Archives for July 2023

Mobile Homes Affordable Housing Solution with Franco Perez – CRE PN #416

Franco Perez 0:00

A lot of these metro areas people don’t actually know that these mobile home parks are around like in the Santa Clara County, we have about 58 parks. And they’re in key areas like right across the street from a Google Campus and other ones in this Samsung right next to Samsung headquarters. And these were built in the 70s meant for the working like farmers or working people. Now they were built to be temporary. Now why cannot we convert these old single Why 1970 homes, their average about 700 square feet. So we now what we’re doing is we’re converting these homes into something massive a 1600 square foot, three bedroom, two bath that looks just like a new development single family home today. Right interior looks beautiful. We have 12 foot flat, high ceilings, and really luxurious homes. And that’s really been our mission is to break these stigmas and myths around mobile homes by making them beautiful and making them more modern, because it really helps advance people to get out of that rat race and we want to break those myths as best we can.

Announcer 1:09

Welcome to CRE PN Radio for influential commercial real estate professionals who work with investors buyers and sellers of commercial real estate coast to coast whether you’re an investor, broker, lender, property manager, attorney or accountant we are here to learn from the experts.

J Darrin Gross 1:28

Welcome to Commercial Real Estate Pro Networks CRE PN Radio. Thanks for joining us. My name is J Darrin Gross. This is the podcast focused on commercial real estate and investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals who provide their experience in insight to help you grow your real estate portfolio.

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Today, my guest is Franco Perez, Franco grew up in a family that experienced unstable housing. Today, Franco is on a mission to create affordable housing in Silicon Valley. And in just a minute, we’re going to speak with Franco about how mobile homes are the easy answer to the housing crisis.

But first, a quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do to help us out. You can like share and subscribe. And as always, we encourage you to leave a comment, we’d love to hear from our listeners. Also, if you want to see how handsome Our guests are, be sure to check out our YouTube channel. You can find us on YouTube at commercial real estate pro network. And while you’re there, please subscribe. With that, I want to welcome my guest, Franco Perez, welcome to CRE PN Radio.

Franco Perez 3:13

Thanks so much for having me. Darrin.

J Darrin Gross 3:16

I’m looking forward to our conversation today. But before we get started, if you could take just a minute and share with the listeners a little bit about your background.

Franco Perez 3:26

Yeah, I guess one thing is I grew up in the Philippines at a young age and then moved over here with immigrant parents. And it’s me my younger sister, and my parents that moved to the Silicon Valley, San Jose, California specifically. From that, I was kind of put in a weird situation where my dad was the main breadwinner, they had a divorce my dad left. And immediately I was put in a situation where I had to survive and, and pay for housing and support my younger sister and my mom to about 1718 years old. And from that was one of the hardest times of my life. And I remember at the end of every single month trying to just gather as much money as I could to just pay my rent to the landlord to the to the homeowner. And I remember reflecting on how difficult that was and why is it this way. I feel like we’re good people. I’m a good person. But it’s so difficult for us to just survive in this area. Right and having gone through that experience. I later became an agent did real estate stuff for a while, did a good job at that and then really found out that I didn’t love being a real estate agent to the industry kind of is geared towards helping the richest people you can help find the most expensive real estate that they can and that’s really how you progress in that industry. However, I wanted to find something that was really, I wanted to build something that was going to benefit people that were in my shoes that are currently going through that struggle of that rat race that are currently maybe having that same pain of trying to pay for rent just to survive, and how can I build something that can help make their life just a little bit easier, right, and, and so I went along, trying to do government work, didn’t like that route. And then I came across mobile homes, and realized that it’s such a misunderstood asset class, there’s a lot of people that are able to get out of that rental rat race, and then get into these homes, then they’re able to kind of get a lot of benefits of homeownership to then few to then in the future, after three to five years, then be able to purchase single family, because in San Jose, it’s like, you rent a one bedroom, one bath for $3,000 a month, or you buy a median price home for $1.7 million. Right? And it’s so hard to imagine you can buy expensive single family home, when you’re paying rent all the time, and there’s no stepping stone in between, we’ve found that mobile homes are that perfect stepping stone in between. And since then we’ve worked on guiding people to get out of renting and then starting their wealth journey. But yeah, that’s kind of how we got started. And I got hooked and love helping the clients that we help. And then both on the on the personal end, and then also on the investor end as well.

J Darrin Gross 6:37

Awesome. Well, I appreciate you sharing the the background story there. And and kind of what, you know how you got to where you are. So curious, you mentioned growing up? You know, you’re kind of that the housing struggle? Did you ever live in mobile home housing, was that ever an option for you?

Franco Perez 6:55

Personally, I didn’t, I was always renting we were renting for a while. And then you know, we got to a point to where I was able to make enough money as an agent to be able to purchase. But in those shoes, in that phase of my life, it’s one of those things that I wish we were taught more in school values of where our money goes, the importance of ownership and how it’s not only our career, that we should be worried about rain, and it is one of those things that I personally feel if I didn’t know about it, my life would have been able to progress a lot easier. You know?

J Darrin Gross 7:37

Yeah, no, I think there’s there’s a lot of lessons like that in life. And and, you know, if I’d only known or, or had a lot of its seats, what we don’t know, like you said that nobody introduced it to you or it didn’t appear to be an option kind of thing. So I get it. So tell me about your current situation. You mentioned that the mobile homes, are you working to invest in mobile home parks? Are you working to find, you know, homes for individuals to buy? Or who tell me a little bit about how you’re set up?

Franco Perez 8:14

Yeah, so I mean, it really started with just doing the later part being an agent to help people get into purchasing these mobile homes selling mobile homes. What I’ve found is that, because of these bad stigmas and these bad myths around mobile homes, there’s really bad service around the whole mobile home industry. So unfortunately, part of the world of the real estate agent, we’re all this, because a lot of agents also don’t know about it, what’s happening is these people that could barely qualify for single family homes are now being ignored, right? A lot of the advice that these people are getting is like, hey, sorry, you don’t make enough or you don’t have enough as a downpayment, save up more, make more, and then later, we can talk, and then they just have to go back into that rent cycle. Now with us, we’re able to create a solution that’s actually going to benefit them to get that level ahead, right. So we give advices as best as we can to the consumer, on how they can have a pathway to be able to get to that ownership. And it’s through and is a perfect tool to have the mobile home side of it. So we did that for a long time. And then we got into why are these you know, in a lot of these metro areas, people don’t actually know that these mobile home parks are around like in the Santa Clara County, we have about 58 parks, and they’re in key areas like right across the street from the Google campus and other ones in the Samsung right next to Samsung headquarters. And these were built in the 70s meant for the working like farmers are working people. Now they were built to be temporary. Now why cannot we convert these old single Why 1970 homes, their average about 700 square feet. So we now what we’re doing As we’re converting these homes into something massive a 1600 square foot, three bedroom, two bath, that looks just like a new development single family home today, right interior looks beautiful. We have 12 foot flat, high ceilings, and really luxurious homes. And that’s really been our mission is to break these stigmas and myths around mobile homes, by making them beautiful and making them more modern. Because it really helps advance people to get out of that rat race, and we want to break those myths as best we can.

J Darrin Gross 10:35

Got it. So just to make sure I understand, are you acting in as an agent to help people that are buying the mobile homes? Or are you acting as a park? Do you are you investing in parks and, and kind of providing, you know the opportunity of the newer mobile homes and selling the mobile home, so I’m just gonna die and make sure and shiny

Franco Perez 10:58

Yeah, it’s actually a mix of both. So we try to be the all around anything for mobile homes. So we help with the agent side, we have several agents on our team throughout San Jose, la San Diego. And then also, we kind of have the construction development side where we help people that own one of these old mobile homes, they want to replace that one with a new bigger one. That’s the new big part of our business. Now, so we help that for direct to consumer. And then also we help park owners, these people that own these mobile home parks, we help them replace their old units and develop their parks as well. And so that’s hopefully that answered the question.

J Darrin Gross 11:37

Got it? No, I just I was trying to understand if you were actually if you had an equity stake in a park, or if it was more of the the the units that you were transacting? And if I understand right, so basically, it’s more on the focus of the units themselves, for the individual unit owners in in, I guess consult with park owners on how they can maximize or improve their park.

Franco Perez 12:02

Exactly that.

J Darrin Gross 12:04

Got it. Got it. So you mentioned kind of the stigma, you know, the way way people have kind of, I guess, probably more ignored parks. You know, I think, you know, growing up, I can remember driving past them. And they a lot of them look more like something that you can actually tow behind a vehicle. Whereas now I think they’re more, you know, double wide, or I don’t know if there’s a triple wide, but I mean, there’s their significant, significantly larger properties and what they once were. Tell me about some of the transition. So take me through an example of somebody, an individual. And then also, tell me a little bit about how you work with a park owner. If they’ve got old, tired properties, how do you go about making her helping them transition to a newer unit and or a newer, newer look in the park? Yeah, so

Franco Perez 13:05

I’ll tell you about one of our first clients, there’s a lady that’s a teacher that lives in one of these older, like you said, looking homes might even look towball, right. So it’s about 700 square foot. This lady’s a teacher, her name is Maria, and has his home and their kids are growing. They have she has a husband and two kids. But they only have one bedroom in a small home. So for them, they have this old mobile home that’s in a key location, but they have because it’s built so long ago, it wasn’t optimized for high density housing. So we check out their lot and we see how big of a home we can fit. We essentially design a home to be able to retrofit that lot specifically to give them the maximum square footage, then design that and build that in a factory in an assembly line. assembly line fashion, right, so we build out that home in a factory. And meanwhile, we’ll be removing their old home, setting the foundation, putting the double wide in replacement to that home and turning that 700 square foot home into more than doubling the square footage. And then which also will raise the value of her future sale of the home as well. Right. So we try to make it a win win solution. Now these prices and stuff that I was mentioning might be relevant to what’s in San Jose, but in different states. These numbers could be much drastically lower. But for example for her case, her home, she spent about $250,000 to replace her old woman with a new one. But now her new her new mobile home value if she was to sell today would be about $390,000. Right. So from making that investment to replacing her old home to a new one. She now has a nicer home with higher quality standards with drywall with great H vaxis. DOMs dual pane windows and a beautiful kitchen beautiful bathroom. Not only does she have a better lifestyle, but she has more value in her home today than she if she would have stayed in now. Right. And that benefits both which will transition to the park as well. It benefits her because it beautifies her Park, I mean her beautifies her home. And then it also helps the park itself because it makes a nice home in the park owners Park and then which incentivizes others to want to have nice homes as well. Right. And now with that same concept that I just told you about Maria, we also work with park owners and do consulting for them, and how can we help replace a lot of your old units. And you know, whether you have five or 30 units of old homes, how do we help replace those at at scale to build the value of your park as well. So we typically will work with park owners to help find several different ways to raise value in their park. And then we’ll also work with park owners to create educational systems for the residents to learn that the benefits that there are benefits to upgrading their home. That way they have better tenants that are more invested. And because they both have good investments into this development, they both take care of the units, they take care of the park, and in the end, everyone’s happy.

J Darrin Gross 16:26

So a unit owner, they rent the space or their home sets correct? They rent the ground? Correct. Okay. And is there typically a lot of additional land around where the home sits? I guess I am. I’m trying to think I’ve been omitted in a park recently. But it seems like from memory. And I guess the density depends on the park. But I can remember some being pretty dense as far as the you know, the space between homes not being exactly. A lot of room there. Are you are you finding that in the parks that you’re working in that the the the ground that they have, that they’re leasing is is regularly adequate to to support a larger, significantly larger footprint?

Franco Perez 17:25

Yeah, I mean, of course, just like any real estate property, every case, every park is case by case, right? There are some parks that can only fit single wides. But the most common is really you’ll see a single wide with a pop out. And that pop out really doesn’t maximize their space much. However, in many cases, you’ll have these single wides that are like 700 square foot. And if even if they don’t have that much room, on the side of the home, they can still expand it two to three feet, but they’re the main Pro and the value add for that consumer is that they’re no longer dealing with the 1970 built 10 insulation home with a bad roof or anything like that they could we also have clients that just want the same footprint, same square footage, but a nicer home, you know, it’s still in the end can raise their value drastically as well, you know, new roof with shingles and better sub floor and insulation and just changing up the floorplan a little bit also helps for them as well.

J Darrin Gross 18:30

Sure. So how dependent is the value of the unit owners? I guess they have the opportunity to appreciate based on just their unit as opposed to you know, getting more of like a neighborhood reset. I mean, we’re more more than just you are the one that that has increased your your value. Where is it just a matter of just supply and demand?

Franco Perez 18:56

Yeah, it’s exactly that I was gonna get to that is it it is the supply and demand. One of the things that we do is we evaluate different metrics of each park. In some, you know, the common myth that we’ll get is that these homes don’t appreciate they depreciate drastically that blah, blah, blah. But that that kind of depends on the density of that city itself. It also depends on the job opportunities of that area. And it also depends on what are the alternative housing options for people in that area as well as are the rents low are the rents Hi, what is the purchase price of the homes relevant to that park area? Right so we use those as metrics to evaluate whether this park and the units are going to appreciate or not. Right so a lot of what we do is in metro areas where it makes a lot of sense. And with that, we’ll find that you know people are able to, like I mentioned to you here is like a one bedroom one bath apartment is 3000 a month and then In owning that new home, like, for example, for Maria, she’s paying 1000 a month on the space rent, and about 2200 a month on the mortgage, right, which is just a little bit more than what she would pay for a smaller apartment for rent. Now, that little bit more two thirds, guess you’re paying 1/3 of that to rent still. But two thirds of that is going towards a mortgage of something that you own, that that is part of your net worth, where you can build equity, or it has a big chance of appreciation, and you get tax benefits as well. You know, and these are, it’s at a smaller scale, you’re getting benefits of what homeowners are getting, right, which can help ease that payment, which can help build financial security for these families. And the the barrier of entry is no longer as crazy high as it is to buy a single family home, people can actually afford that small jump of payment compared to spending seven $8,000 Immediately after buying a single family home.

J Darrin Gross 21:05

Got it? So let me ask you about the park owner side of the equation. So you mentioned kind of $1,000 a month rent or the space? What’s What’s the appeal? Or what’s the kind of the conversation you have with park owner? If if I’m getting x per month in rent for the space? Does that does the rent increase? If if somebody puts a bigger home? Or? Or, you know, am I able to charge more rent? Or is it just I’m getting a better caliber of of rental units or rental owners or what’s give me some kind of what the appeal is for the owner because I would think that if just a ground lease, belong they’re getting their their monthly payments. I’m kind of curious how that conversation plays out as far as the appeal of of unless it somehow improves their bottom line or makes the I mean, I’m obviously it would it make the park more appealing if you had nicer units in it. But help me understand the park owner side of things,

Franco Perez 22:23

the advice that we get really accustomed to that area, every area and county has its own jurisdiction of rules and regulations on how on how you can raise rents and that sort of thing. So each strategy is a little bit different. The main, like you mentioned is the appeal of the park is a very valuable thing. There are cases in some times where they are able to raise the rent if if a new home development is being put normally the case is is that if there happened to be vacant lots, that’s where the park owners opportunities are to be able to charge a little bit more on the rent side to to put a new home in, right because they can’t it’s very difficult for them to attract a buyer that will pay a higher rent if it’s a very old unit, and that sort of thing. But if you actually have a newer home in your park, then and you have the opportunity to raise that rent, then in some areas that makes a lot of sense to do. So. Now, there are rent protections in many areas for residents, if they want to upgrade their home, if they want to put a bigger investment into their home to replace it. Normally it doesn’t. It isn’t to the parks benefit to raise that rent. Right. So because because they’re putting money in best investment into the park as well. But he’s strategies a little bit different on how they do that.

J Darrin Gross 23:54

You mentioned an unused space. As far as a strategy for park owners. I’m curious how often are you finding that there’s a significant amount of unused space where they can add additional units.

Franco Perez 24:11

Very often, most of these mobile home parks, it’s very difficult to build new mobile home parks nowadays, but we are working with a few. But a lot of these old mobile home parks are are built in that year I was talking about this in the 70s right and these are built in areas that weren’t high density before and before people their values was having a yard a large yard a large porch, you know a place for them to have a view and that sort of thing. But I’d say more than 80% of the time. There’s a decent amount of space for them to be able to expand their home and maximize the living square footage the interior living square footage because another thing to talk about too is these these cities in these counties they these are classified as affordable housing and they have their minimum quota that they need to have as available, affordable housing square footage in their areas, right. So that’s why this is a perfect tool. Because one, we’re benefiting the city’s quota by putting nicer bigger homes. And then also, it’s to their incentive to keep these parks the way it is to be able to create more affordable housing for that city and for that county.

J Darrin Gross 25:31

So how long have you been been working with the park owners and the individual owners in the mobile homes,

Franco Perez 25:39

Did it for about two years before I went independent, and then started my business two and a half years ago, actually. So that’s when that’s when we really, it really kind of kicked off, because it’s such a big problem that we’re coming across now as construction of affordable housing, we’re having big problems of not having enough labor not being able to build affordable cheap housing. And we’re really seeing a big shift of traditionally built homes, and how to how it’s migrating to now, homes that are being built in factories and an assembly line fashion, because it’s a better process, it’s actually better for the environment. And we’re able to produce more homes, than if we were to do stick to doing site built.

J Darrin Gross 26:27

So talking about the factory, build aspect of the mobile homes, how quickly can a development, you know, hey, from from sampling of, so you get the green light from the city, or even if you’re just doing a one off replacement, I would guess if you’re going traditional stick build, you’re probably a better part of the year to put up a home. How quickly can can an individual mobile b be, you know, put in place compared to the traditional stick stick belt?

Franco Perez 27:10

Yeah, so to do a replacement of an old one to a new one, like you mentioned, it takes about a year for traditional, but from start of the order, when we do it, we can actually have from start to finish to win, they can move in, in as little as three months. Now. That’s yeah, and that’s going to vary based on the current demand and material delays. If there’s no permit delays, and that sort of thing, but we’ve done it in as short as three months, which is quite amazing. And with that, it’s it really showcases how beautiful of a thing this is because when you look at traditionally built homes, it’s you have so many different issues, like whether it’s a weather delay, or the delays and the sort of things that can cause an issue. And one thing to keep in mind too is that the workers at these back in traditionally built homes, they have to be transported to that area to be able to do construction go back and forth, drive their, their tools and whatnot. Whereas like in these factory settings, you have a wait, what so much of a efficient process that’s really building these out in a in a safer manner and more effective manner. It’s kind of like how cars were only for the wealthy before until it was built on an assembly line, right, because they were able to pump out more at less costs. And because of that cars became something for everybody to be able to have. And that’s exactly the shift that we’re seeing in the construction industry to right right now it’s costing a lot of money to build housing. And it’s going to cost a lot more because a lot of our workforce that are actually our Gen X and older people that are retiring, and we don’t have enough Gen Z or millennials that want to be working with a hammer and doing construction. So we’re having really big issues with that. And that’s where these assembly line fashion construction in these factories are really going to be making that difference and creating an impact on how we can build affordable housing.

J Darrin Gross 29:17

So tell me a little bit about the conversation or the experience you’ve had with the local communities and their their acceptance of a mobile homes in in the community and possibly creating new parks.

Franco Perez 29:37

I’m glad you brought that up. I’m actually going to be speaking at this Congress event this month. And there’s there are a lot of issues you know, there’s a lot of misunderstandings about what these parks are Hollywood paints this picture that these mobile home parks are very slum like and very disgusting are now and for not so nice people. And that’s what We’re facing, we have a lot of these other entities that we’re working on, you know, there’s other, there’s people that don’t understand what mobile home parks are and how they benefit society. And then we have these people that are trying to close these parks down. And that’s what we’re fighting against. And that’s why we’re so passionate about showcasing how beautiful the other thing, this is not only financially, but aesthetically as well. And the quality of the people that live in these parks, they’re actually very important to, you know, these are teachers, nurses, working class people that that really make our cities feel like this, that are unfortunately going to be very displaced, if we don’t have this type of housing and this type of opportunities for the working class. And we are facing some people on the opposite side that don’t want these parks around. And that’s why and that’s part of it is because of those stigmas, but part of our motion now is trying to showcase how crazy it is for these people. And then also how beautiful these parks can actually be. Because if you actually take the time to see how nice of a park, this could these things could be. Because you see, you can have apartments or single family homes in very bad areas. And then you can have very nice apartments as well. But it’s the same as well, with mobile home parks, you have some not so nice mobile home parks, and yes, some beautiful, luxurious mobile home parks that are like a resort or a spa. Right. And these are things that I’m very passionate about protecting because of the use cases of the families that need this as housing.

J Darrin Gross 31:43

So you mentioned the kind of the the creation a lot of these parks was in the 70s. And how there’s a need to replace the the units. Is there a life expectancy of these are the factory built ones? Are they more similar to a stick built home as far as the, you know, the life expectancy, the you know, life use of one of these types of homes.

Franco Perez 32:12

The two big metrics with that is, one is the upkeep and the maintenance of that home. I have some I’ve worked with some 1960s homes that were very well maintained and taken care of very well. And then I’ve also dealt with some 15 year old homes that were not well maintained, and, and are deteriorating and that sort of thing, right. So there’s a few metrics that are kind of coming into place. But one of the new things with the homes that we’re building now, as we’re creating, and working together on these standards of how they’re being built, we’re working together with HUD and different associations, to be able to build these standards for them to withstand the same standards as any new construction being built now. So we use, we use very, you know, very strong roofs, and then two by four siding and all of these standards that are similar in new construction, we’re doing the same things to be able to build, it’s to build the homes now, but it’s tough to say how many years a home would last. Because before they really were meant to be temporary. They were really built to be like 10 to 15 years, but that’s been proven wrong because we still have so many people living in these 1970s homes. Right So

and, and the beautiful thing about these mobile homes too is it because the people living here are actually owners and invested into their homes, they’re going to take the time to put money to repair to fix to remodel their homes, right because they this is their home. So just like single family homes, you could buy an very old home that wasn’t that isn’t in great condition and you can remodel it and fix it and repair and maintain it.

J Darrin Gross 34:07

So as far as getting into mobile home, you you kind of laid out the the rent you know scenario in Silicon Valley and and the costs for a one bedroom one bath as opposed to you know, a nicer unit that your your client bought. Are there any special financing opportunities for the unit owners? Do they qualify for Fannie Freddie type loan or our our that what’s the financing like for these?

Franco Perez 34:40

Yeah, there are motions for us to work with Fannie and that sort of thing, but they don’t currently get covered by them. There are specific financing. They call them chattel loans, where they work for mobile homes and are in these parks. And then we also are working on our own fine That’s a financing company as well, where we’re helping make it easier for people to get loans for these for these mobile homes and parks as well. But typically you’ll see about a 25 year loan of that matter.

J Darrin Gross 35:19

Got it? Got it? And do the factories provide any kind of financing? Or is it? Or is it outside financing?

Franco Perez 35:28

Each state that we’re in, it’s a little bit different. But in California, there aren’t, the factories aren’t providing any financing of that matter. But, you know, it’s, it’s really finding somebody that will help and, you know, that’s why our company is very proud of what we’re doing is we’re we help create those financing connections for these buyers and for the, for the sellers as well.

J Darrin Gross 35:58

So if you were to describe a an ideal opportunity for you, what what would that look like?

Franco Perez 36:07

I’d say for me is what’s interesting is, for me, my, my big passion is really trying to create more opportunities for people that aren’t as well off, right. So the opportunity for me is to be able to protect these mobile home parks and protect these residents and create and protect their opportunities to be able to own a home. Right? What’s unfortunately happening with the real estate market is a lot of real estate is being really only benefiting the very wealthy, you know, and for me, I

because of where I came from, I’m very passionate about of creating opportunities for these, whether it’s an immigrant family, or a low income family or a teacher, we want to protect their ability to be able to have a spine and have financial freedom. And that’s really our focus in the why we’re building this company, and why we’re very advocate. We’re, why we’re advocating this type of housing as well.

J Darrin Gross 37:18

Got it. He Franco if we could, I’d like to shift gears here for a second by dam and insurance broker. And as such, I work with my clients to assess risk and determine what to do with risk. And there are three strategies that we typically consider, we first look to see if there’s a way we can avoid the risk. If that’s not an option, we look to see if there’s a way we can minimize the risk. And if we cannot avoid nor minimize the risks, then we look to see if we can transfer the risk. And we do that through an insurance policy that’s risk transfer vehicle. And as such, I like to ask my guests, if they can look at their own situation. And it could be your clients, investors, political interest rates, the market, however you would like to identify what you consider to be the biggest risk. And, again, for clarification, while I’m an insurance broker, I’m not necessarily looking for an insurance related answer. And so if you’re willing, I’d like to ask you, Franco Perez, what is the Biggest Risk?

Franco Perez 38:24

I think, for this conversation is one of the biggest things is really the advocacy and you mentioned politics. You know, what one of the big risks are people not understanding the value of these mobile home parks, and them advocating for these to be closed down or redeveloped into rentals into rental property? You know, these. That’s what I’m fighting for right now with our conversation on the Congress meeting. And that sort of thing is protecting these parks, making sure we keep affordable housing available. And that’s one of the big risks that I see because a quick government change could really change the landscape of these opportunities for so many people. And we need to protect these mobile home parks and create guidelines and policies to make sure that there’s always going to be opportunities and social mobility for the middle class to be able to, to to own assets and stuff like that as well. So that’s, to me, I’m finding is one of the biggest risks of our industry.

J Darrin Gross 39:44

Got it. Franco, where can listeners go if they’d like to learn more or connect with you?

Franco Perez 39:52

You can google us at Franco mobile homes or all of our links are on www.franko.tv There you can see how beautiful we’re building these homes. You can see how beautiful these communities look. We make a ton of funny videos and educational videos on how this is important. And yeah.

J Darrin Gross 40:14

Got it? Well, Franco Perez I can’t say thanks enough for taking the time to talk today. I’ve enjoyed it, learned a lot, and I look forward to doing it again soon.

Franco Perez 40:26

Appreciate and thanks for having me. I love what you’re doing.

J Darrin Gross 40:28

You got it. For our listeners, if you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow? That’s all we’ve got this week. Until next time, thanks for listening to commercial real estate pro networks. CRE PN Radio.

Announcer 40:51

You’re listening to CRE PN Radio for influential commercial real estate professionals. For more information on this or any of our guests like us on Facebook CRE PN Radio.

Apartments Built for Affordability with Mike Kaeding – CRE PN #416

Mike Kaeding 0:00

But the reality is today our rents are market rents. And that’s intentional. We could charge 20 to 30% less and still be profitable. But that solves housing affordability for a couple of 1000 people. Let’s that’s good. But that’s not the scale. We want to solve it at. The solve it nationwide, we really have to pour the money into building the system that builds apartments. You know, Elon Musk talks about how it’s hard to produce a car, but it is 10 to 100 to 1000 times harder to produce the system that builds that car. And that’s what we’re working on engineers, architects or our team, don’t think about how do I build the next building? They’re looking at this system and how do I tweak and change a system to make it better to produce units at scale. And then our goal in the next 10 years is to reach 192,000 units under manage it with a 60,000 unit per year pace and that kind of level. Our hope is to produce enough units in the marketplace, but supply and demand starts hitting

Announcer 1:11

J Darrin Gross 1:31

Welcome to commercial real estate pro networks, CRE PN Radio. Thanks for joining us. My name is J Darrin Gross. This is the podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio.

Today’s interview is sponsored by Building Insurance and Risk when you invest in real estate. It pays to work with a real estate investor protection specialist to protect yourself and your investment from catastrophic loss. The experts had building insurance and risk focus on real estate investor protection. They provide you with multiple insurance coverage offers and a side by side coverage comparison. To learn more, go to Building Insurance Risk.com.

Today, my guest is Mike Kaeding. Mike is the CEO of Norhart, where they design build and rent apartments. Norhart is transforming the way apartments are built and managed by incorporating technologies and efficiencies that have revolutionized other industries. And in just a minute, we’re going to speak with Mike about how Norhart is disrupting the housing crisis.

But first, a quick reminder, if you like our show, CRE PN Radio, there are a couple of things you can do to help us out. You can like, share and subscribe. And as always, we encourage you to leave a comment. Also, if you want to see how handsome Our guests are, be sure to check out our YouTube channel. You can find us on YouTube at commercial real estate pro network. And while you’re there, please subscribe. With that, I want to welcome my guest, Mike Kaeding, welcome to CRE PN Radio.

Mike Kaeding 3:24

Yeah, thanks for having me. I’m excited to be here.

J Darrin Gross 3:27

I’m looking forward to our conversation. But before we get started, if you could take just a minute and share with the listeners a little bit about your background.

Mike Kaeding 3:36

Yeah, at a high level we designed to build and rent apartments. But really, we’re about driving down the cost of housing by really solving construction. So right now we’re already producing multifamily units at about 20 to 30% less than other developers for similar properties. We believe we can achieve a 50% reduction in cost. But imagine what that means. I mean, someday your rent could be half or your mortgage payment could be half. So at a very high level we’re trying to solve America’s housing affordability crisis.

J Darrin Gross 4:19

Well, that has if that didn’t pique the listeners interest. I don’t know what well, because when you say and especially in this environment where, you know, seems to be inflation is the the opening sentence for any kind of news. You hear or, you know, just the the increased cost everybody’s facing. I think this is going to be a great conversation. So, if I understand right, you are based in Minnesota, is that right?

Mike Kaeding 4:52

Yeah, Minnesota was born here. I grew up here raised here. Great place to have a family.

J Darrin Gross 4:59

Okay. A and is that where all of your your investments and your construction your properties are?

Mike Kaeding 5:07

Yeah, most of our properties are here in Minnesota, although we have manufacturing capacity in Wisconsin, we’re expanding now into Texas, we also are looking to expand manufacturing capacity in Mexico, and we have an inner belt 15% of our staff are international all across the world.

J Darrin Gross 5:25

And it’s a you get even incorporated the remote work for your staff as well.

Mike Kaeding 5:31

Oh, absolutely. And that’s been a really interesting experiment to how to do that. Well.

J Darrin Gross 5:37

Yeah, no, I’ve never got any secrets I’m sure everybody would love to hear. I mean, it’s, it’s interesting in that it’s expanded the opportunity for employers to find talent, you know, from from all points of the globe, as opposed to just in their local, you know, workplace. But it is a he and I think this is probably here to stay kind of a phenomenon, I’m seeing people racing back. And most of the conversations I’ve had with people about offices, or office assets would tend to support that. So unless you know something, otherwise, I think that’s probably

Mike Kaeding 6:18

it’s, it’s really interesting, because people often think you need to be in close proximity to build great relationships and a great culture. But that isn’t necessarily true. What it really comes down to is intentionality. So in a, in an environment, like an office, you’re gonna bump into people and have a little bit of international, but you can improve the international if you’ve more intentional about it. Same is true about remote. And so when we bring out a new remote person or a remote team, we spend quite a bit of time and attention intentionally working to build those relationships. It’s small things like just having coffee over zoom together, right? Connecting in different ways. You’re playing little games together, a big part of it’s finding amazing people who are just fun and engaging to interact with. And honestly, now that we’ve gone through it, some of our very best, most engaged teams are the ones that are fully remote. So we’ve we’ve seen how it can be done? Well, it’s not easy. It’s not it’s not given. But you can definitely do it.

J Darrin Gross 7:19

No, Agreed. Agreed. That’s good. So let’s talk about Nora Hart, and what you’re doing. You mentioned your in the introduction, I read that you guys you build and you you operate apartment, buildings, do you guys, are you You manage in house as well? Is it from stem to stern, or?

Mike Kaeding 7:44

Yeah, we have everything under one roof. So management, we also have development, general contracting, all the sub contracting work, we have manufacturing, we have supply chain, the whole gamut is an engineering architecture is all under one roof, what we find is that you look at this industry, and typically it’s pretty segmented, not always, but mostly, it’s pretty segmented. If construction work to produce cars, you’d have a different company installing the windshield, a different company, and side door and different company installing the wheel. And of course, you know, the wheel company would come to us and say, Hey, by the way, I had this other project, they ran late, I’m going to be late to your project, it’s just how it is. And then your line would be shut down, and they would come back and maybe two weeks, and then we’d get there. And they would be irate, they be so upset, because they can only work on one car at a time rather than a whole fleet of cars. And so the manufacturing world looks at this and says that’s crazy, we would never do that. That’s normal in the world of construction. So bringing everything under one roof starts helping a little bit with solving the affordability issues in construction.

J Darrin Gross 8:59

So in the construction side of your business, I understand like the development but are you you do the general contracting and do you also have the subs? Do you have all the trades in house or is that due to sub out for those?

Mike Kaeding 9:15

No, it’s all in house or the general contractor all the subcontractors and as far as manufacturing, we have precast concrete manufacturing we have steel wall power manufacturing where she’s spinning to a 48 acre manufacturing facility now and engineering architects are are all in house as well.

J Darrin Gross 9:37

So is the is the thesis or nor Hart’s your your plan is it to to buy or I mean build and hold forever or is there are you guys selling properties?

Mike Kaeding 9:52

Now we occasionally sell but generally we buy and hold because we really want to think about what the end customer experience says we’re trying to create a better way for residents to live, not just in the affordable for improved writing affordability, but also just in the quality of lifestyle.

J Darrin Gross 10:11

So as you start out here, how long have you been in business?

Mike Kaeding 10:19

The business has been in place for about 30 years, and I have been running it for the last decade or so.

J Darrin Gross 10:25

Okay, and is the mission always been the same?

Mike Kaeding 10:28

No, it was originally a small family business, right, my parents started it. I remember family outings where we would go to the local hardware store about a half an hour away, my brother and my myself and my mom and my dad, we’d each get two carts full of materials stacked as high as we could get it. And we can put it all in my little my dad’s little trailer, behind his fairly small car, I’m pretty sure it wasn’t entirely illegal I if things were flying off when they were driving on the highway. But we would work on building these buildings. And so that was my entire growing up was this this this construction, this building small multifamily, I mean, like four, eight units. And then I went off to college. And I wanted nothing to do with the family business. But the reason that was is that I don’t want people to think it was given to me, right. And I had to really wrestle with my own ego, not to care so much about what other people thought. And what I realized is deep down, I wanted to make some kind of meaningful, positive impact on the world. You know, my dad died at a relatively young age not long after this point. And it really reminded me how short life really is. So I don’t want to waste my life, I want to do something meaningful with that. And so that’s, that’s what we started doing. And so my dad and I worked together for the first couple of years, then, as I mentioned, he suddenly passed away unexpectedly, was really rough. And overnight, I was in charge of this business, it was getting very small all the time. But looking back, I think that was part of the magic. And the reason I say that is because it I didn’t know everything, right, I was inexperienced, I didn’t know the way things were supposed to be done entirely. And we started questioning everything. Why is it done this way? Can we do it differently? Is there a better way to approach this? We started to change things, there was no one to tell me? No. And what we started to realizing is that there is a better way we can make a change, we can actually start driving down the cost of construction. And now it’s really become clear that that is the impact I think we can have on this world, at least nationwide over the course of a lifetime.

J Darrin Gross 12:56

Now, that’s, that’s awesome. Sorry to hear about your dad, and your loss. But I think like you said, the magic in that is when you if you don’t know what you don’t know, you know, why? Why would you do it, you know, the way that it’s always been done. I mean, to have that kind of blank slate and the opportunity to really approach things from a different angle or a different way of, of in, you know, not not just have to go with the status quo kind of thing. So let me ask you, so, it sounds like your family started this business 30 years ago? How many units did you have, prior to you taking over?

Mike Kaeding 13:39

About 90 at that time?

J Darrin Gross 13:42

Okay. And I’m assuming, I don’t want to say anything. How does debt figure into your, your growth?

Mike Kaeding 13:55

So what’s interesting is our cost of construction is low enough that typically dad can cover the entire cost of construction. So if you have $100 million building, a bank loan might be 75 million, but our cost might be 70 million, which means we can actually generate cash with each building. Although the reality of the world today with rising interest rates is that it’s changed a little bit. Banks have become more skittish, the proceeds have gone down. So maybe they’re only offering 55 or 60 million today. So we’re having to pivot a little bit, but that’s kind of how debt fits in that picture.

J Darrin Gross 14:35

So you mentioned the in the beginning, your your family is building these smaller properties and that you you eventually had 9090 units. What’s What’s the sweet spot as far as your new construction, how large properties are you building?

Mike Kaeding 14:52

Are we target around 350 units per building today?

J Darrin Gross 14:57

Are buildings here going vertical then How many

Mike Kaeding 15:01

I sort of latest building is seven storeys above ground and others underground parking as well.

J Darrin Gross 15:09

Gotcha. And you’ve mentioned the affordability factor. Are your units are the market rent? Are the Harry, is it strictly? Are you going after the affordability? Are you doing any of the light, low? Low income, housing tax credit, light tech? Are you doing any of that kind of thing?

Mike Kaeding 15:32

It’s a great question. It’s a common question we get. So we talk about affordability and wanting to solve a more America’s affordability crisis. But the the reality is today, our rents are market rents. And that’s intentional. We could charge 20 to 30% less and still be profitable. But that solves housing affordability for a couple of 1000 people. Let’s that’s good. But that’s not the scale, we want to solve it at the solvent nationwide, we really have to pour the money into building the system that builds apartments. You know, Elon Musk talks about how it’s hard to produce a car, but it is 10 to 100 to 1000 times harder to produce the system that builds that car. And that’s what we’re working on engineers, architects or our team, don’t think about how do I build the next building? They’re looking at this system? And how do I tweak and change a system that make it better to produce units at scale. And then our goal in the next 10 years is to reach 192,000 units under manage it with a 60,000 unit per year pairs. And that kind of level? Our hope is to produce enough units to the marketplace, that supply and demand starts hitting, right. There’s so many units available, the prices start coming down, naturally. But here’s the magic. It’s not just for our own residents. It’s for everyone, nationwide. And that’s how you truly solve housing affordability in America.

J Darrin Gross 17:14

Couple of questions. How many? How large is your staff? You’ve got in be curious, overall. And then also, in your in your local, based on all of the different trades and hand people you have incorporated in your in your projects?

Mike Kaeding 17:35

Yeah, so we have about 250 staff members entirely right now. It’s maybe a little less than 200. That’s specifically in the realm of construction.

J Darrin Gross 17:45

Gotcha. And how did you arrive at the 350 unit size of a property to build as opposed to some of the smaller units you get he Richard originally our building.

Mike Kaeding 18:02

It’s pretty simple in that the more units that you can have on site, the nicer the amenities can be because you just have more money to spend on those amenities, which makes the property more attractive overall. Another important factor is land costs. And so we’re really good at optimizing a site for the maximum number of units imaginable. And it just lowers the cost of the land per unit. It’s just another way that we reduce costs.

J Darrin Gross 18:34

So in speaking of land, how large of a a parcel do you need for 350 units?

Mike Kaeding 18:41

I think I think our latest project is two and a half acres.

J Darrin Gross 18:47

Really two and a half acres for were 350 units. That’s That’s great.

Mike Kaeding 18:53

Yeah, it’s yeah, it’s it’s very well compacted in there.

J Darrin Gross 18:59

So let’s talk about capital. We talked a little bit about lending. Are you are you raising money? Do you do you have investors?

Mike Kaeding 19:11

Yeah, so it’s been amazing. Over the past decade, we’ve grown, we’re about $200 million valuation today. And we’ve grown all of that organically. We’ve not brought in any outside investors and we haven’t needed it. We don’t need it even going forward. But there’s that change in the debt structure, right? So the fact that the loan proceeds have gone down means that we’ve got to solve that gap somehow. One way is we can sell buildings. But this past six, nine months, we’ve actually been working on an investment platform, giving investors an opportunity to get involved for the very first time. The way it works is that it’s its account so you can put your money into earn a high rate of return and then pull that money back out when you want you can lock it up for different things. periods of time, basically, we’re kind of working to replace the banks. In some sense, we’re bringing that function in house, as well. And we’re giving investors not only the rate of return you would have earned at a bank, but also the bank’s profits, which has been really fun. We’ve been pitching investors and really enjoyed it, because the reception has been really strong.

J Darrin Gross 20:21

So in that, would your investors be more on the on the debt side of things? Or would they be an actual equity player or partner,

Mike Kaeding 20:28

I, the way it works is that Nord invest, which is the platform is a fund. And the investors are debt holders into that fund. So they get a fixed rate of return, and they get the money back then in the period of time, that fund also has equity investment that we put in as a company to protect the debt holders. So if something happens, we lose our money first before the debt holders get impacted. And then that fund in turns, invests in our different projects. So for example, if we have $100 million building, the bank loan in that building might be 55 or 60 million, no hard invest might invest maybe 20 million. And then on that particular building, we’d also have an equity stake there was kind of nice there as it is gives investors two levels of protection

J Darrin Gross 21:19

on it, and is that a new thing and that you’ve ever how many projects? Have you have you operated under this model? Where you’re where you’re raising capital?

Mike Kaeding 21:33

Yeah, it’s brand new. We are launching soon. And by the time the podcast comes out, it might actually already be launched. Okay. Yeah.

J Darrin Gross 21:43

That’s exciting in a different, different hat. One more thing you get to learn, right?

Mike Kaeding 21:49

It’s been really fun. Actually, I was always nervous about the world of investors. But now that we’ve gotten into it for the past six or nine months, it’s been actually kind of fun working with the SEC, it’s been fun talking to investors. It’s, it’s crazy as it sounds, I kind of enjoy audits as well, like I just learned something through those processes. That’s been fun.

J Darrin Gross 22:09

Well, and it sounds like the way you’ve been operating thus far, you’ve been free of all that kind of requirement. And hats off to you to be able to grow it to the to the size you you have. But it is interesting how the debt has changed. And not just the interest rate going up. But the you know, like the the percent of the project the lenders are willing to lend to. As far as the debt goes, Are you is an agent’s agency debt, or are you are you doing any longer term debt?

Mike Kaeding 22:48

Yeah, so the variety, our construction lending tends to be mid tier banks, the really big ones tend to not offer the best terms, the smaller banks are just not big enough for what we need to do. So it’s a middle tier bank, usually two or three of them, we bring together for one of our construction lenders. For the after we’ve stabilized the building, then it goes typically to HUD financing. So just it depends on the situation, each situation is a little bit different. But our general pipeline is is to push it in a while because they just have great interest rates, long term loans, it’s one of the best best vehicles out there that I’ve seen.

J Darrin Gross 23:33

You have what little I know of HUD and if your your, your plan is to keep them for long term, we think that makes a lot of sense for you, as opposed to in and out kind of thing, where I think most of the people I speak with are, are more of a value add, I’d say it’s probably a lot of the strategy. Although I’ve talked to a few, you know, more construction oriented, or guests, even though I think a lot of them, you know, look to build, fill, get the value up and then have a disposition and return the capital to the investors. So for you to

Mike Kaeding 24:18

just really kind of interesting strategy there too with hide one of the things. So HUD all they do is they put their stamp of approval on it and say that this is going to be backed or guaranteed by the government in some way. But then you still have third parties have to go out and sell that. And so there’s there’s an expense there that you’re paying because of that, that that extra third party involved. One of the things we haven’t dug into this too deeply yet, but one idea we’ve had is let’s go get the HUD stamp of approval. But then take those notes and put it back on that no harder invest platform, because now these are notes that are government guaranteed they’re probably can’t legally say this, but they’re probably similar. A degree of safety is like a traditional bank then. But it’s not a bank, be clear with that. But that can be really interesting to investors, because now they’re getting a higher rate of return yet again, and very low risk. And then we cut our costs even further as a result.

J Darrin Gross 25:18

No. So you mentioned you’re looking to expand operations from just Minnesota but also Texas. I thought I heard you say Mexico. Yeah. Are these? Is this where you’re you’re working to expand your portfolio? Or is this more of a where you’re expanding capacity for construction for some of your construction? You mentioned you had some panels or different material supply kind of thing?

Mike Kaeding 25:53

Yeah, so in Minnesota, we have most of our properties we’re producing, we’re getting close to producing a level that’s producing much of the multifamily in Minnesota. So we have to start expanding elsewhere. So the next place we’re working on expanding the multifamily buildings we produce is in Texas, thing I like about Texas is its largest three or four major cities all within a few hours of each other, lots of room for growth, there’s good demographics in general in that area. And it lets us kind of expand and scale up without having to spread out geographically, because with more geographic locations, it’s just more pain and headache to have to deal with the Mexico play is to move some of our manufacturing capacity in New Mexico, it will be the manufacturing capacity that’s feeding the Texas operation. So the first thing that moved down, there would probably be wall panels precast concrete or probably stay in Texas. But there’s a whole variety of things that we’re starting to move into, in for manufacturing capabilities. In some sense, you look at Tesla, and how they’re producing cars right now. In many ways, this is incredible, right? It’s automated. There’s robots, there’s the Tesla bot, they’re reengineering, the way cars are even made, but the full body cast, for example, in many ways, working here right now feels a little bit like how Tesla probably was 10 or 15 years ago. And our dream is over the next 10 to 15 years that we have plans at that kind of level, like the Giga Noor heart, not just the Giga factories for for Tesla. And yeah, so Mexico helps us reduce some costs a little bit of labor savings there, there’s a lot of supply chain stuff that we can do more efficiently through Mexico. So that’s, that’s where we’re headed.

J Darrin Gross 27:53

So with the kind of the factory build of the wall panels Ned, do, you have basically a standard floor plan that you are building and that’s how you’re able to do the to the system, build.

Mike Kaeding 28:11

I it’s more like Dells model a mass customization, right, because when you build buildings, you need to have flexibility to produce the bespoke quality of building that you want to build. So we do allow enough variation to make that happen. But whenever we can, we do actively remove variations. I was just on a call with our head engineer this morning, we’re talking a little bit about some of those design decisions. So one of the goals is to to make basically like Lego bricks. And so we choose the best 30 Different Lego bricks for wall types that we typically need now becomes 99% of our production, but it lets us get 99 plus percent of all the variations of design we ever want to build in buildings.

J Darrin Gross 29:02

So it’s your current capacity. How many units can you build? A year?

Mike Kaeding 29:09

500 a year right now, producing about an apartment every five hours.

J Darrin Gross 29:14

That’s great. Yeah. And you said, Did I hear you it was a 6000? Or 60,000? Was your goal. Steve 60. That’s big.

Mike Kaeding 29:23

Yeah, that’s yeah, we’ve been more or less each year in the last handful of years, we’ve been doubling in size.

J Darrin Gross 29:31

Yeah, no, that’s, that’s fabulous. I’m guessing based on all of your reference to Tesla. Are you a Tesla driver?

Mike Kaeding 29:39

Oh, yes. Very much.

J Darrin Gross 29:40

So Nyla love the cars are. They’re crazy.

Mike Kaeding 29:44

It’s just fun watching how good the technology has gotten. And just in general, the AI space right now. I don’t know how carefully you pay attention to it. We’re laser focused on it, but it’s insane. How fast that space is moving. It feels like if you have news that’s a We’re too old. That’s already old news things have radically changed.

J Darrin Gross 30:03

No, no, no. So let’s talk about the demand for housing. We talked about kind of the affordability thing. And then your your plan is to go ahead and to stay in the market rate, but essentially affect the affordability by by basically filling the demand gap. If that’s kind of what I understood is that my list ended here.

Mike Kaeding 30:32

You’re right. That’s exactly right. Yeah.

J Darrin Gross 30:35

And how long do you think it would take to reach that point? Where you’re able to essentially create a surplus of suppliers? What it what it would take to lower the lower the cost is that then that’s yeah, the economics are currently a supply and demand.

Mike Kaeding 30:56

Yeah. It will likely take a decade, I so wish it could be faster, and we will fight to the nail to make it as fast as we can. But scaling up something like Tesla is done with the Giga factories, it’s, it’s a ginormous task, I don’t think people really appreciate how incredibly challenging is to manufacture things effectively.

J Darrin Gross 31:21

Yeah, I think that, for most of us, I’ll speak for probably one by myself Is it it’s one thing to have an idea for a system. But as you grow, and you run into the challenges, a lot of people get discouraged. And we’ll go back to I’ll just do one at a time. You know, I won’t forget what was the, the M math or they’re talking about how, you know, guy starts off, and he’s a mechanic or whatever, and he, he does good work and, and his clients are telling all their friends about how good work he does, and all sudden, you get more work than he can handle. And then he has to hand hire an employee. And then obviously, he’s got a managing employee, and all sudden, he’s not doing the mechanic work anymore, which is what he enjoys. And, you know, to where he says, I can’t handle the employees and get rid of everybody. And he’s basically back to the, you know, the guy working on one car at a time kind of thing. And so that curious how how is it that you really kind of, you know, focused in and saw that that was the bigger system? Was it you? Were you primarily the driver of that? Or were you and your family? Kind of, you know, recognizing the opportunity? Or how did you come from, you know, the smaller operation to recognize and the bigger opportunity and making that shift.

Mike Kaeding 32:42

I think a part of it is just a little bit of who I am and that I just don’t want to waste my life not making at least an attempt at solving a world level problem. So I think that’s where the energy comes from, but the solutions and how we tackle things and how to move next. And exactly what that vision looks like, comes from a lot of people, one of the most important lessons I’ve ever learned in my life, is to hire the very best. And when I say the very best, I truly mean, like World Class world level people. But I found and I’ve, I didn’t just find this where people taught this to me, but I’ve seen it myself, the best people outperform the average person by two to five to 10 times as much. And people often think well, okay, great. You’re hiring great people, the best people, but they’re expensive, aren’t they? And the truth is, yes, on a per person basis, they are expensive. But when you look at what they produce, because that production level is so much stronger, they’re actually less expensive. Now, you bring on this caliber, this group of people at that kind of level, and they start to change things, right? They’re the ones that question things. They’re the ones that push the ball forward, and invent a whole new world of how things could be done. And it is just, it’s magical, right? You You knew that mechanic example. You start hiring your friends happy to help you do the mechanic work, you’ve got lots of problems, because managing people are difficult. And that’s true with great people as well. But it is a lot less difficult, right? They bring way more energy and passion and drive to a team than they suck out of that team. And honestly, like, I come into work, and I have so much fun, because the caliber of people that work here are extraordinary. I can give you examples, but they’re extraordinary. And they’re changing the world and I just along for the ride.

J Darrin Gross 34:58

Well that’s awesome. And definitely encouraging based on just, you know, having some excitement for being or doing what you’re doing. And also, I would tend to think that the employees or your your staff would, would be, you know, probably praised praise you based on just the the creating the environment that creates that kind of open for ideas, and, you know, the ability to share ideas and create and to contribute in a meaningful way to the output that they’re, that they’re involved. And I would think that would be a create an exciting place for people that want to work there. So, absolutely.

Mike Kaeding 35:45

Culture is so critical we, we have three major strategies in our company, three things I think about every day. And the first of those three strategies. Only three, the first of those three, is all about our staff. It’s the people, it’s the culture, if you get that, right, you’ll change the world. If you get that wrong, you’re gonna struggle most of your life.

J Darrin Gross 36:11

Yeah, no, no. So I’m curious. You’re focused on housing. Do you see are there any other asset classes that this model would work in? Or have you considered any other asset classes?

Mike Kaeding 36:26

It certainly could. Because the idea is quite simple, like, learn the lessons from other industries, and then apply it to your own space. So it could be things like other classes of real estate, you could use it to manufacturing in general. In fact, I have been working on a TED talk right now that’s kind of touching on this very point, how do we take these innovative brainpower and apply it to solving some of the world’s biggest problems? Now the reality of it is, the idea is simple. The execution is incredibly hard. That is where all of it all all of it is at is in the execution. And so for us as an organization, for us to be world class best in the world at something, we have to be laser focused on what that specific something is. And for us, that is housing. And that’s what will stay focused, I kind of doubt will go beyond that, because the housing problem is a big enough one for us to tackle within our lifetime.

J Darrin Gross 37:27

Yeah, that makes sense. Let me ask you, as far as the the different elements that you’re brought in house, is there are there any other elements as far as manufacturing go that you have identified as a potential opportunity for you to bring in house like, cabinetry or more, I don’t know just as ideas or any any other ideas, or any other we look

Mike Kaeding 37:53

at, we look at everything, even down to like drywall manufacturing. We’re, in fact, I just got sick earlier, I got off a call with my head of engineering, we’re starting to dream a little bit about what that overall system looks like. It starts not just the manufacturing, but it starts all the way back in software. Right now we’re working on a system such that we the dream is we give it the site layout, and it can compute and figuring out what the most optimal layout is maybe some impact from our designers. And then it actually spits out a full set of drawings, a full set of materialists entire cost and Ally analysis. And the reason that is, is because we don’t want to engineers, designing buildings, we want our engineers designing systems. And so we want them to take a step back and be designing and working on tweaking the system that builds that layout. And then we’re also moving our engineers then to think about how do you manufacture this in a different way. So we’re, I, one of the things we’re looking at is doing full volumetric. So producing entire apartment units in a factory, not 100% sold yet that that is actually the best for lowering costs, or if it’s just a step shy of that, which is a kit of parts where you’re producing a bathroom pod, a kitchen pod, and then you delivering them on site and kind of assembling them. The kind of simpler things is yeah, we’re looking at cabinets trimwork. We, we even looked at like Job creep mixtures concrete we’re doing or we’re looking at building a batch plant as well. Really, we look at each one of those specific niches and we say, is there some kind of advantage? Can we lower costs in some way because we’re doing it the work on site on a manufacturing facility? Or can someone else do it better? Like drywall is an example where somebody else can do that better because there’s a certain scale that’s needed to really make that effective and So we won’t get into drywall. And so we look at all those different components. But really, every step of the way is there’s 10,000 little problems. We’re just working to solve them so that we can lower the cost of what we’re doing.

J Darrin Gross 40:13

So the majority of what we’ve talked about is the construction cost. Are there any other unique things that Nora heart does with respect to operating the property?

Mike Kaeding 40:27

We think a lot about design. And this is this is newer, so I talk a little less about this. But it’s coming down the pike pretty strongly in the next few years. We want our buildings to be destinations. And we’re looking at like, how do you brand a building? Right now most people in this space they brand a building? separately for each building? Why is that? Why don’t we have apartments like we have hotels, where it’s, you know, the Hyatt your high building, and you know, that’s the caliber, the quality, and things that you expect from a Hyatt building, we want to provide that kind of branding and experience within our facilities. And so if you look at some of the most recent renderings that we’re putting together, it’s an experience, it’s a, it’s a different feel, and flair, it doesn’t feel like an apartment building, it feels like a destination in some way. Other things we’re thinking about, is if you look at the employment market, pre COVID, places like Google have these amazing campuses and places where people can engage and connect and build relationship in a kind of really cool way in their working environment. Now we’re moving a little bit more toward remote work, I don’t think it’ll ever be 100 100% remote work, but we certainly will live in this hybrid world, this opens up some space there, maybe one or two or three days a week that people are working from home. But can we create an experience in our facilities, that gives them that kind of inner connection, that human connection that they would have normally gotten at work, but now it’s with their apartment mates in a co working spaces. So we’re building up that kind of infrastructure in our buildings. You know, things like spas, pools, game rooms, Sky lounges, Penthouse Suites, those are all things that we’ve already been doing. But I think the last piece of the puzzle is the experience. And the key to really make an experience amazing is the human interaction part of that. And so where we pour a lot of time and attention right now is really built up the team, but it’s in that team. A lot of people think that to create an amazing customer experience, you have to think about the customer experience. And that’s true. But really, really to put your time and attention into is the employee experience. If you can find, attract and hire the best people, give them an amazing experience that bleeds out and just us a natural and authentic way to our customers. And so those are some of the areas that we’re thinking about on the resident side.

J Darrin Gross 43:15

But fascinating to hear all the different aspects and the ways you can tweak or make better the overall experience for everybody involved. That’s great. Yeah, he might, we could, I’d like to shift gears here for a second by dam and insurance broker, and has such I work with my clients to assess risk and determine what to do with risk. And there’s three strategies we typically consider. We first looked to see if there’s a way we can avoid the risk. But that’s not an option, we look to see if there’s a way we can minimize the risk. And if we cannot avoid nor minimize risk, then we look to see if we can transfer the risk. And that’s what an insurance policy is. It’s a risk transfer vehicle and asset to I guess my guests if they can look at their own situation. Could be your clients, manufacturers, interest rates, investors, tenants, political how are we you would frame or like to frame the question and what you know what you consider to be the biggest risk. And again, for clarification, while I am an insurance broker, I’m not necessarily looking for an insurance related answer. And so if you’re willing, I’d like to ask you Mike Kaeding. What is the Biggest Risk?

Mike Kaeding 44:35

Such a good question. I’m going to answer it in three parts, three levels. The first level is the surface level, which is today’s some of the bigger risks of the economy. Specifically rise in interest rates has that has a negative effect and debt proceeds used to fund new construction and just deals in general. But if we take it a step further deeper, which you realize is that those kind of problems happen all the time. It’s this year, it’s interest rates next year, it might be employment. After that it might be a supply chain, just something totally different. And so the deeper level, the deeper risk, there’s level two, is making sure you have the right people. Because if you have an amazing quality team that can solve the biggest, most challenging issues, they solve those problems, they start unlocking doors and making things happen that you didn’t know could happen. They have the capacity to pivot and change with the changing times and the changing market. So that’s the level two tickets one step deeper, and maybe the deepest level for me, I think the biggest risk in life is not utilizing your life to the fullest potential. You know, as I mentioned earlier, my dad died at a relatively young age. And I haven’t asked myself the question, how do I want to spend the minutes I have here on Earth? It For Me, a big part of that answer is I want to make some kind of meaningful, positive impact on the world. So I think the biggest risk we all face is selling ourselves short not trying to make the biggest impact we can and not living the life that we know we can live.

J Darrin Gross 46:41

Now I’m definitely being intentional. I like the the sentiments. Mike, where can listeners go if they’d like to learn more or connect with you?

Mike Kaeding 46:52

Yeah, the best places to visit our website. That’s Norhart.com. That’s n o r h a r t.com.

J Darrin Gross 47:04

Awesome. Mike Kaeding, I can’t say thanks enough for taking the time to talk today. I’ve enjoyed it. Learned a lot and look forward to doing it again soon.

Mike Kaeding 47:14

Awesome. Thank you so much for having me.

J Darrin Gross 47:17

All right. For our listeners. If you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow? That’s all we’ve got this week. Until next time, thanks for listening to commercial real estate pro networks. CRE PN Radio.

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Commercial Real Estate Valuation Uncertainty with Rick Kalvoda – CRE PN #415

Rick Kalvoda 0:00

There’s a lot of questions is what is VAT? Where is value at this point, and you have what, you know, anytime there’s uncertainty and there’s a freeze up, there’s no transactions occurring, you have what we call it a bid ask spread. What someone’s willing to sell at their asking price is different, what someone is willing to buy it at the bid price. And so that spread means market value is not the asking price. It’s not the bid price, but it’s somewhere in between. And so that is a, especially when you get to office that is a widespread, everyone has the exact answer, they know exactly where the price is, it’s just no one agrees as to where that is, you know, if you’re an owner, you’re at the upper end of that range, if you’re a buyer wanting to buy you’re at the lower end of that range. And so from a value perspective is their their challenge. And it’s always a challenge in markets, when there’s no transactions, you know, it’s like going, you know, logging into your stock account and you want to sell a stock and there’s no buyers, well, what’s the value of that you really don’t know and or vice versa, if you want to, if you want to buy and there’s no sellers, is it’s figuring out where that is. And and it’s really using anecdotal information, it’s talking it’s a lot of communication, talking with brokers and investors and, and lenders and trying to get a feel and understanding all of that data and bringing that together and formulating an opinion of value. So a lot of discussions a lot of different opinions right now, probably the best way someone you know, or when a client you know, explain this is, you know, is where you know, you may not know where the value is, but you know where the value is not.

Announcer 1:44

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J Darrin Gross 2:03

Welcome to commercial real estate pro networks, CRE PN Radio. Thanks for joining us. My name is J. Darrin Gross. This is a podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio.

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Today, my guest is Rick Kalvoda. Rick is the President of the Analytics Branch for the Americas of Altus Group, which is a service provider of intelligence to the global commercial real estate industry. Rick has over 30 years of experience in commercial real estate consulting with a focus on valuation and management. And just a minute we’re going to speak with Rick about Data Insights into the Quickly Changing State of the Commercial Real Estate Market. But first, a quick reminder, if you like our show, CRE PN Radio, there are a couple of things you can do to help us out. You can like share and subscribe. And as always, we encourage you to leave a comment. We’d love to hear from our listeners. Also, if you want to see how handsome Our guests are, be sure to check out our YouTube channel. You can find us on YouTube at commercial real estate pro network. And while you’re there, please subscribe. With that I want to welcome my guest, Rick Kalvoda. Welcome to CRE PN Radio.

Rick Kalvoda 3:54

Thanks, Darrin, good to be here.

J Darrin Gross 3:57

Rick, I’m looking forward to our conversation. Before we get started, if you could take just a minute and share with the listeners a little bit about your background.

Rick Kalvoda 4:04

Sure, as you mentioned a little over 30 years in the commercial real estate business started out on the valuation side doing doing valuations. And we probably about 10 years into my career. We were acquired by PricewaterhouseCoopers. So that’s where I started more the advisory side of the bet so valuation advisory side of the business. And for the past 13 years I’ve been with Altus Group, as you said, leading global provider of not only advisory services, but then also data and software as well in the commercial real estate industry. So that’s been my 32 year career business.

J Darrin Gross 4:47

Got it. So as a an asset valuation specialist Are you agnostic to the class of asset or do you have a focus?

Rick Kalvoda 4:59

I’m primarily whatever, whatever our investors and so we work with some of the largest institutional investors across the globe. And so they will historically have primarily focused on the four major food groups. So think office industrial, multifamily, and retail. That has changed quite a bit over the past, let’s call it 10 15 years where there’s been other alternative asset classes that have come into or sectors that they’ve invested into. So think student housing and and single family rentals and self storage, medical office sucks address. So we pretty much work with any of those real estate sectors.

J Darrin Gross 5:46

Got it. So as far as the the valuations go, you mentioned last 15 years. We’re recording this in March of 2023. There’s been a little bit of turmoil in the marketplace in the last year with interest rates and not to mention COVID and etc without supply chain stuff. What are you seeing as the the most affected positively and negatively asset class for valuations.

Rick Kalvoda 6:25

So if you if you look at you mentioned COVID, and then now you know, with interest rates, if you think back to COVID, over the past three years, think not only multifamily, but then also industrial and more specifically industrial has been very positive, positively impacted as we went more to online shopping as opposed to you know, in in, in store shopping, is industrial has had just a phenomenal and then also think of the amount of money that has been put into the system think fiscal stimulus, think lower interest rates, quote, unquote, free money, much more spending that has occurred. And so warehouses by far been industrial warehouse has by far been the biggest beneficiary in terms of sectors over the past three years from COVID. Looking to today, now as part of the inflation and now the Fed now fighting inflation with the increasing interest rates and backing off and that liquidity, really all asset classes have been impacted. All sectors of in commercial real estate have been impacted. But from a fundamental perspective, most of the impact has flown or has gone to office and think of the work from home phenomenon. And and, yes, there’s been more of a back to Office focus in the US that’s been less successful. I think everybody will argue as to eventually where you know, how much of that work, work from home will stay and how much back to the office, there will be. But I think everyone will agree is it’s not going to be the same as what it was, you know, pre COVID. And so from a fundamental perspective, if you need less office than you needed, before the start of COVID, that’s going to have an impact. And especially now, as you have more stress in the market, more increasing interest rates, people are more focused on expenses, companies are more focused on expenses, they really look more closely at the need for the office space that they have, and really look at their return off as Paul policies on a go forward basis from a fundamental perspective, both from COVID but also now just the stress in the industry and in the economy is office has been most impacted.

J Darrin Gross 8:50

And no doubt. I’m curious, the clients that you you work with, you know, the commercial industry. The commercial real estate industry is kind of far and wide. Is it primarily the investor side or is it is it lender side? Or is it all all of the participants in the in the real estate market?

Rick Kalvoda 9:16

I a little bit of all but from the valuation, perspective valuation, especially the valuation you met mentioned the Bayerischer management focus that we have. That’s more on the investment manager side. So on behalf of the institutional investors, institutional investors will generally invest in a open ended fund or in a closed end fund, they’ll commingle that money into a fund where the manager of that fund the investment manager will go out and invest and buy and sell and operate the real estate. So we’ll work with those investment managers on the fund will work on helping them with that mark to market on a quarterly basis sometimes monthly sometimes even Daily, there’s no products out there now or even on a daily basis, they’ll need a mark to that to the underlying real estate. And so generally it’s we do work with investors, we do work with lenders, but primarily, it’s the investment managers of that commercial real estate.

J Darrin Gross 10:18

And within that mark to market requirements for the funds, have you seen a lot of, of willingness or letting go of some of the assets that are performing? Or is it more a matter of just recognizing that the the asset values have have lessened in the office type of acid?

Rick Kalvoda 10:41

Yeah, Dan, really, just because of debt is a very important part of commercial real estate. And so as that cost of the debt as interest rates have increased, is that’s going to impact the overall value of the commercial real estate of the assets. Generally, the institutional investors use less leverage, so they’re less directly impacted by it, but debt will impact just real estate asset prices overall. And so that that has an impact whether you’re buying for cash or buying, you know, we’re buying with leverage. So that that has an impact. As far as recognizing, you know, that is the big discussion right now, in terms of, you know, adjustments, you know, to those marks. There’s been a lot of that, let’s call it uncertainty, given that there’s no transactions because of the uncertainty. Where’s How far is the Fed gonna hike? Where’s inflation going to be? You know, three months, six months, a year? Where’s the fundamentals from office for office, not just now, but a year, three years from now, the lot of questions right now, just in the macro economic part of the market, but then also the commercial real estate market as well. is there’s a lot of questions is what is that where is value at this point, and you have what, you know, anytime there’s uncertainty and there’s a freeze up, there’s no transactions occurring, you have what we call it a bid ask spread, what someone’s willing to sell at their asking price is different, what someone is willing to buy it at the bid price. And so that spread means market value is not the asking price. It’s not the bid price, but it’s somewhere in between. And so that is a especially when you get to office that is a widespread, everyone has the exact answer, they know exactly where the price is, it’s just no one agrees as to where that is, you know, if you’re an owner, you’re at the upper end of that range. If you’re a buyer wanting to buy, you’re at the lower end of that range. And so from a valuer perspective is their their challenge. And it’s always a challenge in markets, when there’s no transactions, you know, it’s like going, you know, logging into your stock account, and you want to sell a stock, and there’s no buyers, well, what’s the value of that you really don’t know, and or vice versa, if you want to, if you want to buy and there’s no salaries, is it’s figuring out where that is. And, and it’s really using anecdotal information, it’s talking, it’s a lot of communication, talking with brokers, and investors and, and lenders and trying to get a feel and understanding all of that data, and bringing that together in formulating an opinion of value. So a lot of discussions, a lot of different opinions right now, probably the best way, someone, you know, or when a client, you know, explain this is, you know, is where, you know, you may not know where the value is, but you know where the value is not. And it’s not where it was yesterday, it’s not where you know, where the bid is where the ask is, it’s, it’s somewhere in between. And so you triangulate using all that data, and probably right now just talking about, specifically with Office data’s as you see some of the borrowers start, you know, had the properties back to the lender, is you now are stressing, well, now it helps establish where that value is doesn’t necessarily mean at that price at that, you know, where are they because sometimes it’s just used for negotiations and negotiating with the lender. But that’s what you might consider more of a distressed transaction, distressed sale, that doesn’t mean its market value, until you start seeing a lot more of that stress, which then becomes the market. And those are things that the third the appraiser needs to consider when they’re determining what that value is.

J Darrin Gross 14:28

Ya know, the, the, you know, just kind of the scenario you were talking about, there were some of the the investors are given, you know, properties back to the bank. You know, that’s kind of that that I don’t see a slippery slope, but it’s it, at least in the asset class of office. It seems like it could there could be a domino effect, but I’m assuming or they’re not. So I’m on the The bid side of the thing of the bid ask where there’s some, some opportunist investors waiting for something like that to happen to, you know, acquire properties like that.

Rick Kalvoda 15:14

Yeah, absolutely is is, you know if there’s a positive thing in the market right now is that there is a lot of capital out there that still wants to invest in commercial real estate, you know, there are people on the sideline looking and same thing happened after the GFC. Same thing happened, you know, back in the.com, is you had a lot of investors looking to take advantage of any drop in price to get in for the longer term, because commercial real estate is more of a long term investment. And so there is capital, they’re waiting, but given the uncertainty, given the risk, that they’re ascribing to the unknowns going forward, whether it’s on fundamentals, whether it’s on debt, whether it’s on pricing, whether it’s on the economy, is there waiting for a point, you know, you could say the same thing with stock market waiting for a point where it reaches a certain level before they will actually take the opportunity, opportunity to invest at that point. And so this positive, there’s capital there, the negative from a perspective of looking at this value perspective is, it’s not where the ask is now, it’s definitely something, you know, lower that. And another way we look at it is if you look at times where there’s no transactions, and there’s a bid ask spread, early in that cycle, is or in that time period, early is the market value is probably closer to the asset than it is to bed. But every day that goes by that things don’t change, and there’s still that bit s spread, the value that market values likely declining, you’re going closer and closer to where the debate is. So where we are right now, we’re probably, you know, nine months into, you know, where things started, you know, the Fed started raising, you know, second quarter of last year, we’re seeing where it’s, you know, we’re starting to see those, you know, declines, you know, accelerate, or, you know, seeing more and more of those adjustments to market value.

J Darrin Gross 17:11

Is there any data that you guys focus in on with respect to? How close one is to their, their rate term expiring? Or how, you know, how old their their dead is? On Does that, does that tend to be a, a, an action point, where where you see, you know, more, I don’t say desperate, but more activity occurs based on your, you’re nearing a point where you’ve got maybe an empty building, and you’ve got financing that’s expiring, and you’re gonna have to refinance, and you’ve got, you know, the situation becomes more dire, does that create any more of a need to act? Or is it? Was it none?

Rick Kalvoda 18:00

Yeah, no, that’s, that’s what we would call a compelling event is, or a critical event where, when you mentioned, it’s not just office, it’s really, you know, if you think about increasing interest rates, not only is that debt, so you may have a lower interest rate on that debt. And when it comes up for refinancing is now it’s at a higher lift. So not only will you be paying more for the debt service on that new loan, but then also, the value of that property like that underlying collateral know that asset is likely declined, that fundamentals are the NOI of that property to service, that debt has likely declined. And then on the flip side is, is there’s more uncertainty and your net, seeing the, you know, especially in, in office, we hear all the time, it’s inevitable, no, no lender wants to land on off, it’s just given the uncertainty of the values of the, you know, the debt sector, specifically. So you have all those factors that come together. So yeah, we do track information on properties across the US that where loans are coming due. That is a big focus this year with the amount of commercial real estate loans that, that that are maturing this year, and to your earlier suggestion is what happens, you know, as you know, if more of those properties are handed back to the lenders, or even just negotiate with lenders, what happens when that accelerates and if fundamentals don’t improve, if the economy does improve, if interest rates continue to go up further and values continue to climb further, all of that, you know, is is some of that risk and uncertainty that investors are looking at now and therefore, you know, from from a buyer’s perspective, demanding, you know, or they’re providing a lower bid before they actually, you know, invest in the market.

J Darrin Gross 19:59

So if we just exited a low interest rate environment, and most of the properties in the marketplace have lower debt on them, do you expect kind of a wave as this is the the older term start to expire that this will then increase and then that that will kind of like create that, that the valuation or mean will that kind of like, set the floor for, for, you know, the market and at that point, then the deals will, will start to happen, because the price has been set as a kind of the, the 123 of it or,

Rick Kalvoda 20:39

um, yeah, I mean, if you do see if it accelerates, and you see if the distress, whether it’s and and the keys back to the lender, the lender, then you know, they have real estate owned and reo. And then they, you know, they’re not, you know, in it for ownership, and so they’re looking to get it off the books, and so they then turn around and sell it, you know, in those distressed scenarios, if that becomes more the standard, if that becomes more reflects what’s happening in the market, because it’s happening that frequent, then that’s indicative of where market values, you know, shouldn’t be, you know, at that point, and one thing I’ll say with and specifically when we’re looking at office, and and you could correlate this to retail, especially regional malls 1015 years ago, is it really gets down to not just, you know, this sector, not just the market, not the, you know, the sector within that market. But really down to the individual property down to the individual assets, we used to say 10 years ago is what the regional malls Do you have the haves and the have nots, you had those that, you know, if you think of, you know, of a city or metropolitan area, and if you had five malls, it’s likely to go down to two miles or three miles. And so the haves those that will actually might benefit from closing of a couple of malls, and then those that just won’t make it, you know, in a bike malls and a three mile town, we’re starting to see the same thing with Office is as there’s less need for office space, think work from home, thank you know, if the economy slows or goes into a recession, there’s less need for that offices, which buildings will do very well, the top of the market, which ones will do, okay, in which ones it’ll be at the expense of the other, you know, the third, the third component there. And so you really have to look at those individual properties, what are the amenities? What are, you know, ESG is a big focus. Now, tenants won’t look at certain buildings, unless they’re, you know, certainly, you know, certification. And, and so it becomes much more focused, again, not just on the market, but now that particular you know, that particular asset, especially when it comes to, to Office, and so, so it isn’t just a hey, everything’s down, you know, X percent, did, you know, what is this building relative to other buildings in that in that market? Makes it much easier?

J Darrin Gross 23:10

So the average, what’s an average term? As far as debt financing for office? Is it seven to 10 years as far as rate law? More like five? by five? Yep. Okay. So theoretically, if, if we’re in year one have higher interest rates, within five years, this will, this will reset, is that

Rick Kalvoda 23:37

I? Well, you could say you’re seeing the reset now, because as those low interest loans, that that low interest debt over the past five years, you know, have been in the term can be longer than as well, but let’s call it five to seven years, is past five to seven years, as that’s now coming due. That’s when the reset occurs is when you adjust to that new level, because can can that property support that new level of debt service? And at the same time, I mentioned all the amenities needed in office, you know, that requires investment into, you know, into the building. So is there equity, and is there capital there from the owner? Is there willingness, you know, from the owner to invest that extra capital into the building, in order to support long term the debt service on that new loan. So, that’s really starting to happen right now. Then you started seeing, you know, some things, you know, from, from the lending perspective on offices, properties going back are being negotiated with the lender is happening over the past. Let’s call it the past three months, is that’s what you know, we’re watching very closely over the next, you know, six to 12 months, next two years as to what happens in terms of as those loans loans come due, then for the next five years as those are renegotiated or extended or have new loans at that higher level that actually helps helps the market longer term because now if it has no lending or it has a bone or if it was handed back and it was recapitalized with the with a lower level of loan against the property, then now that that helps that asset, it’s repriced, that helps the asset and the market on a go forward basis as well.

J Darrin Gross 25:24

Right, definitely the go forward, once you get through that stall, and the, the, the bid ask, and, and all the lending there. So if you were going to advise the listeners on what to do, or how to prepare for the next, or who as we go through this transition, what would your advice be? For you know, how to prepare and what to do to, to get through this?

Rick Kalvoda 25:52

Yeah, I would, I’d say, that mentioned, you know, earlier is just, you know, communication is very important. So it’s, you know, being, you know, with the lender, with the broker, with participants in the marketplace, is, as everyone’s trying to figure this out, is very important. And the second thing is, is and it’s gotten better, you know, over the past, you know, 2030 years, but is, is what the data is having the data and, and and you mentioned at the earlier, just data insights, you know, when an author says hope focuses on intelligence as a service, and so providing not only that, you know, the advice the, as a trusted adviser, not only having the software, you know, the technology behind it, but having that data and bringing that data together to make those informed decisions, whether it’s on an acquisition, whether it’s on a disposition, or whether it’s on an ongoing ownership, which you know, back to especially, you know, you think offices, which ones are the haves, which ones are the have nots based on the just voluminous amount of data that’s out there in the market, bringing that together to make an informed decision on on, on, on, you know, what your strategy is acquisition disposition, or, you know, ownership or, or, you know, improving in reinvesting in the property is, data is just so critical. You know, right now, anytime, it’s funny, just some of the data that and advisory services that we provide to our clients over the past 10 years, that wasn’t being used that much, because you just saw just a very consistent 1%, you know, every quarter was just you saw the tick up right up to COVID. And it was there wasn’t that need for that amount of data and the analytics behind that data. Now, as you see volatility, but probably more importantly, the uncertainty in the market. Now, it’s even more critical to have that, you know, information right now. So those are probably the two things, you know, it’s it’s communication, talking with people in the industry, but then also having the data, you know, to make informed decisions, those are probably the two biggest things.

J Darrin Gross 28:01

Hey Rick, if we could, I’d like to shift gears here for a second. By day, I’m an insurance broker. And as such, I work with my clients to assess risk and determine what to do with risk. And there’s three strategies we typically consider, we first look to see if there’s a way we can avoid the risk. And then if that’s not an option, then we look to see if there’s a way we can minimize the risk. And when we cannot avoid or minimize the risk, we look to see if there’s a way we can transfer the risk. And that’s what an insurance policy is. And as such, I like to ask my guests if they can look at their own situation, could be your clients, investors, tendons, the market interest rates, political however, however, you’d like to identify what you consider to be the biggest risk? And again, for clarification, while I’m I am an insurance broker, I’m not necessarily looking for an insurance related answer. And so if you’re willing, I’d like to ask you, Rick Kalvoda, what is the Biggest Risk?

Rick Kalvoda 29:04

Yeah, I think. So operating expenses of which, you know, insurance is is a big component, you know, the risk, I think, right now have ownership of commercial real estate. I think right now, and this kind of goes back to the uncertainty and what’s going to happen with inflation, what’s going to happen with interest rates, what’s the Fed going to do is just, it’s the uncertainty. And as the Fed continues with that increases, the biggest risk right now is is there, you know, is there a global financial crisis, you know, you starting to see the stress on some of the banks, you’re starting to see, as I mentioned, with some of the, you know, blending or the borrower’s, you know, handing keys back to the lenders, you’re starting to see some of that, at the same time, slowing economic growth, you know, and also increase inflation, all that stress to the economy that if we go into a recession if we continue to have higher interest rates and that that’s going to have an impact not just on commercial real estate, but across all asset classes, but then specifically, commercial real estate and especially with, you know, the amount of lending done by the regional banks, which you know, are, over the past couple of weeks have seen this stress is, that’s probably the biggest, you know, concern out there is in biggest risk for our investor and for our clients, is just what happens, you know, the overall macroeconomic picture and there’s just so many different things impact again, on top of that, you know, back to your comment just on insurance is just with the, you know, you just think of the climate risk and everything that’s, you know, happened this year, and, and how that impacts, you know, commercial real estate, whether it’s rising, you know, ocean levels, etc, is, all of that has, you know, so our clients, the owners and operators of that commercial real estate, not only have to think about that, but then the macroeconomic you know, side of it as well. So, so a lot of risks now, hence the uncertainty, but that’s, we’re all here to help the industry out, you know, in times of risks like that, ya

J Darrin Gross 31:12

know, plenty of risk to go around, that’s for sure. Hey, Rick, where can listeners go if they’d like to learn more connect with you?

Rick Kalvoda 31:21

i You can go to our website, altusgroup.com and reach out and we’re happy to help. You know, with any, any data software services needs they have in the commercial real estate business.

J Darrin Gross 31:36

Awesome. Well, Rick Kalvoda, I cannot say thanks enough for taking the time to talk today. I’ve enjoyed it. I learned a lot, and I look forward to doing it again soon.

Rick Kalvoda 31:48

Absolutely. Anytime. Thanks, Darrin.

J Darrin Gross 31:50

Announcer 32:08

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Better Asset Management Tools for CRE Investors with Anne Hollander – CRE PN #413

Anne Hollander 0:00

The number one thing that we advise is visibility more than anything else, it’s very difficult to manage the things that you can’t see, and you can’t manage overall. So really getting this visibility ideally in, you know, where you can have a real time daily, weekly, monthly look at what’s going on at your individual property is incredibly important. This visibility can come also from the income side of the house as well and to what your cash flow is looking like. So beginning to look at things that are happening below the line and making some strategic decisions about what makes sense in this kind of environment. For somebody who’s just starting into a value add project, the timing is not great, frankly, for what that looks like. And so potentially delaying that reducing the scope of what you’re trying to do and understanding what the financial impact is going to be incredibly important. But that holistic visibility to everything that’s going on, not just operationally but also with debt with equity and of course with risk incredibly, incredibly important for operators, owners investors, frankly everybody in the real estate space.

Announcer 1:13

J Darrin Gross 1:33

Welcome to commercial real estate pro networks, CRE PN Radio. Thanks for joining us. My name is J. Darrin Gross. This is the podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals provide their experience and insight to help you grow your real estate portfolio.

Today’s interview is sponsored by Building Insurance and Risk when you invest in real estate. It pays to work with a real estate investor protection specialist to protect yourself and your investment, catastrophic loss. The experts at building insurance and risk focus on real estate investor protection. They provide you with multiple insurance coverage offers and a side by side coverage comparison. To learn more go to building insurance risk.com.

Today, my guest is Anne Hollander, and is the CEO of Lobby CRE, a Thirty Capital Company. And she is making an impression in CRE and tech as one of few CEOs with a background in both real estate operations and rapidly scaling technology companies. And as an expert in strategic strategic planning. And in just a minute, we’re going to speak with Anne Hollander about balancing return and risk with data backed asset management.

But first, a quick reminder, if you like our show, CRE PN Radio, there are a couple of things you can do to help us out. You can like, share and subscribe. And as always, we encourage you to leave a comment we’d love to hear from our listeners. Also, if you want to stay on track to our guests are, be sure to check out our YouTube channel. You can find this at commercial real estate pro network. And while you’re there, please subscribe. With that I want to welcome my guest Anne Hollander, welcome to CRE PN Radio.

Anne Hollander 3:31

Thanks, Darrin, it’s great to be here with you today.

J Darrin Gross 3:34

I’m really looking forward to our conversation. Before we get started, if you could take just a minute and share with listeners a little bit about your background.

Anne Hollander 3:43

Absolutely. So I have been in this real estate space now for a little over 15 years and got my start first as a leasing agent and a small portfolio here in the Dallas Fort Worth area. From there I have worked with a number of real estate tech organizations I own and invest in real estate myself primarily focused here in the Dallas Fort Worth area and now serve as the CEO of Lobby CRE as well as the Chief Strategy Officer of our larger parent organization Thirty Capitol.

J Darrin Gross 4:17

Awesome. So the Lobby CRE. Can you tell us a little bit about what what’s the what is the focus of Lobby CRE and and what, what does it provide as far as service and words clients?

Anne Hollander 4:34

Absolutely. I think this may be a great introduction for your audience to Lobby CRE is we are relatively new inside of this market space. So Lobby CRE is an asset management platform that is designed to help manage and optimize noi cashflow valuations and ultimately the returns to the sponsor and investors. We’re focused primarily in the asset management space We believe that the asset manager in real estate organizations, is the unsung hero to link together both the operational efficiencies, as well as the financial strategy of what a real estate asset and investment look like. So very excited to provide new capabilities to the asset management side of the house. So historically, they’ve been largely ignored, and, you know, left to their own devices and their own technologies, workflows and processes to go figure out, what do I need to do to maximize the returns that come back out of this investment?

J Darrin Gross 5:34

Ya know, I, I, I’ve come to recognize myself. The distinction I think a lot of times the depending on how company operates or investor operates. A lot of times the the operations management in the asset management or may be lumped together, and they’re truly two separate operations.

Anne Hollander 5:58

They absolutely are. We see property managers in particular, very focused in finding the operational efficiencies, you frankly, you want those people to be in front of the other folks within the building that they serve, whether that means office tenants, retail tenants, you know, industrial tenants tends to be a little more centralized, but see this most often in the multifamily space, versus an asset manager who needs to be thinking about how do I return back what I need to to the investors, not whether there’s a broken pool pump, or, you know, the common areas need to be cleaned up, or I needed a maintenance crew on site?

J Darrin Gross 6:34

Right, right. Right, no, very, very kind of Micro Focus on the return kind of thing. And then and then push down to operations and make sure that happens. So let’s talk about, you know, the current situation, markets, you know, changing, we’ve got interest rates, increasing, we’ve got kind of, I don’t know what to call it, and just kind of there’s, I’ve heard a lot of people refer to it as pencils down, just kind of like trying to figure out where things are, and, and what, and it would seem to me that, in this environment, the focus on your net operating income, and making sure you’re not going backwards, but how to maintain and or, or push your noi upwards would be critical for any, any real estate investor to be successful. How, how is it that Lobby CRE and an asset managers can reduce the risk and then push the net operating income up?

Anne Hollander 7:49

So I think that’s the question on everybody’s mind right now. So thank you for asking that. Certainly, in every conversation that I have, with our clients, with my colleagues in this space, that is the number one question at the moment. The good news is that, yes, it’s pencils down. And I know for folks that are focused, you know, as a transactional broker or focus in acquisitions, this can be a tough time for you, because you’re kind of twiddling your thumbs, you’re looking at opportunities, you’re looking at things trying to get them to pencil. The good news in this is the pencil is not broken, necessarily. And so we see this volatility right now as just an opportunity to reset or recalibrate what our expectations look like. So as part of this, you know, when we talk about in particular driving in a why, really, this is all about increasing income and reducing your expenses. So, the big news here is that the income side of this has cooled off quite a bit in a number of markets. Now, I’ll be, you know, honest here, some markets have cooled off more than others, other markets are still pushing. And so understanding the dynamics of your specific market or sub market is incredibly important to figuring out okay, is this deal going to work? Or is it going to pencil or is it going to return what I need it to return? To stay ahead? The other part of this is reducing expenses, which I don’t think any of us are strangers to the supply chain disruptions that have affected us over the last several years. We’re not strangers to the to the natural events that have happened, particularly in Texas and in Florida with hurricanes energy issues, the number of insurance claims that have been processed in the areas that have been hit harder by more natural disasters and natural events going on. I can speak here in Dallas, our insurance costs going up quite a bit year over year as have property taxes. When we have tornadoes ripped through a major metropolitan area when we have wind storms with 80 mile an hour winds and above. It’s pretty easy to see you know exactly what it is driving these insurance premium. seems to go up in particular. But insurance isn’t the only piece of this either. Expenses across the board are up. And again Market to Market. We can say trend wise, up, but within each market anywhere from 8% increase to 20 25%. increase year over year.

J Darrin Gross 10:20

Yeah, no, I know, just as the insurance part of the thing that bet a lot of not happy to hear from me, clients, when I talk to him about the insurance rate increases, but it’s kind of all over the place. So, are there any specific I mean, we talked about insurance and inflation. I mean, it’s, it’s, I think that’s kind of just an accepted thing. You go to the grocery store, you go to the gas station, you go out to eat, I mean, my God, just the everything seems to have increased in price. Are there any specific points that you are focused on? Or that you see that operators can focus on to try and contain their cost? Or is it more about, you know, property to property market to market? Or are each individual situation is is unique?

Anne Hollander 11:14

Yeah, great question there. So the number one thing that we advise is visibility, more than anything else, it’s very difficult to manage the things that you can’t see, and you can’t manage, overall. So really getting this visibility ideally, in, you know, where you can have a real time, daily, weekly, monthly look at what’s going on at your individual property is incredibly important. This visibility can come also from the income side of the house as well, and to what your cash flow is looking like. So beginning to look at things that are happening below the line and making some strategic decisions about what makes sense in this kind of environment. For somebody who’s just starting into a value add project, the timing is not great, frankly, for what that looks like. And so potentially delaying that reducing the scope of what you’re trying to do, and understanding what the financial impact is going to be incredibly important. But that holistic visibility to everything that’s going on, not just operationally, but also with debt with equity. And of course, with risk, incredibly, incredibly important for operators, owners, investors, frankly, everybody in the real estate space.

J Darrin Gross 12:31

Yeah. So in the in the broader sense, not just on the property specific, but more like in the economy, or their space specific points that you look to or that you feel like investors and operators should focus on.

Anne Hollander 12:51

Sure. So at Thirty Capital, we’re focused on a number of different aspects of performance. So the operational component we focus on and have a deep level of experience inside of the capital markets. So really working with owners, in particular, and borrowers on debt and advising quite a bit on the right situations in which it’s right to take on that kind of debt. We also advise on the equity San front, and we ourselves have been a principal for quite some time in the real estate space, more than 20 years, at this point, investing in our own real estate assets. So as we as we look at this, right, we’re bringing our own experiences to this, we’re bringing our own background inside of managing real estate and of course, squeezing out those returns, not just in the what I’ll call the height of the cycle, or the growth side of the cycle where we’re able to leverage a little bit more on appreciation, but also in the the battening down the hatches side of the cycle where we find ourselves today. You know, debt is a big unknown at the moment, certainly, we’re seeing a ton of volatility, we’re taking a look on a daily basis it with our forward curves look like and beginning to make some decisions in our own real estate assets, as well as future opportunities based on what these forward curves look like. We’ve created our own proprietary model on this, which is, which has been not only a valuable project for us to take on, but something that’s been incredibly valuable for our clients that we serve across 30 capital within 30, capital financial. So really, you know, when I look at what the recommendation is, you know, taking a look at the economic indicators, in particular, around debt around inflation, and of course, the demographic shifts that are happening as part of that incredibly important to get a pulse on on a regular basis.

J Darrin Gross 14:50

No, that’s having some sort of a sense of a handle on it as mean, seems like kind of a slippery handler now, but Are there any, like more important? As far as the performance of a property? Or is there are there any, you know, indicators or metrics that you focus on more than others? Or is it? I mean, can you can you isolate me we’ve talked about expenses and income battening down the hatches, but is debt really kind of the focus point right now for most people or is it?

Anne Hollander 15:33

It certainly is a is one of those areas where it’s not particularly well understood at from the bigger scheme of, of commercial real estate, and one of those opportunities where you can get yourself in over your head, particularly depending on the asset types. So we’re beginning to see defaults. For example, in the office space, we have a quite a bit of office space, that due to the work from home trends, and some of the demographic shifts that we have seen, begin to take its toll specifically within Office. As part of this, we anticipate loan workouts and modifications to come through this, if not outright, you know, defaults on the mortgage itself. So having that debt background, having that advisor by your side, particularly important in these times, for folks that are looking to do a deal today, making the decision about whether a fixed rate loan or floating rate loan makes sense based on the equity position that you have, is an incredibly important decision, do you want to take on that risk and those costs up front in order to maximize your equity on the backside? Or did you want to put that off a bit taking a little less risk with a fixed rate loan, believe it or not, even with the volatility in the interest rate space, we still see people who are engaging in floating rate loans and taking those on for their new deals. And again, depending on the strategy and structure of how you’re structuring this deal, and what you’re looking to return back out of it, that could be the smarter choice to go and do. Certainly, one of the topics that doesn’t get a lot of attention today, but I think is going to everybody’s going to get a crash course pretty quickly here are the unfunded cap liabilities, so exceeding the the caps, or the limits that you may have set on your floating rate debt, those liabilities, beginning to to show up in the space, and causing quite a bit of, of economic and financial distress for a number of owners and investors in particular. So I think, you know, as I as I take a look at this, really that that holistic view of being able to put together what’s going on operationally at the asset, with the debt metrics and economic metrics, taking a look at forward curves, with the equity position and returns that you’re looking to achieve and trying to find the balance within those in this time. While not easy, incredibly important, for our for our asset managers to begin to go and look at this is why lobby care exists is to bring those three things into balance with each other in order to maximize what those returns look like.

J Darrin Gross 18:12

Yeah, you mentioned the capital requirements, and that wonder if you could give kind of an example of what you’re seeing or what you expect to see, as far as how that plays out.

Anne Hollander 18:26

I think it’s completely deal dependent, and then strategy dependent within that. So there are a number of different ways that this could potentially play out, depending on the asset type, depending on the asset class, depending on the market and sub market, depending on the demographics, for the asset itself. And then of course, you know, the the underlying factors within this as well, as we see office spaces begin to move into distress and defaults. And folks not moving into offices, or we’re going to work inside of offices like they did tenants beginning to move out or reduce the size and scope of the space that they have. This is not an isolated thing, this begins to put stress on the financial system or the the banks and lenders who have loaned out that particular money, right, and we begin to see this chain reaction happening with the additional stress that lenders and banks have, then as part of this, that the next step begins to happen where they tighten up their lines of credit, which then begins to affect a number of other industries in addition to commercial real estate. So you know, I don’t think that we can look at commercial real estate as the as a single isolated thing. This is instead one of the dominoes that has quite a bit of chain reaction that comes back out of that. The same can be said for multifamily as well. This has been the darling of the commercial real estate space over the last market cycle. And just last week, I was talking with colleagues of mine on a panel during an event that we we were at and asked the question, you know is multifamily Only still the smart bet, or is it the default bet at this point? And, you know, the panelists in taking on that question, you know, basically said it’s probably still both. But you know, we’re really, really, really looking hard at the multifamily deals right now, to make sure that this is going to return what we need it to return. Multifamily dwellers need that additional retail, and office presence in and around them, we’ve seen that they don’t want to commute the way that they used to, and they don’t want to have to go more than about a 1015 minute drive, in particular, to the next thing that they need to go and do, whether that be work, whether that be retail, whether that be entertainment, whatever that is, if things begin to shut down in those particular spaces, new development is not happening, redevelopment is not happening, then an impact multifamily becomes particularly difficult to, to get to a place where you can return what you’re looking for out of that property.

J Darrin Gross 21:03

It is kind of crazy when you look at the interrelation between all of the different asset classes, and and also the lenders in the the real estate market. And, you know, like you said, just the the domino effect. I mean, I think a lot of people, you know, focus on what they’re doing, and what they’re trying to accomplish, but may not understand the relationship between all of the different players and how it all plays out. And it is scary, I think sometimes when you look at how interrelated it is, and how, you know, if one is, is weak, how it can, you know, set up a collapse for not only that one, you know, aspect or asset class or property or whatever, but how it can have a effect paying it back to the banks. And and, you know, even though the market trend kind of thing. It’s that’s it is it is interesting, it is interesting. So, as far as trying to push the performance for for a portfolio, what what are some of the opportunities or the performance levers? Or what do you see that the the asset managers have available to them in order to push the the performance of a portfolio? Sure.

Anne Hollander 22:36

So today most asset managers that I talked to are trying to centralize or consolidate as much data as they can from as many different sources as they can. And one of the friction points of this is that that’s entirely manual today, I don’t think anybody here is a stranger to Microsoft Excel. But essentially, we are running our businesses and putting all of our trust into a tool that was designed to not to necessarily bring together that much amount of data and do that analysis, but has no background whatsoever in what do we need to be looking at within real estate space, creating the models that you need to see re forecasting out what a performer can potentially look like, in this particular dynamic, all very, very important from a tool perspective. And what we see are asset managers who for no fault of their own, are leveraging models that were created 1015 years ago, wouldn’t know necessarily if a particular formula was broken in that Excel spreadsheet, don’t know where that model is being distributed to or who has access to it, which may have some sensitive information in it, particularly if you’re including your cap table in it, as well as the you know, the fact that the data that’s coming in is in no way streamlined. You know, one data source may define occupancy in one way or another data source may define occupancy and another, which sounds completely insane until you begin to look to say okay, well, they defined occupancy, it’s physical occupancy, not economic occupancy, I need economic occupancy. Well, this other data source doesn’t have economic occupancy, they only have physical occupancy. So can I can I really even use these as a basis of comparison, let alone actually trying to bring in all this data. We have a timeliness issue of data as well. In many cases, data is being reported back, you know, 45 days, 60 days out for operational perspective. And in benchmark data, oftentimes, typically a year can go by before you have fresh data to go and actually look at. So there are some risks that go into this as you’re beginning to try to evaluate what your portfolio performance is today as well as what it could be in the future. Lavi care in particular solves a lot of this because we handle a lot of that data data centralization, bringing together the pro forma as well as modeling tools that come with this beginning to centralize the operational data from the property management systems and the tools that are being used at the property level, seeing all of your debt information, bringing in forward curve data in order to help model out and optimize what debt looks like. And then of course, with equity of being able to manage all of your investors that maybe as part of this, and using those tools all together to help model out what am I what do I need to do to get to the cash flow that I need to see particularly important in this day and age, as well as the returns that need to come back out to my investors. Investors, at the end of the day are the types of human beings who want to understand when and how much return they’re going to receive. The wind being a big part of this, and the how much being particularly important as well, we may have gone into deals that aren’t going to be able to return what we had initially expected. So communicating back out, and having confidence in what you’re communicating back out, particularly important in this dynamic.

J Darrin Gross 26:09

Yeah, no doubt. So let me ask you a lobby care is the data. are the data points? Are they can you customize which data points you’re choosing from? Or is that something that’s pre selected by lobby care?

Anne Hollander 26:23

Yeah, so we feature more than 500 metrics directly within the system itself. So you can choose what you want to look at. And I know that you asked me the question earlier around, you know, what specific data points do we need to be looking at, I think that’s highly dependent on the strategy of the asset itself, a lease up is going to operate differently than something that’s stabilized something in a core is going to be different than new development that you you may be working on or building value add is going to have a different strategy. And you may be looking at different metrics as part of this to help assess operationally, how effective Am I at driving the NOI and cash that I need. And then of course, how efficient ally in doing this. There’s a number of opportunities, where efficiencies, particularly within the commercial real estate space, and I think that we’re going to be over the next, you know, three to five years very, very focused on driving those efficiencies inside of our organizations.

J Darrin Gross 27:23

Yeah, I think that’s, that’s, you know, three to five years is, like, that’s kind of pretty accurate, I think. Let me ask you, so the, the 500 data points and the fact that everybody can kind of focus in on what their, what their, you know, what’s important to their situation? You mentioned some of the stuff or some of the data that’s available is, you know, almost a year old or, or, you know, how you may not be as current in not not just what you have, but just just the way the market and the data works out there. Is there anything that’s like, specific to the on the street? For the the market you’re in? Or how, you know, meaning that like, you know, you talked about how different, you know, different markets in different areas. And, you know, there’s some some markets that have have totally fallen off as far as income gains, whereas some are still able to hold is how customizable is the thing for just your specific area? I mean, or does it pick up data from from right where you are,

Anne Hollander 28:36

ya, so we’ll pick up data from right where you are. And with some additional tools that we have connected with lobby care, the ability to do, what we call peer to peer comps, or comparables in the space becomes very easy, no more of a manual process anymore. Instead, you can set those up directly within the system, and then have them run so that you can see every quarter, let’s say exactly how you’re doing against the cops in your market. This is going to provide you a level of detail that a lot of organizations don’t necessarily have today, or where they do have it prohibitively expensive to go and do. So we’re also not having to rely then on a property manager to pick up the phone and try to secret shop, who the comps are of what’s going on. We know that property managers all know one another, we know that they’re going to report back whatever it is that they want to report back. So keeping an eye on this and removing that from their plate, so that they can go and focus on all of the other things that we need to do operationally to be as efficient as possible, incredibly important to driving those ultimate efficiencies for the organization.

J Darrin Gross 29:45

So how is it how are you able to how Islami see Are you able to get that information without having the secret shopper? Property Manager do that? Sure.

Anne Hollander 29:57

So we one connect directly into the Property Management Systems, where we’re our clients, you know, are handling a lot of their their day to day data. So we’re seeing that day to day about the asset for data, specifically, what I call around the asset, where we’re starting to get into demographics and other things. This is a mix of data that’s coming from everything from lindo reporting to, on the CMBS side, to demographic data that’s coming in through census to get a more localized data sources where we can find it through other technology organizations who are opening up their data flows. So that lobbies care can can use them. And so that might be care clients can utilize that

J Darrin Gross 30:42

pool. And so is that part of the the agreement then for the users is that the data will be shared or that there is a reporting point? Not necessarily identifying their data, but some sort of a market data or how’s that work?

Anne Hollander 31:00

Yeah, so great question. And this is certainly one of my areas where I’d like to climb up on the soapbox. Historically, in the commercial real estate space, technology providers have taken ownership over the data that flows through their systems or their tools. So where a property manager or an asset manager and owner and investor etc. Use technology today, with the technology vendor that they’re using, oftentimes is claiming ownership of the particular data so that they can go and do anything else with it. Here at lobby care, we give that right back to whoever it is that’s using the system. And so they can decide directly do I want to share this in an anonymized fashion to create this market level reporting, there are benefits in doing so, of course, we have a product, the income and expense benchmark that where we have partnered with the National Apartment Association, the building owners, managers Association, the Institute of real estate management and among other organizations, to provide a benchmark a market side benchmark that has the ability to filter down quite a bit where if you’re contributing data to this benchmark, you receive that benchmark for free. That said, Your data may be more important to you than that benchmark itself, and you have full rights and access to turn off that data flow, we see this instead as an opt in to this program, rather than an opt out.

J Darrin Gross 32:29

No, I would think that, you know, just the overall the sense of that it’s not lobby CRDs data, but it’s a shared data type thing amongst the, the subscribers would be a welcome thing, as opposed to That’s mine, you gotta pay for it.

Anne Hollander 32:45

That’s fine, you get to work, I’m going to create other products that leverage all of your data that I’m then going to charge you for again, and, again, great,

J Darrin Gross 32:54

thank you, thank you for subscribing. And thank you for giving me all your data, and I’m gonna sell it to you and sell it to ya. Yeah, that’s, that’s good. So, you know, historically, I would think that, you know, more of your institutional firms would be more attuned to this kind of a data platform. Is it is it available to small and midsize operators,

Anne Hollander 33:20

we focus almost exclusively on smaller mid mid market operators, in particular. So with this, right, these are institutional grade capabilities to your point, but making them much easier to use and much more available to the mid market space is really where we’re focused. I don’t see us necessarily stretching up into the institutional space from the lobby care perspective, there’s no shortage of opportunity here in the mid market to provide these kinds of capabilities at a very effective price point to do so.

J Darrin Gross 33:54

And is there a sweet spot? Is it I mean, say the mid is that typically the client and how would you define the the mid market operator as far as a sweet spot of customer for lobbyists era.

Anne Hollander 34:09

So generally speaking, less than five or 6 billion in AUM, the mid market space, we have some clients that start that start fresh, they’ve been in the real estate space a while they were able to hit the height of the market, sell everything off and are beginning to build back. And they want to take on that first asset with the workflows and technology in place where they know that they can derive the most amount of efficiency out of that particular investment. And so they’ll start with just one asset on the platform as they begin to grow their portfolio. I’d say our sweet spot overall, typically, between 10 and 50 assets, we do have the capability to stretch much higher than that and we do have some larger clients than what that is. But certainly, you know, when you get to a place where you’re trying to manage more multiple assets at the same time, and see ever thing altogether, this provides you, uh, not only the opportunity to maximize the cash flow that you have to help fuel your growth, but also find the efficiencies that you need. It’s really just, you know, throwing gasoline on the fire when you’re thinking about the growth of your portfolio.

J Darrin Gross 35:16

Right. And I think a lot of times when I think of like, going to different data, or not data, but platforms, digital platforms for, you know, investors, property owners to use, I tend to think more of like the property management type software based on, you know, it’s, you know, it’s the operations kind of thing. But this is entirely different, more like a, you know, a step back and a larger kind of review of things and how to then affect the operations. If I’m understanding, right,

Anne Hollander 35:52

that’s right. So being able to optimize across the the asset, the debt and the equity positions together, rather than individual are isolated from each other.

J Darrin Gross 36:05

And if we could, I’d like to shift gears here for a second. By day, I’m an insurance broker. And as such, I work with my clients to assess risk, and determine what to do with the risk. And there’s three strategies we typically look to, we first look to see if there’s a way we can avoid the risk, that’s not an option, then we look to see if there’s a way we can minimize the risk. And when we cannot avoid nor minimize the risk, we look to see if there’s a way we can transfer the risk. And that’s what an insurance policy is, it’s a risk transfer vehicle. And as such, I like to ask my guests, if they can look at their own situation, could be your clients, your investors, the market? Your firm, how are we how are you’d like to frame the question. But if you can take a look at whatever that is, you want to identify and identify what you consider to be the biggest risk. And again, for clarification, while I am an insurance broker, I am not necessarily looking for insurance related answer. And so if you’re willing, I’d like to ask you Anne Hollander, what is the Biggest Risk?

Anne Hollander 37:21

I am happy to take on this challenge. So over the course of our conversation, I think we’ve talked about a number of areas of risk, right, we’re seeing expense growth, quite a bit in the operations, which, frankly, is a lot of ways the silent killer. We’ve talked to them about the debt side of this and understanding your positions within debt and understanding it a much deeper level where you sit today and what risk you’re taking on within the debt that you have either existing today on the on your existing assets, or in the future as you’re doing deals. Frankly, you know, when I begin to look at, I think there’s also equity risk as well for capital call unexpected capital calls, if the to an asset and debt aren’t mitigated particularly well. So opening up new risks potentially on the equity side, and either not being able to return as much as you’re expecting, or potentially even being underwater in what those returns look like. The three of these things, though, can all be also, the other uncovered risk, or perhaps the area that we haven’t talked about at this point is the fact that a lot of information is being sent around quite a bit very freely and openly within an organization and, and then outside of the walls of the organization that can be highly sensitive or are particularly damaging to organizations. If you think about, okay, when was the last time that I took a look at my models that I had that had all of my investor information in it. And it’s all sitting in Excel, Excel can’t be secured. We don’t necessarily know where it goes, who it’s shared with. We don’t know how they access things. We don’t know if they if somebody is modifying something within that document, sending it back sending it around. And so Excel becomes essentially a game of telephone where everybody’s got their hands on it, and hands in it. For the most part, you know, fairly innocuous but not not in a place where we can necessarily even assess what if anything has changed or information has been borrowed or stolen back out of that document as well. I think the one thing that we don’t talk about much in the commercial real estate space is the technology risk and the data risks that people run when they’re using you know, tools that seem extremely convenient, but then have a complete lack of any level of accountability to them. Excel being probably the number one offender other potential tools also offender as well.

J Darrin Gross 39:55

Ya know that transfer of information and in that no sharing of documents? Well, that’s yeah, that’s a big, big problem especially like, if everybody has the ability to edit the document that’s you’re setting yourself up

Anne Hollander 40:12

Or find ways to edit it, right? I’ve been sent locked documents before that I can log into edit it, or save a copy of it, edit it, and then send that copy back out with the same, same thing. And I could do that in less than 10 minutes.

J Darrin Gross 40:25

Yeah, no, that’s, that’s, that’s always the it, you know, even in that instance, there’s no harm meant, but just the fact how that can change the whole, you know, model or, or whatever the expected outcome is, that’s, that’s in how it could affect somebody’s decision to act or do something that’s, that’s pretty scary.

Anne Hollander 40:46

I can strip investor information, such as bank accounts, social security numbers, ein, et cetera, out of these these documents that are being sent around, it’s, it’s truly amazing to me, how willing we are to share all of this data with other folks, but then don’t or get surprised, perhaps when something doesn’t quite come back the same way that we thought it was going to.

J Darrin Gross 41:10

Yeah. No, it is a scary time, and just, you know, the how, how fluid the information is, and how sensitive it is, and, and how much trouble it can create. It’s, it’s, it is a problem. And I don’t know how you get back. I mean, you go through all the dual wellthen authentication kind of situations. And I mean, it just seems like it’s very cumbersome and stuff and and then that’s what we need, if you’re going to try and be secure or some sort of a platform. That’s a secure way you got to log in. And that information is held on the platform. There we go. So that’s that. I assume that’s kind of what you guys have available on yours.

Anne Hollander 41:53

We do. Yes, yeah, we’ve got full access control, limits and permissions on what data can be accessed. And then of course, the full logs of who’s doing what within the platform.

J Darrin Gross 42:03

There you go. Got the logs. That’s the who’s who did this. That’s great. And where can listeners go? If they would like to learn more connect with you?

Anne Hollander 42:15

Absolutely. So I would point your listeners to LobbyCRE.com to get an understanding of how lobby care can help your organization. Certainly, I’m active on LinkedIn. So find me there. I’m just linkedin.in/in/AnneHollander, so you’ll find me there as well as Twitter. I’ve gotten back on the Twitter bandwagon as of a few weeks ago.

J Darrin Gross 42:41

So they’re all safe on the Twitter there. So there you go. That’s good. So well, Anne Hollander, I can’t say thanks enough for taking time or taking the time to talk today. I’ve enjoyed it, learned a lot, and I look forward to doing it again soon.

Anne Hollander 42:58

Thank you, Darrin.

J Darrin Gross 43:00

All right. For our listeners. If you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow. That’s all we’ve got this week. Until next time, thanks for listening to commercial real estate pro networks. CRE PN Radio.

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