James Gosse 0:00
So a typical three year cap 3% cost $98,000. This is for $100 million loan. It costs $98,000 in 2019. The two by two, two by that same cap today cost 3.4 million.
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J Darrin Gross 0:37
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.
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Today my guest is James Gosse. James is an is Executive Managing Director of transaction services at NXT CRE. NXT CRE supports commercial real estate lenders find properties for their exiting borrowers that match their exiting 1031 needs. And in just a minute, we’re going to speak with James about how the price of interest rate caps is making it near impossible for borrowers to use floating rate debt.
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, James Gosse. Welcome to CRE PN Radio.
James Gosse 2:32
Thank you, Darrin, nice to Nice to be here with you.
J Darrin Gross 2:36
Well, 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. Sure.
James Gosse 2:46
I’ve been in commercial real estate since I graduated college while back now over 20 years, and I’ve been on really all sides of the transaction, right. So I learned the business on the buy side as a principal, and then certainly had involvement on the sell side. I was at the Carlton group for 10 years, really trying to doing that intermediary role. And most recently, more recent things as I was at 10x running the institutional group. And then I was a founder of of oke x, which is a a marketplace. But now I’m running as Darren, you relate, I’m running the transaction services for next care and look forward to the discussion.
J Darrin Gross 3:34
Awesome. So I think the ideal place to start is if you could describe what next ERP is, and how it works.
James Gosse 3:45
So next, cre we are a platform that effectively what we do is provide I think you touched on it, but we provide to our lender partners were able to generate, we’re able to generate not much by investors we call them, right do you mean effectively, these are 1031 investors who are looking to reinvest their cash. And they’re identified and sent to us by our lenders. And so by the time they get to our platform, these are, you know, we call them verified, whatever you call it, there, but there must by investors, that’s why we call them MPIs. They have a certain timeline, you know, typically 45 days to identify, and then there’s a bit more time afterwards to close. But that identification process is happens quickly. And so what we do is onboard them once their lender sends them to us they have a specific criteria. I would like multifamily and Los Angeles or retail in Ohio, whatever whatever it may be. And then we’ll work with them to match. Our system has a pretty intense algorithm that matches sort of the first cut of, of assets. But it’s it usually just starts there because the reality is is once you’ve matched someone’s assets you need to then take that next step. up and sort of listen to what they’re saying, I like these five out of the 30. Let’s go further that so we help them find assets and meet their their reinvestment needs.
J Darrin Gross 5:09
Got it? So the platform in and help me make sure I understand this right. So you guys receive the the borrower information from the lenders who have these loans with the placed loans already in a property with their their borrower, the terms of the loan are coming up, or is it a matter of just the the borrower’s is just expecting to exit? Regardless of the the terms of the loan?
James Gosse 5:42
Darren, you’re asking good questions. I like it. The, it’s both, right. So there’s there’s the maturity, notice, if you want to call it that, so someone effectively is coming down the pike, they’ve had a loan for 10 years or whatever, it might be a fixed rate loan, yes, if the loan is coming due, they’ll there’s a, they’re gonna get notified for that reason, right, that we will, they’ll be on board for that reason. But typically, if that’s the case, they’re already planning to do something people don’t typically let these loans just expire, without a plan. So it’s really more the other one, it’s more, these are people that maybe in year 789 10 have this have this timeframe of their loan, but they’ve made the decision to sell, right, that decision happens before we’re involved before their lenders involved. I mean, it’s that’s owners who are making these decisions every day. So once they make that decision to sell, you know, as required by loan documents, you may be familiar, you know, you often have to give them, when you have a pay off requests to pay down your loan, you need to give them at least 30 days, so the lenders get an additional 30 days sort of heads up, if you want to call it that. And that kind of is makes it so we’re able to have a 75 day window, instead of a 45 day window. Right. So you know, that’s kind of the crux of it.
J Darrin Gross 7:06
Got it. So it’s a pay off request is kind of the cue to onboard.
James Gosse 7:11
That’s sort of an early warning signal, as we see it, and that’s, that’s sort of the value in our, in our partnerships with with our lenders, is obviously they want to, they want to know what’s going on and help that borrower, you know, find a new property, and then make a loan on that new property. That’s what their skin in the game, that’s what their interest is. But it lines up well with what we want to do. And ultimately, what what their what their borrower wants to do. So got it.
J Darrin Gross 7:39
And I guess that that was what I was trying to figure out is like, is this just you you have the whole portfolio of loans in your, your system? And you’re, you know, looking for activity? Or? Or is this like a we’re getting closer, you know, but this is that request is where it’s it’s actually generating the the, I guess, we don’t
James Gosse 8:01
know exactly how many or, you know, are coming from who and when, just that they’re coming? Right, if that makes sense. And there’s sort of an ongoing flow with these. And we, you know, again, some of it to maturity driven, but it’s very rare, you find one lender that has a bunch of loans all maturing at the same time, they try to spread them out.
J Darrin Gross 8:22
Gotcha, gotcha. So and then from there, you’re basically following the the 1031 guidelines, you know, what is it 45 days identify, and, I mean, so you’re getting the queue that they’re going to sell, which then gives you the bank, when you said 30 days, they have to at least 30 days notice. If you’ve got 30 days plus the 45 days, that’s a minimum amount of time,
James Gosse 8:48
right? So we’re able to communicate then with, you know, the borrower is able to excuse me, the lender is able to communicate with a borrower and say, Look, are you planning to reinvest? If they are great, you can go fill out this questionnaire and go look at your at some opportunities on on next care? And if not, or if they’re not planning to obviously, they don’t come to our site, right. I think it’s, you know, it’s certainly, you know, we have the right incentives, if that makes sense.
J Darrin Gross 9:18
Got it. Now, the next property, are you involved at all? Or do you have a portfolio of listings that are available? Or is it more of just the communication with the borrower that they do intend to, you know, reinvest. And that’s kind of cueing it up for your your lending client, who is actually if I understand, right, the lender is your, your true client, because that’s the one that you’re trying to get them the next loan or the get the borrower to use that lender again for their next loan. Is that my understanding that right?
James Gosse 9:54
Yes, a little bit. I’ll clarify. I mean, the the lender The benefit for the lender, and one of the reasons we talk about this sometimes is the digital line of sight. Right? So most lenders when they, when they make a loan, they’ll make that loan, and then they may hear back from the borrower, they may not. Right. I mean, the reality is, is you may hear from them, you may not you may get a pay off request. I mean, typically, that’s a, that’s a, something they have to do by the documents. But you may have my point is you may hear back from them and have a sort of report, and you may not. So the point is, is once that borrower says, I’m great, I’m selling my property, you know, as by asking for this loan, pay off request, that’s kind of them telling you that I’m selling this property. Well, it kind of alerts that that lender, I’m about to lose a loan, right, again, not lose a loan, but it’s you want to retain that borrower if you can. That’s the name of the game for all lenders. So from that perspective, yes, we’re trying to help them. Ultimately, that’s what they’re, that’s where their head is at. That’s where the, the skin is in the game for them. Because they ultimately want to be in a position to help that borrower again. Right. So from from the other side of the coin, you know, I think you said you just you matching, or just helping, you know, once they get here, it’s a fully curated list, right? We are not a marketplace, we’re not a listing site. So when someone goes on our website, let’s say, you know, John broker goes on our website and uploads 50 properties. That’s fantastic. Now you go on our website and go, I can’t find any these properties, James. That’s because no one can we by design, if you upload a property, the only, the only, so there’s, so there are a lot of properties uploaded, but people can’t see them, except when they’re matched. So once you’re matched in again, this is the idea behind keeping some of this stuff anonymous, we found a lot of our institutional clients like it because they can market assets without marketing assets, right, they can sort of get price discovery without having to come into the market and say, you know, I’m definitely going to do this kind of thing. But it lets us then have a have a wide swath of properties to which we can match. And when we’re able to match them with properties that are on the market, we can match them with off market properties. And so it’s been, you know, we’ve been, we’ve gotten a very, here, I say, dare I say, rave reviews so far from the MBI. Because ultimately, it’s not just what we do in the initial match, it’s then the follow up, right? Someone may say, great, you sent me 83 properties, but I’m not really that interested in 75 of them. These five are interesting. And here’s why when the five is interesting is great. But here’s why is more important, if I like them, because they all have $20,000 a month in income, which I need to support this new loan, or they’re, you know, none of them are more than 10 units if they’re multifamily, because, you know, I want it to be enough that it’s, you know, that it can generate the income, but not so much that it you know, I don’t want 30 units, because that becomes a headache. Right? So but I don’t want to units either, because that means if I lose one tenant, I’m at 50% occupancy, right. So it’s kind of like, you know, finding things that that make sense. And what we’ve we’ve found is that they really, you know, ultimately, these investors, by the way, the 1031 buyers, these are very sophisticated investors, right? It’s not like you’re dealing with someone that you have to explain, Well, this is how a cap rate works. I mean, these guys know exactly what they want. So it working with them. Obviously, it makes our job easier. But, you know, ultimately, our job is to bring them as many suitable replacement properties as we can. They then have to pare through that and say, These are the ones we like, but ultimately, you know, we look at our job as being successfully completed with that MBI. Once we’ve identified a match that they say, Yes, I’m moving forward. And this kind of goes back to something you said earlier, it’s not just the 45 days, when you say 45 days for identifying and we can extend that, as I said, the 75, when we get the loan payoff request comes in arlena. But it’s 45 days is a little bit, it’s a misnomer, because it’s not like you just need to identify something in 45 days, you have to, you have to find it. You have to do the due diligence, and you have to tie it up, right? I mean, that’s a very different than, hey, do you have four properties you might buy? Because anyone can do that. But that doesn’t actually accomplish what you need, right? Because you have to then say I have identified XYZ property. And so to be able to say I’ve identified it, you really at least need to have had, you know, that contract discussion, you want to have the thing tied up so that now it’s just a closing function. So what we found is that the buyers, the MBAs these guys are extremely motivated. They don’t let the paint dry on anything. They’re asking for information right? We try to explain this to we did a CCI M webinar yesterday, I was trying to explain it to some of the brokerage community. You know, by the time they’re matched to a broker and to a seller, saying, Hey, you’re one of five people that this NBI is interested in their asset, you’re already three quarters of the way down the sales funnel, right? I mean, they’ve already said no to 75, other deals, they’ve probably gone through your materials. And now at that point, they just have questions and want to talk about price, right? Because they don’t have time to play around. They need to get into do the due diligence, and get the process going.
J Darrin Gross 15:35
Yeah, done the answer. But no, I haven’t done a couple of exchanges. I mean, 45 days is fast. And I would think, Oh, yeah, no, I would think that the, the, you know, this must by investor would welcome the the kind of the narrowed funnel of the opportunities that kind of match their criteria.
James Gosse 15:59
Otherwise, it’s really hard for them to sort through all this stuff.
J Darrin Gross 16:03
Oh, yeah. I mean, you’re literally going, you know, I remember a guy saying, it’s kind of like standing at the ocean with a Dixie cup, saying, you know, go ahead and empty the ocean, you know, it’s like, there’s just so much, so much information, and just, you know, you can try and narrow it narrow and narrow it, but there’s still, too to have kind of more of a systematic way to, to, you know, find a replacement property. I didn’t, I mean, I knew about the the matching thing from the lender thing, or they understood that, and this piece, I guess, was kind of new, but, but to me, it’s making a lot more clear on the value of that. For the borrower, the investor that’s doing the exchange has to have that. And let me ask you, so your CCI M group that you were working with yesterday, has been well received in the broker community,
James Gosse 16:56
unbelievably, I mean, I’ve got to give a big thank you and shout out to CCI M, we joined the member Advantage program, I think it was May or June of this year. And CCI M has been fantastic. I mean, as you being, you know, a broker of any sort, right insurance or what have you. You can certainly appreciate CCI M and sort of the way they have the education system. I mean, they’re looked at, certainly in the brokerage community. As you know, the this kind of a leader is at least on the you know, in terms of knowledge base and those kinds of things. Now, granted, are there other brokers that are not CCM that have done huge volumes, of course, that said, I, you know, we love CCI n because I feel like they take the time they listen, we were on that we had a webinar we had scheduled for them, right kind of just talking about us and our services, and we had, you know, almost 260 people sign up for the thing. And, you know, we had went out once because we had too many people in the first call. So it’s been very well received. I think Darren, it kind of goes to the point. I mean, think about the discussion we’re having here today. And you said, you know, I know a bit about you. But you know, as you’re making it clearer as the light bulbs go on, you can see what the value is. Right? So, yes, there have been instances where I’m having to talk to, you know, so so and so, you know, a brokerage firm and explain to them, you know, understand that, and basically make the light bulb go on for them. Because once they realize, you know, you have someone that’s interested in one of my assets, this person is already qualified, doesn’t need to do the proof of funds doesn’t need to do a lot of this has a loan, right has a lender that wants to lend. And, you know, those are
J Darrin Gross 18:48
two big pieces right there. Round three. If somebody wants to make the deal, you’ve got the vet them the capital, and you have the lender. Everybody’s Greenlight, those are three, those are big, big pieces to do a deal.
James Gosse 19:02
Those are the important components. And so when you have those, you know, you can sort of see the light bulbs go on, and if people understand as well. I mean, with with all respect to all of our MBAs because we love them all. You know, I think they would be the first to tell you, they can be a little bit less price sensitive than a typical investor, right? I mean, Darren, if you and I were gonna go buy a multifamily property. And we said, let’s find a deal that really is juicy and is great. I send you three or four deals and you sent me a couple we’re gonna we’re going to be bargain hunting, right? We’re going to be beating up the sellers trying to get the best price we can get. And that’s great. We’re probably gonna make a great deal. The reality is, is yes, these are still savvy investors, they still want to make a good deal, but they’re not going to go to the level of brain damage that you and I will write only because they don’t have the time but they just don’t have they can’t play around. They can’t waste two weeks negotiating.
J Darrin Gross 19:59
Right? Right. Not that’s, that’s definitely a critical piece of this. And I appreciate you clarifying for me that that piece because I like so did understand the front end working with the the lender and the borrower thing but the the value of the portfolio of opportunities and the way that the the borrower can’t see them until they are, you know, rolled or they’ve they’ve answered the question or whatever to, to quantify or what you know, they’re not going to see the whole A to Z, they’re gonna see the portion of the dead fits their exchange, correct.
James Gosse 20:42
Only that Right, exactly. So and then they’re going to sort of self select the ones they that they liked, versus the ones they don’t. And it kind of you know, it that starts the second search, if you will. And ultimately, we try to have conversations, as many as we can, with these, these viruses are coming on, because oftentimes, they’ll tell you stuff that you can’t put on a questionnaire, right? Like, yes, I put down Los Angeles County multifamily, but what I really meant was Studio City, right. I mean, it’s a big difference between Well, geez, okay, so it’s not 100 properties, we should show you it’s 20. But right, that’s actually helpful, because now all 20 are and guess what? Studio City? Right? So it just depends on there’s something to be said the relational part of it is, is certainly interesting and important as well.
J Darrin Gross 21:30
That’s good. So let’s talk just a little bit here about interest rate caps. Oh, yes. fun talking. Yeah, the topic we started with. So describe for the listeners, what they are, and who uses the interest rate caps?
James Gosse 21:49
Well, interest rate caps for those that don’t know, and it’s, it’s to me, I mean, this is not something that they teach you in, you know, business one on one or anything like that, this is this is a little bit of an obscure product, like interest rate swaps. Interest rate caps are used by owners of buyers of property. And they can either be required, or they can be, you know, elective. So you can choose to get this if, if you if it helps you sleep well at night, or it can be required in many cases, I know that Freddie, Freddie Mac will require them for any free floating rate loan. And again, it’s just a risk mitigator. So what is it, let me let me start with that. An interest rate cap. Again, for floating rate debt, it basically limits the amount of limits the amount of differential we’ll call it, that you can that you can have. So if I have a 3%, if I have a 3%, floating rate debt, deal with a with a spread of whatever it might be 200, or 150, means that if I buy an interest rate cap with a strike of three means that anything above three, I that I’m not, I’m not gonna have to pay for it. If that makes sense. I basically have kept my interest cost for a set period of time. Now there’s a few things that make it up, I’ll just run through this quickly. There’s the notional, which is the size of the cat, right? So it makes a difference if I buy a camp, obviously, for a $50 million loan or $100 million loan. And it but it’s kind of linear, except on the extremes, right. So typically $100 million, interest rate cap is about double that $50 million interest, again, all else being equal. So that’s typically the rules except on the extremes. So that’s one component that kind of built into it, then there’s a term, obviously, if you want, the longer the term, the more expensive it’s going to be. And then the third is the strike rate, as you sort of have the rate at which, above which the rate the cap kicks in, and I mentioned that one before, if you’re, hey, it’s three? Well, let’s talk about today’s interest rates, right, five, five and a half. So if you put if you bought an interest rate cap at five and a half, you know, if the rate went to six, you’re still paying five and a half, if that makes sense. And again, these are floating rates at that. So I’m using sort of, I’m using exact numbers, but you know, roughly speaking, so what that means is the lower the strike rate, then the higher the cap, price is typically these things are typically bought and prepaid at one time, right. So, you know, at the beginning of a loan, they’ll typically do it and sometimes in some cases, and we’ve seen this recently, Darren, I think this is this is why it’s pertinent that some of these floating rate debt deals that are coming due because I mean, oftentimes these are these are used when you were doing a bridge loan or things like that, where you’re just trying to transitional situation or you’re stabilizing a property. We’ve seen where these these caps are. I mean, literally, it used to cost you 98,000 or something? For a property? I was using? I was looking at an example I did before. Yeah, so a typical three year cap 3%. Cost $98,000. This is for $100 million loan, it costs $98,000. In 2019. To buy to buy to, to buy that same cap today. Cost 3.4 million. Yeah. Right. So it’s not only not affordable, it basically has put the heavy brakes on that market. In terms of what’s what’s doable. Ironically, this kind of goes back to what, what you mentioned before Darren, which is, people are still moving forward. So, yes, they need to adjust to the new normal. But I mean, I think that’s the reality is, we’re still in an interest rate environment, that’s very reasonable, on a historic basis, right? If you look at historic levels, I mean, 1980, we were 15%. So this is not, this is not crazy, but by any stretch,
J Darrin Gross 26:05
reasonable on a historic basis, but shocking, compared to a recent historical, you know, basis. And, and, you know, we were talking before we started recording, but you know, the the market, the market goes forward, just like the sun comes up every day and Saturday night. You know, it’s going to go on with or without you. But for the the rate cap, I would guess that this is more of a situation where there’s the those that purchased them previously, and they’re setting or they’re getting ready to expire. And they’re their financing is coming due for either a balloon payment or or refinance, which sounds like it might be a good cue for next era. Right. But
James Gosse 27:00
it’s interesting, you say that, because what I’m saying, I’ll give you an example, we actually have a real life example. Sorry, that we saw recently, and I’ll leave the names and all that stuff out so that it doesn’t identify anyone. But we’ve we’ve been seeing, ironically, we had a large tender one. Replacement need, it was over 100 million actually of equity. And so the deals that we came across were, you know, sporadic in terms of, you know, we’re having a look at different markets. But ultimately, some of the deals that the system matched to, there was a couple where we can these are, these are beautiful Class A, or double A, in some cases, multifamily built in the last two, three years. But again, some of these were built like again, think about it, if you built something in 2020 or 21, you probably weren’t putting on long term debt. Right? You were putting on short term debt to try to get it stabilized, and then you go get the long term debt. Right. So what we’re finding now is that, you know, we have one case where it was north of $100 million loan in place. And it’s a floater. Right. So there are extension options, but the extension option includes guess what, you have to buy an interest rate cap, and something that I believe, I don’t want to miss misquote what it was on this one. But I mean, it was somewhere in the neighborhood of seven $8 million for an interest rate cap. And when you think Well, geez, okay, yes, it’s a large deal, did it? Well, but if you’re buying these deals with 20 $30 million of equity, then then $8 million of equity, just just to continue to hold it exactly like it is nothing’s changed. That’s sometimes a tough pill to swallow, right? I mean, we’re seeing Brookfield, and we’ve seen a lot of the big owners around around the country as well started giving the keys back on deals like this, right saying, Look, we can’t, we’re not going to go and buy the interest rate cap. Because we can’t, and we can’t continue to have the loan if we don’t buy the cap. So here you go. Lender, you figure it out, right. And then the reality is, as most of these lenders are going, then then in a slowdown, we let’s let’s work on something, right? Because they don’t want to be stuck having to sort these things out by themselves.
J Darrin Gross 29:21
Certainly the the, you know, the example of if you have a, you know, a five $5 million dollar loan, that’s a huge problem. If you have a $500 billion loan, that’s a bank problem kind of thing and
James Gosse 29:37
you get to some level, then then all of a sudden, you’re exactly right. I mean, they would take your $5 million loan back, no questions asked and foreclose and go figure out a way to sell it. You could try to give them a $500 million loan back they’re going Oh, hold on. Yeah, right. They they want your expertise involved. So
J Darrin Gross 29:57
yeah, that’s That’s it And I’m guessing that those larger ones with institutional borrowers and that there’s a little bit more flexibility to work out that kind of thing, as opposed to the, you know, mom and pop or individual investor that’s, that’s got a smaller property that
James Gosse 30:19
you say that is the case by and large Darren, but i On the flip side, remember I mean, this is not like 2008 or, you know, more recent periods of pain or tightness, if we want to call it that in the credit markets. So, you know, it these extensions, you know, we’re seeing them done, but we’re seeing them being done very selectively, and situationally, so, you know, six to 12 month extensions, we’re seeing instead of the typical one and two year, and, again, why? Because, you know, I may be your let’s say, your life company, and I’m one of your fantastic relationship borrowers who you’ve done business with, yes, you’re going to do everything you can to help me continue to do it. But guess what, I probably if I’m a Life company, borrower, I probably only borrowed 60%. Anyway, right? Because that’s what you guys lend. So this really speaks more to the bank’s CMBS the high leverage borrowers, right, where there’s less space in the deal for any blips, they’re more sort of financially structured. But, you know, by and large, yes, the big guys tend to, you know, get get favoritism, or what are you going to call it, they tend to have more options to them. And again, oftentimes, these institutions have, you know, we know this, you know, as you probably do as well, they’ve got opportunity funds. So oftentimes they have lending capabilities through those funds, that, typically, they’ll they’ll go in and lend, you know, aggressively, but they have, they’ve already sort of thought this through, they’ve seen this before, so they have GAP funds that are sort of ready to go. So they may be able to delay their own pain, if that makes sense, or delay the situation, I say pain, it’s not really pain, they may just be able to delay the situation. Because right now, that’s, that’s really what most borrowers want and need, is I just need some time, there’s nothing wrong with my asset, but the market don’t make me some of this market. Right, people can get new financing to buy the loan, or there’s so few deals, you know, that have gone on. And then what we’re gonna see at the end of this year is the opposite. We’re gonna see everything coming to market. But the bid ask spreads still has to come in a little bit, right? I mean, there’s still a gap between what people think their assets worth what someone can pay, based on and a lot of, it’s based on financing. If I’m, if I’m out there today, trying to get a loan, I used to be able to get 70 80% leverage, I can probably get 50. Right, just based on loan size. And so it’s making it harder to do deals. But again, that’s a function of at somewhat driven by the pricing, as that adjusts, we’ll see the market go back much more normal. I mean, I You’re exactly right. The people that want to do business are going to do business, there’s going to be people that sit on the sidelines and kind of go, Oh, I missed the the cheap capital, but it’s gone. everyone’s on the same on the same playing field.
J Darrin Gross 33:16
Right, right. No, I get the, you know, the, it’s gonna go on. And I think the I think the hard part for, like most people, myself, definitely included, is the reset of the mind to what the market is, as opposed to what it was based on the numbers that I entered the market on, when, you know, I thought everything worked. And, you know, accepting that either now the values decreased, or the loan cost has increased, or, you know, everything’s changed and my number, the only one that’s not working as well as I’m not, you know, I’m not benefiting like, I originally thought I was going to because of all the recent and the numbers. And for the short term, that may be true, but I was talking with somebody earlier this morning, just about, you know, it’s more of a long horizon kind of thing, if you’re able to have a longer horizon. You know, you can get through these things, but if you have loan maturity issues and and you’re forced to, you know, sell or make a deal or refinance or whatever, then you’re going to have to come to the reality sooner. But many
James Gosse 34:29
like, I mean, again, many of the things about if, if you’d bought something a few years ago, and you bought it based on, you know, hey, I think we’re getting a deal. We’re buying this at a seven cap in a six cap market, right? And today, you’re looking at it and say, Well, we’re sort of bearing down on this on this loan maturity, and I think I’m going to sell Yes, it might be painful as you get out into the market and realize I’m actually gonna have to sell it at a seven cap or a seven and a half cap. You know, So, now I’m not instead of making instead of having equity and making money in this deal, I’m, you know, I’m just going to have the cash flow that I got along the way, and the pay down of debt and all that kind of stuff. And but but here’s the silver lining to that is, yes, but now you’re when you go to buy, you’re gonna get that deal on the going back in. Right. So, right. That’s the long horizon mentality to it. And again, all investors? Well, most of the investors, we we’ve dealt with, you know, they may, they may look at, you know, individual deals on us, you know, timing and situation, but everything they’re doing is on a long term horizon. So, I mean, that’s the flip side.
J Darrin Gross 35:42
So I think it was before we started recording, you had mentioned kind of the activity in the market. quarter to quarter. Can you speak a little bit to what you’re seeing in the market as far as activity? Yeah, I
James Gosse 35:59
mean, I think we’re probably seeing much of what what others have been seeing as well. There, at least from a, you know, investment sales perspective, we’ve seen a, I mean, it’s, it’s, I don’t want to say it’s come to a grinding halt. But it’s been pretty close, right, the first half of this year has been pretty lackluster in terms of what everyone had hoped for. But it’s really because, and again, that that kind of comes off last year, as well, we weren’t exactly going gangbusters last year in terms of volumes, but volumes just dropped off a cliff this the the first half of this year, but it’s mostly again, in our opinion, it’s mostly uncertainty, right? The uncertainty where interest rates gonna go, how they’re gonna go up to eight. So once we kind of got to June, around that, that that time period, we started to get some some clarity on, okay, interest rates, you know, we may end up at five and a half 6%. But that’s going to be it. Right, that’s kind of the end of it, at least in the short run. And then investors start to reset. So what we’ve been seeing now, you know, the beginning of, you know, end of June, beginning of July, we’ve seen a huge volume of deals coming to the market. And it’s important. The reason I mentioned when, is, you know, if these deals were all trickling in, and you know, April, May, June, it means less, it’s the fact that these deals are coming in July, after the market has now said, Okay, here’s some certainty for you. Right. And so these deals are now coming out. And I mentioned that because it’s not just deals are available. These are deals with, obviously not in every case, but a lot of realistic sellers, right, if someone is bringing an asset to market now, they, you know, if you think about it, Dan, why would you sell an asset you have right now, unless you have to? Right? So you wouldn’t is the answer? So, you know, these are motivated sellers, that realize they have to do something, and, you know, they’re trying to try to not be the last guy to figure it out, we’re seeing we’re expecting, you know, that the volume is going to continue in terms of new deals coming to market and listings available, I think it’s gonna be we’re not going to see as much activity as we’d like, you know, just from a from a macro standpoint, in the third quarter, because we’re still trying to find that bid ask, you know, that that sort of happy place, right, that. And right now, there’s still that gap between the bid ask spread. But as you’ve seen, in that I’ve seen previously, investors are pretty savvy. And so it may take, you know, a couple of months, but it won’t take a couple of years, right, is the point, investors don’t like to lose when they’re bidding on deals. So they’ll quickly become accustomed to the new normals. And you know, hey, if I don’t like it, I don’t have to play certainly is the case. But we’re expecting the fourth quarter of this year, as you know, some of these extensions are burning off. Now. As we’ve talked about, you know, lenders are having to be very selective about where they choose, because it’s not like I have cheap capital, and I’m just withholding it from you. If I’m a lender, right? It’s, I don’t have access to it. So it’s not even an option. You know, they’re only able to, that’s why they’re doing shorter extensions, right. They, you know, to the extent we can manage that we want to start making higher interest loans. So, you know, we have to, that’s, that’s what we do. So,
J Darrin Gross 39:32
yeah, no, I mean, and they’re kind of in the same position, their cost of capital has increased, so they’ve got to lend it out an IRA, and they still want to make money
James Gosse 39:42
and they want to loan money, right. I mean, this is yeah, so
J Darrin Gross 39:45
if if everybody sells and nobody buys that’s, you know that that’s not exact. I mean, that couldn’t couldn’t work period. Yeah, yeah. You gotta sell on the buy. There’s two people on Wall there. So but no, It’s interesting. Well, I do I do believe that, you know, we’re I hope, let me let me ask you this way. You know, everything we’ve talked about kind of the and especially this this activity you’ve seen in the second quarter, and as you kind of indicated, the fourth quarter, you expect more activity? D you Do you sense that? Are there any more potential surprises? Or do you feel like we are we have reached or about to reach? What the The equilibrium or the you know what the market is? And that’s what’s that’s where people are, are getting comfortable? Again, like I said, realistic sellers, on valuations, is this kind of reassurance to investors in, you know, buyers and sellers that this is the market and we can go forward?
James Gosse 40:48
I think so I think that’s that’s one of the reasons the Fed. I mean, obviously, they’re they’re speaking a lot to a lot of constituents. But Jerome Powell, specifically mentioned commercial real estate, because, again, I think they’re aware of what’s going on. I mean, you’re exactly right, lenders want to lend money, they’re certainly trying to adjust to the new norms. You know, our expectation is that once this uncertainty was removed, and again, it’ll be, you know, completely removed when we when we get to that last rate cutter, or rate increase scuze. Me. You know, I guess the surprises could be, if they, if they didn’t raise the rates at all, more might mean, we’re expecting to more 25 basis increases now. Or, you know, they were just to do one of them. Theoretically, if they decided that things were going so well, they were going to do a rate cut, I don’t think that’s very possible, but I guess anything’s possible. So, other things, and I think that’s what you’re getting at other things affecting this, or what else can happen, that would, would sort of change things or shake the market. Obviously, there’s geopolitical things. But to some extent, that’s even been baked out of it, right. I mean, we’ve been living in, in sort of this new normal, where were all the markets are connected and tied together. You know, not just economic, but political and all this kind of weird stuff. So I think, to some degree, a lot of that’s already been baked in. That said, you know, obviously, there’s, there’s a handful of things that could, could play a role and could change the direction of, or trajectory of kind of the, the pull out. But I don’t think what we have here, I mean, I almost said recovery, but the word isn’t recovery. Because if you think about it, this is not like 2008, it’s not like these prior ones, where, you know, properties are sucking wind, and things are really struggling. And everyone’s property is now worth less kind of thing. The reality is, is you’ve got a lot of properties that are chugging along, are doing exactly as they’re supposed to. I mean, that’s the, that’s the tough part is you have some owners that have done exactly what they’re supposed to do. But they finance the deal with 3% leverage. So now, when they go out and try to refinance at five and a half, you know, their loan no longer meets that one to five coverage ratio.
J Darrin Gross 43:22
Right, right. No, I get it, I get it. Hey, James, 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 consider, we first look to see if we can avoid the risk, when that’s not an option, then we look to see if we can minimize the risk. And if we cannot avoid nor minimize the risk, and we let’s see if 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, the Fed political supply chain? Well, you know, whatever you believe, right, you identify as the biggest risk. And again, for clarification, while I’m an insurance broker, I’m not necessarily looking for an insurance related answer. Right. And so if you’re willing, I’d like to ask you, James Goss, what is the BIGGEST RISK?
James Gosse 44:36
Well, a great question. And certainly, you know, the topic we were just touching on by the way, Darrin, I think, you know, oftentimes, so people are aware interest rate caps are often referred to as insurance policies for your interest rate. So I just found that an interesting aside, the biggest risk for us and this is a good question. You know, it’s one of the things that If I’m honest, sort of this probably keeps me up at night more than other things. It’s, you know, it’s not making people aware of who we are, it’s not not being able to get our message out to the right people. Right, that that’s the risk I see. And again, we’re obviously doing what we can to eliminate, mitigate, minimize all that kind of stuff. That said, you know, to us, that’s the biggest risk, obviously, there’s, there’s other market forces and things like that, but just from what we can control. You know, to me that that’s the biggest risk is we have something that when we explain it correctly, and when we have the right, people were talking to light bulbs go on. And when we have the discussion with lender partners, they go, of course, we want to do this with you, right? Of course we’d like so, but it’s just a function of the risk is that we don’t communicate it right. Or the risk is that we don’t communicate it to the right audience or, you know, whatever the case. So, to us, it’s a an exposure again, and I see this very much. So we’ve got a guy, I think the gentleman who set me up to this, Tim, is outstanding, and he’s spends all of his time trying to figure out how do we make sure the market is aware of us has the right perception. And again, that’s one of the reasons we were so pleased to join CCI M, their member Advantage program? Again, for us, it’s a, I would say an exposure or, you know, making sure we get enough exposure is our Biggest Risk.
J Darrin Gross 46:30
You know, that’s well said if you have the, the, you know, the solution, and nobody knows you. That’s not a good, not a good recipe for success.
James Gosse 46:42
Well, and history is littered with, you know, with people that had a fantastic product and couldn’t communicate it. So we’re making sure we, we try to communicate
J Darrin Gross 46:54
again, James, where can listeners go if they’d like to learn more connect with you?
James Gosse 47:00
Yes. Obviously, you can get started our website. It’s NXTCRE.com. If anyone has questions or would like to talk to me, I’ll, I’ll just give my email here as well. It’s James at NXT cre.com. Certainly, you can have if you want to follow us on LinkedIn. That’s a good way to keep up with our newsletter. We posted that webinar. I think the recording is going to be posted to that here this week sometime. So lots of information out there. But certainly NXTCRE.com NXTCRE.com would be the place to start.
J Darrin Gross 47:36
Got it. Well, James gas I cannot say thanks enough for taking the time to talk today. I have you enjoyed it. Learned a lot and I look forward to doing it again soon.
James Gosse 47:46
Do All right. Thanks. Darrin.
J Darrin Gross 47:49
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.
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