Looking Back on Real Estate in 2023 (Investors Round Table)
As we close out 2023, let's take a look back at this year in commercial real estate.
Brian Adams, Excelsior Capital
Dave Codrea, Greenleaf Property Management
Logan Freeman, FTW Investments
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Key Takeaways:
2023 was a challenging year for commercial real estate with rising interest rates and economic uncertainty
Investors are focusing more on stable asset classes like multifamily and industrial properties
Creative deals and alternative asset classes may provide more opportunities going forward
Accessing private/hard money lending could be attractive given current rates
Insulating portfolios from downturns and having a long-term approach will be important strategies for 2024
About Your Host:
Tyler Cauble, Founder & President of The Cauble Group, is a commercial real estate broker and investor based in East Nashville. He’s the best selling author of Open for Business: The Insider’s Guide to Leasing Commercial Real Estate and has focused his career on serving commercial real estate investors.
Episode Transcript:
0:00
This episode of the commercial real estate investor podcast is brought to you by cre launch Pro. This online commercial real estate program is designed to take you from beginner to pro commercial real estate investor with access to all of my courses, our online community and monthly group coaching calls. Learn how to confidently buy your first commercial property today at www dot c r e launch pro.com. Welcome back to the commercial real estate investor Podcast. Today we are recording our final episode of the investors roundtable for 2023 We will be picking back up in the new year but it's gonna be probably about a month I'm taking my sabbatical. So I'm gonna be gone for a little bit. But we've got some new exciting things for you all in the new year. But first, let's talk about 2023. I wanted to talk about, you know, key lessons key takeaways this year as investors this has been a very interesting, strange environment, especially compared to the last couple of years. And we had the pandemic before that it's been a weird four years in commercial real estate. As always, I'm joined by Dave Comadre, at Greenleaf and Logan Freeman over at FTW investments, gentlemen, how's it going? I'm going to lob it over to to Logan first. And Logan. What were what were some of your your thoughts on 2023?
1:13
Yeah, I mean, overall, I think that 2023 was a year of contrast, you know, while some sectors surprised with the resilience, new opportunities emerged. And then others face greater challenges than anticipated. So the market I think, rewarded strategic thinking, adaptation to new changing trends and a focus on the fundamentals. As we move forward. I think understanding those surprises and market performance is going to be crucial for navigating this ever evolving commercial real estate landscaping to make informed decisions. That being said, I think compared to previous years, the 2023 market is characterized by a distinct shift towards more cautious and discerning investor landscape. And my top four key markers of that change are as follows The first one being flight to quality, I think investors are increasingly prioritizing stable income generating assets in prime locations, you know, particularly multifamily and industrial properties. You know, conversely, I think riskier asset classes, maybe some might call risky office correctly are, you know, they're facing headwinds due to changing consumer habits. And the hybrid working models we spoke about on this, the second one being rising interest rates. Look, it's no surprise that the aggressive federal rate, Federal Reserve rate hikes have significantly impacted financing, current deals and acquisitions, making it more expensive for borrowers and potentially cooling down the market. So may say 5060 70% transaction volume decline. And so that is trying to cause and a, you know, in an efficient market should be a recalibration of pricing expectations that we may see going into 2024 I think there's greater selectivity. You know, I mean, investors are, I think conducting more due diligence on operators on deals, the underwriting process, you know, focusing on factors like tenant credit worthiness, property condition, long term market trends, I mean, I think that's a big, and that's probably a good thing. Right. I think that's a good thing for for the market. The last one just being, you know, emerging opportunities, some some things that happened this year in regards to data centers, neighborhood retail, life sciences, facilities, and senior housing. I think those are all attracting new investor interest due to a strong underlying demand driver. So those are some of the things in 2023 that got me, you know, really were on my mind, just thinking through talking to investors, looking at new acquisitions, looking at the current portfolio. And I know, we're going to talk about 2024 going forward. But I think that's the sentiment that I've, I've sort of felt this year, outside of real frustration in a lot of different ways that I'm sure we're going to discuss as well. Yeah,
4:06
it's been an interesting year, man. I mean, you know, we're starting to look at different kinds of assets. You know, I kind of started off with a reputation in with my investors. And of course, here on YouTube and on the podcast is a guy that does really creative out of the box, different deals. And this year, next year, probably the year after that we're doing nothing creative. It makes no sense. We're going for the single base hits. What is the safest thing for us to do right now? Because, you know, we just don't know where the markets going. You know, it could take tomorrow, it could take off tomorrow. I mean, I would, I would think that the indicators are there to say that it's probably not going to tank and things are going to steadily increase, but we just don't know. I mean, let's do this too. I mean, Logan on a scale of one to 10. If 2021 was a nine out of 10 year, which I feel like for most of us, it was an absolute nine out of 10 year. What would you say? A 23 was, yeah,
5:02
I mean, overall, I think 2023 I give it a rating of six out of 10 for commercial real estate investors. This reflects a market with promising pockets of opportunity, but also heightened risks and uncertainty. You know, it's not a boom year like predecessors, but it's not a total bust either. I mean, I think investors who are patient, and adaptable and focus again on those fundamentals can still find attractive deals and generate solid returns. And the the way that I gave this a six out of 10 was I had a few positives and a few negatives that I'll run through real quick. I mean, the first one being positive is resilient, multifamily and industrial sectors. I mean, those asset classes continue to perform well, and offer strong rental rate growth, and stable occupancy rates, demographics, we have favorable demographics, we have long term population and job growth trends that bodes well for future commercial real estate demand. And then you always have to think about the appreciation aspect of real estate. Right. So I think that the potential for value appreciation, even though we have near term headwinds, I think commercial real estate still has the potential to outperform other asset classes, like bonds, potentially, in the long run negatives, on my my point scales, where, you know, rising interest rates, you know, this is a significant hurdle for many commercial real estate deals, impacting valuations, and potentially delaying a broad market recovery. We have geopolitical and economic uncertainty. So global factors, like the war in Ukraine and Israel and potential recessions can create volatility, and reduce investor confidence. And then this was a this was a kind of a unique one. But I thought through this, because we often saw, you know, these headlines that were saying commercial real estate is, is in a big recession, a big crash, but it's not really true. I mean, it was just uneven performance across different asset classes. So while some sectors showing shine, really bright, others struggle, you know, requiring investors to be more selective. So I do think that while it wasn't a boom year, like 21, or maybe even, you know, the beginning of 22, I don't think it was a complete bust as well. There were some definitely some busted deals, and we saw some, some cracks in the armor, some chinks in the armor that may come to fruition. But I do think and I know Dave is going to speak to this, but I do think with less competition out there looking for certain opportunities, that dislocation always is going to create opportunities for folks that are experienced in the marketplace, while being albeit that they might be more selective, going into 2024. So I give it a six out. Yeah, that's
7:34
really interesting. I gotta say, like, I'm kind of surprised. That's a lot higher than I would have thought for 2023. But you've got some good, good reason to back it up. Dave, what are your thoughts on on 2023? And we'll get to your your spreading out of 10 as well. Yeah,
7:49
I mean, this was the first year where I think people didn't have their best year ever, you know, kind of like past pick however many years you want to say it was, people have had their best year ever for many times. So there's brokerage size acquisition side, sales side, any of it. And so this year is a change from that, you know, it has not been all roses across the board. So I think you've got some challenges, just that that come from that, you know, psychologically, right, ignoring kind of how is the market actually performing, but for us, and you know, what I do here at Greenleaf, you know, we're looking for opportunities where there are problems, and there's fewer and fewer problems, the better and better the market does. So now we're starting to see opportunities arise that are new and creative. And you're, you're kind of in the weeds of figuring out, how are we going to solve this new thing that came up? I've mentioned it a couple of times just office coming up, and how that's such a new problem that's out there and exciting to try and solve in the real estate space. So it's like, you know, these things happen. And it provides a creative opportunity to go get some stuff done. So on a on a How would I judge the year, I think this year was like a roller coaster where you could see some stuff was gonna happen. And even if you're on a roller coaster, you know, it eventually goes down. You're still scared, though, you're still like riding on the things screaming going upside down. You know, that's a little bit of what this year was like, even though you know, it's a roller coaster, there's a lot, there are some, there's some challenging parts to the year, but it really opens up like new opportunities to do stuff. And I think that's where a lot of a lot of great businesses, a lot of great investment opportunities come out of that kind of turmoil having to happen. So on the on the rating, it's like, oh, you know, maybe it's a five out of 10, but on the excitement from like, Hey, what's going to come from this? I think there's a lot more opportunity to now a lot more like kind of, like breakage in the market. And maybe that's makes it like an eight out of 10 Because now I see there's a lot of stuff that's going to come from this. That's going to be exciting to see and I mean, I might not do all of it, but I'm sure other people are gonna be doing different stuff, but because of that, it's kind of an exciting time.
9:58
Yeah, I guess I'm the Most negative one on on the panel today. I mean, I would give this year a four out of 10. Like, I mean, if I'm looking at it and saying, Okay, five out of 10 just an average, okay, year, you know, I would say this is slightly below average. So I'd go with the four out of 10. But I would have to agree with you, Dave, that I think that the, the excitement and the opportunity that's going to come out of this is a 10 out of 10, in my opinion, I mean, you look back over the last 10 years, and this is going to be the best buying opportunity that we've had since. I mean, since I've been in commercial real estate, I mean, since I got started back in 2013. I mean, back then, man, I wish I had some money to start buying deals, you know, it started, the market started heating up. And by 2017, things started kind of starting to get out of hand. And you just have the acceleration post pandemic, and it's, it's been wild. But,
10:50
guys, we have to remember that a six out of 10 is a 60% If I'm in school. Right? So you got a passing 80% Being a, b and 90% being an A so if you went to private schools like me, you had to get a 93% to get an A right. So, you know, we just gave the commercial real estate overall market in my mind, F Sunday's, you know, that's pretty bad. I think zero would be, you know, obviously multifamily, dropping, you know, occupancy dropping, you know, really stagnation in the commercial real estate market across all different asset classes. But we do have onshoring, you know, with all the stuff that's coming back to the United States, we still have a massive demand for multifamily. We still have office buildings that are getting being constructed, that are having great occupancy, right, we've seen a little bit of an uptick in regards to Office YouTube usage as well. However, that is changing, and it always is changing and the commercial real estate markets, and that's what creates those opportunities. So I think a six, a five and a four are you know, d f and f minus? So I mean, it's not like it's been fantastic. But I think the outlook for going forward is a little bit more opportunistic in the sense that one, this dislocation might create opportunities from an asset class standpoint, but too, I think that the inflated syndication real estate market is that that could be in a bubble, right? Like I've heard stories of large groups being in real trouble. I mean, the real deal has no problem, you know, putting those people on blast, whether it's true or not, I don't know. But I have some that have not popped up on the real deal from folks that I know that I've either invested with indoor if invested with me, in deals that things are in trouble. So I think that bubble is definitely maybe not popped yet. But it's definitely deflating a little bit, which I look at that not necessarily as a positive to those equity investors or those operators. But I looked at it as a positive of a of a more equilibrium of a market that is going to create a true market inefficiency for us to actually operate it. And so that's where I'm looking at this to be opportunistic going forward. And I think that the real, you know, real estate investors, operators are going to, you know, potentially thrive here in the near future. Yeah,
13:18
I mean, if you just anecdotally, from what I've I've been hearing 70 to 80% of syndications out there are having some sort of issue. Whether they're defaulting on their loans, they're having capital calls, they're trying to refinance their debt, something to that extent, right. And that's based on LP investors in the amount of deals that they've invested in the amount of deals that they are actively saying, are our problems. And I was having to explain to to one of my investors over the weekend, because we're having zero issues across the board, we actually were very conservative and all of our deals, haven't had to do a capital call, haven't had to refinance any dead, haven't had to fire sell anything because of what's going on. And, you know, we've got a deal right now, that's a redevelopment that we are hopefully starting construction on here pretty soon. And he was asking me, you know, hey, if we had to sell today, do you think everybody could get their money back and we could break even? And I said, probably not, I mean, with the sunk cost of our development in it, the sunk cost, you know, buyers not being able to get favorable debt terms and banks not wanting to do redevelopment projects. It's not as attractive of a project as it was 12 months ago, but our debt is from 12 months ago, we've got really good debt terms, the project is going to be a success, it's going to deliver in 12 to 18 months. We're fine. We're not trying to sell today, if we were we probably have some problems, but we don't have to worry about that right now. And so, you know, there's a lot of LPs out there that are getting worried just because a lot of the deals that they've invested in aren't doing well. And so, you know, Brian has mentioned this a couple of times in the podcast that, you know, he's talking to his LPs and a lot of them are wanting to do entire portfolio reviews, because they're getting capital calls and other other stuff. I mean, it's just it's kind of cool. Ready to see what's going on? Let's see slow cars saying what do you guys think? Is the bottom slash downturn for resi? On an aggregate basis for the upcoming recession? For example, 2007 2009 was down about 25%? I mean, in my in my personal opinion, I think and I've said this a couple of times on the podcast, I think values are down 1717 to 25%. I don't think that we're seeing comps that support that that's just my feeling. But that to me, based on what I'm seeing with where interest rates are with where investor sentiment is, seems to track, Dave, what's your thoughts
15:37
to hang on 2007 2009, when you started seeing operations of multifamily where their capital stack was so thin, that they had to really cannibalize different units to get parts for, you know, turnovers, and you saw, not only values go down, but the operating quality of what was happening tanked. So a lot of the deals, you know, sure, maybe their market values are declining, too. But they've also got an asset class that you can't lease as effectively, you can't operate as effectively, and you got some real challenges. And I mean, that leads to, you know, not 10 20% wipe outs, that's you got significant 50 60% declines, if you operate poorly, if you operate well, and you're able to maintain occupancy and keep your quality of an asset. Yeah, you maybe you only have a little bit of a decline. But that's kind of, you know, you've got ups and downs in the market all the time. So I think it's going to be disproportionate in look was mentioned, sort of, like disproportionate to the assets that are not functioning well, will have significant value declines versus the ones that are functioning and operating. They've got a good team, and they have a functioning capital stack. Those would do a lot better.
16:51
Yeah, I would agree with that. Logan, what are your thoughts? Yeah, I
16:54
mean, the Green Street property price index is down 19%, since the march 2022, peak, right. Jay Parsons posted today on LinkedIn, and really parsed out a lot of the data that I think was really insightful and kind of said, the multifamily sector looks to be closer to 11 to 13%. Down. So trying to find the bottom of what that might look like. I think that is the hard part. Right? I think the the challenge with that is continued rising operational expenses, which is going to put pressure on your net operating income, and then limited capital availability, for you to go get a multiple on your capitalization rate in the marketplace. And until one of two of those changes, we have both of those going against us right now. And so I don't foresee operational expenses is going anywhere, but continuing to be to be up. So the other one that we really have the impact on could be, you know, the interest rates, which would help folks to try to bridge that gap. All signs kind of look to 2020 for being a little bit better in regards to lending environment in capital markets. But you know, anybody who says that, yeah, rates will be lower now. Or sorry, in 2024, than they are now. I'd be a little weary of I mean, yeah, sure. Looks to be that way. But we don't know. We don't know, what's going to happen with these geopolitical risks. And also, we're coming up on an election year. Right. And we talked about this on the last panel was, you know, how's that going to impact, you know, the lending environment and or the economic environment. So now, a couple of highlights and a couple a couple hopeful statements there is that Ray Dalio has been posting about, you know, the, the insights with China, but also the insights with our own United States government, and is starting to see some positive shifts and momentum. He's calling it kind of the Dark Horse strategy. And it could happen, maybe if a, you know, and Nikki Haley or Gavin Newsom comes into the election and really is more moderate on both sides. And to get people to work together on on across party lines can be really interesting for our country going into 2024, that gives us some hope. And it seems like we are in better talks with China as well, which I think also has a big ripple effects in regards to commercial real estate and in our economic kind of sentiment as a as a country as well. So those are a couple things that I would continue to keep my eyes on, for sure. In regards to that. But trying to guess where the bottom is, you know, I think that it's highly dependent on those two, those two factors. That being said, if you can keep occupancy up and you know, you don't have to sell then, you know, you don't need evaluation of your, your current deal, right. So it's going to come down to what debt is looming, that is going to need to be coming up for refinance and 2024. And frankly, I have not done a deep dive into that and to see where those different pockets are no commercial real estate analyst on LinkedIn does a really good job of that. I should probably look into that in 2024, but Guess what, I'm focused on my own portfolio in the Midwest right now, not necessarily anybody else's. But I think that would be an interesting topic to kind of really dissect and see how that might impact the multifamily market in the next year. Yes,
20:14
sir. Just saying it'll be interesting to see how the winning environment changes come 2024 Whitney is definitely tightening up. It's, yeah, I mean, you know, look, we're looking at doing a residential flip. It's not normally something that I would be doing, but I went some hard money, and I'm taking that house back here and 11 days, I get foreclosed on it dead. But I'm actually looking at taking the debt opportunity to my investors, I'm probably just going to take it to them, instead of going the traditional bank route, I only need 300 grand, I've probably got three investors that want to throw that money and make 10% and call it a day, it's gonna be a lot easier for investors to take that approach. Because at the end of the day, why if I'm gonna pay a bank, almost the same amount of money? Why am I gonna go through the headache of having to work with a bank? You know, we've talked about this a couple of times on the podcast, like, I think that private money lending might become a more commonplace strategy for a lot of investors moving forward.
21:10
On the debt side, just to put a, you know, give you guys some, some some facts on that I was looking this up, actually, before our call. The mortgage banking Association, said that mortgages were down 53%. Right. So yeah, definitely has been cut in half. However, you know, going into 24, they do believe that we're going to have a 25% year over year increase. And then that's kind of backed up by the Kroll bond rating agency, and they're predicting 23.6% year over year increase. So, and that's in commercial real estate loan origination. So I do think that that comes back up. Now, if we took a 50% drop, and we came back 25%, you know, that's only half, right. So we're not quite backed up there. But it's looking like the smart people that are forecasting and spending a lot of money to look at this, do believe that that might turn the corner here. Yeah,
22:02
it'd be it'd be nice to see for sure. Let's see slow cars saying thanks. All insightful, final question. Any areas in the tri state area you think are attractive from an investment perspective? Or is everything just expensive out there? So if you could, if you could clarify. Which which tri state area because I think everybody kind of refers to a different tri state area, depending on which part of the country that you're in. I mean, look, I think, for the most part, everything is expensive out there. There's nothing, you know, interest rates have been so low for so long, and they push the value of commercial real estate up so high. A lot of these sellers do not want to come back to reality, and accept the fact that we think that real estate's down 1719 25% They're still looking at last year's valuations. And there's no reason I mean, unless they have a reason to sell. I don't think they will. Now that being said, you know, tertiary markets. I mean, we're looking at Louisville, Kentucky, we're looking at Chattanooga, we're looking at Huntsville, and Birmingham, Alabama, there's some really exciting opportunities there. Is it cheap? No, you're still paying a lot more than you would think for markets like that. But it's still affordable. He's saying New York, New Jersey. Everything is expensive there. Everything is expensive there. Yeah, I would I would definitely start looking out of market. You know,
23:23
I mean, expensive there too. But operating costs in those in those markets are significant.
23:26
I would imagine insurance has to be crazy. And New Jersey, insurance, taxes,
23:31
manpower, it's all it's a very expensive market. But you also have a huge amount of demand that's there. It's, you know, I grew up in that area and moved down to Atlanta, simply because it was a more affordable business friendly place to get started in what you needed less capital. So that's how I was moving south. But yeah,
23:53
I mean, I think the New York City still very well posted this on LinkedIn, number one place for new graduates coming out of good schools to go work. So you know, frankly, in regards to an investment perspective, they're no idea take a long term approach, right. But that's not a market that I've ever invested in. But I do know that if you follow key demand drivers like population growth and job growth, it'll be up there at number one, or, you know, top 10 For sure. So that's always going to bode well. In that in those markets for sure.
24:27
It's hard, it's hard to against New York City.
24:29
Yeah. That'd be what everybody was saying during the pandemic. Oh, everybody's moving out of New York City. They're never going to return Come on. I mean, that was not believable for one second. It's one of the largest cities in the world, and it's one of the economic powerhouses of the world. Like it's not going to change.
24:44
That's good. It's like, hey, everyone's leaving. So put the price down so I can buy some more but I mean, I'm not doing that up in there. New York City prices are still crazy compared to this. You know, Atlanta in the south, but yet, New York is singularly impressive market here in
24:59
the US I mean, just the amount of capital you need to get started on a basic. I mean, we were walking around and in, you know, rougher parts of Brooklyn, and I was looking up townhouses, you know, there's like trash cans burning outside and, you know, gangs riding by on scooters. It was hilarious. And, you know, you look at prices of the townhouses there. And it's like $1.2 million, like Duke, who could afford to pay that and want to live here? Like, that's what's so crazy to me about that. It's just a totally different market. Totally different market. Well, let's, let's talk about wins and 2023. Once you guys to celebrate here for a minute, so what are your What are your biggest wins? What are you most proud of that you guys accomplished? In 23? Dave, I'm gonna hand it off to you first.
25:41
Yeah, well, one of the things I pride myself on in my organization is we're always trying to find out what is a problem that we're able to solve and what's something we can do, given the current circumstances and, and we've had a pretty good run this year buying single storey office and, and finding usable uses for it, which is not office right now. It's converting it to other stuff. So we've done a good job with finding opportunities like that, and converting stuff and finding new tenants for it. So that's been a big win. It's a it's definitely a source of inspiration. And a lot of our plans for next year, is just replicating that problem solving that we've been doing and, and I optimistic about next year, what it's going to hold doing that. Yeah,
26:24
that's great. We're gonna have to get you to come on and do a masterclass on what you're doing with single story offices at some point once once you guys have bought enough market share in Atlanta that you don't have to worry about anything, of course, but it's I think it's really interesting. It's really cool. Y'all are doing? Well. Good. What about you, man? Yeah, I
26:40
got two off the top of my head, the first one being really the technological innovation, that the commercial real estate industry is kind of going through and trying to adopt some of those new technologies. And one of them being actually leasing apartment units and how to do that effectively. So I went really deep in regards to understanding ILS systems and normative artificial intelligence and how to get somebody to actually show up and do a tour to getting them to creating, you know, a lease and getting all these different things completed. So that was really interesting kind of project. And it's yielded quite a bit of results for us across our portfolio in a tough time. And so that's been really great. From an operational standpoint. And then, you know, from a transaction standpoint, our brokerage is going to do close to what we did last year, you know, which is really positive. And our gross commission income is, if not higher than the actual volume that we did. So we're able to still get deals done on the brokerage side. And on the disposition side, we're able to effectively sell about 250 apartment units for big wins. And the way that we did that was when debt was cheap, we put on fixed rate financing, that became a very attractive investment for investors. And we're, I'm proud to say we're selling 120 unit, multifamily property for lower than a 5% cap rate in the Midwest. And so that's fantastic. And so we've got some big wins on that side in a very difficult market, to be able to transact in on the brokerage and the disposition
28:27
side. Yeah, I think that's a big takeaway right there is make sure whenever you're financing multifamily, especially because it's not really as possible and commercial. When you're financing multifamily. Make sure that the loan is assumable, especially if you've got an attractive fixed rate, because right now, that is a lot of what's transacting because people can assume that debt makes their lives a whole lot easier than to have to raise as much equity or they can, you know, squeeze better returns or they could buying something else, which means they can pay you more. Yeah, for me, it's a little bit in a similar vein, Wogan with the brokerage. I mean, we ended up not acquiring anything this year, because I just didn't find anything that made me want to get out of bed to work for it in the morning. And, you know, I have finally built up a phenomenal team at the brokerage and really excited for what these guys gonna be able to accomplish in 2024. And what they've been able to take off of my plate this year, feels really good to finally have that side of things running without me having to do anything other than managing coach these guys. So that's been a lot of fun. That's hands down my biggest when and 23. We've got a question from doster group for new builds nearby garden style multifamily, which has settled occupancy at 80 to 280 to 82%. Always has rehabbed 55% of the mark of the property, man, I'm just butchering this question and asking you around 15% over market, mildew smell from the outside no perk or when tests should they counter offer on it, or should they just move on? I mean, 15% over market today is a bold ask.
30:09
It's kind of a I mean, unless there's something about the exact location that makes it worth that, right. But if you're looking at it purely from a, you know, these are the numbers standpoint, there's gotta be some reason that it why would you pay more than the market is right now? I don't see a lot of stuff, transacting that's going above kind of a market pricing right now, more, I'm seeing stuff that's trading, you're getting a better deal on it. There's got to be some kind of specific reason as to why they believe it's worth more, but then again, I also a lot of my deals for over market as someone wants to buy him.
30:45
Yeah, I mean, it all depends on what somebody's willing to pay. But I mean, if there's four new builds nearby, then I mean, I would say there's an opportunity there to be the value play in the neighborhood, there's always going to be a need for that. But I mean, if you can smell mildew outside, and you know, only 55%, rehabbed, and it's stabilized at 82% occupancy, that, to me, seems like there's something else going on with the property. But that also could be a huge opportunity for you, maybe it's just got really terrible operations, maybe the team is just terrible. And they're not doing things right. I mean, Logan, what's, what's your take on that?
31:23
Yeah, I mean, there's a lot of factors here that we don't understand and don't know, but just from the reading the the message, I would say that, you know, keep in touch with this seller, and wait till they have to sell and be the number one person that they call when they're ready to be able to transact at a price that you feel is comfortable, but I wouldn't, I wouldn't put myself in a position right now, to do that. Or maybe they're just maybe there is a opportunity to get creative here with seller financing, and or some sort of master lease structure. Because if they believe it's, you know, worth 15% More over market, well then make them put their money where their mouth is, and say, okay, at closing, escrow means six months or 12 months worth of rents on the other 18%. And if you fill them up before closing, then we don't have to, we're not to have this conversation, but if not protect yourself, right. And we are actually doing some, some creative deals like that right now, where now it's about 50% over market. But it's also not in the path of progress, there's a garden stop multifamily deal, it's about 75% occupied, and the buyer needs it to be at 90% occupancy, or economic occupancy. And so the seller is willing to do kind of a master lease scenario for six months. And between now in closing, if they get those filled up, then, you know, that drops off of the agreement. But there's ways to kind of maybe approach this in a more creative way with seller financing or a master lease structure.
32:55
And the story continues doster, saying seven property managers within two years, either the ownership is crazy, or the property is in a terrible location.
33:07
You're not putting people in a position to be successful there, if you've got, I don't even know what that turnover percentage is on an annual basis. But that's, you know, the residents aren't gonna be happy, they're they're gonna have no connection to the manager, there's no way the manager is doing a good job every two to three months, if they know someone's getting fired, or transitioned or something. That's, I mean, that shows an 80% occupancy, too. So that, you know, it seems like there's a good opportunity there to improve just how its operating. Whether that's worth the risk on the investment side, but it's certainly operational issue that's going on right there. It must be in a good location if there's that much building going on around it, too. So it sounds like it's got a lot of positives on the on the what to do side. But it's also capital stacks got to match up in the today market, not the three months ago, six months ago, real estate market, but in the today market. Yeah.
33:57
And to be fair, I mean, I think at the 82% occupancy is actually pretty high for seven property managers to be blowing through there, nobody can really get their systems in place. Right. So I mean, that seems actually pretty decent. You're probably retaining a lot of people. Who knows? Well, let's jump to the flip side of that question. What was your your toughest challenge, or biggest mistake, and 2023? And I'll kick it off. You know, for me, it's been on the development side, you know, we're dealing with with Metro, you know, Nashville Davidson County, trying to get permits for a hotel that should have been delivered this year. And we're probably not even gonna be able to start construction for another few months, assuming we get our final permits. And then it's just it's been miserable to deal with them. I've been developing property since 2015. And this is the worst project I've ever worked on. And it's because Nashville has grown so much there's so many projects in for permitting, the city refuses to hire enough people and pay them well enough to keep people that are knowledgeable in the seats. And it just makes it proud. SS form Hasbro, I don't know how you fix that, we actually retained an attorney that had worked in planning and zoning to go after the city and start hounding them so that we could get this pushed forward. And he called me back and he was like, Look, you can pay me to go yell at him, but it's not gonna go anywhere, every single property that's going through permitting right now is dealing with the same issue, it's not going to help out. So, you know, I've had, I've had to deal with that. And it's painful, and it's annoying and frustrating, it causes deal fatigue, it's gonna be really exciting once we can start construction and just get it underway. But you know, I've been having to explain that to my investors. And it's not fun. Fortunately, we're in a good position. But, you know, that's, I would have rather had to deal with something else this year. So, Logan, I'll kick it, I'll kick it over to you now. Yeah,
35:46
I mean, I think for for me, it's pretty simple. You know, and this is from a general business philosophy. But, you know, going into this year was not certain where, you know, interest rates would be and or where they would maybe flatline out. But I think I underestimated the ability for us to find acquisitions, to purchase in the areas that we wanted to acquire. And so when when we had all these deals that we continued to underwrite, and go through the process on, we just kept being a million or $2 million off on the Ask, and they kept transacting, and all these different things, it was really frustrating for our team, but also, it really stunted kind of what I'll call the growth of, of our company's portfolio this year, because we were pretty focused on one niche asset class. And, you know, frankly, I think that I underestimated the ripple effect that interest rates would have and, and everybody just kind of put a big pause on it. And so not being able to acquire other than, you know, one property this year, it's been a weird position for us to kind of, you know, be in looking at previous years, which then impacts you know, revenues that are coming in the door, and then you have to make decisions about other technology or other resources. And so mine is more or less on, you know, navigating a declining real estate market in regards to transaction volumes, and how that impacts your continued strategic vision and growth of your company. And we've kind of had to just put a pause on things, you know, for the last six months and say, Okay, well, what's our, what's our buffalo plan? Or what's the plan of when we gotta go into the storm, and that looks a lot different than the plan that you have when you're acquiring and continuing to do a lot of different real estate deals. And so lots of good lessons learned within that, but also a big loss in regards to just kind of where that's put us. And maybe it's okay, right? We don't want to be acquiring bad deals or anything like that, but didn't really have a plan outside of the brokerage to be able to continue to bring revenue in from from operations and had make some, some tough decisions based on that.
38:02
Yeah, it makes it tough when you're used to running 100 miles an hour, like we have been for the past couple of years. To have to all of a sudden come to a complete stop, take a step back and reevaluate how you're approaching things is it's it's tough. Thanks for sharing. Dave, what about you?
38:19
Some of the best some of the best deals with the deals you don't do? Yeah.
38:25
rig out through the annals of time.
38:28
I needed that pat on the back. So I appreciate
38:31
Yeah, it's yeah, you just got to stick to your guns and stick to your underwriting and I think those are wins if you're sticking to your underwriting and you're sticking to the metrics that you know work for you. I think that's the way to do it. You know, and on my side I'm very eager to implement technology and improve how the business is operating and really provide people with tools to do their roles better but we tried to do Salesforce this year and that was like a light it on fire disaster that took a year to get through and you know, trying to make something just too complicated that doesn't need to be that complicated. There's a lot of easy simple solutions in real estate and sometimes you know, those are the best ones so we wasted a lot of time and money on that potential move I guess we should say so not gonna do that one again. That was a that was definitely a painful experience. But then yeah, I you know, likewise, I wish I wish we could have done some more deals there's stuff that we were close on and we didn't get but on the other side, I'm happy we just stuck to our numbers and let them go. So
39:40
so to join up sinking Salesforce or did you push through it? Now we we gave up? Yeah, I've heard that. You know, it
39:50
was just so complicated, so complicated.
39:53
I've heard that so much from from investors around our size like until you get to it 100 200 plus people Salesforce often it just doesn't make sense. And you almost have to have a consultant that's working on Salesforce full time to retitled that implement.
40:11
Did you really implementation, we hired the Salesforce consultant. And then ultimately, they were like, look, we don't, we're not gonna get there hasn't been any sense. So yeah, so now we've pulled the plug on that one. And, you know, back to simple, which has been working fine for the past month and a half. So it's like, okay, we're fine.
40:30
Yeah, everything's good. So always nice. When that happens. You're like, oh, yeah, nothing's on fire. It's actually working. Just fun. Yeah. Let's see. So car saying, What would each of you do with around $300,000? From a real estate investment perspective today? Would your answer change with $500,000? How do you think about returns, especially with risk free money returning 4% Plus, first caveat I would throw onto that is no investment is really risk free, no matter how often people say it. Obviously, you know, if you're getting 4% plus 5%, from from us, you know, treasury bonds and bills and stuff like that. That's probably about as low risk as you can get. But hey, there's a chance that we could default on our debt tomorrow. And, you know, those are not sitting pretty, but Dave, was, let's toss it over you first 300 to $500,000. In Your Pocket, what would you do?
41:25
My favorite movie is office space. So I go with that answer on that one. But you know, having money to invest, always looking for stable long term cash flow. And I know it's not going to be the best deal at that moment. But whatever I can do generate stable long term cash flow that replaces some of my income that I've got to earn. That's always what I've been looking for. And a couple 100 bucks a month is a great to me is great. You know, I'm just trying to compound that and keep going with it. So, you know, I would just say something close to home, something you can touch and feel and understand that you can get your arms around and, and generate some passive income problem that has the ability to be held long term and look for long term appreciation. That's been my investment philosophy since day, 120 years ago.
42:15
It's hard to argue against cash flow. Welcome, what about you?
42:21
I think that I would build a new subdivision in the metaverse next to Snoop Dogg.
42:32
So out of the sky, you're like, I might as well wasted.
42:38
No, in all reality, no idea what the goals are of this investors capital. So it's hard to say. But I do think that Dave gave a very good answer, mine would probably be look at some private credit opportunities, and likely in really strong preferred equity or mezzanine debt positions, that are yielding anywhere between 10 to 12%, Netta fees to you, in a qualified sponsor who's done it before, not somebody, maybe that's doing it for their first time, but looking for that. The other thing would be looking at really strong operators in the retail sector, very bullish on neighborhood retail and the prospectus of that going forward from a value play, but also from a cash flow play. And then, you know, I think that, you know, potentially, depending on if this 300 to 500k is the only capital that they have available. Or if it's in a broader pool, sitting on some cash right now, waiting for that next opportunity could be really interesting. And I mean, that from this perspective of, you know, what about single family homes and in your neighborhood, you know, I've recently seen a couple of for sale by owners come up in my own neighborhood. And I'm just curious to know why. So maybe there's a cash play, where you could go buy a house or something necessarily close to you, in a good neighborhood that you might be able to sit on, fix up a little bit and wait for interest rates to come down and catch that, that rising demand on the single family home spot as well. That's really interesting to me, as well, but I do think preferred equity and mezzanine debt could be a really interesting place to be at right now as folks are placing a lot of that into multifamily and other types of real estate deals.
44:33
Yeah, I've got a few different directions. I would take it one is is the private money winning route. Right, just like what Logan was saying. I mean, yes, I'm having to foreclose on a house right now. But it's going to end up being a really good deal. I'm happy that I did it. You know, you can get 10 to 12% on your money. You can also charge points for it. As long as you understand the deal and you know exactly what you're getting into and you understand that you might have to take this back and do what I'm doing and actually finish the project. They can be pretty deep. So you can get good margins, especially today, because like we were saying earlier in the show, I mean, a lot of investors, there's not a big difference between the the private money lending route and the traditional banks right now with regards to interest rates. So if you can move faster, and you don't have as you know, burdensome of a process can be very attractive. Second thing I would do is look at smaller neighborhood commercial properties. You know, there's a building I was looking at today, that's hitting the market for 800. Grand, you know, I love little deals like that. It's a small little, you know, basically commercially zoned home, with a studio in the back. I mean, I love deals like that. Nobody else really likes to play in that game, except for owner occupants that usually lease out really well, you could get a very low loan to value on it, which to me is very attractive today. And you can always refinance that equity out later and deal with it. Third thing I would do is just buy more land around my house, I need more land, and I would love to have $500,000 in cash to do that. That'd be great. duster saying is that a typical mess fee? Yeah, I mean, 10 10% to 12% interest on that debts? Pretty common?
46:10
To be honest with you, yeah, I've seen 1515. Yeah.
46:16
Yeah, and you can charge one to two points, which means, you know, if you're, if you're giving $100,000 loan, you can charge you know, 1000 to $2,000, for putting that loan together. So, sometimes,
46:28
we're in that space, too, you know, you're not going to get the other benefits of investing in real estate, from a tax perspective, this is going to be income, right. So just know that it's going to be taxed at a higher rate and or you're not going to be able to do a 1031 exchange or anything like that. So I think it should be a bucket in there. But I do think the land play is also very interesting, right now as well, because I think people are trying to gobble up land and, and bank it for future opportunities in specific areas. So finding some things like that, I know that a lot of investors have found, you know, commercially zoned land and residential areas, and that has proven to be a very successful endeavor, if you have a long term approach to that, because let's say you bought 20 acres in a residential area that's commercially zoned, and, you know, or vice versa, right residential in a commercially zoned area, you know, find some unique opportunity with that, sit on it and wait for somebody to come pay for it. That could be really interesting, too. So I like that idea.
47:32
We know one thing I point out there, you know, for us, we're all we're all investors in our kind of local areas where we operate in live. So we're pretty familiar with, you know, what's going on in our own markets. I think that's critical when you're looking at real estate investing as understanding the market you're in. So you could do any one of these scenarios, but you know, you should know the market that you're in. So you're gonna have the best results. Really? Yeah,
47:57
how well do you know what's going on in your backyard? I mean, that segues really well into this next question from Matt, which is, would you guys see industrial outdoor storage is good first investment, minimal improvements on site with month to month tenants? I love it. I'm a big fan of industrial outdoor storage right now, to me, anything that is considered a covered land play, that's a land that covers the mortgage and hopefully makes you a little bit of money, and just sits there in the path of development path of growth, and appreciates in value that could potentially in the future, have a higher better use? Absolutely go buy that 20 acres of land that's so in commercial sitting in a residential neighborhood? Because it's only going to go up in value. Logan, what are your thoughts on that?
48:37
I'm gonna one up yeah, I've got an industrial outdoor storage building, that, you know, it's, it's a 215,000 square foot, flex industrial building, that I lease the parking lot some of the parking lot to, for a trucking company that needs to store their, you know, their big truck beds on. And so I think that's a really interesting perspective. Now, I've seen some of these iOS deals, and iOS always throws me for a loop because I'm not sure if it's referring to my Apple phone, or if it or if it's industrial outdoor storage, but you know, they are typically in some interesting areas. So I think location is extremely crucial there. But if you go by land in an area that people want to put RV parks on or you know, storage on, and you can figure out how to flatten it and put gravel down and put some gates up, you might have some really great land that is really easy to manage. Right. So one, I think theme that we're hearing here is it's not your typical real estate deals that we have been previously doing in previous years. They're all creative, different types of hybrid opportunities. And so more generally, I think that that is coming into favor here whether they be smaller deals, they'll be mixed use deals with retail on the first level and short term rentals or, you know, apartments on top or iOS or something along those lines. I think thinking creatively, right now, it's with somebody who might have a piece of property that needs to get rid of it for whatever reason, it could be an interesting perspective. But none of us are saying go buy the, you know, 250 unit multifamily deal, and put that on it right now and do the name the typical, you know, structure like, just I want people to hear that, that we're thinking about things differently and or going after opportunities that are a little more creative. Maybe they now are in the past.
50:35
Yep, I agree. Well, jets, how has 2023 shaped your approach or strategy moving forward? And what what is, what are you going to be your biggest takeaways from this year? And how is that going to shift? How you invest in commercial real estate? I mean, I know Logan, you just kind of mentioned a little bit of that, like we're looking creatively at deals, we're looking at things differently. What are your other thoughts?
50:58
So I think that there's a few things people are continuing to move the Sunbelt is booming. Areas like Nashville is booming. Kansas City is lower on that list, but they are on that list. And so I think traditional hotspots for commercial real estate investment, money is fleeing towards other areas, maybe tertiary or secondary markets. And that is important because if you get in now with those areas, you can catch a Nashville when it's on its way up, or a Denver when it was on its way up. That's how I'm positioning kind of Kansas City right now is there's a lot of good infrastructure, new airport, a lot of different things we can't beat the Denver Broncos or the you know, whoever we played last night, I can't even remember, but we can't be teams in the NFL right now that are have losing records. But anyways, long story short, I think finding markets right now. And spending a lot of time on these emerging markets could be really interesting. And so what am I looking for population growth, job growth, affordability, all of those different pieces to be able to invest in. I'm also really interested in Dave's approach with this hybrid work hangover, I think that, you know, watching what happens in the office space is going to be really interesting. And I think that's going to yield a lot of different opportunities, still love the retail play in very specific locations. We've talked about that in the past, as well as logistics and last mile distribution. I mean, you know, e commerce continues to rise, I think the Lindemann group thinks that it's going to be up to 20% of overall sales will happen online in the next 10 years. That might not sound that much up from 16 to 20%. But that for, you know, four percentage points is a lot. And so that's going to continue to drive the industrial space. And I'm really curious to see what happens in the capital markets here. And the new or the the debt that was originated two or three years ago, coming due here in 2020, for always watching the geopolitical risks in regards to wars and things like that, that are happening, but also really interested in those different aspects that I just mentioned. So yeah, a lot of different things moving, but how to 2023 Impact 2024? Well, I think it's two things, one being insulate yourself from any type of market downturn, that you can either generate revenue, or generate positive returns in those. So that's diversification, not getting your head over your skis, and making sure that you can navigate uncertainty. And then number two, is having a long term approach. I mean, there's this real estate stuff, the game of flipping apartment units, flipping land, flipping, anything, should be really well thought out, if you're going to approach that and being able to understand cash flow, and making sure you have it right now, extremely important. So that's going to impact what we do in 2024. For sure.
54:01
Dave, how about you, man?
54:05
You're going into 2024 I'm, I've mentioned a bunch, but I'm very interested in how the whole office sector as a whole is going to evolve and change over the coming years, both suburban stuff in town stuff, you know, Class A Class C, I think there's so much activity that's going to happen in that space, that I think that one is going to be a lot of fun to be part of, but also a lot of interesting stuff is going to come out of that. The other part, we're looking at just going into 2023. And we've talked about this a couple times. It's just the debt markets on where they're at. And I think there's gonna be opportunities to either, you know, pick up kind of distressed properties or debt pieces that are that are coming due and there's got to be a creative way to solve what's happened with that debt. I think the private markets are gonna be able to adapt and move faster, and then the banks will eventually kind of catch up with with what It looks like but there's kind of, there's definitely gonna be opportunity in 2024 in my mind to, to either acquire debt pieces or take positions in deals that are more debt oriented to get into the operating seat. So I see those two aspects happening. That's what we're really looking for in 2024. Yeah,
55:18
I'm very interested in some debt opportunities, I'm going to be bringing those out to my investors for sure. In 2024, you know, we're definitely looking at some residential construction. I think there's a lot of opportunity there right now, I think that markets hot, I don't think that, you know, the residential market is anywhere near where it was in 2008. You know, where we just got over build, I think that we're at a point where you can't build enough, and I'm sure at some point that will change. But next year was a good time to take advantage of where we're at. Neighborhood commercial is still very attractive to me. You know, those deals, you can typically find them for under a million under one and a half million, if you're doing them, right. And it's there's not a whole lot of people that are out there competing for that, right? Because either it's an owner occupant is a business or it's a smaller commercial real estate investor. And there's not too many of those, those types of people out there. So I like that blue ocean and then, you know, of course, focusing on the brokerage, it's gonna be a lot of fun this year, watching the guys go out and do $80 million in sales. It's gonna be the first time that we've ever done that. Logan and I are gonna be doing a monthly podcast update diving into the business side of things. So that'll be a new addition to the podcast this year. giving you guys a recap play by play every month of what that looks like is I'm not a good manager. I historically have not been a good manager and I have decided to completely change that and become the most badass manager there is. So it's gonna be it's gonna be a great year. We're gonna have a lot of fun. Well, jets. Thanks for coming on the show. Appreciate you guys closing out 2023 with me. Happy holidays. Merry Christmas, and we will see you both in the new year. Thanks. Yeah, thanks.
57:00
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This conversation explored how Neighbor.com helps commercial real estate investors unlock hidden value in their properties through self-storage and vehicle parking solutions. It also discussed trends in the storage industry and opportunities to generate new income streams from underutilized spaces in offices, multifamily, and other commercial asset types.