interest rates Archives - J Darrin Gross Podcasts

Interest Rates Affect on Multifamily Demand with Henry Stimler – CRE PN #422

Henry Stimler 0:00

So you’ve got two types of sellers that have to sell. You got guys that, especially on new development, construction merchant builders build the product. Typically, they’ve got a little bit of runway to lease the deal up and then put it on the market. And the banks will allow them that time. Now, the construction lenders are just scrambling to bring as much money back in. So the pressure on the merchant builders is immense. So they are under tremendous strain. And especially because they took out floating rate construction loans, when Sofer was let’s say 10. Today service first of five, so their cost is so much high, it’s astronomically high, so the pressure is on them, they’re choking. Again, lease up deals don’t bring a lot of income because you’re leasing up the properties so much and builders are really feeling the squeeze. Then on top of that, you’ve got guys that again took out floating rate debt, floating rate variable option debt, especially bridge debt that needs interest rate caps, those interest rate caps have gone through the roof that then insurance against interest rate costs, because of the fluctuate the volatility within the lending market. So guys that have loans that are coming due, they’re also under tremendous pressure to go and sell but a lot of these guys are going to struggle because they bought deals at the height of the market when Cap rates were in the threes. Today the market is in the fives so that a lot of them are going to have to sell for a loss and swallow it and just do what they need to do. And they don’t really have a choice.

Announcer 1:24

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 1:43

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 to provide their experience and insight to help you grow your real estate portfolio.

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Today my guest is Henry Stimler. Henry is the Executive Managing Director of global commercial real estate at the firm Newmark, whose team financed 4.4 billion in deals in 2022 alone. Henry’s core focus is origination and brokerage in large multifamily debt and equity transactions. And in just a minute, we’re going to speak with Henry about the impact of the current economic factors on the commercial real estate industry. And we’ll drill down into multifamily housing.

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Henry Stimler 3:39

Thank you very much for having me.

J Darrin Gross 3:41

Henry, 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.

Henry Stimler 3:49

Sure. So I’m British born, lived in the UK moved to New York at the age of 22. In 2002, did a few things in that tent in the time there in 2017. I joined Cantor Fitzgerald, which was the controlling shareholder of Newmark in 2019. Myself and my team got transferred from Cantor to Newmark. Fast forward today we are the one of the number one lending groups in the company and I would say in the country. Our core focus is obviously multifamily where we originate billions of dollars of of deals and loans. But we also do office industrial hotels, so we touch all the sectors when our core focus is multi.

J Darrin Gross 4:35

It so let’s talk just a little bit about the current state of the commercial real estate market. When you’re doing the origination, who, who’s your typical client? Are you working with individual investors syndications? Or, or how what’s the what’s kind of a sweet spot for you? As far as the size of the, the loan, yeah, that you work on.

Henry Stimler 5:05

So I typically am looking to do larger size deals, the deals all take the same time from a $10 million deal to $100 million deal. So if I can focus on the on the bigger deals, that’s a better use of my time I cover institutions recover some of the large institutions that own 3040 50,000 apartments. Some of the largest developers, we closed alone. A few months back for Larry Silverstein, he built the World Trade Center was $176 million construction loan for new development in Queens. So it and then we also have the syndicators, we have the smaller mom and pop investors. I’m always a very big believer that from small acorns can big trees. So one of my favorite things to do is to is to help my clients build their businesses and achieve their dreams. And we’ve we’ve helped guys go from 1000 units to 10,000 units and up and up and up. So that’s what we love to do. But so we support we have the entire gauntlet of different types of, of real estate investors from the big institutions, that the syndicators, the mom and pops and then the guys just starting to get on their feet and start to expand their portfolios.

J Darrin Gross 6:13

And are you geographically limited to New York? Or were no, no,

Henry Stimler 6:18

no, no, no, no, I do deals all across the US. The last deal I closed was in Dallas. It was a new built multifamily deal bought by a group called Harbor Group. Close the deal in Columbus, Ohio. Another multifamily deal we are closing an office deal in Dallas again, closing a taking out a construction that we did in 2017 in Boca Raton of a hotel, condo, an apartment building with a golf course performance $60 million dollars. So I’ll go with the businesses.

J Darrin Gross 6:49

I’ve heard you mentioned construction quite a bit. What percentage of your business is new construction versus an existing property?

Henry Stimler 7:00

So I would say that those numbers have changed dramatically. In this year, obviously, with the rise in interest rates, a lot of construction property, a lot of construction deals that were shovel ready, developers are taking a pause because their cost of capital has risen. So incredibly, so I would say right now less construction, more buying and holding or buying and fixing.

J Darrin Gross 7:24

Got it? Got it. And on the the buy side of the existing stock. Is there a what are the typical length of the or the term of the loans? Are they 10 year holds five, what’s the what’s there.

Henry Stimler 7:45

So it always varies always changes last year, when when interest rates were historically low. A lot of people were taking out floating rate shorter term loans for Domine. Bridge loans, the bridge lenders were very aggressive in the space lending 7580 all the way up to 85%. LTV those were three plus one plus one three year term plus two extensions. But now with the incredible volatility and interest rates, it we advise our clients to lock in fixed rate money, because the indices and the Treasury just keep on moving against us. So rather than to be exposed to continued hikes to continue fluctuation, lock in the lock in five year money, seven year money 10 year money, but it also really depends on what your business plan is. So if you’re buying a transient asset, if you’re buying a building that sits in 1970s, building it in need of a lot of love and TLC and care, but it’s in a fantastic market and a fantastic neighborhood. You know, your comps and other buildings that are in better shape are getting higher rents, those type of deals you want to go in, you want to fix it up, push your NOI and then be able to do a refi. So pull your money out. So if it’s something that’s super transient, you don’t want to lock up long term money, because there’s gonna be it’s gonna be very difficult then for you to pull your equity dollars out. But if you know that if you do the work, you’re gonna get a big pop in rents, I would advise them to take a floating rate loan, do the work, fix up the property, once you’ve fixed up the property, once you’ve pushed noi through the roof, come back, lock in a fixed rate deal and pull out some of your equity.

J Darrin Gross 9:17

And as far as the different loan products, you talked a little bit about bridge loan and then kind of referenced the different length the terms is it agency or is it

Henry Stimler 9:29

Yeah, so today, I would say that the biggest players are in the space, a little bit to my chagrin, because it gives them a lot of power is Freddie Mac and Fannie Mae right? So they’re really not competing with anybody else because the regional banks have pullback tremendously. The debt fund lenders have pullback tremendously. So for multi besides, I would say on much bigger deals when you can access Blackstone’s money you KKR as life insurance money, areas as money these big conglomerates. The really only game in town you have is Freddie Mac Fannie Mae, but that’s amazing. And that’s what makes multifamily such an such a unique asset class is that you have these government backed programs that have 160 100 $70 billion to put out in 2023.

J Darrin Gross 10:12

Right. Now it is. It’s almost scary when you see just how the the cast of players has changed so much. And just the rates have changed so much. What are you seeing from the, I guess, let’s talk about the seller side of the equation as far as somebody who’s got an existing property, they’re looking to exit What what are you seeing as far as their expectations versus the reality of the market and

Henry Stimler 10:40

so of course sellers are always want to get top dollar, they always want to sell at the highest price they can. And for many years, they’ve been able to get it’s been a it’s been a buyers, it’s been a seller’s market, the seller says this is what I want, I want a three and a half cap. And they’ve been able to achieve those staggering cap rates. Today, it’s not so much a seller’s market, it’s more buyers markets. But there is a disconnect between buyers and sellers, right sellers still want to sell things in the mid four caps. buyers don’t want to buy take negative leverage, they want deals that are five and a half cap. So there’s there’s that disconnect time. That’s why we’ve seen We’ve seen that transactions fall off a cliff, I think there’s a 75% drop in transactions from 2022 to 2023.

J Darrin Gross 11:24

And as far as the gap there, are you are you seeing more sellers? Well, as far as the sellers that are selling because the deals that are getting done, are those sellers that have to sell or is are they at the end of their financing, or what are you seeing there.

Henry Stimler 11:44

So you’ve got two types of sellers that have to sell, you got guys that especially on new development, construction, merchant builders build the product, typically, they’ve got a little bit of runway to lease the deal up and then put it on the market. And the banks will allow them that time. Now the construction lenders are just scrambling to bring as much money back in. So the pressure on the merchant builders is immense. So they are under tremendous strain. And especially because they took out floating rate construction loans, when Sofer was let’s say 10, today service first of five. So their cost is so much higher, it’s astronomically high, so the pressure is on them, they’re choking. Again, lease up deals don’t bring a lot of income, because you’re leasing out the properties so much, and builders are really feeling the squeeze. Then on top of that you’ve got guys that again took out floating rate debt, floating rate variable option debt, especially bridge debt, that needs interest rate caps, those interest rate caps have gone through the roof that then insurance against interest rate costs, because of the fluctuate the volatility within the lending market. So guys that have loans that are coming due, they’re also under tremendous pressure to go and sell. But a lot of these guys are going to struggle because they bought deals at the height of the market, when Cap rates were in the threes, today, the market is in the fives so that a lot of them are going to have to sell for a loss and swallow it and just do what they need to do. And they don’t really have a choice.

J Darrin Gross 13:09

Ya know, and as far as that goes, Do you see or is there a lot of debt that’s due to reach the the end of term? Yes here or what’s the

Henry Stimler 13:20

Yatra a tremendous amount of of debt put on three years ago, and that end up getting you they would say, well, we have we have another two plus we have to one year extensions. But to get those extensions, you have to meet certain DSCR requirements. And a lot of those deals are not going to meet those DSCR requirements. And they’re not going to get those extensions. So guys that took out about five year paper with a three year plus the one plus one when that three year term comes through, and they’re going to either have to refi out of that existing loan into an agency loan and the agency loans many times I’m going to size to where the bridge loan was or they’re gonna have to sell. But I do want to just caveat and say that the multifamily space is incredibly strong. The fundamentals are incredibly strong rental growth is still very, very strong demand is still very strong. The high cost of buying a home only makes your tenant stay in longer. It’s so much more economical to rent right now than it is to buy. So the fall off in the single family home buying market is a boon to the multifamily investment multifamily MSL. So if they can find a way to refi out of their high octane bridge loan into an agency loan and buy themselves time they’re going to be okay, so there’s no huge distress coming. There’s no massive fire sales coming. It’s kind of just kind of an equilibrium has to be found. So that’s very important for your listeners to know that the multifamily space is not a boom and bust space. It’s very stable in a very strong and secure asset class.

J Darrin Gross 14:53

Right but but as you were relaying there the the dead that cover surface or the debt service coverage ratio? Is that not really what’s going to drive a lot of what the options are based on? Yeah,

Henry Stimler 15:09

yeah, for sure, for sure. But there’s a Yeah, but there’s a lot of solutions as well. So, so there’s a lot of ways to create a cap sack. So let’s say that let’s just use round numbers, let’s say you bought $100 million building in 2019 2020. Let’s say you put on a floating rate bridge loan at 80%. You on $80 million loan, three years later, you want to you want to get out of this loan, you come to an agency lender, like me, are size the deal based on the DSCR. And let’s say your own, my agency load is only sizing to let’s say 60 $65 million. So now you’ve got a gap from the 65 to the $80 million, there are prep lenders out there, that will give you the gap financing, so you can layer on top of your senior you can layer a prep piece, and that press piece will will be able to take out your senior loan. So there are solutions, rather than just being forced to sell as long as you’ve done a good job running the asset. Your collections are good, you’re pushed your noi over the last three, four years, you should be able to refi using a combination of senior agency debt and pref equity on top. And there’s a lot there’s a lot of private lenders there’s there’s a there’s this drove a private lenders that are sitting on a lot of dry powder.

J Darrin Gross 16:24

Right? And are you seeing that that’s typically the case that if somebody has come in and they’ve been able to get there no I up to that the numbers are still working, or is it Yeah,

Henry Stimler 16:34

yeah. So many times by themselves, but just on a senior you still you’re not there. But when you combine the senior and the press, you’re pretty much getting there, nine times out of 10. Got it. And the prep the prep component is is a is an accrued payment, so you’re not stressing the asset. So the prep lender your senior loan will have what their interest rate what you have to pay monthly, the prep lender many times will accrue their amount to either sell or refi. So you’re not stressing the property with a 12 13% grass piece, they’ll have a harpy component of four or 5%. And the rest will accrue.

J Darrin Gross 17:14

And on that, is that almost like an equity position that they take? Or is it is it just strictly a debt for the for the lender?

Henry Stimler 17:22

It’s the prevalent is strictly debt because an equity position is like equity is like a marriage. The minute you bring an equity partner, you’re married to the equity partner for life, no matter what you refi three times you sell it in a crazy multiple your partner, the pref equity is not really a partner, the minute they’re paid, they’re gone. So they’re there a little bit. So they are really debt in terms of how you treat it. It’s treated as debt as well from taxes.

J Darrin Gross 17:48

Got it. But it helps bridge the gap between what the agency will do now versus direct the full amount you need to earn is that is that a typical percentage you’re seen as as far as what the maximum loan to value that the agencies will do right now? Is it 60 is of interest?

Henry Stimler 18:09

No, no, that that’s not how the agencies work the agency work to a DSCR covenant. So as long as you can hit the DSR, so so it’s very simple. The higher the cap rate, the higher the loan is from the agencies. So in places where you’re buying six caps, you can get up to 80% LTV from the agencies or 75% LTV from the agencies, the tighter the cap rate, the lower the agencies are going to go so that just based on noi, they’re going to underwrite your inplace noi, adjust it to the new taxes on it on acquisition. So as long as your NOI is good, you can get quite good, good octane leverage from the agencies.

J Darrin Gross 18:44

And what is the debt cover or the debt service coverage ratio that the agency has right to fiver

Henry Stimler 18:50

it to be a 120 5:30am? Or it’s to or in some cases can be a 130. So it depends, it depends on how the agencies view the deal depends on how you talk to the agency to view the deal, but it’s going to range from 121 to five DSCR to 130 DSCR and on lease up deals obviously they underwrite to a lower DSCR and then you have a Freddie Mac value add program that one right so one oh DSCR so there’s there’s different programs with different DSLRs but just for the sake of the listeners to keep it simple 125 DSC is typically what they’re looking for.

J Darrin Gross 19:22

And as far as the the amortization schedule, is it usually a 30 year Amazon

Henry Stimler 19:29

30 year Amazon and in some cases, you can push the 35 year ARM with certain exceptions to get you more proceeds.

J Darrin Gross 19:34

Okay, so there, there does tend to be like there’s a there’s a way to make the equation work for somebody that’s been operating the property well, and as far as push the NOI up, it’s not necessarily there’s going to be solid blood in the streets. No. But with respects to the opposite side of that coin. Somebody who bought something didn’t buy The recaps Yeah, had a plan of getting get out kind of thing. And also now they’re stuck. What? What are your what do you see in there with something with those types of opportunities are those.

Henry Stimler 20:11

So again, it’s very hard to, to, to to, to mess it up so badly because we’ve had great rent growth, we’ve had great demand. And occupancy is at a very high spirits high point, there’s not as much we need a lot more units that come online that are coming online, less people are moving out to buy homes. So if you’ve botched it up, you’ve done a pretty bad job, because there should be no reason why you butcher somebody, I’m able to drive anyway and drive occupancy. But if you have then yeah, obviously you’re gonna have some pain, right? The vultures are gonna be circling, but you haven’t done your job, you haven’t looked after your property, I always say this to my clients. I said, at the core of the business, it’s not just heads in beds, you’re providing a service, you have to look after your tenants, you have to make sure that you’re a good landlord, a good a good custodian, a good steward of the property. If something is broken, you have to fix it. If you have a million bad Yelp reviews, no one’s gonna want to live in your buildings. And that only comes down to you.

J Darrin Gross 21:07

Yeah. So looking ahead here for the next couple of years, is there any kind of an expectation on the volume of loans that are that are due to expire? Or that are going to need to be replaced here in 23 years? 24? I mean, does it ramp up? Because I know there was, there was kind of a little bit of a cycle. You know, in the in the years prior where it seemed like you’re really ramped up, especially during COVID. There. Yeah, so

Henry Stimler 21:38

so so we’ve got time with those deals, because the last year was just insanity. With the explosive growth in multifamily, everybody and their uncle jumped on the bandwagon and bought multi. So there’s a little bit of runway, there’s a staggering amount of there’s a huge number of deals coming that will need to be refined, as always gonna have that. But a lot of those deals will work in some in a few words. But on the majority, I would think a lot of those deals will find a home either with the agency’s regional banks, pref lenders, unique structures, maybe bringing in some fresh equity and diluting the previous equity. But there’s no follow up a cliff. disaster waiting for us here. It’s not it’s not all rosy, but it’s not all draconian either. Right,

J Darrin Gross 22:25

right now just sounds like there’s a little bit of a struggle ahead to kind of is it more of just the change from where we’ve been to where we are? Is the the issue and that’s really the struggle, or is it? Or is it bigger than that?

Henry Stimler 22:41

I think it’s I think it’s, I think it’s two factors, I think one people who bought very, very tight cap rates, you know, the market in the Carolinas, the market in Texas, the market in Florida deals were trading at three, three and a half caps, right, those days are gone, those days are over deals can no longer trader those cap rates, again, because interest rates went from being at 10 basis points or, or very or sofa and it’s not liable, but so low to be to where they are the seven year today is much higher than it was a year ago. So it’s the combination of rapid increases in interest rates, buying very tight cap rates and trying to find an equilibrium now where that because the cap rates mark is blown out today, the same deal that you bought a three cap is going to trade close to a five cap today. And it has to drink because you have five cups because your debt is over five.

J Darrin Gross 23:32

Right. Right. Right. Now and I think that’s really kind of the if you’re trying to make a deal pencil in your you’re using some old debt rate expectations as opposed to the new debt to world a difference.

Henry Stimler 23:48

Yeah, and it’s so it’s so fast. It’s so fast. And you know, so yeah, obviously right now the Republicans Democrats can’t agree on the debt ceiling. So if someone puts a deal under under contract, let’s say a week ago, the seven year the 10 year that says at 340, the tenure today is at 367 or 370. The swings within a few days are so extreme that your deal goes from making sense to not making sense. So it’s just a tough, it’s a tough environment get deals done because of the crazy swing in treasuries.

J Darrin Gross 24:18

Right. Let me ask you this, your firm and just kind of the kind of the outlook for the future here based on you know, this the cycle we’ve been through where the rates were just like historically low, near zero for the longest time as opposed to now and historical marketplace. Is there any reason to believe based on the demand and how strong the market is and kind of what you’ve been talking that that we should expect rates to go back to where they were or lower? Or is this kind of like the new norm What what are you guys forecasting?

Henry Stimler 24:55

I don’t think I don’t think the rates are gonna go back to where they were. I don’t think I think the Fed are trying to deal with a particular problem, which is inflation. I think once they have inflation under control, they will, they will. They will bring rates in. But I don’t think they’re going to cut rate do seven rate hikes, right? They’ve done seven continuous rate rate hikes are not going to do seven continuous cuts. So I think we’re going to kind of settle on equilibrium. We thought we had an equilibrium, the Fed spoke last time said, Then there’ll be a pause, and kind of everything hovered at the 350. And we thought, okay, so the 20 will be around 350, we can understand that if the spread on top of that 10 years. 350 is, I don’t know 150. We, this is our this is our level. But now, again, that’s been thrown out with the bathwater, because now we have the debt ceiling issue. And if the US default on their debt, God forbid, you know, that’s going to cause a tremendous spike. So there’s just so much uncertainty, that that it’s very volatile. But again, hopefully, they’ll come to an agreement, hopefully, inflation will be will be dealt with. And then I think if inflation comes down, then I think towards the end of the year, maybe you’ll see a little rate hike, maybe some some some some light in the end of the tunnel, but I think it’s gonna be a long time since you see the numbers that we saw during COVID, where interest rates were just it was so cheap to borrow.

J Darrin Gross 26:11

Right, right. No, I think those days are, yeah, something for the history books will always be able to look back to that and say, Wow, yeah,

Henry Stimler 26:19

that was great. That was wonderful. Yeah.

J Darrin Gross 26:22

So as far as the, you know, what’s affecting lending right now, we’ve talked a little little about the Fed policy, and they’re trying to attain inflation. There was a time when like supply chain was an issue is that is that still driving any of the cost or any of the issues that some of your, your your new construction clients are facing?

Henry Stimler 26:47

I think you’ve got a perfect storm, when it comes to new construction, one got tremendous labor shortages. There’s there’s our labor market is incredibly strong, our unemployment is incredibly low. And the demand for skilled workers is incredibly high. We just don’t have enough skilled workers to do the to do the work to cost of cost of goods are sky high because of inflation. And then three costs of variable floating rate construction debt is sky high as well. And you’re talking, you’re talking to seven 8%. So it’s just everything together is making a lot of developers pause. So even Miami, which isn’t on fire market, related, one of the largest companies in the world was shovel ready on a project, they’re taking a pause on their projects, you’re seeing a lot of guys that say, It’s entitled, it’s ready, let’s put this in the back pocket, put it in the drawer. And in a year’s time, we’ll revisit when the when the debt markets are, we’re not borrowing at seven or 8%, where our cost of goods are so high, inflation is rampant, and we can’t get the labor because the labor costs are so high wages and so high. It’s just a perfect storm right now with everything. And that’s always how it happens. 2008 was the same perfect storm. It’s never it’s never comes in ones. It comes in twos and threes and fours. That’s what causes the pain and the suffering.

J Darrin Gross 28:00

Right, right. Now in you know, it’s trying to forecast demand and and to catch the demand wave and when on that when you know that there’s demand. And then you have all these additional expenses that could have their own demand and

Henry Stimler 28:18

the demands. Now I’ll give you a staggering statistic that the National Multifamily Housing Council put out that the US needs 3.7 million new apartments to be built this year. And all that’s coming online is 640,000. And again, you have to just think of the bottlenecks. You’ve got kids leaving college becoming first time renters, you typically had renters becoming first time buyers, those renters now stay as renters. So you’ve got new immigrants, new people coming in all the time. So you’ve got this bottleneck, there are people who need housing, that we’re not gonna be able to, to to give them housing. So of course, rents are going to continue to rise. So it’s there’s some difficulty on the housing side on that side because of demand.

J Darrin Gross 29:07

Yeah, I was curious, does immigration play a large part of that demand? Or is that just one of the factors in the demand?

Henry Stimler 29:16

That there’s, besides, besides what you see on the news, there’s just a ton of people coming into the us all the time, on visas on immigration on work visas, right. So besides what you have on on the border, you also have legitimate people coming in all the time to work here. So there is a huge influx of people coming there’s a huge influx of college kids finishing college or becoming first time renters. So there isn’t just a ginormous demand and just the the numbers are just polar opposite from being needing personal $4 million homes to delivering versus 700,000 homes. We can’t keep up which again, it’s good for the multifamily owners because that’s what makes that asset so desirable.

J Darrin Gross 29:55

Right now there’s there’s there’s definitely an exit opportunity in the In the future, there’s somebody’s going to want to buy what you have. And there’s demand for rent which you have. So that’s yeah, that’s, that’s definitely a good thing,

Henry Stimler 30:08

even with just one more thing in New York City, which is, I think, always the best barometer to what happens in the rest of the country, New York City has the highest rent growth. It’s 6.1%. Since 2005. So strong. Yeah,

J Darrin Gross 30:25

that’s strong. On on some of the other factors that have been affecting the market, or any of these bank failures, are they affecting show of the shoulders? Yeah,

Henry Stimler 30:38

sure. So Signature Bank was a huge player in New York real estate. The agencies are not such a huge player in that in the New York real estate market, because they can’t get that get their head around the price per unit, right that that typical highest price per unit is gonna be $350,000 a unit of value. Miami, it’s a New York that that is so much higher, you know, the units can have a value of close to a million dollars a single a single unit. So the agencies were never really a player in New York City, because they couldn’t wrap their heads around values. So the regional banks here was such huge players. So signature no longer in business was a huge player, so they’re gone. Santander was a is a very big player def pullback. So there’s been a huge pullback from the regional banks. They’re just very, very nervous. Taking a long time to get quotes out of them very hard to pull quotes out of them. They’re just very, very nervous right now. So yeah, the regional banks again, had put all the onus on Freddie Mac and Fannie Mae, making them really the kings in the multifamily space.

J Darrin Gross 31:42

With the change in the marketplace, are you seeing that? Your your investors are having any difficulty raising capital? Yep. For the down payment?

Henry Stimler 31:53

Yep, of course. So a year ago, you could have a deal, throw it out there on an email chain to a bunch of guys and you have 20 Guys handing you money to do the deal. The syndicate says what kings today the Syndicate is kind of sitting in the darkness in a corner huddled up because it’s very hard to raise equity. The equity markets are very frozen. The Far East, the Koreans were big players, the Japanese were big players, those guys are kind of sitting on the sidelines, because they did some very bad deals on Office and hotel and condo that they shouldn’t have done. So those guys are off the off. And then the big institutional equity guys are really picking their spots, they really want to find where they can really hit higher returns. So they’re being very selective. So yeah, the syndicators are are not active right now. Again, that’s explains why you’ve got a 75% drop in transactions. So a lot of those guys have been sidelines, I would say the main players, the main players that are still very, very active today are the big institutional funds that buy on behalf of their clients, because they’re selling a lot of dry powder. They’ve struggled in recent years to buy because they’ve been priced out because we’re over aggressive syndicators. They now have the pick of the litter, and they can go out and pick up some really, really good deals. And we’re seeing that our guys are our clients are picking up some really excellent deals, and not having to fight like they had to fight a year ago to win a deal.

J Darrin Gross 33:15

It was kind of curious, with the volume of deals that were syndicator driven. In 22, do you have any sense of the percentage of of the the market that was syndicated driven?

Henry Stimler 33:31

Yeah, I would say it was 30 40% of the market was syndicated driven deals, and that those guys are are gone. Very, very few syndicated deals are getting done. Especially because a lot of the guys are not giving returns on previous deals they did because again, they had floating rate bridge debt. Now they bought it when silver was at 10 bits 10. Now Sofer is at five, right, so all they’re doing is using all the cash flow to keep current on the debt. So not really giving returns to the equity. So how can you go back to that equity and most investors say, hey, pony up another million, 2 million for me to buy another deal. They said, Well, look at the deal we bought last year, I’m getting no returns on that.

J Darrin Gross 34:06

Right. Right. It is. It’s interesting, how the, you know how how volatile the market can be, and actually just how quickly the market changed with the Fed changing the interest rates.

Henry Stimler 34:22

And a lot of people blame the Fed foot for reacting way too slowly, way too slowly. They should have started raising interest rates way before they did they didn’t they waited they held they held and that’s caused them to keep on aggressively raising over and over again, which is really spooked the market. I would say the the Fed have been rather Cavalier and caused a lot of this issues by not reacting faster.

J Darrin Gross 34:46

Let me ask you, the LIBOR to sofr. changed is that do you see that having any effect on this?

Henry Stimler 34:55

No, I don’t think I don’t think it makes a difference what we change to the 30 day sofa it’s a lie but that’s that’s not made a difference. What makes a difference is having show for go from 10 bips to close to five. That’s a massive, massive Delta. That’s a crazy delta. So think about it. Think about a guy that bought a deal sofa was 10 bips get a 300 spread over, he was paying 310. That was his interest rate rate. Now he’s three under 300 over five, right? 8% he’s 8.8% of interest, right? That’s gone from 350 or 310 to eight that’s a huge, huge Delta.

J Darrin Gross 35:33

Ya know, you’re gonna you’re gonna struggle with those numbers. I don’t care how how, you know, how good you are you were able to push around. I mean, that’s that’s just that’s the numbers don’t work. At least the same deal doesn’t work on the same printer. You know, same. Same starting point. Yeah. That’s tough. So what about you talked about the demand, can you mention the number that goes up 3.7 million units. That’s what the multifamily housing projection demand is as far as markets that you’re seeing that are that are still red hot. Are these the primary the markets or you know, with with pre COVID It seemed like urban core was like the Darling and then when COVID hit seemed like kind of Sunbelt. Yeah, a lot. There’s a lot of movement away from some of the downtown’s to, you know, where your lifestyle kind of Sunbelt stuff is the Sunbelt still kind of the driver right now.

Henry Stimler 36:36

So so this is how I would answer this. So so there’s the only red hot market left today is South Florida, because the demand for South Florida is just so big. So that is just a hot market. Miami is on fire. And because Miami can’t house all these people, it’s moved everything over. She got homestead, Boca Delray, those markets are just doing so great Fort Lauderdale. Tampa. So Florida is red hot. But Florida has its own headwinds, which is insurance. I would say COVID caused the biggest the biggest winners of COVID were Texas, Carolinas and Florida the biggest losers were New York and California. I think in a way New York has come back very, very strong. The demand in New York is sky high, you put a deal, you put an apartment on Airbnb, you have 150 people outside going to see that little unit. The cost of a single one bedroom is I believe over $5,000. So New York has just gone through the roof, California less so. But the bet I in my opinion, I think the best market when the markets that I love the most and is often overlooked is the Midwest, I think places like Columbus, that have a huge university population, Intel building their $3.1 billion facility. Great right in the middle. Great, great central location. Columbus is a fantastic market. And the reason why it’s about US market is because the cap rates are where they need to be to get deals done. Florida because of the demand, the cap rates are still so low, it’s tough, put that with insurance, tough to get deals done, really have to pick your spots, we’re seeing a lot of transactional volume happening in the Midwest, Columbus, Kentucky, those are the places we’re seeing a lot of lot of deals happening because you’re buying six and a half cap, six caps. And if you’re buying a six cap, you can get 80% agency financing very tight spreads, so 131 40 with by downs. So we’re seeing a lot of activity in I would say between the Midwest number one, followed by Texas and Florida two and three. But then you’ve seen a huge drop off everywhere else because the Carolinas was red hot for a while but sellers don’t want to capitulate. So you’re not seeing a lot of trades. So those markets are kind of just suffering, not badly, just not seeing a lot of a lot of deals getting done because the cap rates haven’t come to where deals need to be to make sense. While in Florida, the rental growth is still so strong that you can buy a four four and a half cap and bet that the rental growth is going to push you to a five five and a quarter cap.

J Darrin Gross 39:23

So on the Midwest cap rates what was the the low that the cap rates go up to the markets that you’re talking about?

Henry Stimler 39:33

Again, that’s nothing the cap rates never got that crazy low in those markets. They never got to where the Texas markets got to to threes, Austin you had deals in Austin trading at the low three cap rates. Austin was so much so on fire. So that’s going to be a time till the sellers understand where the new the new paradigm is. But the Midwest never really got that tight and never got down. It was always for four and a half. It never got down into the threes. So to push that cap rate from a four and a half to Five and a half is not such a huge jump, and oxygen has a bitter pill to swallow. So that’s where the volume is being done. That’s where the activity is being done. And I think we’re going to talk about Phoenix. Phoenix is just also having its moment in the sun, a lot of people coming out of California going to Phoenix. So Phoenix is also having its word and also the cap rates are are getting pretty good in in Phoenix as well. So there are there are certain light spots where deals can get down to where it makes sense to do deals. And again, that’s going to be number one, the Midwest, for me, where Cap rates are where they need to be. It’s, it’s always slow and steady wins the race, the Midwest has never boom and bust. It’s not going up like Tampa 19% rental growth, it’s always ticking along three 4% rental growth. That’s a super strong market, lot of transactions happening there. Florida, a lot of transactions happening there. Because again, rental growth is showing credibly strong in certain markets. And then Texas to a lesser degree, again, because the rental growth is so good. And again, the cap rates have kind of moved to where they need to move.

J Darrin Gross 41:01

No, no, they the Midwest isn’t sexy, but it seems like it’s pretty steady,

Henry Stimler 41:08

steady, steady, which obviously steady wins the race and, and I live, it’s not sexy, it doesn’t have the weather and the pizzazz and the flair that some of these other places do. But it’s just a very solid market just I’ve been doing deals in the Columbus market with a colleague of mine called George Scaff, who has a staggering number there. He has 96% market share in Columbus as a broker. So we’ve been doing the deals every year, which is crazy. He really dominates that market. So we’ve been doing their deals there for the last seven years. And everybody that’s bought there has bought well being able to sell well bought, again been able to sell well rents been growth has been good collections have been good. It’s just a great market.

J Darrin Gross 41:48

For the cost of living in the Midwest, as you know, it’s it’s doable. And it gives people there’s a little bit of extra money leftover where they can do things as opposed to would you say one bedroom in New York School for 5000? a month? Yeah.

Henry Stimler 42:05

And also the university is a big driver, because all the kids that go to the universities that want to end up staying there.

J Darrin Gross 42:11

Yeah. Nope, good to have demand. That’s good. Hey, Henry, if we could like to shift gears here for a second, by damn 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 there’s a way we can avoid the risk. When 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 risk, then we look to see if we can transfer the risk. And that’s what an insurance policy is. It’s a real risk transfer vehicle. 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 interest rates, however you would like to frame the question and 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 like to ask you, Henry Stimler, what is the BIGGEST RISK?

Henry Stimler 43:20

I think the biggest risk is not doing, I think more is lost by inactivity than activity. The biggest killer of deals is time, time and dalliance and not getting it done. So I’m a very big believer in that you have to jump in. Right, you have to be all the way in you can’t be you can’t be partially pregnant. And you have to have conviction in your decisions. And if you don’t have conviction, that’s the biggest risk. If you are Wofully. If you don’t, if you want to buy it, if you don’t know how you’re going to run it. That’s the biggest risk to me. So when I see clients who are unsure, who are not confident their decision, I see that as a red flag, I think you’ve got to make moves move quickly. That’s the best way to mitigate risk. If you see a deal that you like them make sense. You got to move quickly, one to wrap it up to to get the right debt in place, rate, lock your debt, take that risk off the table and move quickly. So that’s what I see as the biggest risk is not having conviction in your decisions and not having the gumption to go forward and get it done.

J Darrin Gross 44:30

Now that’s awesome. The inaction yeah, there’s a lot of time just spent, you know, grinding your teeth and working the pencil and all that. But actually, you have to kind of fish or cut bait as they say.

Henry Stimler 44:43

Yeah, you got to start by making sure the numbers work. Numbers never lie. My dad always says that. Do the numbers, do the math. Make sure it makes sense. But once you know it makes sense. Then just go and time is the biggest promise as I mentioned earlier, you could be at a place where the treasure is 350 and in five days time that Treasury’s at 367 and because you’ve kind of wasted time and waffled around, you’ve lost 17 basis points and that’s materially hurt your return. So if you made a decision, you want to go for it, go for it. Be quick.

J Darrin Gross 45:15

Right right now on the flip side can be true to you find the three, seven, and then the rate goes down to three, six, and you you know, because you’re locked in your head, so, yeah, it’s good stuff. Hey, Henry, where can listeners go if they’d like to learn more connect with you?

Henry Stimler 45:31

Sure. So I’m on LinkedIn, Henry Stimler STI M L er, I’m on Instagram, Henry Stimilar again. So you can find me on those two social media platforms and I’m always happy to respond and connect.

J Darrin Gross 45:43

All right. Well, Henry Stimler 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.

Henry Stimler 45:53

Thank you very much, Darrin. Enjoy.

J Darrin Gross 45:55

Alright, where 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 46:13

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Multifamily Investors Interest Rate Pain with Neal Bawa – CRE PN #407

Neal Bawa 0:00

So your average syndicator buys 10 properties, right? I think what’s not obvious in the industry is that three or possibly four of those properties are already underwater, because they already had these floating loans. And these floating loans went up, they hit their cap, some of them didn’t have a rate cap, so they still going up. And the ones that have hit the red cap rate caps usually been set to like 8%, or something like that. And so at, so they’re at the rate cap there, they’re still the rate cap companies helping them with their mortgage payment. But still, their portion of mortgage payment means they’re still illiquid. Now. Then there’s the bigger problem. Banks are realizing that your rate cap may be expiring sometime next year, let’s say it’s, or this year, maybe it’s maybe it’s August this year, October this year. So guess what more and more banks are doing at this point, Darren, they’re calling you and saying, Hey, we’re seeing that that rate cap is going to cost you about $700,000 When you get it and we require you to get that rate cap in October unless you’re selling your property. And even if you’re selling your property, even if you have plans to sell your property, look, we can’t do anything about this. We want you to start escrowing 50 to $70,000 a month for you to buy that rate cap when it comes up in October.

Announcer 1:14

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 1:35

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.

Today’s program 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 BuildingInsuranceRisk.com.

Today my guest is Neal Bawa. Neal is the founder of Grow Capitus, an online multifamily investor education platform. He’s also an experienced syndicator developer, and his attention to the data has earned him the moniker the Mad Scientist of Multifamily. And in just a minute, we’re going to speak with Neal about the Feds Gambit with rising interest rates and their impact on commercial real estate.

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 and please subscribe. With that I want to welcome my guests back to CRE PN Radio radio. Neal Bawa, Welcome back.

Neal Bawa 3:31

It’s great to be back Darrin interesting times so interesting conversations.

J Darrin Gross 3:36

No that’s that’s always a guarantee with you. But definitely the the times are a changin before we jump into the conversation if you could take just a minute and share with our listeners a little bit about your background. Sure.

Neal Bawa 3:51

I’m a data science technologist, successful tech career successful tech exit. I work with about 900 A little over 900 fairly nerdy data driven investors a lot of them from Silicon Valley, and I buy and build properties across the US in 10 states and 16 metros portfolio is about a billion dollars. And we are agnostic to any particular asset class, but the largest portion of the portfolio currently is multifamily. both new construction and value add

J Darrin Gross 4:25

Got it. And you said to agnostic, have you how far have you strayed from the multifamily?

Neal Bawa 4:35

In my mind very far and sometimes people don’t quite get this so you know, I’ve I’ve done townhomes for sale. I’ve done for plexes for sale I’ve done for plexes for rent, I’ve done built around communities, which are very different from a standard multifamily community have done other asset classes like industrial self storage, student housing, and I’m still missing one or two

J Darrin Gross 5:00

All right. Well, it’s it’s I think it’s, you know, good to kind of test the other stuff there and and get a feel for how they play and and get to know those different asset classes. That’s great.

Neal Bawa 5:13

Yes. So I certainly don’t suffer from the grass is greener on the other side problem?

J Darrin Gross 5:18

Yeah, you’re, you’re mowing on both sides, I get it. So, Neal, it’s been a little while since we last spoke, you’ve been very kind with your time and coming on the program here, multiple times. And I think the last time we talked this, probably about a year ago, when when we were kind of working through COVID, things were still good, there was kind of the sense that the Fed was working to slow inflation. And there, the expectation was the interest rates were going to be pushed upward. And that that the fear was there was going to be a crash. And here we are, today, we’re we are recording this in February of 2023. We’re clearly feeling the effects of or the interest rates have been pushed up. And inflation has not necessarily been is not under control just yet. The fear of of, you know, a looming recession is still, you know, evidence. And there’s plenty of evidence of that. I mean, and so I guess my my first question to you is, is the the landscape sits before us right now? What is your just immediate sense of things, just with respect to the multifamily marketplace?

Neal Bawa 6:55

What I would say is that the market is not doing a very good job of adjusting to its new reality. So I feel like there is this sense of, you know, we’ve had goods for so long, right, the last eight years have been so good. And every time something bad happens, something changes it, like, for example, COVID was actually a very positive change for the multifamily industry, just when we felt like all the cash flow is getting squeezed out. COVID comes along, and then the Fed, you know, showers all this money and interest rates go to zero. And you know, it’s party time again, actually, the biggest party of all time, and multifamily was in 2021. And so something always comes along and Bails us out. But I feel like there’s no evidence at this point that there is something that is going to bail out the industry. But I still see too much of a party like atmosphere, I don’t see acknowledgement, either of the fact that today, you can’t really buy a value add property with significant cash flow, I mean, 1% 2%, you know, sure, technically, that’s cash flow. But I think that if your property is producing four or 5% cash flow, you’re probably being a little aggressive with your underwriting, because I don’t think that that actually exists. And so when you’re in a situation where you’re buying, you’re a cash flow industry, you’re a cash flow asset class, and you’re cash flowing at one or 2%, or 3%. And 40%, of all buildings purchased in the last four years, are either just breaking even or bleeding, then the sort of attitudes that I see in podcasts and conferences, needs to be adjusted. So my answer to Darren is, the industry is in a process of adjustment and not doing a very good job so far.

J Darrin Gross 8:46

Yeah, no, I have my own mind, I’ve kind of thought that it’s, it’s that transition phase between where we were, and the expectations that things are going to go back, or the kind of the reality, you know, where we really are, and that change in reality. And I think the only thing that, that that, you know, cures at his time, you know, it takes time for people to realize the marketplace to realize that what was is not anymore. This is the new reality. And

Neal Bawa 9:24

Well, I think what helps is having open discussions, because there’s people that are going to listen to this podcast that I think will have a slightly changed point point of view. If there were 90 people or 200 people on 200 podcasts having this conversation, then that pivot to reality would just go faster. It takes time. Yes, but it you know, that takes less time. And I think that that’s why having these kinds of conversations is even more critical than the sort of conversations that we’ve been having on this podcast for the last two or three or four years.

J Darrin Gross 9:55

Ya know, and I wonder to this Does the conversation and the reality accelerate as the the financing that one has in place expires and has to reset? And does that not necessarily, you know, either force a sale or force a refinance or kind of that recalibration happens when we’ve just come out of some very low interest rate terms, those who were looking to refinance probably locked in and a pretty good, pretty good rate. They’ve got some runway to work with. But those that are, are coming up on an expiring term, or you know, are looking to sell or have to refinance. They’re facing a different reality. And wondering if if your thoughts on on as they transfer or transfer, you know, go through that, that transfer. If that doesn’t kind of cement for more people that the new route, what the new reality is,

Neal Bawa 10:58

It’s beginning to cement it. The problem is there’s no education around what to do. Right. So I have yet to see a course. And you know, most indicators today did not go through a college education course, they didn’t go to Utah University’s real estate program. They basically went to a weekend course or a five day course and then signed up for some kind of mentorship and they became syndicators. That’s the standard path, right? So you look at that, and you look at the curriculums of all the gurus and it’s good. I mean, the stuff that’s being taught there, you know, underwriting stuff like that, what to look for in property, excellent stuff. But there’s never any chapter on what happens when debt takes your property underwater, because that scenario really didn’t exist for the last eight years. So nobody ever wrote a chapter. Nobody ever recorded a podcast, nobody ever had a conference session on it. And so the problem isn’t that people don’t understand the issue. The problem is that there are very simple, straightforward, somewhat painful fixes that people are not aware of, because no one has ever provided any kind of education. And this isn’t necessarily true of, you know, people speaking at the NMHC conference, because those folks have gone through 2008. And they understand what what are the things that they need to do? But but the syndication industry, the vast majority of us were doing this, including myself, in 2008 2009 2010. Right? Luckily, in my case, I had a property where I got education, forced education, and but I look at what people are doing today. And I tell them, you know, look, the problem isn’t just what Darren described. So what you described is, there’s a bunch of properties that basically have to be refinanced and made refinance, all of a sudden those properties will go from either breaking even or making some money to just losing money. $50,000 $100,000 a month. Yes, that’s the case. But let’s talk about what is already happening. And that’s, that’s, that’s what I really want to focus on. So if you bought, let’s say you’re a regular syndicator, you know, you have a regular portfolio you like most of us believe that bridge loans or floating loans are better than, you know, being locked into a loan for 10 years, right, nine out of 10, syndicators, were using some kind of floating debt, because they wanted access to, you know, extra money from the bank for rehabbing their property. So you’re like us? Well, then, in the last three years, 2020 2021 and 2022, and maybe a little bit in 2023, these three years, let’s say you bought 10 properties. So your average syndicator buys 10 properties, right? I think what’s not obvious in the industry is that three or possibly four of those properties are already underwater, because they already had these floating loans. And these four floating loans went up, they hit their cap, some of them didn’t have a rate cap, so they’re still going up. And the ones that have hit the rate cap, the rate caps usually been set to like 8%, or something like that. And so at, so they’re at the rate cap there, they’re still the rate cap companies helping them with their mortgage payment. But still, their portion of mortgage payment means they’re still illiquid now. Then there’s the bigger problem. Banks are realizing that your rate cap may be expiring sometime next year, let’s say it’s, or this year, maybe it’s maybe it’s August, this year, October this year. So guess what more and more banks are doing at this point, Darrin, they’re calling you and saying, Hey, we’re seeing that that rate cap is going to cost you about $700,000 When you get it and we require you to get that rate cap in October, unless you’re selling your property. And even if you’re selling your property, even if you have plans to sell your property, look, we can’t do anything about this. We want you to start escrowing, 50 to $70,000 a month for you to buy that rate cap when it comes up in October or August. And so now all of a sudden, you are bleeding already. And now you’re bleeding because you have to put another $50,000 in and we’re not at the peak yet because I at this point, it’s pretty much guaranteed that the Fed will raise interest rates once in March once in May and once in June. So there’s still another point seven five increase He’s. So if you have a $20 million loan point seven 5% is basically $150,000 more a year in interest, which is $12,000 more a month. So guess what’s going to happen? In July, you’re going to be bleeding $12,000, more than you’re bleeding today. But today, if you’re putting that bleed in from your pocket, imagine how you’re going to feel putting in an additional $12,000 a month in July. And you might say, Yeah, but it’ll get better. Here’s the problem. Nobody has spreadsheets on this, I’m looking to create the industry’s first spreadsheet on actually showing syndicators, what their cash flow will look like in the next 24 months based on their own projections based on their own assumptions. I’m telling you that property, if it’s bleeding $100,000 today, and it’s going to be 120 $12,000, in July, is still going to be bleeding $100,000.09 months later, does that mean it needs a million dollars of cash? And that understanding of what to do when you have this kind of situation is completely missing? That’s the problem. You know, you asked this question on your app. Sorry, I’ll get back to you. But you asked this question about risk, right. The number one risk today is not interest rates, and it’s not inflation. The number one risk today is complacency.

J Darrin Gross 16:19

Yeah, no, I think that that’s, that is, you know, you’re spot on. And in the end, I think it’s a necessity that changes the mindset, and you know, the action, or it creates the action. And until you have that, if if, you know, people keep thinking they’re gonna hang on, or they’re going to be able to or things are going to change? Are they telling their investors that, you know, we’re, you know, we’re expecting this to change here? And in the third quarter are mean, how are they? How are they positioning that because eventually there’s, there’s going to be a change, either they either, you know, they lose the property, the the interest rates do do go down, and they’re able to refinance out of it? Or, or, or what else can they do?

Neal Bawa 17:09

It will be very useful if you’re saying those things to investors that interest rates may go down for you to actually project it. So one of the things that we do, and we give this out to anybody that wants it, by the way, we create something called the Grow capitalist interest rate tracker, and it tracks all of the usual stuff. So you know, where Sofer where spreads? You know, where’s the overall number, which is so far plus the spread? Where do we think the inflation is going to be in the next 12 months? Where do you think the Feds gonna be? The truth is, whether you’re Goldman Sachs or Merrill Lynch, or you know, you’re one of the big guys, if you read their stuff, everybody thinks the Fed might cut by 25 basis points, or 50 basis points sometime in November or in December. And if you’re lucky, it might be 25 basis points in November and 25 basis points in December. How much is that going to help you that property? That’s cat that’s bleeding? $100,000, that’s going to be bleeding $112,000, in June or July? Well, that’s still going to be bleeding by $88,000. If those that half point reduction did happen. So in January, how is your situation going to be a lot better than it is in July? Right? And, and then July, August, September, October will all look the same, they will all look more painful? And so my big question is, how can you stay with a straight face to your investors, that things are going to get better with existing properties? When the most basic math and you know you’re a syndicator? You do very complex math and do it quite well. So clearly, you don’t have any shortage of math people. Why? How do you say this? How do you say it with a straight face? I think it’s absurd. And I think that everyone has these properties. I’m one that’s very straightforward saying I have these properties. There’s nothing that I did that in any way changed. My problem, that problem that I’m describing. What I’m saying, though, is I’m extremely proactive, on buffering up cashflow for my properties, extremely proactive, raising more equity, getting more loans, doing everything that’s needed. Because, you know, and I have a monthly meeting with my team. We don’t talk about anything else. We don’t talk about the property. We don’t talk about asset management, we just talk about this property stability. And every month, we open a spreadsheet, we play with it, we tweak it based on what our beliefs are at that point, right of where interest rates are going to be over the next 18 months. And how this property is liquidity is going to get affected if you’re not doing that religiously. And by the way, we were doing it weekly. Eventually you get to the point where monthly is fine. If you’re not doing this, it’s your job right now, for God’s sake to be doing this with an existing property. And here you are underwriting 30 new properties every week, making three offers a week and buying a property every three months and that property has the same exact problem.

J Darrin Gross 19:56

Let me ask you this because you’re the as a data scientist here, the the data that you’ve been kind of referring to and a lot of the syndicators that, that are, you know, relatively new to this asset class, I mean, you know, the 2008 crash created an opportunity for a lot of people to get in and get get some, you know, properties that were that were in distress. And so, if you are looking at your, your current properties and trying to bolster them so that you can, you know, make it through this situation here. Are you looking to other historical points, where the interest rates and you know, the, the investment environment was similar? Or are you basically just taking your, your, what you have now, and seeing what you can do to to, to bolster your, you know, your position so that you can make it through?

Neal Bawa 20:59

Um, it’s a good question, I think it’s a very good question. As I think about it, the answer is, we don’t need to go back and look at history. 2008 was extremely unusual, it was a worldwide equity crash, a worldwide liquidity crash. We have no liquidity problems in the US economy today of any kind that I can think about. There’s massive amounts of debt and massive amounts of equity available, everybody wants to lend everybody wants to invest. The problem is that the interest rates are so high, that you basically effectively can’t make a property cash flow, if you invest, if you put that into it, if you put equity into it. So the our situation is vastly superior to 2009. The problem is complacency. And the problem is because like, you know, I asked this question, I’m gonna not gonna mention names. But a recent conference conference, you know, somebody called the conference, I said, Where’s your sessions on teaching people about all this stuff? Cash calls? recapitalizations, you know, bargaining with lenders? What are the things you say to your investors? You need to be teaching people how to do this, because this is what they need to know. And they said, Yeah, but there’s no distress right now. And my question is, you realize your conference is only held once in a year 12 months from now will be too late to teach people. Because the distress basically effectively starts this quarter. And you might say, why this quarter? Well, the answer is, when did interest rates go up? Right. So you know, in March, it was a quarter point increase, nobody cares. In May, it was a half point, nobody cares. And then after that, we have 475 basis point bombs, right, going to October, and then a 50. basis point bomb in December. So three and a half basis point increases happened in the second half of last year. Well, how could there be distressed in the second half of last year, interest rates were still going up. Now they’ve gotten up to the point where in January, you’re like, Oh, my God, I’m noticing losing a lot of money. And but you have reserves, you can put some money and you can raise some equity. So no distress, q2, same thing will happen. You know, we will put more money in the won’t be any distress, you’ll push something back, you’ll take money from your rehab reserves to three now you’re getting seriously worried because you’re like, Man, this thing gets keeps getting worse. By q4. The whole industry is like, oh my god, bad stuff is happening in q1, I think next year is the peak of when properties are going back to the bank. So if you’re having a conference in February next year, who are you going to help?

J Darrin Gross 23:33

Yeah. Right. The new buyers of the properties have gotten off.

Neal Bawa 23:38

Right. So I mean, I think that’s what’s what it is. I think the distress takes such a long time, because there’s so many steps in the process. But why are there no podcasts about cash calls recapitalisation bank management? What are the sort of things that you can do with banks, and I’m not saying I’m an expert at this, I’m saying I need that education just as much as the next guy. I’m just aware of the problem. And the fact that it’s the next 12 months, not the previous 12 months, all the stuff that’s indicators have been saying about the pain in the last 12 months. There isn’t any pain, all of the pain 100% of it starts now and goes for the next 18 months.

J Darrin Gross 24:18

Right. Right. Now. And again, I think you’re you’re spot on with the in the sense that I think today that at least my experience has been that people keep looking backwards with the expectation they’re going to be able to recognize what’s coming. And to your point is none of the syndicators that are of have no right now I’ve been through that. So how are they going to be of any value for the coming year on on how to weather the storm and how to not lose a property?

Neal Bawa 24:48

Right. And people people have been saying, I said this in a podcast last month and people are like, Why are you saying it Neil? You should just be hiding it and waiting for these people to make mistakes and pick up their properties. No, you don’t really realize I won’t be able to buy their properties in q1 next year if there’s contagion in the industry, because banks will stop lending right now. No, every bank wants to lend, right? They don’t want to lend a 70%, LTV, they want to lend a 55%. Because, you know, the DSCR is the numbers that they care about are not working, right. But otherwise, every bank wants to lend on every project. Well, what if there’s hundreds and hundreds of properties returning to the bank in q1 next year, which bank will be ready to lend to me? How is that going to be helpful to me, as an industry, we either figure out how to get over this bump in the road, because that’s really what it is. By understanding, recognizing and getting stopped for God’s sake buying properties at this point, just focus on the existing ones, so they don’t go back to the bank. That’s all they have to do. This is our job is maybe 1/10 As hard as 2009. But why aren’t we doing it? Why aren’t we having those conversations? Why aren’t you having people actively say, Hey, we’ve got to be talking about this stuff. And let’s get some education. Let’s figure out how to be better. Let’s start calling every frickin lender in the industry and saying give us six months of deferment. You did that as soon as COVID happened, where why aren’t you making those phone calls now?

J Darrin Gross 26:14

It you know, I’m curious. Do you think any of this part or maybe part of the reason why there’s not this conversation and education occurring is that most of the syndicators I mean, the the the business plan is to, you know, buy the property, renovate and sell. And her I guess rented higher ed, you know, get the get the NOI up and then exit. But But how many of the the syndicators business plan really has a whole plan with an operation to weather a storm.

Neal Bawa 26:54

I don’t think that these plans were ever built, because they were unnecessary in the last six or seven years. You know, here’s my plan on my existing properties. Make sure my investors don’t lose money. If I promised you 17 IRR. I’m sorry, that’s not my plan. If I promised you 8% cash flow, I’m sorry, that’s not my plan. Something happened that no one in the industry, not Goldman Sachs, not the Fed itself predicted a massive bomb went off. My focus right now is I want to make sure that I don’t lose your money. That is my only business plan. And if I don’t lose your money for the next 18 months, then I’ll go try and recover whatever portions of the business plan I could on a property by property basis. Don’t think about it 18 months from now?

J Darrin Gross 27:45

No, no, I think that honesty and having that frank conversation with investors, it may not be what they want to hear right now. But, you know, as we get through this, and when they get to the end of it, if you’re successful in, you know, able to do that, you will attract a whole bunch more investors from the standpoint of, you know, the, the honest, reality based conversation that was occurring with your investors, and I think that would, that’ll that’ll bode well, well, I

Neal Bawa 28:21

hope so. Because I think that that’s what is needed today, I obviously have to give up buying buildings today, I can buy buildings, you know, everyone sends emails out saying you buildings are $20,000 a door cheaper right now. $40,000 a door, I’ve got a huge deal compared to 12 months ago, when this building was $40,000 a door more? Well, you’re probably neglecting to mention that you were you know, underwriting you know, 4% interest rates a year ago, and now you’re underwriting at seven or eight or nine or even 10. Right, so that part of it is rarely mentioned. And so, I mean, I look at how I can get pencils up because I desperately want to be pencils up I haven’t been pencils up for a while. And every time I pick up my pencil, I look at data and I put the damn pencil down again.

J Darrin Gross 29:12

Yeah. In let me ask you so the you know, the the Fed sets the interest rates were they kind of the the overnight rate for banks and and, and, you know, as long as I can remember I think was Alan Greenspan back when he was kind of the first Fed chairman of note that really pushed the lower rates and in so it’s been 2020 plus years that we’ve had lower interest rates. But, but as we settle into kind of, like I see settle into, I don’t know if it’s gonna settle but I’ve heard conversations both on both sides or, you know, trying to express it both ways. Do you think that the, you know, if the market plays out like you, you’ve suggested here and that first quarter of 24 properties gone back? Naturally, you would assume that the Fed will then have to do something to kind of, you know, Goose the, the the market, do you think that the interest rates will go down because of that? Or, or do you think they’ll try and hang on to as much rain as they can?

Neal Bawa 30:32

No, I don’t think the Fed will do anything at all to help when the when this occurs, because I want to just explain the size of what will happen 1000s of properties could go back to the bank in q4 this year and q1 next year, q2 next year, right. Please understand the size of the multifamily industry. The syndication industry itself is a very small portion of the multifamily industry, people have been buying multifamily for generations there lots of people that don’t even sell them, they hold on to them for decades. And then there’s the institutional guys that are buying multifamily with hard loans and 10 year fixed loans, and they’re just laughing at the rest of us saying, hey, my property, I’ve owned it for 10 years, it’s got another 10 year fixed loan. So as a portion of the multifamily industry, the syndication industry is fairly small, and as a portion of the syndication industry, that properties that are actually going to be distressed enough to go back to the bank, that’s still very small. And then multifamily itself is a small component of the overall real estate industry, the single family industry is larger. And then the real estate industry is only a small component of the economy. In 2008, it wasn’t a real estate crash, all liquidity dried up in every single part of the economy. So compared to what happened in 2008, what could happen and may not happen, right? I could be wrong, and there may not be that distress next year. But let’s say that there is distressed, we’re looking at dollar numbers that are maybe 1% of what the Fed had to deal with in 2008. Why would they change track, when bad stuff happens in the economy all the time, the Fed didn’t change track when when Twitter laid off, you know, 7000 people or when Facebook laid off 11,000 people, the Fed actually pointed out to people that unemployment in the tech sector has risen in the last four months, even though big companies are laying laying off people, the small ones are hiring them, because they didn’t have access to those people before. So point is, the Fed doesn’t really react to things the way that the market would like them to react, they look at the economy as an overall picture. And within that, if there’s a sector that’s distressed, they’re not going to jump in to help that sector easily.

J Darrin Gross 32:34

Yeah, that’s interesting, as you kind of lay that out, you know, just thinking back about the oh eight. And how big that was. I mean, it wasn’t just, you know, commercial real estate, but, you know, all real

Neal Bawa 32:47

thing. The entire economy was in severe distress because of a complete lack of trust, complete lack of liquidity. We don’t see anything like that today. They just, I don’t see a scenario in which there’s a Fed chairman, that’s going to vote to start dropping interest rates to help 1000 multifamily properties in a in a country that has millions of them.

J Darrin Gross 33:08

Right, right. Do you think this could potentially, you know, reduce this, the the numbers of syndicators just based on, you know, the sexy investment of real estate, non performing, as well,

Neal Bawa 33:26

as there’s 100% chance that there’s going to be less indicators 18 months from now than they are today, there’s 100% chance. The problem is these people don’t know how to speak to their investors. So there’s still people doing sessions where they don’t talk about this stuff. And I’m actually, I’m guilty of that too, myself, right. But I’m planning over the next three months, I feel like I’ve done enough to make sure that my properties are not going back to the bank. But I feel like I need to do more sessions with my investors and just have these straight, toxic straight conversations with them about what’s happening in the marketplace, and how it’s affecting them. I think this stuff is important. And I really don’t feel I lose investors that way. They may not give me money for a property three months or six months from now. But I think that there’s appreciation that I’m right now, pencils down, I’m not looking to buy properties. I’m not looking to my I have staff on payroll that I’m paying from my own pocket, because you know, I’m not buying new properties just focused on their money, because they gave me that money. So I think that if, unless that happens in the syndication industry, I predict that there’s going to be a lot a lot less indicators. I mean, you already see brokers in the US single family brokers have dropped by about 30%. In just the last six months. The bottom dwellers just couldn’t take the fact that homes were not selling. And they went and did something else. Right. The job markets good. They got other jobs. I think we lose. I’m speculating maybe 20 to 40% of the entire syndication industry in the next 18 months. Yeah. Now and again, this isn’t this isn’t blood on the streets, right? There’s at no point have anything that I said represents Blood on the street, it just represents distress for individual properties.

J Darrin Gross 35:06

Right, right. Now just deal by deal challenge as opposed to a systemic.

Neal Bawa 35:14

You know, I don’t see a systemic problem, I do see that if 1000s of properties do go back to the bank 2024 2023, maybe or next year, 2024 may be a difficult year, especially early on in the year to get lending, where the banks are, if they’re worried about properties on their books coming back into them, it’s harder for them to lend at that point of time, because they have to deal with those properties. Today, slow down,

J Darrin Gross 35:38

right? I’m just sitting here thinking is you’re talking about the, you know, the lending environment, and just kind of this education that you’re working now, with your investors, it would seem that part of that education be kind of just more about the cycle, you know, the market cycle itself, and where the opportunities, you know, potentially will come from, or when they will come. And, you know, if you are able to weather the storm, and investors are wanting to get back in or have additional capital they want to put to you to use that that would be kind of the point for them to jump in or for you to go forward. But I’m kind of curious to on just the psychology with investors, you know, if they’re, you know, the aversion to loss, you know, the fear of losing, is so strong. And if they’re in the mindset of where if that’s what this week, your investors are, the hope is that you’re like you said, you’re able to, to not lose their their investment. So let’s say you’re successful in that, and you’re having a good conversation with them. And they feel educated and they feel taken care of by Neil. And as the cycle presents itself, there’s all these other additional properties that are that are turned back to the bank. Do you think you’ll you’ll I mean, I would assume you’ll be in a better position to raise capital from those people hand or anybody else? I mean, the I guess the the flip side is that people that lose money in the deals from the syndicators that aren’t having this conversation that are turning the deals, they’re not going to have the capital nor they’re going to want to get get back in the market, I would assume is that,

Neal Bawa 37:26

Yeah, it’s not read necessarily a good story, right? So 18 months from now, my job actually will be harder to raise money than it is today. Because those investors in my properties or other properties, haven’t seen this play out publicly. At this point of time, as I said, when I go to conferences, tell people, where’s the session on training on this? And they say, well, there’s not enough to stress Yes, for us to be doing this stuff. So stuff is in our future. And because it’s in our future, I think that 18 months from now, there’ll be investors who a have been burned, you know, with the property going back to the bank, or, you know, having to put in cash, or be they’ve been with somebody like me, and, you know, work hard, and maybe our properties are, are skating through this challenge, but they’re still not making money. I mean, I’m even for properties where I’m when I’m quite profitable, just out of an abundance of caution. I’ve told them, I’m sorry, I’m not distributing any cash, I need to just build my operating reserves, it’s your money, it’s not mine. If I don’t use it, it’s yours. I’ll, I’ll distribute it to you. Right. So since it’s not like, I’m going to sit and eat this money, it’s going to go into a bank account, it’s going to sit there for a while, sorry, but that’s what I have to do. Because my job is to manage your money. And know I see potential risks. And if that risk goes away, you’ll get your money. So so there’s people even in my database that are not particularly not happy with Neil Bauer, because they’re like, you know, I’ve this property is doing well, by now, you know, you kind of delayed cash flow during COVID. And then the cash flow came back, and now you’re taking it away from me again, I’m not quite happy. I think they understand. But they’re grumpy about it. And I think so, raising money next year is not going to be easier simply because other syndicators have burned investors. I think there’s a process where the mindset resets 2024 We’ll just muddle through 2025 I think is going to be a fine year. And we’ll do well. You know, you said Alan Greenspan was really the first guy that advocated for lower interest rates. I believe all Fed chairman in the future will advocate for lower interest rates simply because it’s okay for the US to have these high interest rates for one year, maybe even a year and a half. It’s no big deal. We’re a very strong economy. But what Imagine if interest rates were this high for the next 10 years? Do you know what that does to the interest payment on the federal debt? I mean, you have to cut every program, you have to cut military you have to cut Social Security, you have to cut, you know, job entitlement programs or unemployment. Everything’s got to be cut because you’re basically spending $300 billion extra that you weren’t paying thing before. So the political pressure from both Republicans and Democrats to keep interest rates low in the long run is extraordinary. In the short run everyone’s understanding of what the Feds doing, they understand that inflation can prevent them from being elected at the next election. So they’re like, Yeah, go ahead, do your job. Once inflation comes down to a reasonable level, there’s going to be a lot of pressure.

J Darrin Gross 40:21

Yeah. No, I definitely. It’s a interesting dynamic with the Fed. And, and, you know, have some scary times ahead of us. But I think that, you know, the wise syndicators and, you know, investors that understand the situation, the the, you know, preventing a loss is really kind of prevented, you know, prevent defense or whatever, trying to try to prevent losing is really kind of the game right now.

Neal Bawa 40:52

Yeah, and it’s not that hard, right. So if I wanted to sum this whole thing out, I don’t want to use the word scary, because I don’t think it’s scary. I think it’s just neglect. People are just not thinking about this, because they’re like, you know, it’ll get better. No, take a spreadsheet, plan out the next 18 months, and be reasonable, when you think how interest rates are going to fall, and how it’s going to reasonably affect your property, figure out how many dollars you need, and put together a plan, it’s not as many dollars as you think. You just need to look at it. Now. It’s going to be a lot harder a year from now. So you might as well look at it now. So I think this is really all about action there and not panic.

J Darrin Gross 41:32

That’s good. Hey, Neil, if we could like shift gears here for a second, but damn an insurance broker, and to have such worth my clients to assess risk, and try and determine what to do with the risk. And the three strategies we typically consider our first look to see if we can avoid the risk. When that’s not an option, we’ll see if there’s a way we can minimize the risk. And when we cannot avoid nor minimize risk. We look to 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 political interest rates, the Fed clients, investors, tenants, however you want to frame the question for the answer for you. But, you know, I’d like ask you Neal Bawa, what is the Biggest Risk?

Neal Bawa 42:30

The biggest Risk is to keep doing what you were doing before. Right now we are at a point where we need to pivot. So you know, you name three things. And so I’ll go through those three and tie them back to the biggest risk. This change right now may not be a good time to buy multifamily. In fact, I don’t want to buy multifamily until about July this year, when something known as the spread, which is a portion above Sofer is likely to to drop it might even just collapse. So I basically want to wait until that time in terms of transferring risk. Yeah, I want to go out and have my distressed fund by not buy properties, but invest money into properties. Because when I invest money into properties that are that are distressed right now have negative cashflow. I’m doing what Darren mentioned, I’m transferring my the risk from my investors to the existing investors of that property. So if they change their mind would allow me to come in as preferential money. I’m coming in ahead of them. And I’m transferring the risk of ownership of the property while I’m getting ownership of it to someone else. It’s somebody else’s risk is the GP and the LPS risk, not my LPs, their LPs. So if I can transfer risk successfully, I’m looking to do it by recapitalizing existing properties that I like nothing wrong with the property, just the interest rates are killing it. One day, the interest rates will go away and the property will do well, again, I want to own this property, but I don’t want to buy it from the market because I think that the price is too high. So when I recapitalize somebody else’s property and put my investors in pole position and transfer the risk.

J Darrin Gross 44:12

That’s an interesting strategy there. Are you finding lots of opportunities that way?

Neal Bawa 44:18

One a day early. That’s, that’s remember the distresses there. Everyone’s ashamed to talk about it.

J Darrin Gross 44:26

Right. Now, that’s, that’s, that’s good stuff. And you’re able to with your investors come in and establish a position and put some capital in and I’m

Neal Bawa 44:42

Looking to do so as I as I said in my commentary, that the peak of the distress starts in q3 this year. So right now it’s time for conversations, understanding those properties, seeing, you know what they’re doing, we’re encouraging them to do cash calls first before they recapitalize. You know, cash because if they can get by with cash calls good for them, I mean, that’s the easiest way that that’s what they should be doing. So we’re providing education at this point of time. But there may be properties where the cash calls are not successful, and they come back to us, they’ve checked off that box. And then their investors are ready for a, you know, change in their position in the equity stack, after an unsuccessful cash flow. So it’s a process. I haven’t done any yet. I’ve got, you know, two dozen properties that I’ve looked at, I think I like four. And I’m monitoring those four to see what happens in the coming months. And I’m also having conversations with my investors. This, you know, I shouldn’t be recapping any property at this point, but six months from now is different.

J Darrin Gross 45:42

Well, I have an interesting conversation for later to hear. Are you? Are you done? That sounds good?

Neal Bawa 45:48

Sure. There’s, there’s more opportunity at a time of distress, not less.

J Darrin Gross 45:53

Yeah, no, absolutely. It’s the old Warren Buffett there, you get a chance to use homeruns shorts on this kind of thing. So I like it. Hey, Neal, where can listeners go if they’d like to learn more connect with you?

Neal Bawa 46:06

Two different ways. One, I’m the only Neal Bawa on the World Wide Web. So you can just type in N e al space B Awa and hit Enter on Google and you’ll find my content and connections to me. The other one which is more formal. We have about 50 75,000 people that are current subscribers of multifamily University, the web URL is multifamily followed by you that letter U so MultifamilyU.com. We do webinars each month on these kinds of thorny topics that no one else wants to touch. We do about 20 of them a year. We just did one we had 2600 people registered about 1200 watched it live. So those kinds of events. I don’t have a podcast so you can’t listen to one but I have been on over 200 podcasts so you can go to pod chaser.com and search for my name and you’ll find a couple 100 of them.

J Darrin Gross 47:00

Awesome. Well, Neal Bawa, I cannot say thanks enough for taking the time to talk. I always enjoyed, learn a lot, and I look forward to doing it again soon.

Neal Bawa 47:11

Awesome. Thanks for having me back Darrin.

J Darrin Gross 47:13

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.

Unknown Speaker 47:32

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Cap Rate and Interest Rate Relation to Value with Edward Ring – CRE PN #404

Edward Ring 0:00

From call it 1980 Through through the early 2000s All apartment buildings were bought with negative leverage. Leverage was always the price of debt was always higher than than the cap rates are very frequently a higher than the cap rates. And people got used to figuring out how to how to buy real estate with that kind of debt environment if you had equity just buy with equity because why would you pay a lender you know you know, we get to the later part of the 90s and now all of a sudden you know, early 2000s Now we’re talking about leverage cost of debt that’s actually lower than your cap rate. So you walk into a project and the more debt you can put on it, the higher return your equity is going to get that’s how the math works. And so everybody got pretty excited about using that call it certain read about when I got into the business so read read around 2002 You know borrow it 4% Or four and a half percent and buy a property that has that’s thrown out for five and a half percent. And why yield that feels great.

Announcer 1:22

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 are an investor, broker, lender, property manager, attorney or accountant we are here to learn from the experts.

J Darrin Gross 1:42

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 Edward Ring. Edward founded New Standard Equities in 2010 and serves as its chief executive officer Edward has transacted over $2 billion of real estate over an illustrious 25 year career. And in just a minute, we’re going to speak with Edward about the relation between interest rates and cap rates.

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Edward Ring 3:37

Hi, thanks for having me. It’s a pleasure to spend morning with you.

J Darrin Gross 3:42

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

Edward Ring 3:51

Sure, I I’ve been in the multifamily real estate space since 2002. I was working for another company for about eight years when the great recession hit and I decided to do what I was doing for them for my own book and my own investors and you know, I was full of hubris and ignorance and just enough to keep the blinders on and the things I didn’t know about and you know enough to give me the the courage to try to do this on my own. So it’s been about 13 years now and I’ve got currently about 2000 units in my portfolio. I I do strictly value add apartment investing, and I own and operate and manage the investments with a team of course, we’re about 60 stronger so on the employee side and I stick to the markets that I know I’m in as greater see Seattle, I’m in Northern California, I’m in Southern California, and I’ve been farming Denver for the better part of about four years. So eventually, we’ll be in Denver as well. I use equity from anywhere, anywhere from Mom and Pop type investors, to large institutional equity sources, and in all parts in between family offices and whatnot. And my debt, generally speaking comes from Freddie Mac, Fannie Mae debt funds, banks, kind of whoever’s giving us the best rate at the moment in time, all nonrecourse talking about risk, I don’t want to lose my house over this stuff. I am very, very cautious. Some of my peers are more cowboys, and I tend to be very slow and steady wins the race kind of kind of character.

J Darrin Gross 6:06

No, I appreciate you sharing that kind of your background there. So you’ve been doing this long enough to see the front end and the and the kind of the back end of a cycle. I feel like a lot of people I speak with are kind of all, you know, post, you know, the the crash where everything was, you know, so low that you you didn’t really have to know anything you’ve just got in at the right price, you could write it up and, and, you know, get out and make some money. Because if my math is correct, 2013 or, excuse me, 13 I guess you were 2010. So it was kind of postcrash. Is that kind of the when you got in as far as doing it doing it on your own?

Edward Ring 6:56

Yes, exactly. Um, as far as going on my own, there was a small recession in the early 2000s 2000 123 ish. And, of course, I saw what was going on in that. And interestingly, the folks I was working with back in the early 2000s had gone through the previous downturn and recession in the end the and the, the credit crisis of the early 90s. And that was fascinating, because everybody that I learned from and my mentors and whatnot, We’re all veterans from multiple cycles. And for sure, it’s a pretty interesting time right now, because I to meeting all sorts of people who jumped into this business in 2010, or 2011. And have never really experienced what it means to sign on the dotted line, and what it means to have, you know, your credit crisis or, you know, or fundamental changes in, in the macro economy where your values can get impacted. It’s, it all looks so easy from afar, but it’s far from easy.

J Darrin Gross 8:15

No, well said. So I’m kind of curious, you know, I, when, when I have these conversations, a lot of times, what I find is that there’s a viewpoint that what happened last time that caused the crash is, you know, and this is more like a pre crash conversation. And I’m not saying we’re having her, we haven’t crashed yet, but there’s certainly been a slowdown right now. But the the want is to look to the past, and identify what caused the, the the last crash and look for those signs on the horizon for the next crash. Clearly, the the, the 90s was a credit crash, you know, you said the mentors you learned from and, and if I remember, it was not like the savings and loan kind of debacle that that kind of came on, done with I don’t remember what the circumstances were. Yeah, that’s

Edward Ring 9:19

effectively Correct. was you know, back way back then you’re talking about a a system that didn’t have really didn’t have the internet. I mean, that’s how, that’s how long ago it was. And that really that that information flow changed everything. Obviously it changed and we hear about it all the time. But when you really think about commercial real estate and and what’s going on, you went from a system where it was a weird thing to invest in an apartment building, because who knows what’s going on and what you got to fix the toilets. I don’t get it. You know, there’s a lot of ways There’s stuff out there and people are like, Oh, no, you can make money by investing with, you know, this guy from Chicago. It’s like, Oh, my God, that sounds terrible. Well, then the internet comes around. And you know, the last, the last big recession? What 2008? We talked about that in a minute. But all of a sudden, you had asset managers at banks, who were, you know, all of my peers and mentors, and people who had been around were like, oh, no, no, the banks, they don’t want to own this stuff, the banks are just going to take it on the chin. And don’t worry, you’ll buy it pennies on the dollar. Well, not so much. In 2008, there was this thing called the internet. And there were things called cameras that you can plug in, you know, put on your computer desk and take a look at the asset. And even in 2008, we had that technology. And so now all of a sudden, you have banks that are now populated with highly educated people who aren’t necessarily afraid of, of this thing called an apartment building, they’re not necessarily afraid of what they don’t know and are willing and able to jump in with two feet. So whatever it was afraid, or whatever was excited about in 2008, and nine was out, we’re gonna, we’re gonna go and make a ton of money, because banks are going to take it on the chin. And now that didn’t happen too much a little bit. Some, some borrowers and some owners really got over their skis and bought in markets that they didn’t understand or whatever. And sure, there were some losses. But cut to today. And the most fascinating conversation I had, I think was really at the front end of this thing back in, in June. And again, we don’t know where we’re all heading. I have some, I have a hunch. But back in June, I had a extremely sophisticated, very, very intelligent investor, institutional investor manages billions of dollars. And he’s literally one of the smartest people I’ve ever met. And he said to me, he pulled out of a project that we were trying to buy. And he said, Eddie, I know where this is all heading. I remember 2008 I know where this is all going. Like, really? You’re the most sophisticated guy I know. How do you know where this is heading? And he said, Yes, this total straight face and I said, Listen, I can tell you one thing for sure. One thing for sure is, it’s not going to happen the way it happened in 2008. That’s the only thing I know. In fact, nobody knows anything about anything except for no things happen in the exact same way each and every time. If they did, that’s called a crystal ball. And he would everybody would make money, I guess, or everybody would lose money. And, you know, think of a world where everything happens the exact same way every single time, first of all, but pretty boring. Second of all, that’s not the way human beings are. So now the question is, well, what’s going to happen in this next go around, and that’s where I’ve been mulling a lot recently, and kind of think through the various factors and, and, and prepare for a downturn prepare for the worst. But however, this is not 2008 2009 that was the scariest time I’ve ever seen in my life, not just as an investor, but as a sophisticated person who reads the reads the news and watches what’s going on and understands what’s happening with with credit markets, that was a really, really scary time, we were very much on the brink of an entire financial system collapse. And so if you think about that, and he cut to today, we have some inflation, we have a group in Washington dialing up the interest rates, we don’t have anything remotely close to what it looked like in 2008. And in fact, we’ve got full employment we’ve got lack of employment, we don’t have enough people to fill the jobs that we have out there. So you know, I the assure a bunch of layoffs in the tech industry right now and you know, you open up the newspaper here about somebody else laying people off but that’s actually normal. It’s a normal course of business. That doesn’t necessarily mean that we’re facing a ginormous credit crisis and everybody should run for the hills.

J Darrin Gross 14:38

No, I appreciate you kind of going through that and I’m you know, a believer like you say that whatever happened last time was now not what is going to happen this time you’re you know, that’s too easy. In a lot of it is because the the holes get fixed or like in the instance where you’re talking about the 90s where it was pre internet and now we have the internet You know that that’s a whole lot of information coming in everybody that’s available 24/7 365 as opposed to some sort of a local on the on the street kind of knowledge that, you know, may not be available to everybody. So let’s talk a little bit about, you know, kind of the, where we are now. And then, if we, you know, however it works best talk about, you know, that that that relationship between interest rates in and cap rates, because I think one of the things that, that, you know, people, historically, the interest rates read today, the mark would be doing cartwheels on the broad, kind of the broad spectrum of time. But having come from such a low interest rate environment, it’s a shock to the system. Right now, in my sense, and I guess my question to you is, do you think that the market will accept this and continue forward? Or will there be a complete stoppage? You know, and, and the recession, and then the need for the low interest rates to get the market going again?

Edward Ring 16:23

Yeah, it’s a great question. And I think that when I really like look at the landscape, and and I think about where we’ve been, and where we’re heading, first of all, there’s a couple of factors. From call it 1980, through through the early 2000s. All apartment buildings were bought with negative leverage, leverage was always the price of debt was always higher than, than the cap rates are very frequently higher than the cap rates. And people got used to figuring out how to how to buy real estate with that kind of debt environment, if you had equity, just buy with equity, because why would you pay a lender, you know, you know, we get to the later part of the 90s. And now all of a sudden, you know, early 2000s, now we’re talking about leverage, cost of debt that’s actually lower than your cap rate. So you walk into a project and the more debt you can put on it, the higher return your equity is gonna get, that’s how the math works. And so everybody got pretty excited about using that call it certain read, right, when I got into the business, so read, read around 2002. You know, borrow it 4%, or four and a half percent and buy a property that has that’s thrown off a five and a half percent. You know, and why yield? That feels great. You know, in some markets, that was a six versus a four and a half, or a seven versus a four and a half. And, you know, some markets, that’s a four and a half or a four and a half. But either way, that was everybody got used to the idea that that was part of the calculus, that would be there forever. And again, things change, and things move around. And people who are buying these things with financial engineering in mind are not looking necessarily at the proper metrics. Just because you can buy a seven cap somewhere, and finance it at a four doesn’t mean you should be buying that property. There’s a, there could be a lot of reasons why you shouldn’t be buying a property and we can talk about that in a minute. But, you know, today, last couple of years cap rates fell, because you know, the Fed cut interest rates to zero when Cap rates fell through the floorboards, and all of a sudden, people are getting comfortable at a three, three and a quarter cap. And the lower that cap rate, the tougher it is to dig out of it if you’ve you know, if something changes. And so we were very slow in 2021. And we were very cautious. I kept looking in my markets, we had a bunch of people not paying rent, and we couldn’t kick them out. And it was it was still very, very, very challenging. But we we tried our best to stick to our knitting and stick to our park discipline. And some folks may have not done that. And they bought it a three and a half cap and today they’re sitting at a four cap, maybe with some rent growth and you know, the markets are decidedly in the five and a half kind of range. All those folks are underwater. And so at some point, if they don’t have additional equity or they can’t do capital calls or Then those properties will be sold. And the equity holders will take a loss and maybe isn’t the lenders will take the loss depending on again where that property is. However, the other funny thing about today, and this is what makes me laugh every time I think about it, every single conversation I’ve had in the last nine months, is some version of the following. Oh, it’s gonna there’s gonna be a lot of opportunities out there. We’re excited. Oh, yeah. Yes, we have. We have dry powder. We’ve got billions. We have you know how much money we’ve raised billions of Okay, great, wonderful, all your dry powder well, and then I turned the conversation to their own portfolios and said, Well, what are you going to do on your own portfolios? Oh, no, our portfolio is fine. Right? So nobody, nobody’s, nobody wants to look at their own stuff is saying like, Yeah, I’m gonna get rid of my junky stuff and buy this now brand new stuff, like, you know, eight caps, nobody’s talking about that. They’re just talking about how everybody has dry powder. Well, somebody’s got to not have it, somebody has to have a deal, the clothes to sell, if nobody has to sell. And you know, it’s a little bit like the single family home market. And you want to talk differences between 2008 and 2023, the single family home market in 2008, there were tons of people with floating rate debt and tons of people that are underwater in their homes and forced to sell. And there were a lot of things well, this time around, not only has there been fiscal discipline on the part of the lender side, in the last 10 years. But now we’re coming out of this crazy time where people were refinancing their homes at two and a half 3% 4%, whatever it is, but there is no sale pressure at all in the marketplace for single family homes. Very, very little. And so now we’re just like in the multifamily spot, if people don’t have to sell, they’re not going to sell, they’re not going to sell and say, Yeah, we’re gonna sell it or nightcap, just because No, not we’re gonna hold because we don’t have to sell. Just reified. We’ve got 30 year mortgage on my house, why should I sell it, you know, that kind of thing. So I don’t know, if you can look at today’s market and say, yeah, there’s gonna be tons of deals gonna just materialize. But I can say that when the market fully resets, there will be a new cap rate, we won’t be buying in the threes anymore, we won’t be buying, you know, across the country at the same cap rate, which we can talk about that too, will be bifurcating and diversifying what we think is a good deal in Des Moines, Iowa versus Hollywood, California versus Hollywood, Florida, you know, there’s going to be a difference in all of those cap rates that we haven’t seen really in the last couple of years. And that’s driven in part by written by interest rates.

J Darrin Gross 23:03

Yeah, it is, I love the comparison that you’re making there about, you know, in what what created the market opportunity in the in the Oh eights is that people had had the sell, they didn’t have the revenue, they had a loan being called, or the I mean, the capital markets dried up to where they they couldn’t meet their, their, their debt covenants or whatever, whatever those situations were, they were forces outside that were causing them to have to sell. Whereas again, right now, like you just described, if somebody’s got, you know, low cost debt, and their property is performing, what’s the where’s the supply of opportunity going to come from? Other than get their markets where maybe there was a overbuilding that occurred or maybe you’ve got, you know, a debt that’s that’s coming due or that has to be refinanced, or I’ve heard a couple of stories where maybe a fund has a property and because the stock market has not performed well, that they had to liquidate, to rebalance their portfolio and, and I heard about a, you know, a group that picked up a property with tenure debt that was only one year into the debt, you know, at a at a great rate, I mean, they had bring more capital than maybe maybe it would have but but, you know, I am not hearing all of the story is just yet, of all the opportunities that have been forecasted by those you’ve talked with and many others and you 90. And I mean, there is a chance that this just could be kind of a boring cycle that that is the new norm of, of business. But I guess the history books will tell us what it what it what it was, or, you know, after we have to go through it. So, let me ask you about, you know, we’ve we’ve already talked a little bit about, you know, kind of the compression, the cap rate compression that occurred, and, and I guess even going back before, like the 2000s, how, you know, debt was always more expensive to wear, you know, the way people you know, the performance of a property. I mean, it encouraged people to come with more equity than it did. Debt. Is it possible that, you know, that becomes the new norm? And if that is the case, what are your thoughts on how long it will take for the market to accept that that’s the new, the new norm?

Edward Ring 26:09

Yeah, great question, I definitely think that it is possible that that is going to rapidly become the new norm. And I think that the what, what we’re getting back to, and this is, I think, good for my business. But we’ll see. But that is that you pay a lower cap rate. A lot of times the cap rate is always a function of risk, and you’re going to pay a lower cap rate, if there’s less risk in the project. And part of that risk comes from the market fundamentals. So we’re here on the West Coast, and we get a lot of a lot of grief about our politics and a lot of grief about, you know, this, that and the other thing, but you know, at the end of the day, we’ve got a ton of jobs here, we have a ton of high paying jobs. And so if we’re buying properties, even if we have to finance them at, you know, five 6% and whatnot, we can go and buy a project at a five, four and a half 475 cap rate, even though there’s, there’s negative leverage, because we know that our incomes here are so high, and the jobs are so plentiful, and this housing supply is so limited, that we have a very good sense that we’ll be able to move that rent in place up to basically cover ourselves, maybe we’re negative leverage for a year, year and a half. But within two to three years, we might be positive leverage, if we put the right data on, so all of a sudden, that opportunity feels a little less risky. And so we’re willing to pay a lower cap rate for that particular play. Now, if you’re buying something in a different, I don’t know where other markets where your listeners are, but let’s just I don’t know, pick some market in the middle of the country somewhere east coast or something that I don’t know. But let’s pretend there’s a market that used to trade at a six and a half. And lately, it’s been a three and a half. Well, in the last two to three years that didn’t necessarily add a bunch of high tech high paying, you know, supercharged jobs. And you’re really talking about service workers and you know, retail employees and whatnot. Well, now you don’t have the fundamentals that you could then make that bet that your cap rate was that you were safe at buying a three and a half, four and a half cap rate, because you’ve been moved that cap rate up as tight as you can raise rent, all of a sudden, you’re stuck with the rent, you know, barring maybe two 3% a year or something increases, but by and large your market is your market. And all of a sudden, that feels very risky. If you’re putting on a piece of data at five and a half, and you’re buying at four and a half and you’re in a market where that that market growth is not going to happen. Now how you can actually generate enough yield for your investors or enough appreciation so that when you go to sell your project in three to five years, they’ll actually make money. So now all of a sudden, that feels a lot more risky to me. And so that going in cap rate had better be a little higher than say what you’re buying in California. So all of a sudden, you know, what we saw in the last three or four years is just a real compression of cap rates around the country to a single kind of cap rate. Oh, this is the cap rate for an apartment building. Well, now I think we’re going back to No this is a cap rate in Tucson. This is a cap rate in Los Angeles is the cap rate and northern cow and each specific pocket. Each sub market has its own risk measurements and its own risk profile and its own fundamentals. And that’s why you have to be really, really diligent and smart about what Your buying and where you’re buying?

J Darrin Gross 30:03

Yeah, I totally agree with you, I’ve, I’ve definitely come to the conclusion that, you know, the cap rate does dictate, will there be anybody behind me wanting to buy this, when I’m ready to sell, you know, if if, even when, you know, cap rates are crazy in the twos and threes or whatever, in some of your bigger metro areas, and that was felt like that the one safety, you know, piece of security that they had was that market was not going to collapse. Whereas you get somebody that’s all excited, because it’s a 10 cap, you know, or something like that. I’m gonna like, you know, the 10 cap, you better love that property, because you may own that forever, as opposed to, you know, something that’s more in a, you know, in a market with jobs, I mean, the fact that you, you know, have said jobs, jobs, jobs, that’s, that’s pretty key, because those people with jobs are the people you want in your, your property. Right. And I feel like, you know, with is cheapest capital has been for the recent past, it’s allowed investors to, I don’t say, overlooked jobs, because jobs have always been kind of that statistical point that you have to be able to identify, you know, what’s the median income? You know, what’s the, how much how much rent can your, your potential tenants afford. But, you know, with the, we mentioned, the internet will shoot, you know, the whole COVID taught us that you can work remote. And so there was this kind of this almost this thought that you didn’t necessarily need to be in the market where the job was, you could be, you know, you know, at any point. And I think that, by and large that has played out, and I think there’s a lot of people that have relocated, you know, talk to anybody that’s investing in an office space, and I’ll tell you, certainly some, some stories about that, but but, you know, again, it still comes down to jobs. And, you know, there’s got to be some sort of concentration of jobs, high paying jobs, so that you can whether you buy a property at a low cap today will be, you know, cash positive or leverage positive here in a short amount of time. And I just think that, you know, kind of what, what I’m hearing you say, and what I’m kind of picking up from, from others is just that, you know, there is a reset that’s occurring. It’s, I’m assuming, and tell me, how long do you think? Is there a timeline you think are you believe that it will take for people to accept? This is the new norm? Um, we I know, we talked about Yeah, we think it could be, but is it like a year? Is it two years? Do you think it’d be three years when everybody just kind of accepts us? Or is this just a everybody keeps looking for something different until it doesn’t happen? And then they say, Oh, I guess this is what it is.

Edward Ring 33:36

Yeah, I think, I think that we’re we, as a real estate investor, as a group are impatient. And I think I I’m a no, no, no exception to that. It’s been, as far as I can tell, since about April of last year, so we’re talking about it’s been 10 910 months now, where the Fed has really started changing the dynamics of our marketplace, you know, with their intentions, good intentions or not, whatever their whatever people feel that they’re doing. They’re doing it and they’ve moved rates so quickly, so rapidly that investors haven’t been able to find their footing. And by and large, don’t want to actually be a participant in a market where they really don’t understand what the landscape is. And I think in you know, get my crystal ball out. But if the Fed pauses or stops, decides, hey, you know, we’ve moved interest rates high enough. We’ve slowed the economy down. Inflation is back to normal. Our jobs are still plentiful. Let’s, let’s just wait and see now and see how this goes on. I think then we’re going to start getting real estate investors to, to really kind of jump back into the market, I think that if they can project what’s going to happen, they’re okay to invest, if that means to get rewarded at some point with interest rate cuts, and great, they’ll take it. But if they presumed interest rates are what they’re going to be for the next three or four years, I think people will start jumping in sooner than later. And I think helping all of this, at least in the markets that we play in, on the west coast, is that our rents are, now there’s they’ve softened up a little bit, but for the most part are holding. And if we were getting, say, $1,800, for an apartment, a year ago, we’re still getting that 1800, you know, and maybe it’s a little bit more, maybe now we’re getting, you know, 1950 if we renovate the project or something like that, so we’re actually still seeing fundamentals been in a decent shape. So if that’s the case, and we can work those higher rents through the rent rolls than our cap rates will be rising, and somebody can turn to us and a year from now and say, Hey, would you want to sell this thing at a six cap? Yeah, I’d be like, Sure, why not? I could sell it a six cap, because my basis, my cost basis is really at an eight cap now. And so if I’m selling at a sixth grade, I’m gonna do well. Now, you know, if I am forced to sell fairly, and I haven’t been able to move the rents, then well, I may be pretty upset, but I might have to sell anyway, in which case, you know, we go back to what it was, like, many years ago with, with having to sell into a market that we prefer not to be in. So

J Darrin Gross 36:56

right. Now, I think that the recognition and understanding of the cap rate, you know, obviously, it’s a market. It’s a market cap rate, like you, like you said earlier, it’s not a, a nationwide cap rate, although that’s kind of what it was portrayed as. More recently, but, but definitely each market has its own home campaign be to be intimately familiar with that, and understand the, the likelihood or the possibility of it moving, I would expect that, it’s probably wise to assume it will go up. So if you’re, if you’re getting a deal, and you have an exit strategy plan, that you you know, plan for something a little higher, you know, but or at least have a plan to be able to hold through, you know, whatever is immediately in front of us. Let me ask you, because I think this is the, you know, it’s probably a question that seems obvious to some people, but I’m always kind of curious about this. How do you see the the the commercial debt? Just the structure of commercial debt? And does it not kind of create the cycles in the market all by itself? Meaning if you have a low rate environment, and people either rush into the marketplace and buy or refinance? Does it almost create a, you know, a natural cycle for when that debts, you know, to be to be refinanced, or extinguished? Or does it present just part of the the operators? You know, Rubik’s cube that they have to solve for?

Edward Ring 38:55

Yeah, I think it’s a little of both. I think, you know, over the last 20 years, we’ve seen commercial lending, take on a very interesting characteristic. Or maybe it’s been going on more than 20 years, but for sure, I see it today that commercial lenders are really just investors. And so they’re just investing in a sub stack of the of the, of the capital in particular project, you know, with between one and 70% or 65% or so. But at the end of the day, all those folks are investing and they’ve got investors and they’re mining their ship for what they’ve promised their people and Gone are the, you know, are the days of, you know, the local bank, you know, Mr. Potter had to go get your loan, you know, that those days are so far gone that now it’s, you know, everything’s been sliced and diced into bonds and you know, that Most people have investors, and so everybody’s basically an investor. And so, and there’s a lot of creativity and investing, as we all know, there’s a lot of creativity in structuring debt. And so yes, what you’re saying is, is quite true, which is, the more creativity that lenders get, the more they’re able to offer the lower interest rate, because they are making certain fundamental assumptions that the next lenders not making, again, trying to arbitrage and squeeze out a little bit more yield for their investors and do a little bit better. So one, time for bonuses come in February, their their bosses are all happy. And you know, because home and celebrates, that kind of competition really mirrors what goes on in the operator space, where we’re going to chase apartment building with, you know, five other groups. And we’re saying, Yeah, but we think we can do XYZ, so we’re gonna pay a little bit more. Well, if we’re right or wrong, that’s kind of where the rubber meets the road. And the same exact dynamic dynamic is happening at the lender level, from at the lender level is the losses could be even higher than, say, the losses and operator level, even though it might feel like feel worse, because you know, losing all of your equity, in one deal was terrible feeling but a lender could lose the, you know, 10s of millions more, and that is a much, much larger loss to bear.

J Darrin Gross 41:30

Yeah, that’s that old saying, if you have a $5 million loan, that’s a huge problem. If you got a $500 million loan, that’s a bank problem,

Edward Ring 41:39

exactly.

J Darrin Gross 41:43

Hey, Edward, 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 the risk. And there’s three strategies we typically look to consider, we first look to see if we can avoid the risk. When that’s not an option, 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 we can transfer the risk. And that’s what an insurance policy is a risk transfer vehicle. And as such, I like to ask my guests if they can look at their own situation. It could be their clients, investors, tenants, the market political, the Fed, how are we you would like to frame and consider the question, what is the biggest risk? And 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, Edward Ring, what is the Biggest Risk?

Edward Ring 42:56

I think the biggest risk I’m facing right now is not having the patience to to get comfortable with the knowledge base that I have, and what I see on the horizon. So I’m, I’m a person that tends to slow down when other people are rushing. They want me to make a decision quickly. So I peel back and take a moment, take a pause. I do my best work when I’m thoughtful. And I assess. And I think that that’s the risk that most humans not just in real estate, but most humans face is that they are making decisions without actually understanding the fundamentals surrounding the problems that they are faced with. And I think that folks out there would, would do well to get educated, and to really make sure that they’re arming themselves with intelligence and intelligent reporting. So they understand the markets that are in they understand the risk, reward calculus, and they understand what, what they’re facing. And if they understand all of those factors and are comfortable with them, then it’s pretty easy to make the right decision or at least a decision. And time will tell if it’s been right or not. But at least you’re eliminating the one single factor that everybody has and that’s your own ignorance. If you can eliminate your own ignorance, man, you’re gonna do great.

J Darrin Gross 44:35

Now, let’s say wise man speaking there. That’s That’s good stuff there. I appreciate that. And where can listeners go if they’d like to learn more connect with you?

Edward Ring 44:49

Yeah. NewStandardEquities.com. You can send us a note I think we have info at and I think there’s investors. There’s an investor portal if anybody’s saying interested in investing with us. You just go visit our website and click around you’ll find you’ll find it pretty easily. We, you know, we’re very cautious. So it’s not like you’re gonna go and see 1000 deals like a crowdfunding platform, you know that. So it’s a couple of year maybe. So, I welcome people to, you know, hop on our site and become one of our investor members. And we’ll see what happens. Hopefully we’ll find some decent deals out there.

J Darrin Gross 45:34

And 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.

Edward Ring 45:42

Cool. Anytime, take care.

J Darrin Gross 45:44

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.

Announcer 46:04 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.

Multifamily Interest Rates and Cashflow with Shannon Robnett – CRE PN #400

Shannon Robnett 0:00

So you’re seeing a lot of this where people are absorbing the, the fall off here where we, we bought it the right thing at the right time, the wrong way. And so we’ve got a great apartment complex, the business plan executed properly, but the interest rate floated up and now it doesn’t cash well. So there’s gonna be some of that that’s going to be a little bit painful. There’s going to be some of that that’s going to readjust. Unfortunately, with where pricing has gone, I think that most of that is going to be able to be absorbed by the investor, not necessarily affecting the bank. Right, because the product is stable. The product has received facelifts in some cases they’ve received rent gross, they’ve seen them repositioned in the market well, and so there’s really not a problem with the asset. There’s a problem with either the opposite Well, it’s not even really the operator. In most cases it has to do with the financing.

Announcer 1:00

J Darrin Gross 1:20

Today’s program 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 at building insurance and risk focus on real estate and 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 Shannon Robnett. With over 25 years of experience Shannon has been involved from start to finish on over $350 million in construction projects, and is dedicated to sharing his experience and expertise. And in just a minute, we’re going to speak with Shannon about the multifamily marketplace.

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 Shannon Robinette Welcome back to CRE PN Radio.

Shannon Robnett 3:10

Thanks, Darrin, it’s great to be here again.

J Darrin Gross 3:12

Well, I’m so glad you’re able to join us. And I’m looking forward to our conversation. For those that may not be familiar with you, if you could give us just a little bit about your your background.

Shannon Robnett 3:25

Yeah, so I grew up in a real estate family. You know, I, my parents were always in construction and development. My mom was a third generation realtor, I’m a fourth, my son’s a fifth generation. You know, so I grew up watching development deals happen. And I got involved at an early age. And I soon figured out that working for even in construction, if you even if you own your own company, you can work for somebody else, and you can make money. But the reality was, if you really wanted to get to where the real money was, you became the developer, you began to find the property and and then you built the asset. And, you know, so I’ve done that whole thing for a long time. And we’ve just been, you know, we’ve been fortunate in the fact that, you know, we currently have about $100 million worth of commercial real estate being built. And we’ve got about $200 million on our books to start in the next 18 months. And you know, we’re just looking at how the markets shaping up and what we’re going to do next, but it’s it’s kind of on repeat. Just really, I mean, we’ve seen it all before it’s coming back again. 6% interest rates are normal. You know, we’re seeing some very similar things that we’ve seen a lot in my past.

J Darrin Gross 4:48

Yeah, no, I appreciate you kind of given us the the background there and I look forward to digging into this a little bit. Just as a kind of a reminder or Are you still kind of primarily operating in Idaho as far as your development?

Shannon Robnett 5:07

You know, we’ve got projects going in Florida and Texas as well. And we’ve done some stuff in Washington. It’s just it’s been some value add stuff, but we’re moving out from, from Idaho for sure. We still do quite a bit in Idaho, we’ve got a lot of people still moving in, I think we’re the second or the third most attractive state by percentage of influx, if you look at numbers, we’re not really there. When you’ve got, you know, somewhere like Dallas, Texas, that, you know, Colorado Springs imported 65,000 people last year. You know, we don’t have quite the size that we compete, but on a percentage basis, we definitely do.

J Darrin Gross 5:49

Got it. And as far as the the asset classes that you’re active in multifamily, and or you use an industrial or what’s the word? Yeah, so classes,

Shannon Robnett 6:00

I grew up in industrial space, that’s been a, that’s been kind of a bread and butter. You know, it’s funny, multifamily is kind of everybody’s darling. But, you know, industrial trades that probably, oh, probably 1% higher on the cap rate on a normal basis. Plus, it’s a triple net lease, which means that the tenant pays all property taxes, insurance, snow removal, lawn care, all of those additional expenses. And on top of that, they’re usually three to five year leases, and a lot of them have national tenants and personal guarantees buying them. So it’s really a better class of tenant. But when people think of industrial, they think of you know, those dirty old dingy warehouses down by the dock.

J Darrin Gross 6:44

Right? Yeah, yeah. No, and I think that I’ve talked with numerous investors and people in the know, just about the kind of the Amazon effect and, and, you know, all of the kind of flex space that’s become so in demand and in, you know, in everywhere, you know, so that’s, that’s definitely an appeal there. And you mentioned, the the projects you have in progress, are those primarily multifamily? Or Is any of that industrial?

Shannon Robnett 7:19

We’ve we’ve got, I just put another $10 million industrial project under contract today, we’re moving forward on, we probably have of that 100 million, there’s probably 20 million. That’s industrial right now. 25 million, that’s industrial right now, and the rest is multifamily?

J Darrin Gross 7:41

Well, let’s talk a little bit about kind of the market and the market cycle. And, and I’m trying to think, where the best place to start on this because I think the there’s been kind of a a sense of something was coming for as long as I’ve been doing this podcast, which I started in 2015. And at that point, there was a notion of that we were, you know, if we weren’t in the eighth or ninth inning of the cycle, maybe this was going in extra innings, you know, and, and then from then we went through kind of a minor slowdown, and then we had all of the boost of the additional printed money in the COVID. You know, situation where a lot of a lot of extra capital is out of the market and interest rates were pushed down. And you know, and now we’re at a point where interest rates are kind of the, the story from as much as that if I understand it, and you could certainly speak to it more is just the, the, the market is trying to understand what’s going on the, you know, the Fed keeps pushing the rates up trying to get the brakes to slow down the economy a little bit. There’s a concern of, you know, a looming coming recession. But then there’s all sorts of signs, maybe it won’t be a recession kind of thing. And I’d love to get your kind of a sense on, you know, where we’ve been to where we are now. And then maybe we could pick up from there and compare that to, you know, historical cycles, as you mentioned earlier.

Shannon Robnett 9:31

You know, it’s funny, I’ve I’ve seen government do a lot of really dumb stuff, and I think they continue to not disappoint. But, you know, when you have people when you have the government really trying to control the money supply and do the things that they’re doing with interest rates. The biggest issue that we have right now that is really hurting what they’re trying to do is the fact that we have no inventory. I mean, we are you know, doesn’t matter who you talk to, there’s not enough The Inventory out there, whether it’s, you know, we’re million housing units short, I’ve seen it up to 9 million housing units short, we’re still we still have a product constraint. And we saw that in my primary market in during COVID, where we went down to a three day supply of real estate, right? This is the average, we’re currently we’ve only bumped back up against 2.8 months supply. And that’s now starting to dwindle, because people are starting to see that maybe the Feds ease easing off a little bit, maybe there’s going to be a plateau here. But the reality is people do things based on what’s happening right now, they tend to forget what happened when we had a percent interest rates, you know, they tend to forget what happened when we, you know, when when we had these other things, but but really, we’re supply line constrained. And so there’s, as the market has shifted upward, we’ve definitely had pricing go up. So now a $200,000 house is $400,000. Well, you know, $200,000 house and 8% is a very different thing than a $400,000 house at 8%. But what I’ve always seen in these cycles is the fact that everything happens in an order, first of all, you have pricing goes up, that’s usually stimulated by some sort of funkiness with the interest rate, which we saw. And then you see as the bidding goes up, you know, now we’re seeing the pressure on wages, we’ve seen a lot of pressure that way, we’re seeing job cuts. But I’m wondering if that’s not a consolidation of, hey, we’re cutting Jim’s jobs so that we can pay Sam and Sally and Sarah, what they’re demanding, because we’re, we’ve got to do this. So we’re losing some jobs, but but by and large employees are being paid more. And that’s kind of at the tail end of the cycle, because then what comes next is we now have $400,000 houses that are being bought by investors that are being financed at 8% that now need 2700 instead of 2700 a month or 3700 a month. And that’s what’s coming. And so we always see these things happen in the cycles. And it’s just what point are we at, you know, we and then with that we’ve got a lot of apartment investors, buyers that bought and thought, you know what this is so great, we’ve got 2% money, but let’s leave it flexible, because we can get 1.78% money, and we can save that extra quarter, or eighth or whatever. And we can have this floating rate debt. So now we’ve got people out there that can’t cashflow their properties, it’s nothing wrong with the property that has everything to do with the financing, right. And I probably see a deal a week coming across my desk that are, you know, assumable loans that nobody wants, or they’re, you know, great products that are underwater currently. And really, they would be underwater, unless you brought a massive cash amount to the table to bring that equity cost out. You’re seeing a lot of this where people are absorbing the the fall off here where we we bought it the right thing at the right time, the wrong way. And so we’ve got a great apartment complex, the business plan executed properly, but the interest rate floated up and now it doesn’t cash flow. So there’s going to be some of that that’s going to be a little bit painful, there’s going to be some of that that’s going to readjust. Unfortunately, with where pricing has gone. I think that most of that’s going to be able to be absorbed by the investor, not necessarily affecting the bank. Right, because the product is stable. The product has received facelifts in some cases, they’ve received rent gross, they’ve seen them repositioned in the market well, and so there’s really not a problem with the asset. There’s a problem with either the OP Well, it’s not even really the operator. In most cases, it has to do with the financing. So there’s going to be some pain of that constriction and that absorption. But it’s not, in my opinion, it’s not going to be catastrophic. Because there’s lots of buyers out there that have the equity to come in and say, hey, you know, you’ve got $70 million in bank debt on an asset that you paid $100 million for, that’s now worth 85. So we’re willing to come in and buy that from you at 85. We’ve just got to get some adjustment here because we’re gonna have to bring in our own $30 million to make this deal cashflow. And we’ll be fine. And as the wages continue to come back into the market, over the next three or four years, we’re gonna see that steady three to 5% rent growth like we’ve always seen, and now your $85 million asset five years from now is back up to $100 million.

J Darrin Gross 14:49

Right. So, if I’m hearing you right, it’s just a matter of time for this to kind of reset or the the you know, the You have a long in the front of the runway on your financing, and you can wait. I will resolve itself. But it’s more a matter of need you need to get out now? Or is there somebody calling your note? Or do you have to refinance her or something like that as well?

Shannon Robnett 15:17

Yeah, Darrin, I mean, you know, real estate is a long game. And there’s a lot of people that joined in the last 18 to 24 months. That thought it was, you know, thought it was a short game, because, you know, they came into it, and they said, hey, you know, what, we can buy this, we can flip this, and, and a lot of cases, they had some great success. But they didn’t come into it with the thought process, that maybe we need to have some some prudent reserves. I mean, we went through the whole COVID thing, right, nobody really got in trouble there. Because rates kept going up, you know, property, values kept going up interest rates kind of substantiated that, but really where we’re at, if you’ve got an asset that is, is not performing today, because of the note, you’re probably you know, if you can stabilize and stop that bleeding, you’re probably somewhere in the neighborhood of 18 months from being right sided back in that deal. It’s just can you survive long enough to be there. And in most cases, everybody I know of people there in that got, they bought a $50 million asset. Sorry, $63 million asset, they financed 85% of the asset, and 100% of the of the $5 million rehab. On a floating rate debt, they got a little bit delayed on how things went together, they got a little bit delayed on their lease up, their contractor cost them a little bit more. And they are now trying to lock in fixed debt today that they anticipated being 4% in their performance. They’re toast, right? They’re toast still there, they’re a million dollars over on the remodel 20%. You know, not terrible with everything we saw in COVID. But all things considered, they don’t have enough runway, and they don’t have enough cash on hand to survive the deal. So now they’re 55 $56 million strike price is likely coming in closer to 48 on a sale, 48 million on a sale, that’s financial, which means that they’re going to eat, they’re going to lose most of their equity, if not all of it to stop the bleeding because they don’t have the ability to get further down the road to get this thing truly honestly stabilized. Everybody says buy real estate and wait. But a lot of people that are getting hurt right now forgot that last word. And they just bought real estate thinking, well, this is a short game, and we can flip and we can do this. And they’re they’re kind of they’re kind of they’re struggling. It’s you know, it’s difficult.

J Darrin Gross 17:59

No, I like your your timeline there but 18 month, because everything you point to is I mean, demand is still strong. I mean, there’s a there’s a need housing is, you know that that riddle hasn’t been solved just yet. And, you know, as long as interest rates are creeping up, and investors aren’t, you know, feeling 100% certain about what their costs are. It seems like and then you tell me, I mean, obviously there, we’re just talking about people that have got have been caught? Are Are people getting? Are you? Are you? How are you structuring deals that you’re offering? Your you know, that you’re making offers on now that you’re locking up? Are you have you Is it still the same math that it was before? Or is there a question mark as to what’s the value? Or is it or is it just a matter of lock in what your financing is? Know what your operation cost and your you know, whatever development costs you may have, and then, you know, make the offer based on that?

Shannon Robnett 19:06

Well, you know, I’ve always made mathematically based offers, I’ve never been the guy that runs in non refundable, you know, million dollar earnest money is day one, you know, so and we’ve always made sense of it. If it doesn’t make sense. You can’t you can’t bet on yesterday, or you sorry, you can’t bet on tomorrow with the appreciation we had yesterday. Right? Right. It doesn’t work like that in most cases. And and a lot of us learned that lesson and oh, wait, so we don’t need to repeat that right. But here here here’s what we’ve always looked at if I can make it pencil today. We’ve I don’t know of anything that has historically gotten cheaper and stayed cheaper. So if I can make it work with today’s rents, today’s construction costs today’s rehab costs, today’s interest rates than the likelihood of me having a successful project are very good. it. So based on always doing that, and always making the math at the front, it’s never been about one of those things. And I heard a guy say this, well, you’ll just have to bring more equity to deal because your bank will only loan you 85% of the appraisal. Well, why are you bringing? Why are you spending more on it? And the appraisal says it’s worth just to get the deal? I mean, where is this? Where is this really going? Right? Right. So people found themselves in trouble because they overpaid for it. They had expectations. I’ve seen stuff that even now shows 10 to 12%, rent bumps for the next three years. Right? Well, who models that? You know, if you’re modeling that stuff, you’re gonna get in trouble, because there’s going to be the year that you get a 7% Rent bump or a 5% Rent bump, or what we’ve always penciled in on our site is a 3% Rent bump. And here’s the thing, Darren, if I run my math, the way I’ve always run my math, the last 25 years, I look like a genius, right? Instead of looking like the town idiot, right? So the people that have that have not been doing that they’ve been running it going, hey, I can pistol whip or I can I can pencil whip this thing. And I can make my numbers work. So any deal looks good. We’ve We’ve walked away from a lot of deals, we passed on a lot of deals, and we were having trouble right now, educating sellers on what the deals really worth with this interest rate. Right? I mean, you know, I’m paying, you know, a mortgage on a deal right now, we’re about $900,000 apart, the seller doesn’t think that’s a big deal. It’s about $4,000 a month at current interest rates. Well, $4,000 a month, the current interest rates on a $10 million deal is the profit margin. I’m not gonna go into the deal at cost breaking, even hoping that somewhere between the time I take the deal down, and the next 12 months, I’m going to somehow mysteriously run into appreciation that’s going to give me profit. Right, right. Well, I’m actually having to have the conversation with the seller, that shows him my math. And he’s having to decide if he wants to sell today or not.

J Darrin Gross 22:23

Yeah, I think that’s that’s kind of that’s kind of the feel I get from, you know, just the things I’ve seen, and people I’ve talked with, it’s just, you know, that the math doesn’t work like it did, you know, six or nine months ago. And, you know, I would tend to leave just kind of like we’ve been talking that it’s a matter of time, I mean, you know, is a rinse do continue to creep up in the NOI will improve the cap rate, again, market specific will again, then, you know, determine the value, but it’s not going to be a compressed cap rate that was six or nine months ago based on just, you know, unlimited demand and cheaper free money. Yeah, kind of thing.

Shannon Robnett 23:09

Like, I can give you a quick example, from my area in in September of 21, we had average rents in Boise were $1,640 bucks. They peaked in June of 22, at $2,085. Okay, average rent and Boise. They’ve slid down now to about 1965. I was just looking at a model that that was was reevaluating a model that we’re currently under construction on that I had modeled three years ago. And I was adjusting my rents $575 to meet market today. Now that market has slid a little bit from the peak, but I’m looking like absolutely, even with cap rates expanding again, I’m still looking very good with my model. Because I didn’t think that the $1,640 jump to $2,085 in a 12 month period of time was normal. Right? All I did was applied some logic to it and went this can’t this we got to give up a little bit. And the funny thing is there when people look at Tesla, or look at Microsoft, or look at the price of gold, it’s nothing for that to fluctuate four or 5% in a week and nobody freaks out. But if but if real estate fluctuates 1% In a year, even though your debt is fixed for 30 Everybody loses their ever loving mind.

J Darrin Gross 24:37

Right, right. Yeah, no, it is it is kind of interesting. And I think that you know, there’s kind of the fury of it all I think, because so many people have found real estate as an alternative investment. You know, back in a way when when all you had to do is fog a mirror and you could you know have multiple properties under, you know, her own multiple properties regardless of your income and, and, you know, the there was just kind of a story and there was a buzz and it seemed very attainable, and everybody everybody knew somebody that was in real estate. And, you know, as an alternative, I mean, I think that, you know, the stock market the.com was kind of the similar story, you know, everybody was everybody was in, in the market, and it was, you know, I can remember walking by bookstore with my father in law, and he goes the Dow’s at, you know, 10,000, you know, what, that he was thinking it should be like, you know, 3030 500 Dots, that was his reference point, you know, right. And here’s a big stretch. I mean, that’s, that’s a, you know, 300% error of almost a 300% increase. And so that, I think that’s kind of the news. And then you have this constant barrage of the information and stuff to where it it, it’s really easy to get sucked in and, and, you know, pay attention that but I’m kind of curious in, in love to hear your thoughts on this, you know, with with the the run up of the multifamily specifically, since the 2008. Crash, and the number of of syndicators that have come to be, or have entered the marketplace where, you know, it used to be it was it was kind of more in this probably more pre JOBS Act, as probably be more one of the things that then restricted the capital so much, but, but it used to be kind of more of like an old boys network, or kind of who you knew kind of thing or, or, you know, larger funds or families or whatever, that were there primarily, the operators or the investors in that space. But since since the Jobs Act, and around 2008 have been there’s been a complete proliferation, proliferation of syndicators. And obviously, there’s been plenty of opportunity demand. So my question to you is, do you think through this kind of the cycle, kind of going back to some historic levels? Will that kind of thin the herd? Do you think there will be some that will? Get out, stop, you know, let go and we’ll be more of like a more of a dedicated, you know, syndicators that are that are committed to the long, long term, or do you think this, this is just going to be the new norm and everybody in will continue to play?

Shannon Robnett 27:43

No, you know, I think it’s like everything, you know, it’s, it’s the new I mean, shoot in, if you told people in 2011, you were in real estate, they treated you like you’re a leper, or, you know, mentally deficient. It’s, I think it’s kind of the same thing. We’ve gone fullcycle real estate got sexy again, you know, I mean, I ran into somebody I went to high school with and, you know, they were a chiropractor in town, and they were now a developer, you know, and so where’s that gonna go? There’s gotta be some of that clearing out, like with the.com bubble bursts with, you know, what’s happened in the run up in the market. And hopefully, the professionals will come in and clean up and take care of things. And hopefully, the government doesn’t decide to throw some more regulation on there to protect the poor, unwitting people that got into involved in stuff that maybe shouldn’t have, or should have known more about or whatever. But the reality is, I believe that with the lack of supply in the market, we have a whole different thing that’s going to happen, that’s going to make it easier to clean up. You know, when I was talking with Ken McElroy, about where we’re at in the ballgame being you know, now we’ve gone the other direction, right? You when you were talking about the ballgame earlier, it was the ballgame from here to peak, right? Well, now we’re talking about we’ve already we already know we pass the peak, but where is it from peak to keys back at the bank, because people are given up on their projects? You know, I think we’re I agree with Kenny, we’re probably in that second or third inning because of the lack of supply. Because of the strong retail market that we have everybody’s there’s still a lot of transactions going on, go into a restaurant, they’re packed, retail stores are selling things. There’s a lot that’s happening there. Even though we’re at a record low savings in America right now. We still have a lot of transactions happening. And I think that the rent market is going to stay strong. And it’s taken a lot of people out of the home buying mode and left them stuck as renters. But I think in all of that, you’re still going to see that with with high occupancies rents increasing, it’s going to be pretty easy for people to come in, that have a good solid business plan that have learned to syndicate properly, that have learned to raise capital that can Ron, these projects be able to come in and assimilate that. So you’re not going to have vacant buildings and you know, half finished projects and those kinds of things, you really going to be able to finish this out and walk it across the finish line without too much disruption. But there is going to be a lot of, let’s call it short selling in the meantime, that people that maybe overpaid, maybe didn’t quite execute the business plan properly, maybe have a little bit of an issue getting to the end of the day, that they’ll I think they’ll be quickly absorbed, though.

J Darrin Gross 30:33

No. Yeah. I mean, that makes sense to me. You know, again, I think that the it’s, it’s kind of human nature to, you know, look to the last disaster for the answers for, you know, whatever the next one will be, or the crisis or whatever, you know, and, you know, my my sense of things is that whatever happened in the past, there have been efforts that have been made to correct or to not allow that to happen again. And so, you know, even though you have some similar kind of, you know, market conditions, the cause is not always the same. And, you know, so it’s, how it will play out will, will likely be entirely different. Yeah. And so, I think you’re, and then

Shannon Robnett 31:25

And then you’re right, I mean, then you’re going to have, you know, government come in and try and correct the situation and protect everybody and, and do the things that, well, maybe we shouldn’t have, and, you know, maybe you gotta get a serious 65 to do this kind of thing. And, and maybe that’s not bad. But then you when you have those kinds of things, you’ve got the stifling of an economy for a little bit, you know, an artificial constraint, if you will, on, you know, capital coming into the market, like we had in 10 and 11, where we really choked out homebuilding, because of all of the, you know, regulation that was coming in because of the funky loans that were written in, oh, five, you know, six, those adjustable rate mortgages. So there’s always that precession, that lag, in effect, you know, the effects happen, we had the low interest rates, prices went up, rents are now going up, and here comes the after effect.

J Darrin Gross 32:21

Interest rates, where do you think, they’ll kind of rest? Or, you know, what’s your sense of things as far as where we are today, and where we might be within 12 month?

Shannon Robnett 32:33

You know, I just got my crystal ball yesterday, but I dropped it, it’s kind of cloudy right now, I’m hoping it clears up. But, you know, I, I think we’re still going to see some rate increases, I think we’re, you know, everybody’s signaling that we’re going to see another quarter percent this next time they meet, I think we’re gonna have another quarter percent after that, I think you’re gonna see toward the end of the year, we’ll have eased our way up from six to probably seven, I think we’re still going to see some, some raising of interest rates, but I think you’re gonna see, I think you’re gonna see wages are going to have to push up to match that to put people in a position where they can afford what has to happen. Because if that deals gotta get financed at 7%, the rents got to be here. And, you know, people have got to be able to afford it. So it’s going to come out of there, we’re gonna go back to the hurt cycle of, we’re going to be pushing on employers to pay more, because they’ve got to fund this upcycle. And then, then here, we come with more inflation on pricing of what it costs for me to show up with my employees because of what I got to pay. So I think you’re gonna see 7% And you’re gonna see that cycle just continue to ease its way up through the end of the year.

J Darrin Gross 33:49

Yeah. That’s clearly plausible. And, and, you know, I think historically, if you look at the the markets, like we’re, you know, started the conversation. You know, and that historically, that’s not been a, an outline. Interest rate. I can remember, the first home loan I got I was seven and three eighths, and we were doing cartwheels because I was like, Oh, my God, you know, we’re the

Shannon Robnett 34:18

he used to be that phrase, if it’s under eight, don’t hesitate. Right? I mean, it was so cliche, but it was and yet now we’ve got the combination of the incredible price increase and the interest rate that may get a little bit different story. But at some point, we’ve got to we’ve got to choke down and get through that.

J Darrin Gross 34:37

Right. You mentioned trying to re educate sellers. What What’s the conversation like with some of your investors when you’re raising capital?

Shannon Robnett 34:50

You know, most people that we’re that we work with work with us based on reputation based on knowledge based on who we are and what we do. So it’s true really kind of a we’ve had, we’ve had a shift from from people looking at it going all I wants appreciation, everything’s going up, give me some more of that, to really maybe being a little bit more balanced in their portfolio and going, you know what I really need to get some cash flow in my portfolio, I can afford to take some risk and some appreciation on these deals. But I like cash flow, we’ve always dealing with people who are looking for the tax savings, you know, we do a lot of tax planning with our investors. So that you can come in and we can say, hey, you know, you need some some of this, you need some of this, you need some of this, we can tailor that product, and help you put together a plan. But a lot of people are shifting back to what I think should be normal, where you’ve got a balanced portfolio, you’ve got cash flow, so you can always take your appreciation deal. What you’re looking for is as you know, the growth and say, Well, if that doesn’t come through, and it takes three or four years, I’m not trying to, you know, get all I don’t have all my eggs in one basket. And so I think we’re seeing people kind of go back to what maybe is a little bit more normal, and more maybe what I think it should be where you’ve got a portion of your portfolio that’s looking to grow and a portion that’s tax free, or in the tax realm of things, and then a portion that is cashflow based.

J Darrin Gross 36:17

No, no, definitely the the cash flow is certainly a lot more are getting a lot more attention now than then, you know, when it was just low cap rates and just turn it in or kind of thing. Yeah, getting get in get out. Let me ask you this COVID kind of introduced, you know, a sense of place that perhaps maybe I needed to be in a certain place before now I can be almost anywhere. I know, certainly Idaho, Boise specifically have benefited significantly from that just, you know, people looking for a place that they rather live than where they were knowing that they could work from anywhere. Do you see that continuing? Or do you do you see the the work placed, kind of normalizing and being more, you know, on site, as it historically were, or some sort of a hybrid of that?

Shannon Robnett 37:24

Well, as you know, I’ve been my physical address is in Puerto Rico, and I live there and have lived there for the last four years while conducting a lot of most of my business in Idaho, and then expanding into into other markets. But, you know, I think that the ability to work from a lot of places, is going through its initial evolution, I mean, it’s kind of like, you know, we got turned loose, and everybody went and did and the whole work from home thing was all the rage, and everybody was doing it. Now you see a lot of the major corporations kind of pulling it back. But you know, I was talking to a guy just today that, you know, he’s been working remotely for a company out of Palo Alto for 10 years. And so I think that that, too, as technology allows us to do that, we’re going to do that more, I know that Boise went from an average median income of $74,000, a year in Boise, Idaho, to $92,000 a year because of COVID, and people that moved in with the higher paying jobs. So I think you’re still going to see pressure that way, I think you’re still going to see, you know, people wanting to work outside of the office. But I think employers are going to pull back on that. So you’re going to wind up with a little bit more of a hybrid. But the technology is there that wasn’t there five years ago, you know, we’re conducting this, the zoom 1000s of miles away, and not having any glitchy stuff, like we used to have with Skype, you know, and any of that kind of stuff. So I think that that’s gonna make it a lot more practical. I think we’re gonna go through the evolution of, you know, there was just this court case where a woman was caught, not actually working, but she built her employer for it, she actually has to pay the employer back. So I think there’s gonna be some more of that employee tracking stuff. So they recognize that you are working when you’re working remotely. And I think we’re just gonna go through that evolution. But I know that work from home is here to stay. And we’re actually incorporating that into some of our designs on our on our projects, because we know that people want those workspaces in the home again.

J Darrin Gross 39:26

Yeah, that seems to make a lot of sense. building that into the design there for for piano players.

Shannon Robnett 39:33

You remember when they used to build houses with a phone desk, right? I mean, no, desk and the phone sat over here and there was this thing called a phone book and, you know, get a pencils and a tablet there to take note. I mean, you know, we’re just going back in time to go forward in time.

J Darrin Gross 39:52

Right? No, I was laughing. As you’re saying that. I remember the phone was attached to the wall. Yeah. I’m very short cord Yeah, you couldn’t get away from the noise kind of. That’s funny. Hey, Shannon, if we could, I’d like to shift gears here for a second. By day, I’m an insurance broker. And I work with my clients to assess risk and determine what to do with their risk. And there’s three strategies we typically consider. We first looked to see if there’s a way we can avoid the risk. When that’s not an option, we look to see if there’s a way we can minimize the risk. And if 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 a risk transfer vehicle. And as such, I like to ask my guests if they can look at their own situation could be their clients, investors, the Feds tenants interest rates, however, you would like to frame the question and identify what you consider to be the biggest risk. And 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 Shannon Robnett. What is the Biggest Risk?

Shannon Robnett 41:12

You know, in my business, the Biggest Risk is taking on the project and having things like prices increase on commodities. You know, we started a construction project. And our lumber costs estimate went from 3 million to 9 million. We locked in on the way up and caught it at about five and a half million, but it was still a two and a half million dollar Upswing on that. Those are the risks that we take as developers on brand new ground up. And so there’s always that question that you have to ask and it comes back to your underwriting? Do you have the runway to absorb this? Can you get from here to there so that you’re not, you know, your framing is in the first third of your job? If you’ve used all your contingency in the first third of the job? How are you going to finish the rest without additional cash? So are you properly capitalized? Have you underwritten correctly? Do you know that three years from now when you’re built out on a 200 unit apartment complex that you’ve you’re going to be able to sell those are the risks that we take that that sometimes keep me up at night?

J Darrin Gross 42:29

Yep, know the budget and the actual definitely plan accordingly, I guess. Hey, Shannon, where can the listeners go? If they’d like to learn more connect with you?

Shannon Robnett 42:43

You know, the easiest place to find me is just ShannonRobnett.com. You can go on there. You can connect with us there you can get on my calendar. I’d love to have a call with you. chat with you about what you’re doing what we’re doing. But we’re we’re we’re there or you know, all the socials. You can find me out there.

J Darrin Gross 43:02

Got it? Well, Shannon, I can’t say thanks enough for making time to talk today. I’ve enjoyed it. Learned a lot, and I look forward to doing it again soon.

Shannon Robnett 43:12

I appreciate it. Darrin, thanks again.

J Darrin Gross 43:15

All right. And 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 43:34

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Commercial Real Estate Deal Cycle Interest Rates with Dan Brisse – CRE PN #399

Dan Brisse 0:00

I do sympathize and understand the market change but this is a very dangerous time to be buying if you don’t know what you’re doing very very dangerous and very it’s not the right time to be coming into a market you know if you’re a newbie investor wait for this to wait for this to blow over wait for interest rates to bottom out wait for something to be a more stable than trying to get into a market right now. So there’s the gap between the buyers and sellers. sellers want prices from June buyers are saying your price is crazy. We’re not paying that. So we’re at more of a standstill I think.

Announcer 0:31

J Darrin Gross 0:50

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, my guest is Dan Brisse. Dan is the co founder and principal at Granite Towers Equity Group, where he oversees the Operations, Acquisitions, Investor Relations and Asset Management. Dan is resident of southern Washington and is also a former professional athlete. As a professional snowboarder for over 13 years, Dan took home multiple X Games gold medals, and was known as one of the top urban snowboarders in the world. Dan’s drive for excellence and success transpires into Granite Towers real estate portfolio. Dan is also the co host of the podcast, Keeping It Real Estate, and the co author of Four steps to Successful Passive Investing. In just a minute, we’re gonna speak with Dan about the multifamily marketplace for 2023.

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 our answer 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, Dan Brisse, welcome to CRE PN Radio.

Dan Brisse 3:03

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

J Darrin Gross 3:06

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

Dan Brisse 3:15

Yeah, you bet. I grew up in central Minnesota with this childhood dream of trying to become a professional snowboarder. And you know, at that age, I was 1011 years old. 12 years old. I went and told everybody about how I was going to be this pro snowboarder. And most everybody told me to get real and you know, I was like, you know, you are in Minnesota. There’s no mountains here, Dan, or maybe you should have a backup plan for that. And yeah, long story short, my parents believed in me and I told my parents and my mom, my dad told me Go for it. You know, they my parents were the biggest asset I’ve ever had in my life growing up. I mean, they basically they just said we didn’t do what we love. Make sure you do what you love as you grow up. And I never forgot that. So with their, you know, support, I had down, started snowboarding and just did it because I loved it. I didn’t you know, first 234 years of snowboarding. I didn’t want to be a pro snowboarder. I just loved doing it. By the time of 15 1617 years old. It was very clear that they were pro athletes. They were these guys who traveled around the world got paid to snowboard very well and had a career out of it. So that was kind of the background there. And as 18 years old, I moved out of Minnesota I transplanted to Salt Lake City. I lived in Salt Lake City for 10 years. Never had any financial help from my parents. I worked the most odd jobs you can imagine. As an ally coordinator at Red Lobster I worked at Blockbuster checking people’s out for movie as I was a busser at TGI Fridays, and after being in Salt Lake City for four years grinding working my tail off snowboarding every day I went to the Aspen open in Aspen, Colorado, and I my buddy actually paid for me to get in the contest and he drove me there because I was still living paycheck to paycheck. And I entered the contest, got through finals I had to get through 250 riders, they’d be the top 10 to get finals, finals, they came, I won the contest and my career took off. And I had a really great successful run as a professional snowboarder and have now since transitioned into real estate investing. So that’s kind of I’ll let you go from there, Darren.

J Darrin Gross 5:14

Well, I’m just gonna encourage any of our listeners, if they want to see some of the rides that you took, it’s pretty easy if you if you Google or search on YouTube, Dan, breezy snowboard, you’ll be entertained. It was pretty, pretty amazing stuff that you did there. Extreme. Extreme. I mean, that is the rider or extreme? Yeah. But well, awesome. I like that. I’m really looking forward to our conversation. So tell me a little bit about the the, the transfer from your snowboarding days into real estate because it’s not exactly like they’re, they’re connected other than the fact that you were snowboarding on real estate there.

Dan Brisse 5:59

Yeah, good way to put that. Yeah, real, really what happened was is as I got into my career, and I started to get to know a bunch of the other pro snowboarders in the industry who were older than me, I saw some of their careers and and it was brutal. It scared me. You know, they ended up coming into this career where you’re this huge known athlete getting paid very well traveling the world, everyone knows you, you go up these events, everyone wants your autograph, and then the career ends and you’re a nobody, or at least that’s how you feel. You’re still somebody but your identity of who you were, your whole life is gone. You’re maybe didn’t manage your money. Well, like most folks that they start making money as athletes, they just don’t know what to do with it. You know, I hear so many people say, and the money ruined me, it wasn’t the money, you just didn’t know what to do with the money. You know, you give someone a million dollars, and they’re broke two years later, you give someone a million dollars, and they’re worth 4 million, you know, two years later, it’s about what you do with it. So really what happened was I just kind of got scared and started reading books on what separates folks and what makes what’s the difference between people who do well and take their money and multiply and other folks that lose it all. So I read a bunch of books, and I started investing in real estate as I figured out I wanted passive income. That was my main goal. How can I find a way to create residual money coming in whether I work or don’t work? And then how can I get a tax savings? How can I get a tax break based on my income. And so I hired a CPA out of Arizona after reading a bunch of books. And we set up a business plan with them, including my wife, to help with the real estate investing. And we were off to the races buying smaller stuff. I bought a duplex in 2012. I bought a nine unit deal. Couple years in the year later. And then I bought a 24 unit deal. All on my own all my self education didn’t have a mentor yet, but I was just reading books and trying to find a way to invest the cash I was making.

J Darrin Gross 7:52

Cool. So the the, you know, seeking some sort of plan B passive income, you’re drawn to real estate. If I understand correctly, now with granite, you guys are doing syndication. Is that correct?

Dan Brisse 8:07

Yeah, that’s correct. After buying our first few deals on my own my business partner now Mike Roeder, one of my best friends I grew up with. He’s actually in high net worth insurance sales. He was buying a ton of single family homes in central Minnesota, and I just said, Hey, let’s buy a deal together. So he myself and one other guy that I went to high school with bought a 28 unit deal together. And then Mike and I went on to hire a personal mentor, or somebody who had been doing this for 24 years, had several 1000 doors, and had the results we were looking to, you know, move to for granite towers. So we started the company. And since then we’ve been buying, you know, 150 to 400 unit deals with private investors, you know, all value at apartments

J Darrin Gross 8:57

counted. So let’s say you said around 200 or 220 12, you buy your first duplex. What about did you start syndicating

Dan Brisse 9:09

the first deal? We syndicated wasn’t 2017 or 2018. So there was a period of time there. Where there’s there’s a steep learning curve in real estate, you know, it takes time. There’s everything takes time. So yeah, it was it was 2017 2018. We didn’t raise money until we had our really, really raise money from several investors until we had had more training

J Darrin Gross 9:37

on it. Got it. So and now how many how many doors do you guys have under?

Dan Brisse 9:42

Yeah, we’re right around 2400 units or so. Just around 300 million of assets under management that we’re overseeing as our team at Granite towers, as you know, takes the property from where it is to its new level through the business plan operation.

J Darrin Gross 9:58

So is it primarily evaluated A value add strategy that you guys?

Dan Brisse 10:02

Yeah, Yeah, it’s it’s exactly like that every every property is pretty dang similar. It’s a rinse and repeat model, you know, we don’t buy Office and storage and all the other stuff we focus on B and C, and we have one a class deal multifamily in Dallas Fort Worth in Nashville, Tennessee. And that’s really all we look at.

J Darrin Gross 10:21

Gotcha, gotcha. So in, excuse me in the the run up here told us, I mean, we’re talking now it’s it’s January 2023. The last, you know, five or six years, or even before that, I want to say back when I first started this podcast in 2010, it was 2015. I remember talking to people going like, Oh, my God, it’s you know, we’re running long, extra long and extra innings. You know, it’s the least the normal cycle of things was running kind of long from when the crash had happened. They were expecting a crash to occur, then. Clearly, it didn’t happen. We had multiple things that had kind of interrupted the normal cycles, including COVID. Your, your build up to the 2400 doors? How many? How many times have you gone full cycle? How many how many deals have you guys sold? And

Dan Brisse 11:22

yeah, we’ve gone we’ve gone full cycle on six deals, four that have been syndicated the two that I bought before I’ve sold off on my own. So that’s, that’s where we’re at currently.

J Darrin Gross 11:34

Okay. And in the in the syndication model, raising capital? How, tell me a little bit about that, as far as your experience with the initial efforts to raise capital versus where you are now.

Dan Brisse 11:54

You know, the market is changing quickly. Right now, obviously, everybody knows being we’re in is January 2023. When we first tried to raise money on our first deal, we raised 575,000 bucks on a 45 unit deal, located in River Falls, Wisconsin. And because of our database at the time in the work we had done, and the folks we had already spoken to about what we were doing, it was relatively quick, it was probably three, four or five days. And we had maybe like 10 or 15 investors who threw in 50 grand. So it was always very easily knock on wood. It’s always been very easy to raise money. I think that you’ve got some positives and some negatives. The positives are that you know, cash is looked at more I think as as trash at times you hear guys like Ray Dalio saying cash is trash on NBC News. I mean, that catches some attention. You know, what does that mean? Obviously, right now, cash feels like King. So are you still thinking cash is trash? I don’t think it is I never thought it was. But I think you have more folks that are thinking, Hey, I can’t let the dollar sit in the bank, I need to find a place to create some residual income find a tax savings? Can I be a part of the inflation through, you know, the destruction of the dollar? So I think I think there’s gonna be challenges for different groups, it really depends on you know, what do you know? And what kind of reputation do you have in the real estate business?

J Darrin Gross 13:28

Got it. So you mentioned like the first deal it took you only like a couple of days to raise the money you needed? Are you guys actively looking for for properties? Now? Do you have any under contract, or where are you at in in your acquisition phase?

Dan Brisse 13:47

Yeah. We’re always looking WE ARE WE every single deal that comes out in Dallas and Nashville, we’re underwriting and trying to see how close we can get to the Whisper price or their offer price. Right now, we don’t have anything under contract we have submitted a few offers, and it’s just there’s a gap right now. And realistically is the gap. I mean, if I’m selling, which we are, we’re selling one deal, you know, that went under contract in June, and the gentleman is still trying to get it closed. And he’s got $860,000 of non refundable money that he’s already released to us that we have in our bank account. And, you know, for us, we’re still of the opinion that you put the deal under contract in June at that price. That’s the valuation he’s of the opinion that interest rates have moved and now you know, the values come down and I i understand what he’s saying. But our noi has also massively increased. And you know, most of the time you don’t close a deal over six months, you close it in 60 to 75 days, at least we do. So I do sympathize and understand the market changed but this is a very dangerous time to be buying if you don’t know what you’re doing very, very dangerous and very it’s not the right time to be coming into a market. You know, if you’re a newbie investor what wait for this to wait for this to blow over wait for interest rates to bottom out wait for something to be a more stable than trying to get into a market right now. So there’s the gap between the buyers and sellers, sellers want prices from June buyers are saying your price is crazy. We’re not paying that. So we’re at more of a standstill, I think.

J Darrin Gross 15:19

That kind of sums up kind of what my my sense of things have been. But yet I still hear about, you know, deals being done. I’m kind of curious, have you in the deals you’ve underwritten? Has there been any change in your strategy as far as maybe some of the, you know, the points you were looking to historically for whether it be value add or always had been more of a financing? You know, Rubik’s cube on how to solve the financing.

Dan Brisse 15:52

Here, our biggest change definitely is what we’re using for debt. And how we’re going about that, and that affects your what you can pay for these deals, you know, when you’re in a very volatile market, like he are, how do you go put bridge debt on in Bridge debt where the variable rate you might get way more loan dollars, but just because you’re getting more loan dollars, and the returns look better on paper does not mean in my opinion, and our philosophy, granite towers, that that’s the way you go. So our biggest thing is just low leverage fixed debt. And if you can’t make the deal work with low leverage fixed debt in a market we’re familiar with, then we’re gonna wait a little bit, we’re gonna stack cash and and see how things play out. You know, we we bought a lot of deals over the last four or five years. And if we have to pause for six or 12 months to see what comes of this, we’re going to pause.

J Darrin Gross 16:51

And historically, your acquisitions, have you raised the capital for the value add capital improvements, or have you built that into your loan? Or have you done bridge financing? Or have you handled the capital improvement budget?

Dan Brisse 17:09

Great question. We’ve done it all. We’ve done it where it’s financed through Fannie Mae. And we’ve done bridge, when we’ve done it, where we raise the capital and just have it liquid in our bank account. Right now the last three deals we’ve bought has been Freddie Mac, fixed debt, and we raise the cap x and it’s liquid. And it gives us more flexibility. Prior to that, we’ve done some bridge debt that we’ve put rate cap insurance policies on where as rates rise, which they have now you have your rate cap insurance paying you to offset your cost and debt still very uncomfortable. Something that, you know, as we go through this cycle, probably will be very hesitant with bridge debt moving forward doesn’t mean you still can’t do well with the deal. I think I think there’s still an opportunity as long as you manage very well. And you can make it through this elevated interest rate period, how low? Did they come down? When did they come down? That’s the unknown factor. So you need cash reserves to get through that stuff. And then the other one Fannie Mae debt, with your capex finance, we’ve done that as well. It’s just a little bit more tedious and much more of a headache to get those loan dollars when you do want to use them. They’re very, very critical on seeing exactly what you did with the money was the work done perfectly, and then you get your money released? So it’s just it just depends on the deal. Depends on your your business plan.

J Darrin Gross 18:37

On those Fannie capex dollars, is that kind of like a construction loan where you have to submit all the work that was done and they inspector?

Dan Brisse 18:47

Yep, that’s exactly how it goes. It’s just part of the loan. I don’t think they consider it a construction loan, like a second loan, it’s just part of the loan that’s you can tap into when you’re ready, it’s available for you.

J Darrin Gross 18:58

Right, but those capex dollars are like in escrow and you’ve got to submit proof. Okay,

Dan Brisse 19:03

that’s 100% Correct.

J Darrin Gross 19:05

Gotcha. So, as far as the, you know, kind of the market changed, are you are you I guess what I’m trying to think is on your hold times, I’m assuming that up until now, you know, there’s been multiple people I’ve talked to if, you know, they bought the deal in January and you know, maybe January the following year, they’ve got a, an offer to sell at a multiple that they had, you know, anticipated for a couple of years. I’m assuming or let me ask it this way. Are you seeing your hold hold times extend based on you know, just the market and kind of the, the, you know, buyer seller gap? Are you do you anticipate holding your deals longer than then maybe you might have a couple of years ago?

Dan Brisse 19:55

Yeah, it one 100% will be dependent on what happens With interest rates in this recession, and how deep we go, and how long the Fed holds rates where they need to hold them, you know, I don’t know right now, that’s the part where if you want certainty of weathering a storm, you want to have fixed debt for a long period of time, because you don’t control when Jerome Powell is going to bring rates back down, or the Federal Reserve decides that it’s, you know, we’re far enough we need to help the market come back to life. So you know, going back to the chant, the biggest change we’ve made is just low leverage fixed debt. You can weather storms, yeah, you’re gonna have a prepayment penalty if you want to exit early. And it’s probably going to be a little bit painful. But which would you rather go back to your investors and say, Hey, we’re going to exit, we do have a prepayment penalty return instead of being 110 is going to be, you know, 97%. Or, you know, what our bridge debt is needing more capital put in 50 grand right now, or you’re we’re going to lose the deal. I mean, what would you rather be in as a syndicator? I’d rather be in the first position and always that position, I want boredom. I want to be bored. I don’t want to be gripped one bit when I’m investing in real estate, you shouldn’t be if you do it, right. You should. You should, it should be somewhat boring. And if it’s exciting, great. You’re just gonna sell for more because the market is good.

J Darrin Gross 21:18

Yeah, no, exciting is good when it’s the right kind of exciting that the Oh my god. Yeah, yeah, exciting. What about rate increase, not rate increases, but rent increases? In the last few years, there’s been quite a run out based on supply and demand, and inflation, etc. And, and all that. In the market you’re in in Texas and Tennessee, are you seen? Or have you seen substantial rent increases? And also looking forward? Based on kind of the economic conditions we’ve discussed? Do you have any kind of expectations for for rent increases? Or what are your expectations for rent increases?

Dan Brisse 22:08

Yeah, um, thus far with our DFW deals, and our Nashville deals, we’re still seeing very large rental increases in somewhere between you know, that 12 to 30%, which is, which is not normal, you know, based off of history, what we think is coming with the oversupply of a class is, is, is definitely gonna be less, you know, how much less again, unknown, do we have negative rent, I don’t know. As far as what we’re underwriting, we’re taking a look at costar, what they’re projecting, we’re taking a look at our one mile median income, we’re making sure we have a B or C Class DL a class, I think we’ll probably get rekt a lot harder than B or C class. And, you know, based off of what we can see with our primary data of what the other competitors are doing, and we take a look at costar and compare it, we’ll make a rent projection based off of that data of what’s coming over the next five years. This is part of real estate, though, that’s always been a challenge. What do you think your exit cap rates gonna be? What our rents gonna do? We’re interest rates going to be you there’s no way of knowing that information other than, you know, and I think you can read a lot on cycles, you know, that’s one thing I think is worth putting more time and effort into is studying real estate market cycles, and trying to better understand if you’re going into a downward cycle, what are the past cycles look like? And should you be using some numbers that are closer to what they were modeling in 2008? Nine, maybe that’s your best kind of, you know, projection of the future. As of right now, you’re in 2023.

J Darrin Gross 23:50

Yeah, no doubt. I, you know, the funny thing to me is, and this is just my, you know, brief experience in investing and just kind of observing the, the market cycles net, but, but it feels like a lot of times what happened before corrections have been made, like, Take, for instance, the Great Recession, there were measures put in place by Congress and, and, you know, other kind of real estate lender fixes that we’re putting into place. And I have this weird sense of a lot of times people when they when they look to the future, because they see certain signs they anticipate is going to happen, just like it did last time. And but, you know, what I’ve seen is that, you know, wherever the problem came from last time, those those holes have been plugged in. So now it’s not leaking over here, but it’s, you know, over there or up there down there. There’s a different cause. Doesn’t mean that it won’t be the same effect. But it’s just about where, where it’s coming from and I think also one of the challenges that I think we have this time is with all of the cash that was pumped into the marketplace. You know, there’s, there’s still I and I haven’t looked at anything recently, but I seemed like I read somewhere that, you know, the the amount of cash, whether it be savings or just, you know, just just cash that people or people are holding as cash as opposed to him in liquid. He has significantly greater than, than what it had been historically. And I should probably check out and have a resource, you know, to cite, but, but there’s like, it’s been more like a sense of like, kind of hanging on like, you know, the, we might need this. Yeah, to cash. And yeah, so,

Dan Brisse 25:47

Yeah, I don’t know if you’re familiar with Ken McElroy, he shared a pretty interesting chart on that as far as the amount of cash in people’s bank accounts, and it was very, very high during COVID. And very quickly, it’s been coming down to some of the lower levels we’ve seen in recent history over the last three, four months. So the direction we’re heading is definitely toward pain. The part that’s interesting to me is how much the Federal Reserve controls the market with these with interest rates, you know, I think the flick of the pen and they bring rates down 2% overnight, and all of a sudden everyone refinancing deals. People are able to now sell deals, people are back to buying deals, you know, people are back to building. It’s just It’s just unbelievable. And the other piece I think that’s unique now compared to the Great Recession is the amount of unrest between our the folks in their country. I am concerned as we go later into this debt debt cycle, and Ray Dalio talks about this in the changing world order. It’s a great book, if you haven’t read it, take a look at changing world order by Ray Dalio just talks about as you get late into a debt cycle like we are, that the amount of synergy and people working together goes down, and you have more fighting amongst political parties. And we’re seeing that I mean, I can tell you right now, firsthand, Portland is a different city now now than it was two years ago. And I don’t know why there isn’t more action being taken to stop what’s happening, because that seems very clear what we need to do, but it seems like it’s being allowed, and it’s trending down very quickly. So, um, you know, that’s the other piece is how, how much do people fight? Versus do they get along? You know?

J Darrin Gross 27:31

Excuse me? Yeah, no doubt the work together versus the, you know, the friction in all phases, but more, you know, more dramatically, so in the political space. And I think, you know, there’s, there’s all sorts of things you can point to that, that, probably exacerbate that. But, you know, it’s, it’s just, it’s just really a sad state of affairs, when you see, the the only thing that has been publicized is about how the other guy is all wrong. As opposed to, you know, going behind closed doors and finding out where the common ground is, and trying to, you know, come out with a solution. But yeah, I mean, Portland, right now, I don’t I don’t get it. How the, you know, just the, the leadership does understand the the value of the businesses and the people in you know, coming in the city and making your your, your city the most attractive and most wanted place, which, you know, people people, I mean, the people with money can leave. Yeah, I think say enough of this. I’m out. Yeah, those are exactly the people you want. Yeah, the if you don’t do what you need to do to attract and keep their interest, you’ll lose them. And

Dan Brisse 28:58

Yeah, and just think about as a parent, if I’m a parent, and I’m looking out the window, seeing the stuff I’m seeing with children, like, I can’t keep my kids there, I have to leave the city, you’re forcing me out because it’s unsafe. And I can’t be explaining, you know what, to them. They’re not at that age, they shouldn’t be seeing the stuff that I’m seeing. So, you know, it seems so obvious and so clear. I wonder if there’s something more it just it, you know, it doesn’t make sense. It’s beyond me.

J Darrin Gross 29:25

Yeah. Well, I’m with you there. And I don’t know what the, the answer is. But I think unfortunately, it’s one of these things where it won’t correct until it gets worse or you know, enough people leave to where, you know, somebody, somebody new in charge. changes the direction but yeah, yeah, not something they’re asking me to solve, but my two cents. Yeah. So, what is as far as looking forward here? You know, we’ve talked about interest rates and kind of the gap in the marketplace between buyers and sellers. With the information that you’re taking in the conversations you’re having with brokers, investors, you know, all of the different players, what what are you? Or where are you with expectations as far as whether it be a a new normal that people just accept? This is the marketplace? Or things change for the better to where it’s, it feels more easy to do business? Do you have a any sense of time that you guys are looking for? Or do you have any sense of that? Or is it just you keep looking until you see something that works? And maybe you find somebody that has to sell? And you’re able to pick up a deal?

Dan Brisse 30:52

Yeah, we’re very tuned into CPI each month to the consumer price index and just monitoring the pace of inflation, just to see how quickly it changes? And can they get it under control? And what does it look like? He looked back at history based off of the last 40 5060 years, then bringing inflation down, it doesn’t happen as quick as some people might think it you know, yours can take. So, you know, you’re heading into this environment. I just it’s it’s hard to say what the heck is coming? It’s hard to say, you know, with how quickly they’ve raised interest rates, and how quickly things have come to a stop, at least in real estate. You know, will it be something we haven’t seen before my not put my money on it. But what we’re really doing is we’re taking care of what we have, we’re making dang sure that the assets we do have are asset managing to the absolute best of our ability. We’re making sure all of our team members that we do have in place are trained well, and are taking care of our tenants focusing on the fundamentals, making sure that any of our debt that we do have it is variable, how are you going to exit it? What does it look like? Well, you know, Can we can we exit it sooner? And just just kind of hunkering down, you know, and seeing how far this needs to go for the system to break. I think that’s probably the next step is at some point, you think that there will be something that breaks in the system where they have to make a pivot move?

J Darrin Gross 32:17

Yeah, no, and it is kind of that I feel like more and more of the people I talked to, there’s I mean, there’s plenty of people I talk with, that are looking that are, you know, hungry that want to do a deal. But it’s again, it’s trying to get the numbers to make sense. And I’m curious when you go and underwrite a deal, and you mentioned kind of like the Whisper price. If you’re not able to get there, do you whisper back a price where you’d be interested? Or are you just kind of like, yeah, doesn’t work for us?

Dan Brisse 32:49

Yeah, we always do it. I think that’s one thing that helps you with your reputation as you go to build relationships with these brokers is they want to know where you’re coming in, you know, if you’ve got a seller who’s selling, and they take the deal out to the market, and all the buyers come back, and here’s a two and a half million dollar gap, they can at least go back to the seller and say you guys are two and a half million bucks off, what do you want to do, and see if they can get the seller to just or if he’s just holding steady. So I think the real deals you’re gonna see come to the market will because of force, you know, force of sale in the sense that their bridge loan variable debt has gone up too much. They don’t have a rate cap in place, and they can no longer make the debt payment, they need to do a capital call to investors, or they need to offload the deal wherever at whatever level they can. So if things don’t change, that seems like the most logical exit for for the deals that are distressed.

J Darrin Gross 33:43

I got it. As far as the markets you’re invested in in Nashville and Dallas. Do you are those the two markets that you’re limited to? Do you have any sense of anywhere else that you might go? If you were to what would be some of the the I don’t say the where but what would be some of the the criteria or or let me put this way? Historically, there have been there have been certain things that people look to mainly, I would say population growth and jobs and demand for housing. Has any of that change for you, given the COVID experience? And if so, what are some of the characteristics or the market characteristics that have have changed? So

Dan Brisse 34:37

Yeah, I would say one of the things that we’re more focused on than ever is just your one mile median income of what kind of demographic Are you buying in? And what kind of laws are being passed by politicians that give you know your tenants more rights than you you’re the one buying the property putting the debt on the property guaranteeing these loans? Taking the risk and building the business plan, bringing these investors together working on the property day after day, and then your tenants have the ability to not pay their rent and they can stay that just doesn’t work. So where are you going to buy so that it doesn’t matter what the government does that the people care enough about their credit, or their future to, to perform in just means pay rent? You know, I mean, at the end of the day, when I buy a home, I don’t just call the bank and say, I’m not paying this month, and they say, no worries, just stay there and enjoy, you know, they just take the house. So so, you know, it is a little black and white. But that’s, that’s the way it is.

J Darrin Gross 35:38

No, I just, it is kind of screwy. And, and, but I think as an investor, you have to be, you know, hyper aware of that kind of stuff. So that you can protect your asset. And, you know, I was having coffee with some investors this morning, we get to talking about and it’s not so much that you have the one bad apple, if he will, I mean, honestly, I made the other part of this conversation was, you know, evictions on a smaller portfolio are not something you’re dealing with all the time, it’s kind of a, you know, a rare kind of thing. But as you get to scale, it’s more of a common, I mean, it becomes more of a regular thing. But just how a, you know, a tenant that needs to go is likely causing other problems that may bleed over to some of your other good tenants that don’t want to be around, you know, that, that that situation and and so it really is it becomes more of an operational thing, and just how you can contain that and get rid of that that problem as efficiently as possible. So it doesn’t become more of a, you know, larger problem, but

Dan Brisse 36:49

Right, right. I could not agree more. I mean, that is that is something we’re evicting constantly, unfortunately, in this environment, there are, there’s more in some demographics than others. But I mean, there’s, there’s, there’s always folks that just decide not to pay, I don’t know what happens exactly, or, you know, because if they’re willing to work with us, or they give us a heads up that things are challenging, then we can work with them, but they just stopped communicating in skip or whatever, you know, it may be that they just go silent on you. And it just I’m not sure what’s going on over there.

J Darrin Gross 37:21

No, no, that’s always kind of a pain that. I mean, nobody, nobody wants to go there. But something you got to you got to have the access to it when you need it. So you can protect yourself. So yeah. Hey, Dan, if we could, I’d like to shift gears here for a second. My 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 that we typically consider, we first look to see if there’s a way we can avoid the risk. And when that’s not an option, and we look to see if there’s a way we can minimize the risk. And when we cannot avoid nor minimize the risk, then 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 investors, your tenants, the market, the interest rates, political however you choose to identify what you consider to be the biggest risk. And for clarification, again, 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, Dan, Brisse, What is the Biggest Risk?

Dan Brisse 38:42

Yeah, I would say that there’s a couple boats the the one biggest one is get your debt right. In this market, particularly if your debts wrong, they can blow up the deal, and you can lose the entire deal lose all investors equity. So I’d say that that right now is the most important piece if you’re looking for the one biggest risk.

J Darrin Gross 39:01

I think that’s that is a pretty good answer given the circumstances. So I gotcha. Hey, Dan, where can listeners go if they’d like to learn more connect with you?

Dan Brisse 39:13

Yeah, they can just go to our website, www.granitetowersequitygroup.com. And there’s a Contact Us form. Fill it out a little email, phone number, hop on a call and we can get to know you guys better see if what we do is a good fit for you.

J Darrin Gross 39:29

Awesome. Well, Dan, I cannot 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. Yeah, thanks for having me on deer has been great. 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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CREPN #56 – Commercial Real Estate Investor Types with Doug Marshall

What’s your type is a popular tease on the grocery store tabloids, but have you ever thought about grading your commercial real estate investor?

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Doug Marshall with Marshall Commercial Funding and I discuss some very distinct commercial real estate client types and the different opportunities each brings whether it is a teaching moment or a learning opportunity.

Commercial Real Estate Investor Types:

WISE CLIENT

This is the one we hope to always have as a client. He has excellent commercial real estate experience. She knows the ropes but also respect what you bring to the table. They realize you are an important cog in the wheel and they don’t grumble about the fee you earn.

WICKED CLIENT

The Wicked Client knowingly withholds adverse information from you about the property or about himself in order to get the best possible outcome for himself. She has no problem cutting ethical corners if that is what it takes. He hopes that whatever he is hiding will stay hidden just long enough to get the deal done.

SIMPLE CLIENT

The Simple Client thinks he knows more about commercial real estate than he actually does. He generally has an over inflated ego and as a rule does not trust anyone’s judgment but his own. If left to his own ways, the outcome of the transaction will get done but it will likely be a more painful process and have a less favorable outcome than if he would have taken your experienced counsel.

CLIENT WHO DOESN’T KNOW WHAT QUESTIONS TO ASK

This client is the most vulnerable and the easiest to take advantage of. He really shouldn’t own commercial real estate. She doesn’t even know what questions to ask.

For more go to MarshallCF.com/blog