wilson (00:19:58) - 17 years?

 

Sam Wilson (00:19:59) - Yeah. Man. Congrats. That's a lot of fun. You've done a lot of things you've shared with us today. Your thoughts on the market as it is today, where you guys see opportunity. You've shared with us how you guys have built, built your firm, the types of things that you guys are investing in, the opportunities and how you guys have diversified yourself over the last ten years or so, and what you've been investing in, the types of loans you're buying, acquisitions, development and a very insightful show. I appreciate you taking the time to come on today. If our listeners want to get in touch with your firm, what is the best way to do that?

 

Greg Friedman (00:20:30) - Yeah, just visit our website, Peachtree Group. Com and we're happy to, you know, connect with anybody that the connect with us.

 

Sam Wilson (00:20:37) - Fantastic. Thank you again Greg. Appreciate your time today.

 

Greg Friedman (00:20:40) - All right. Thank you. Talk soon.

 

Sam Wilson (00:20:41) - Hey, thanks for listening to the How to Scale Commercial Real Estate podcast. If you can do me a favor and subscribe and leave us a review on Apple Podcasts, Spotify, Google Podcasts, whatever platform it is you use to listen. If you can do that for us, that would be a fantastic help to the show. It helps us both attract new listeners as well as rank higher on those directories. So appreciate you listening. Thanks so much and hope to catch you on the next episode.