Real Estate Round Table with Tyler Cauble | EP158

Transcription:

Speaker 2 (0s): Welcome

Speaker 3 (2s): To the working capital real estate podcast. My name's Jessica Galley And. on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time.

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Welcome back to the commercial real estate Investor podcast. Really excited to have such an outstanding group of individuals here today, in my opinion, some of the top commercial real estate brokers from across North America to be bringing you all a brand new segment that we're hopefully gonna be doing, you know, once a month, maybe once every couple of months between the four of us where we have a little commercial real estate brokers Roundtable and talk about what is going on in the commercial real estate market. What are we seeing since commercial real estate brokers are really the front line of what is going on in the commercial real estate industry, both on the leasing front and on the investing front.

And with that we've got Chad Griffiths, Jesse Fragale, and Adam Williams. And so I'm gonna have them each introduce themselves, talk to you a little bit about the asset classes that they work in and where they are in the world. And Chad, I'm gonna hand it over to you first.

Speaker 1 (1m 43s): Yeah, thanks Tyler, and a pleasure to be here. Thanks for the invite and looking forward to doing more of these as well. So yeah, Chad Griffiths industrial real estate broker. Started my career in 2005. Same company actually ever since. And then I started investing in myself in 2014, coal of about 150,000 square feet worth of industrial properties. Brokerage is still my day-to-day business. I follow the industrial market quite closely based out of Western Canada, but I keep pretty much on top of trends all over North America and and the world.

So looking forward to talking about anything to do with industrial real estate.

Speaker 2 (2m 18s): Love it. Jesse,

Speaker 3 (2m 20s): Hey, everybody. My name's Jess Galley, pretty similar Mo just on the office side. I got into the, the business on the investing front in student rentals. Continue to do multifamily to this day, but same, same idea, day to day is still on the brokerage end. Investment sales, predominantly focused on the office market, so investment sales and office leasing. So I do that out of Toronto. So pleasure to be here.

Speaker 2 (2m 49s): Adam

Speaker 4 (2m 50s): Hey, everybody. Adam Williams coming to you live from Charlotte, North Carolina. I don't know anything about industrial or office leasing, so you don't have to worry about me talking about that. I only do retail hospitality. Been doing it now for honestly too long. I remember being a young pup in the business and those days are gone. Same, same kind of story of these other guys. I do a lot of stuff on my own balance sheet and with, with local entrepreneurs. Everything from, you know, bowling alleys to hotels, restaurants, and, you know, small development projects.

But do a, a tremendous amount of kind of institutional level retail landlord and tenant rep in and around the Carolinas.

Speaker 2 (3m 32s): Yeah, this is gonna be a, a fun conversation because everybody on this panel is investing as well. So you're, we're we're all bringing that to the table, which I think is a really unique perspective. 'cause not all commercial real estate brokers are investors, right? And I think that we as commercial real estate brokers that work with investor clients kind of bring a, a fair amount of the investment knowledge to the table when we're working on it. So you guys are very well qualified to be talking about this. Jesse, I wanna dive in first with you on the office sector 'cause that is what everybody has been talking about basically since Covid hit, what is going on in the office market and is it true that office is just dead?

Speaker 3 (4m 10s): So it's, let's see, respond to this concisely. I I'd like to take a look at office between two different markets. The, the downtown cores of the world and the suburban office market when it comes to downtown centers, whether that's New York, la, you know, Toronto, Vancouver, those buildings. I think there's been a flight to quality. So the office market has been obviously sluggish over the last few years because companies right now are just tr we're trying to decide what are they gonna do, are they going on a hybrid model?

Are we gonna be in the office three days a week? Is it five days a week? We're, are we gonna ever gonna be back there? We were just talking on our sales call this morning. And for a lot, we have over 80 offices, I should just say with Avis and Young. So we see a lot of different markets and we're starting to see that return to office. And what I mean by that is a more specific mandate where you don't have companies just saying, okay, you know, we'll say we're in three days a week. We're starting to see more of a push to have it systematized and have people in there. The other thing is, I think after two, three years, especially in Canada, I know you guys weren't shut down as much as we were, but the result was a lot of the team building and being able to build culture in a company had to take a backseat to, for a lot of the, the different kind of arrangements people had in the office.

Now all that being said, I think every major market has seen an uptick in the vacancies that they've had for Toronto and Vancouver. Very healthy for other markets, maybe not so much because we had low vacancy for such a long period of time. How I think this shakes out. I I don't th you know, obviously we're all glass half full guys or we wouldn't be brokers. I don't think offices is dead. I think these changes proceeded, these lockdowns and what's kind of happened to the world that people wanted quality, better amenities wasn't a place that you just were gonna be in a cube for 70 hours a week.

So I think that change is happening. And the reason I separate the downtown and the suburban markets is there's been a lot of talk in the Canada and the US about repurposing buildings. The the reality is, and we talked about this a little last time, Tyler, is that you can't just take an office building and turn it into a multi-residential building. They're not built the same way. They're not designed the same way. So although there are candidates for buildings to be converted to higher and best use depending on the area and you know what's in demand, I think that we're not gonna see as much of that as people think in downtown course.

I think that might be a periphery thing for buildings that where it's feasible. So I'll leave it there. That's, that's kind of my 2 cents right now on, on the office market.

Speaker 4 (6m 46s): Jesse, can I ask a quick follow up question or, or just a, something that I've, I've been itching to hear somebody's perspective on. Somebody told me the other day, or asked me the other day, I should say that how I thought the retail apocalypse where, you know, every retail shop was gonna close and, and every you, everything was gonna be on Amazon, there were no survivors, everything was gonna die. Like I feel that same kind of like click beatty fervor around the office market right now, but I don't know anything about office, right?

Oh, I know that much about office. So I'd love to hear, you know, how that strikes you. Do you see any similarities, frankly in the retail business? It was like a, you you mentioned flight to quality. It was a, it was a merciful death for a lot of, a lot of brands that were just hanging on by their fingernails for the last 10 years that had been watered down and watered down and bought and sold. So I, I'd love to hear, you know, how that comparison strikes you.

Speaker 3 (7m 51s): Yeah, I think it's a good comparison. I've, I've never really thought of it that way, but we've seen with our retail folks that, you know, the ones that have done very well over the last few years have been quality assets, especially in our area grocery store anchored assets where there's this kind of concept of, I think of creative destruction that people just like, they, they don't realize our industry's a cyclical industry and, and every once in a while you need to kind of clean up some of the underperforming assets. And it sounds pretty, pretty brutal.

But some of them that were kind of hanging on, you know, maybe should not have, should not have been there. you know, the business cases might not have facilitated, you know, where they were staying in the rent they're at. So to answer your question directly, I do think there's a little bit of that in office. You'd be lying if you'd say that all these off office asset classes are gonna get utilized. There's gonna be something that happens where whether that means these buildings have to now really start investing in their buildings and make sure there's amenitized we space that it's, you know, those old offices, like I said, where you just have Cube Farms or even modern offices that just don't have a lot of amenities.

And then I think the other component is there, you know, before, I'm sure this is a lot of American markets, but in Toronto, the trendy areas on kind of the periphery, the west end, maybe north of the city in, you know, college, the, those were kind of these trendy areas, but they weren't as well connected to transit. I think now you're starting to see that these, you know, younger companies that wanted brick and beam space, maybe that's not on the top of their list, maybe transit number one. And then after that, you know, they can start looking at the actual look and feel of building

Speaker 2 (9m 33s): Jesse. What, how do you see office evolving over the next 10 years? 'cause if we take what Adam said and kind of go back to what happened to retail really starting probably around 2008, we went from, you know, I mean the first project I ever worked on was built in 2006. I took it in 2013 as the, as a leasing agent. It was a 550,000 square foot power center, right? I mean it was target anchored Kohl's, I mean, you name it, they were all there. And that development doesn't really happen anymore.

It's more of this mixed use town center, smaller retail, and those are thriving. How do you see office kind of evolving over the next, you know, decade or so?

Speaker 3 (10m 13s): Yeah, well, I mean, the short answer is I don't know. So that, you know, that's the first thing I'll tell clients of mine when they ask like, for that long, that kind of, you know, long time horizon. But, you know, my, my intuition is that we are, we're starting to see a lot of these large developers, Whether, you know, Cadillac, Fairview, Oxford, like these, these Brookfield, these big developers that are putting a lot of money into their amenities to the, and it's not just about having the food court, it's that, you know, if you work for a certain company that has X amount of square footage in one of these towers, you have full exclusive access to a gym on say the 12th, you know, the 11th floor.

Something to that effect where they wanna make it as attractive as possible to be in the office and be in kind of that ecosystem. Yes, you're gonna get some people that drop off by the fact that their commute is, you know, further away and they're, you know, and then the dust will settle in that way. But I do think that amenities are, are a huge component that the square footage will balance out in a proper, like what we always say, it's we versus me space. And, and that goes for the common areas and that that goes for the office internally itself.

Speaker 2 (11m 21s): Chad, let's get you in on the conversation here. We've got a question from Junie Cortez. I live in a city with an extreme shortage of industrial space. I've heard positives about opportunity, but also negatives about too much developing to fill the void. Is there a such thing as overdevelopment when it comes to industrial? There always seems to be a need for industrial space?

Speaker 1 (11m 41s): Yeah, it's a great question and an observation about the state of the market right now. It's interesting because industrial's actually been almost the opposite of what offices going through right now, where offices has some challenges industrial, the challenges is there isn't enough inventory. The co rate of that, and I do see this being a big problem at some point down the road, is that developers do tend to overbuild. It's a long cycle from identifying land to going through the permitting process to actually completing the project.

That's a long cycle. And developers often see signals of aggressive rent growth and low vacancy, and they see those signals as a, as a signal to build and look at a market like Dallas, which at one point they had 70, 75 million square feet worth of industrial properties under development at one point in time. It's a staggering amount of industrial property, but that, that's a medium-sized market, that's their entire industrial inventory. And Dallas was building that at one point in time. So I, I think that there is a warning sign that that could be a problem down the road is that we will continue to build too much.

The interesting thing is that might be somewhat offset by the fact that interest rates have caused new developments to actually stall out. So it would've been all the development that got underway in 20 20 21, even early 2022, that's underway. And it's very hard to hit the brakes when you're, when you're in motion already. But that new development, the developer that's sitting on a hundred acres that was gonna do an industrial park, they might just say, well, you know what ca cost of capital's too high right now. Let's actually just sit and wait and see what happens next year.

So it's interesting, we'll see a lot of new inventory hit the market this year. What's gonna happen next year, because there'll be that lag from developers po hitting the pause button right now until it actually comes to fruition. I suspect that we will probably see an oversupply at some point in the next year or so, followed by potentially an undersupply. And just real quick on some stats as well, the national vacancy rate in the US it's 4.2% for industrial, that's nationwide. You start looking at some of the really hot markets like the port markets, California, New York, New Jersey, even Vancouver.

These markets are sub 2% vacancy. In some cases they're sub 1% vacancy where there's no inventory at all. So those markets have a lot of problems and they can't even necessarily add any more inventory because there's land constraints on it. So there's, there's a rebalancing going on at play right now where companies are looking more inland looking to markets where there is cheaper lease rates, more inventory available. But to the, to the question that was brought up, I think it's a fantastic observation is that developers and just the real estate community as a whole, we always do this to ourselves where we always overbuild when the market's really hot.

And then it takes like the, you you had mentioned as well is it's a cycle. So it has to work its way through the cycle where you're gonna have years of really high positive absorption followed by years of negative absorption. And that's the cycle that we're all in right now, industrial's at the top. But I I think that there's reasons to believe that at some point down the road that will have to cycle back and and regress to the mean.

Speaker 2 (14m 53s): Yeah, I mean it, it, it's been very clear to me for years. I mean, I've been telling clients for probably the past four or five years, if you can build flex industrial space, you know, small office with, with some warehouse on it, it'll be leased up before you deliver it. And, and I just know that anecdotally from the calls that we receive on a daily basis from tenants looking for that kind of space, what data points or market indicators do you all follow to determine whether or not a development like that should go on? Like if you're talking to a client and they call you and say, you know, Hey Adam, I wanna build some retail space.

Is this market good? Or Chad Industrial Jesse wanna do an office building? What are you guys looking at to tell them like, hey, the data, not just anecdotally, but like the data says this is actually a good move for you to make,

Speaker 1 (15m 41s): Happy to tee that off and then Adam, you can jump in as well. I would look at it on a very micro level. So there's statistics out there, like the vacancy rate for us industrial 4.2%, that's, that's a good sign, but every market is gonna be different and have its own nuances. So I think you really have to go on a case by case basis as well as even just narrowing in on exactly what you're planning. Because industrial, and, and you've mentioned this numerous times as well, Tyler, it's fairly broad. So that can include manufacturing properties, warehouses, distribution centers, all the way down to the flex industrial like little contractor base or even self-storage really.

So I, I would say it's, it really becomes an exercise in identifying the signals in your specific market. I I really comparing that proverbial apples to apples in terms of if you're building a 30,000 square foot flex property and they're gonna be 2000 square foot bays, what's the market for 2000 square foot bays? Not what's the vacancy rate across North America? You've really gotta get granular and, and identify exactly what you're building, exactly what you're gonna be competing against. And that just comes down to a a, a financial feasibility model.

What's it gonna cost you to build, what are your timelines? What are your projected rents or if you're gonna sell them, what's your sale price? And then working backwards through to determine it. But I, I think that local expertise is imperative when you're, when you're developing anything, it's great to have that global or North America or Canada or US wide perspective, but you really gotta dig in and fully understand your local market and exactly what you're building.

Speaker 4 (17m 17s): Yeah, it sounds like, yeah, I don't wanna repeat what you just said. I mean, retail is like that times 10, you know, retail is so specific and so micro. I mean frankly you can, you can take one wrong turn on one street and have one storefront 30 yards from another storefront and the, and the rent is different. So the the big challenge that, that we're running into right now is, is supply good supply. Like there, there's certainly no shortage of, of bad kind of backwater retail, but the, the available retail that is well-built, well positioned with the right demographics is, is very, very hard to find.

And frankly, going back to the re retail apocalypse kind of narrative from, what is that now, four years ago, five years ago, nobody, it'd be like building a spec office building in a, in a center city right now, five years ago, like nobody was building new retail. And now that it has come back with a vengeance there, there's almost no supply and there's almost no supply on good urban kind of main street, high street retail. But there's also like, I've got clients like Ace hardware that all they want is a, a closed down Tuesday morning or party city out in the suburbs.

You can't even find that. You add on top of that, the, the cost to build a new kind of power center or retail center is, is astronomical at the moment and and hard to get approved that, you know, we're, we're seeing pretty, pretty strenuous supply constraints in a market like Charlotte. That's a market kind of like Nashville that, you know, people really want to infiltrate. So honestly that that's our, that's our big issue right now is just well located supply.

Speaker 2 (19m 3s): Yeah, I mean we're, we're seeing that left and right. It's, it's tough to get anything done in Nashville because I mean, we're seeing more permits being pulled in neighborhoods today than you were seeing in an entire year back in 2013. And you know, the city's struggling just to keep up with that. And so it's almost this, you know, despite the, the city being difficult to deal with, despite interest rates going up despite inflation and, and bank uncertainty being where it is, people are still doing everything they can to push these projects across the line.

And I think that that, that we're at a, a really interesting inflection point that I want everybody to kind of chime in on. I mean, you know, I, I think that we're in a recession, I think it's kind of hard to argue that, especially when you look at all the data, but we're still seeing a ton of cash that is flowing into the right deals and things like that. So how are y'all seeing the interest rates, inflation, you know, winds pulling back on a lot of of deals, how are y'all seeing that kind of impact acquisitions or, or dispositions in your markets?

Speaker 3 (20m 9s): Yeah, I'll, I'll kick it off for us. I mean, just on the micro level, like you said, the brokers kind of are the frontline and we we're kind of boots on the ground in terms of what's going on for us, it's on the leasing front, it's all about velocity, right? Whether it's a a good market, bad market, there's, you know, we can be busy in, in both of them, but when it comes to how, you know, you know, you guys in the US I think you redefined the recession three times in the last four years in the news. Yeah, no kidding, don don't know. I don't know what this administration calls a a, a recession anymore, but I mean, if you take the two, you know, whatever it was, two quarters of negative growth, then yeah, it's easy to say this is a recession.

We're, we're in a kind of a unique situation both in Canada and the US where our employment numbers are relatively good, but we do have a lot of inflation and, and we're trying to combat that with, with these interest rates and the monetary policy. But, you know, despite that, my dad will still, you know, despite the dad of in inflation coming down, my dad, excuse me, inflation coming dad, my dad will still tell you that things are getting more expensive at the grocery store. So for us it's, it's such a big topic that we try to just focus on the things that we can control.

And that's, you know, whether that's buying assets and figuring out what the philosophy is of your investors. If it's just to move cash into safer investments, that's one thing. If it's the cash flow or if the risk appetite's larger than we would push them in something else, you know, maybe even after this. I'm, I'm curious to get the take from you industrial folks on what the financing is looking like right now with your assets. Because at least for us, we're seeing the cap rates just getting still more and more compressed when it comes to industrial, but the interest rates keep going up.

So, you know, my, I'm curious to, to hear from you guys if, if investors are just putting larger down payments or if they're, if they're okay taking, you know, less cash flow. Yeah. Even though, you know, some of the rates have gone up, I still feel like there's these kind of push and pull factors, but I'll leave it there Ty.

Speaker 2 (22m 8s): Yeah, Chad, you wanna weigh in on that? I mean, how, how are people getting deals done? 'cause I I mean we're still seeing that in the triple net space, right? Like cap rates are still seemingly compressing on the triple net retail investment side and it's people they're still moving.

Speaker 1 (22m 22s): Yeah, I I think ultimately cash just can't sit idle forever. So I think a lot of investors are saying, do we deploy money into a project and hope to get some upside down the road, either on renewals or trying to add value to the property somehow we're, we are seeing some upward pressure still on cap rates just as a result of interest rates going up, but we can't see interest rates rise at the fastest pace in decades and not see some pressure on cap rates going up. So it, it, it is coming and as a result of that, there deal volumes down significantly and like across the world, there's just not as many deals happening as there was when we were in that ultra low interest rate environment.

So I, I think that there's, there's a few different seller mentalities at play right now on the industrial side. I can't speak for the retailer office, but on the industrial side, if an owner has really good pro tenants and it's a good property that they can see themselves holding for a long term and they were, and they had to sell right now they're selling less than they would've sold last year. All things being equal, there are some properties that there still could be some cap rate compression or perhaps there's an owner user opportunity there to, to sell it. But all things being equal properties are worth less now than they were last year.

That's just the economic reality of interest rates going up. So the sellers at play, one property that my partners and I bought last year was a good example, institutional seller. They had a sunset clause in their, in their partnership agreement where they had to sell after 10 years and they ended up selling for 15 to 16% lower than what it would've been prior. So we were able to get a pretty good deal on that. That's just the reality, at least in outside of the ultra hot markets, I'd consider Toronto an ultra hot market, some of the big port markets in there as well.

But talking more about like the balance of industrial, there's just downward pressure on pricing. So the sellers that have to sell, there's typically a reason why either they're afraid of an upcoming vacancy, they're, they're worried about the economy, they're worried that interest rates are gonna keep rising, that that's almost a forced sales situation. Whereas the smart institutional sophisticated money, they're, they're in no reason to sell right now. If anything, they're looking for opportunities to buy. So I, I see this being a very tough year in terms of deal volume because I just think it's very hard to get a deal to pencil right now.

And I had this conversation with someone the other day, is that if, if we look back and, and you guys we're all roughly the same vintage here for financing properties, it used to be pretty straightforward. You get a certain loan to value ratio as long as there is cashflow coming in, the underwriting isn't overly complex. Now what we're seeing is that debt service coverage ratio, that metric is actually be gaining in popularity and that's being pushed out a lot more, especially for buyer or owners that have debt renewing.

So if they have debt coming up and now they've got interest rates that have gone up, so their debt coverage has increased, but their rent hasn't gone up at the same level. Now their D S C R is skewed. So I wouldn't be surprised if we actually see some cash in refinancing conversation starting to happen so that borrowers can get that ratio in, in line with what their bank requirements are. And I think that puts all sorts of pressure on, on the economy because these owners don't have money to invest back in the property.

They don't have money to invest in more is more properties. So I, I see that this interest rate problem isn't going to fully manifest for still another year or two, perhaps longer as as these debts start coming up for renewal, new owners wanna start buying property. I, it it's, it's a tumultuous market. Like it's, it, there's still a lot of money on the sidelines, there's still a lot of capital chase in a very few amount of properties, but I think it's gonna be hard getting deals to pencil this year.

Speaker 4 (26m 19s): Yeah, the two things that I'm seeing that make me nervous, one you just mentioned, I feel like we're in this little purgatory type situation where things should reset because of, because of the debt market, but sellers haven't, especially non-institutional nons savvy sellers haven't realized that the market has been reset. The second thing that makes me nervous and, and without naming names, I've got a lot of large scale either office or multifamily developments with large retail components that I, I just, I can't see getting out of the ground, right?

How do you start now that, you know, construction costs have maybe leveled but certainly, certainly haven't come down and your debt has changed by, you know, a, a massive, massive amount. A lot of those new developments just aren't gonna pencil even if it's incredible location, even if you have pre-leasing, like the, the deals just don't make sense. So those two things to, to your point on deal volume and on kind of the letting, the, letting the dust settle. Yeah. It's hard to see that happen in this year or even next year.

Speaker 2 (27m 28s): Yeah, it's funny, I mean with the, with the deal cycle of commercial real estate projects, you know, they, they started raising interest rates, we back in September of last year and we cont we carried on as if everything was normal up until, I swear like last week was when it just hit me. I just kept getting phone calls from, you know, this partner and that investor and, and you know, this other guy that, you know, i I meet with every week at, you know, everybody's saying, you know, winders are pulling back, nobody's doing land loans anymore.

Nobody's doing acquisition and and development loans unless you've got, you know, a $200 million balance sheet. At which point yeah of course those guys are gonna be getting deals done 'cause the banks are scrambling to give them money. I mean, are y'all seeing this disparity between the movers in your markets right now? Like are the, are the little guys getting kicked out right now and the big guys who are still flush with billions of dollars in cash, you know, like the BlackRocks of the world? Are they still moving forward or is it kind of just across the board even?

Speaker 3 (28m 31s): I think on the don don't know if it's the little guys, big guys probably has a component to do with that in terms of being able to capitalize more efficiently. But I think it's a lot of it comes down to the investment style where, you know, people investing with a lot of open debt rather than, you know, locked in fixed debt. And some of that, you know, I've had this debate at work before where, you know, one is seen as this very prudent smart investor and the other ones seen very silly just because we're in this en environment. But you know, for, to say that is to kind of just assume that you knew that the last year would unfold the way it did.

Now I think we, we all should have been cognizant about of the fact that one, two, 3% interest rates were something that every investor should have known could not last. And you, you know, you could do a million sensitivity analysis Whether, you would've predicted what happened did. But there were a lot of very good investors that just, you know, say they were doing value add during this this time period. It's probably the worst time period to do value add in the last 10, 15 years. 'cause you kind of got caught here. So you, you made a really good point though of what we don't hear very often is cash in refinance.

And I think we're, I think prudent investors, you know, not necessarily the ones that don't necessarily have to do it but will do it to, to better capitalize and just have a more healthy balance sheet, I think are are gonna be the ones that are in a better position. whether that means talking to investors and doing cash calls, I think, you know, cash call could be a very big alarm bell and you should, you know, a little be be a little bit worried or it could be, you know, prudent management that's saying, we want to weather the storm and this is what we're gonna use the money for and this is, you know, this is the way we see a path out of this.

So I think it's interesting because a lot of people, you know, you know what a cash up refinance is, but you don't hear cash in very often.

Speaker 2 (30m 22s): Yeah, I mean that, that rung with me too, Chad. 'cause it made me think like, man, maybe we should do a, a whole segment or a whole video on, on the cash in refinance. 'cause you know, I hadn't even thought of that term in that way before, but it does make sense. I think we're gonna see a ton of capital calls and not necessarily because the, the deal sponsors aren't doing the right thing. It's because they are doing the right thing that they're having capital calls, even though investors are gonna get scared by that, I mean every deal that we're looking at now we're underwriting with 30 to 35% equity in.

It's just, it is what it is and we would rather be safe right now than not. We've got a, we've got a question from ms. When do you guys think we'll see the interest rate start to decline? What are y'all's thoughts on that? Me,

Speaker 1 (31m 10s): Let me,

Speaker 2 (31m 10s): Let's get out our crystal balls. Yeah, exactly. Who is,

Speaker 1 (31m 14s): I'm probably the most cynical on this because I, I don't think the feds have any idea what they're doing. I I think that this has been a train wreck of biblical proportion since yeah, day one where look, we, we printed an unprecedented amount of money, like crazy amounts of money and for them to not think that inflation would be beyond transitory is, is a failing of like it's epic fail. Like I can't think of anybody that's failed at their job more than the feds printing that much money and not expecting inflation and then to leave that until we were clear of the pandemic and then force these aggressive interest rates on us.

That's one part of my cynicism is just how poor they're at doing their jobs. The second part is I don't think these inflation numbers are telling the real story. I I think that these numbers are too easy to pull the strings on to manipulate at will. And I think that there's probably some political pressure, there's probably some, clearly some economic pressure that's having these numbers come in a lot more rosy when they, when when, when they actually are like, I think we saw 3%, is that what it was, 3.1% or something that this last month I, I just don't see how inflation is only 3% year over year.

When I know how much more expensive everything that I'm paying for outta my pocket, it's up more than 3%. So I just don't see how those numbers are true other than that basket of goods or however, there's so many ways to manipulate that C p I number that I'm skeptical that, that it's actually a true reflection of real inflation. So that's a long-winded way of me saying that I, I don't a trust that they trust the feds to do their job properly and b, to actually report on the true number. But I do think that if they are serious about trying to control inflation, the inflation numbers are not accurate in my humble opinion.

So I think that we're gonna see these, I shouldn't even say elevated because you made a point earlier about these are like historically still very low over the last 40 years, but I think we're gonna see these similar types of interest rates hovering within 50 to a hundred basis points. Either way I think we're gonna see that for the foreseeable future 1, 2, 3 years.

Speaker 4 (33m 26s): Yeah, and I'm contrarian about this. Your last point is something I think about a lot. I mean these, these were artificially low interest rates, right? These are subsidized BSS rates that everybody kind of got drunk on and the thought that we're gonna see more, you know, two and a half percent rates in the next couple years and that's like some kind of panacea. I, I think I don't think makes a lot of sense. What scares me a lot more is that a lot of these banks are locked in with this very low interest rate environment on long-term deals and it's just kind of artificially affecting our current environment.

It a lot of banks that I talk to, if it's not 40%, 45% down it, it's pencils down for them. Whether it's, whether it's, you know, an institutional user or you know, me and my uncle trying to buy something. you know, so that makes me, I I think we're crazy to just think that interest rates are all of a sudden gonna bottom out again and if they do, what in God's name has happened for them to, for them to push rates that low. So I think we need to figure out how to figure how to make deals happen with these rates or, or slightly higher for the foreseeable future.

Speaker 3 (34m 36s): Yeah, I think I, I like the way you put that in terms of like the, we've been on a bit of a high and this idea that we're now taking our medicine, you can't, can't imagine that we're not gonna have a hangover after that type of the amount of money printing. And to your point with who owes what the bank, I love the quote that, you know, if you owe the bank a hundred thousand dollars, that's a you problem. If you owe the bank a hundred million, that's a bank problem. And I think banks now, at least we're seeing it in Canada, that a lot of these loans are being punted one year I owe extensions.

They're, they're trying to get their bearings as to structure so that their balance sheets are looking somewhat reasonable when it comes to the interest rates. I I actually think I I might be a little bit different here. I I actually think we're at or close to a point, and you can fact check me in a year from now Tyler, so you should just show me how I was completely wrong. But I do feel like we're, we're within striking distance of where it will, will kind of have a balance of interest rates. To me, the five, six, you know, 7% range to me seems like a, an area where we could probably even, you know, in Canada we increased again recently, which was somewhat not unexpected.

But I do think that at this point this is a much more healthy environment from a lending perspective. Obviously we all agree that the one two, you know, 3% that was kind of la la land. I mean my first mortgage I, I got personally was 2000, was it 2008 or 2009? And it was 5.5%. And to me, you know, what clicked for me was when my buddy, he's just going to get a lease right now for a car and he's like, God, do you believe the interest rate? I can't remember what it was, but I realized that I have an interest rate on my lease that's 0%.

And I was like, yeah, we were living in la la land for about 10 years.

Speaker 2 (36m 18s): That's crazy. Yeah. The, the first value add office investment we ever did, we got an interest rate of 5.25% and we were like high fiving each other in the office. We couldn't believe that we got such a good deal. And I think that that's the, that's the interesting thing that I think is gonna get a lot of investors in trouble that bought properties over the last, you know, two, three years. They looked at the commercial real estate market with a 12 month lens and instead of a a 10 or 20 year lens and you know, we, we saw some investors get adjustable rate mortgages, which is the worst possible thing that you could have done in 21 and 22.

And you know, the, you know, as we like to say here in the south, the cows are coming home. It's, it's gonna be painful. I mean did you guys, did you guys see that story about that multifamily guy outta Houston, Texas? Yeah,

Speaker 3 (37m 8s): That was the, the huge delinquency, right?

Speaker 2 (37m 10s): Yeah, I mean 3,200 units that he bought in 2021 on an adjustable rate mortgage. His, his interest rate went from like three and a half percent to 8% in like less than 12 months. And I think he had $230 million of debt on that property and just gave it back to the bank. Yeah, I think you're gonna see a lot more of that. But you know, I I I agree, i i I wish that I had a crystal ball. 'cause if so I would make the, the four of us, the wealthiest commercial real estate owners in the world, we'd all just be buying deals together and timing everything perfectly.

But I I think we're gonna be riding this out for at least 12 to 24 months. I, I don't see, I'm, I'm gonna chat on this. I don't see how you can print that much money and not expect there to be consequences. But I will say there's a pretty interesting pro tip to take out of that anytime you see the government printing money, buy real estate and sell it within 24 months, you can't lose.

Speaker 1 (38m 7s): Yeah,

Speaker 2 (38m 7s): You can't lose. Well guys, what, real quick, I want everybody to just give some advice for investors going out into this market. you know, what should they be keeping an eye on? How should they be approaching their investment portfolio over the next 12, 24, 36 months?

Speaker 1 (38m 27s): Happy to, happy to start again. I, I think the key right now is just stay afloat. It's, there's, this is the bottom of the cycle. I think I, I don't think it gets terribly much worse than this, but like you Tyler, I don't have a crystal ball, so perhaps it does, but I think you just stay afloat. That's the same mentality that my partners and I have. It's the same advice that I would give to clients is that unless you were forced to sell right now, I think you're better off just waiting for waiting, waiting until something changes down the road.

I think that there's still good market fundamentals, whether we are in a recession, whether we're not in a recession. I think that the market is, is still gonna keep chugging along. And I'm, I'm a long-term holder myself. It's I, everything that I think of, everything that I plan, I'm trying to think five to 10 to 20 years out. So these short market aberrations, while they're painful as you're going through them, if you keep that long-term perspective and you can get property that you might not have otherwise been able to get in an ultra hot market, but if you can pick up a really good property that you can see yourself holding for a good period of time at the right price, that could be an awesome opportunity to pick something up.

But just don't rush into it. It's, it's a long-term game. The most successful investors that, that I know that I try to emulate myself, they have that long-term horizon. So I, I tend to look at this as this could be a market aberration in, in 20 years we might look back and we might remember this as being a really tough time, but given enough time and given enough real runway for real estate, there's opportunities to make a lot of money as an investor. So that'd be kinda my message is be opportunistic, but also be patient and have that long-term outlook.

Speaker 4 (40m 7s): Yeah, I would even double down on, on that. I'm seeing more deals today. Like we're, we're literally, we have three deals that we're doing kind of personal balance sheet deals right now that a year ago would never have presented, would never have presented because they would've gotten snapped up. They would've gone at such insane cap rates that I would've never even thought about investing in it. And I, I'm, I, I'm taking this as an opportunity now, obviously I can't play with the, with the BlackRocks of the world still, but I mean, I'm seeing well located interesting deals that are just squirrely enough to, to keep a, a large institution away from doing it at the moment.

So I'm honestly as excited on the investment side as I have been in years because I've been watching, I I work for institutions for a living, right? And they pay my bills and I love 'em to death, but, but they make it really hard for individuals to buy. And this is the first time I've been excited about kind of expanding my personal balance sheet in, in a little while, especially in a market like Charlotte, which you guys were talking about, Toronto and, and Nashville. I mean, Charlotte is not an easy place to play for a small investor right now. So I'm, I'm as excited now as I've been in a while.

Speaker 1 (41m 23s): Hmm.

Speaker 3 (41m 24s): Yeah, I think for myself, very similar to the other ones, you know, whatever the Warren Buffet quote is, we're, we're entering a time now where people are fearful. If not, we're already in that time. And that's really where you gotta keep your eyes peeled for deals. It's, you can never time that you know, the falling knife, but we know that we're entering into a trough at lower end of the market cycle. And this is where you really gotta kind of be ready to put, put your money working and really underwrite deals. And you know, before it was, we saw it was somewhat easier to underwrite properties.

Now it's really gonna be the guys that roll up their sleeves and can look at the deals. And then the last thing I'll say is, to your point, Tyler, when you're talking about putting 35, 40% down on properties, you know, five years ago somebody would said, you know, you're leaving so much money on the table, there could be. So, you know, your returns are, you know, you're giving up that for what you could tell your LPs is your higher i i r R. What I would say is, if you can find deals right now, don't be afraid to put more down. If it means that you're underwriting them more conservatively, you can kind of sleep at night and as long as they're good deals, you know, they're good deals, Whether, you lever them to the hilt or Whether, you are more conservative with your leverage.

Speaker 2 (42m 32s): Yeah, I think you guys are all exactly right. I mean, it's gonna be the best buying opportunity that we've had in the last 10 years. I think that, you know, commercial real estate iss a long, long-term game. So if you can figure out it out today, you know, you can always refinance in three years when interest rates come down. But, you know, is it worth missing out on that opportunity because interest rates are a little bit higher than they were. I, I think not So solid advice. Guys, appreciate y'all coming on today. This was awesome getting to do this with you all. We're gonna have to do it again here soon.

Chad Jesse Adam, appreciate y'all. I'm gonna leave links for their information in the show notes. If you guys wanna go follow them. Highly recommend checking them out. They all have their own podcasts, their own shows, and just awesome guys to follow and we will see y'all next time. Thanks

Speaker 5 (43m 20s): Holly.

Speaker 2 (43m 22s): Biz Now's upcoming Elevate Conference is taking place this August 16th through 18th in Nashville and will convene development and investment analysts, associates, and other rising commercial real estate professionals from across the nation. Elevate will go above and beyond your average event. Attendees will learn critical skills and build career lasting relationships to grow professionally and personally. Plus hear from industry titans, including Willie Walker, Gary Rappaport, and Simon Ziff. Tickets are extremely limited, so don't miss out and apply [email protected].

Speaker 3 (43m 54s): Thank you so much for listening to Working Capital, The Real, Estate Podcast. I'm your host, Jesse Fragale. If you like the episode, head on to iTunes and leave us a five star review and share on social media. It really helps us out. If you have any questions, feel free to reach out to me on Instagram. Jesse Fragale, F R A G A L E. Have a good one. Take care.