What Type of Commercial Property Should You Buy TODAY? (Investors Round Table)

When you're first getting started in commercial real estate, it's important that you focus on a specific type of commercial property - office, retail, industrial, hospitality, etc. Doing so will allow you to go an inch wide and a mile deep so that you can better understand how that one property type works and branch out from there. But which type of commercial property should you focus on? Today, we're diving into the asset types that we like to buy and why we decided to focus on those properties.

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Key Takeaways:

• Look into converting single family homes into duplexes or accessory dwelling units, as discussed in the California policy, to potentially take advantage of the housing shortage

• Consider investing in industrial, flex, or retail properties, as those asset classes were discussed positively

• Be cautious about investing in office, multifamily, or hospitality given the market uncertainties discussed for those sectors

• Experiment with new business models or venture ideas since the previous models may no longer work given higher interest rates

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 as a board member for the Real Estate Investors of Nashville.

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're gonna be diving into somewhat maybe more negative conversation that we've been having. But I think it's a realistic conversation that needs to be had today talking about what types of assets should you be buying? I think if you'd asked the three of us this question 1215 18 months ago, we'd have a very different conversation than we might today. But I think this is going to be a really good setup for a longer term career, and how you might want to look at your real estate investing. Today I'm joined by Dave co-driver Greenleaf and Bryan Adams at Excelsior capital. Gentlemen, thanks for joining me, we're gonna be talking about what types of assets should you buy? So I think first, let's dive into what you started off buying, and how you waited in that. And Dave, I'm gonna kick it over to you to kind of get us started there.

1:17

I mean, go all the way back started buying single family rentals, because it's all I could afford. That's where I, you know, I had a little bit I had some money, I could buy a single family rental, but

1:27

as you know, grown with the trying to find what, what asset class or what investment can really

1:34

like, has some room for growth, like, Where can I go with stuff and eventually got into multifamily simply because of that. But that's gone into all different asset classes. Now government leases, you know, had a had a really good position with debt. You know, three years ago, they were great. We're looking at a lot of office right now that we can buy and convert to flex. That's really, you know, right now, runway wise, we're seeing buy as much single storey office converted to flex as we can. That's where we see momentum going. Yeah, I'm excited to dive into that and tear that apart, because you've had the more typical real estate entrance into investing. But now you've really branched it off into some some different ways. Brian, what about you?

2:21

Yeah, so we started an urban infill development in Nashville, just because we didn't know where else to go, what else to do. And those are the deals that we could afford, you know, we were buying

2:34

these or, you know, we were taking full recourse loans on, buy devalue at opportunistic in our backyard. Again, this is 2010 2011. So a very different world. And it was, it was great. When it was rolling, obviously, we've progressed, you know, substantially since then. But that was the product type that we first. Again, this is kind of weird, because we were raising a fund. It was like a really tiny fund, buying these, you know, pretty risky deals in retrospect. But that's how we that's how we started. And I think just, you know, as we've talked about, it was a function of what we could afford, and who would take us seriously, not many brokers would return our calls. And so that was just kind of the product that we could afford, and that we could actually get under control. I mean, that's the nice thing about starting off on the residential side, right, you can at least build a track record of successful deals, you have people take you a little more seriously, because, you know, I mean, if you're, if you're a guy that's that nobody knows, and you want to buy a $5 million asset, they're probably going to take the guys more seriously that have bought $5 million assets before. Whereas a house, I mean, pretty much anybody or you know, smaller development, kind of anybody can kind of come up and do that. I mean, I have I start in an in a similar way. I guess on the residential development side, I started off at a at a development firm, though. And so I kind of cheated and was able to put together a 42 unit development on my first deal, could not have done it if I wasn't working for a development firm.

4:01

But I got to kind of watch that. And then, you know, my, like, progression, I started buying office buildings back in 2019. And then we branched out into retail and, and a lot of mixed use and development from there. So Dave, let's let's get into your transition. Why did you like when was the market starting to shift for you in multifamily to where you said, you know, what, we got to start looking at other asset classes, and why did you pick what you did?

4:32

Yeah, so the last multifamily deals we bought were 2019. And that was really the end of the point where the math that we use in our models still worked. So at that point, we, it was either Hey, we're just not going to buy any deals anymore, or we gotta go find a different area to play in. And we kind of saw that coming. So 2017 We started buying some just different commercial assets that were more on the Net Lease side, where we didn't have as much work to do

5:00

Before you really get into heavy, you know, operating on the on the commercial side, but outside of 2019, it was like, Okay, what other asset classes can we buy that have a cheap basis are in our backyard, and we can do something with them. So it comes down to it.

5:16

Myself and my firm, like, we're pretty much a basis investor, we want to find

5:21

the cheapest thing we can, we want to buy the cheapest thing we can buy. Like, we're not typically buying high dollar per square foot assets. And that took us into a lot of just different warehouse flex type of assets that were cheaper on a per square foot basis. And, and we saw a good amount of rent growth that was there. So that's just trying to find what market has upward momentum and has more demand than supply at that time. And how did you how did you dive into that data and figure out what those assets might be? Was it was it based on vacancy rates? Was it based on rental growth? I mean, what were you tracking? Vacancy rates? You know, it started with Addison like, hey, where where does this market look? And then also, I'm a big fan of just driving around, kind of driving around in circles and looking at the market you're operating in. A lot of the assets we buy are, it's not infill, right. It's not like downtown Atlanta, or big city, but it's a little more suburban. But the areas are all built up. I mean, you can go to a lot of suburban markets, and they are fully built out. There's not any free space, even though it's still suburb. Yeah, so when looking at assets.

6:34

Yeah, that's true. You know, it goes pretty far out in the suburbs, where it's very developed. So you can look at assets like you can't go build a, you know, 400,000 square foot warehouse building in a lot of these places in Atlanta, because it's, there's already stuff there. There's no land that's available for that. So we're looking at stuff we can buy that just can't really be replaced, easily replaced.

6:58

Yeah, I love that strategy, right? Go out there and find something below replacement costs where you can renovate it and still be below replacement cost, because then you can come in at a cheaper rent with a comparable product to new construction. Now, I say comparable, meaning like, it's not gonna be the exact same thing, obviously, but you're gonna be able to compete with it on a on a tenancy basis. Brian, what about you, man? I mean, how you started off with urban infill? Where did you branch out into

7:25

you ever got into multi tenant suburban office?

7:29

Really, it was a function of at the time again, this is kind of that 2011 2012 timeframe. Multifamily even then was super competitive, with bigger funds with really good, like vertically integrated firms with a cheaper cost of capital. And a lot of the LPS we talked to who are in our network already had access to great multifamily sponsor and fund managers. And so we thought, well, let's give them a different product type that otherwise they wouldn't get exposure to. And at the time, you know, similar investment thesis, we could buy these at a low basis, discount to replacement cost, put on, you know, good attractive debt and produce a double digit yield.

8:13

You luckily, were able to exit those assets with a recap in 2018 2019. We still have some office in the portfolio, we can get into that if you want. But that was the direction we went into, again, because it was really a function of what can we do to give people yield? That's a different flavor of ice cream that they already didn't have exposure to. And so we ended up in office.

8:37

Yeah, let's let's talk about office now. Because it's, it sounds like you'll both have a fair amount of experience on that side. And that's where I cut my teeth to I mean, you know, if you read the headlines office has gotten absolutely rocked since 2020. I personally believe that that's not the case. And I think you've got to really dive into a building by building basis to look at it. But Brian, what are your thoughts on Office investing today?

9:01

Whew.

9:04

Scary, scary, scary. So what I would say is,

9:11

you know, the Wall Street Journal, the last two days, there were big articles about how San Francisco and Atlanta are just getting crushed in their office markets. You know, if you look at the REIT market as a proxy for Office overall within gateway markets, it's still very subdued.

9:30

Okay, so here's the deal. If you have a long enough time horizon, and you can manage the carrying costs, I think office is a great place to deploy capital today, especially if you're a cash buyer, or you have some attractive repurposing or re you know, configuring play there. But just buying it on like a cash flow cap rate basis. I think it's a value trap. If you're buying like core Core Plus stabilized product because

10:00

No matter what per square foot or cap rate you're buying it at, once you impute kind of tendon proven dollars, leasing commissions, deferred maintenance capex and wichard debt is going to cost if you can even get a loan, you're probably gonna have to go to a private credit market to get that which is going to be 13 15%. You put your capital stack together, you better really drive in a why, or you better have a long, long time horizon because it's going to be challenging to actually create money long term I think buying in today's market.

10:33

Yeah. Do you think that work from home is really driving that? I mean, do you think that that is a something that's that seeped into even small businesses now, because you know, when, when the office market really started tanking, it was a lot of corporations, right, they kind of had this middle management that was set up to where they could already manage people remotely. And it seems like your smaller office product, like the building, I'm in 28,000, square feet, 13 to 15 tenants, was doing fine. Now. I think that office is still okay. But even even on my front, the Small Business front with smaller tenants. But it seems like with AI and some of the technology that's coming out, that's starting to really cater towards the small businesses could change that in the future. And I want to make sure we're differentiating here, there's a difference between flex product, which you know, Tyler had been your office like, that's a good

11:34

you know, a good example of a flex product where the typical user profile is probably under 3000 square feet. And some of its traditional office, but some of its storage or warehouse or a podcast recording studio, or something where it's not traditional office layout, right? That product, I think is going to be in a really good shape, and do very well. But traditional office, so we're talking towers, suburban deals with 20,000 square foot floor plates. I think it's in for a reckoning.

12:07

It's going to be super challenging for a constellation of reasons. One of which is, as you pointed out, the way we work is changed.

12:15

We're not in the office five days a week, I'm working from home today, it's a Monday my whole team is distributed on Mondays and Fridays. We're just not in the office as much as we are I don't think we will be. The other issue long term is just demographically. If you look at the workforce I was reading today by 2028. The average are the oldest baby boomers will be 64. And that's the traditional age of retirement. Right. So that's the largest working cohort ever Millennials are second behind that. We just aren't producing as many workers as we used to. Meanwhile, in a zero interest rate environment, the last 20 years, 15 years, developers have been developing. And so there's a lot of new products and spec product coming on the marketplace. It's very hard to compete. And so what you end up having having is these users are giving back space. The sublease market, the shadow market is really, really big.

13:13

You don't need as much space, you've got technology improvements and culture changes that are diminishing how much square footage we need moving forward. And what happens is it becomes a tenants market for commoditized space. And so it's a musical chairs in a lot of these markets where real rates if you go to a market like Kansas City, or Memphis, kind of a secondary suburban office market.

13:40

Real rental rates in office have probably plateaued at 25 bucks a square foot modified gross and they've probably been that way for 25 years.

13:49

And they're there's no catalyst to have them really move. Right and that problem. Chattanooga is a great example of that. Because when we first started looking at office buildings in Chattanooga, we're like, man, these rental rates haven't changed. Like yeah, you're looking at the Coast Guard or like these haven't changed in like five or 10 years. I mean, it's it's the same.

14:10

So it's tough. So those deals, you know, even in a market like Nashville, and then I'll pass the mic. Man, Nashville is one of the most robust, dynamic commercial real estate markets in the world. And we have brand new class double, a triple A whatever brokerage BS term you want to throw on it.

14:30

Like beautiful new buildings with all of the funky crazy amenities that you want in killer locations.

14:37

And we've busted through that psychic barrier where you know, we're getting 4050 bucks a square foot, whatever. If you talk to leasing brokers in the office space locally, our downtown office and really like as a holistic

14:55

profile of product. In q4 q1, we're going to be about

15:00

50% occupied across class C, D, A, et cetera. So that's just not good. And if you're in a worse market, it's a bit of a death spiral. And that's what you're seeing take place in San Francisco and some of these other markets.

15:17

Dave, what are your thoughts on office? I know you guys, y'all have some office space. And you're also getting really creative in what you're doing with Office acquisitions. So want to talk about that? Yeah, we, we've got a good amount of it. But we're also we are signing a good number of leases in the office space. But even within that, it's not the downtown tower type stuff. We're signing, mostly medical leases for buildings that we have. So it's more medical geared leases. And I mean, the medical industry as a whole or even want to call that like a little sub segment has performed well. And it's continuing to grow and expansion of a lot of that private equity fueled as are coming in and aggregating practices, that kind of stuff. So that's done well. We haven't really signing multi story, we don't really have any either big multi story, office leases. But my personal viewpoint too, is I don't think people want to commute as much. If you've got a building that's easy to get to, I think people are okay, coming to the office a couple times, or get another house or mixing things up doing some in person meetings. I just don't think they want to drive an hour and a half to do that. Now, I personally live in the suburbs, and driving all the way downtown for Atlanta, you know, in the main business district. That's a challenge. I don't personally want to do that. And I imagine a lot of people just don't want to do that commute. But I don't mind going to the office and having to call meetings and doing stuff. I think that's fine. So that's,

16:46

that part of the segment will work. But with that in mind, there's a lot of just contraction in the overall office market as a whole. And if you're going to pick that as something to invest in, you better.

16:58

I'm sure some people are going to do very well doing it. They're going to know what the heck they're doing. They're going to be exceptionally well capitalized. They're going to they're going to have a plan that's better than your plan. And they're gonna win at doing it. I don't know how I don't know what that plan is. So

17:15

it's gonna make some money doing it. Yeah, I'm on some YPO real estate, WhatsApp groups where guys are buying office at like 1415 caps. Right cache? Which Yeah, that's there's there's going to be a price discovery process that takes place here. But I don't want to get too technical, but so much of that office product is financed through CMBS. Yeah, and the conduit market is going to take three to five years to clear out right stuff that was the keys are given back on deals and 2020. Blackstone gave back the keys on a big office deal in Manhattan. That loan is just coming to the market now. So there's a huge lag that occurs that it's just going to take a while to shake out.

18:04

Yeah, this cycle on the office in the in the bigger commercial deals is way longer than Yeah.

18:11

Residential at all. We were doing 10 year interest only deals not too long ago. So you could probably service that debt for a while, right? But at some point, when it rolls,

18:23

bondholders is going to come?

18:25

Well, and I would imagine that lenders too, are not going to be nearly as comfortable with it, no matter what the cap rate is. So it's going to be tougher to get debt, you're definitely going to be signing personal guarantees.

18:37

And then they're probably going to make a joint several two, which is going to make a lot of partners uncomfortable getting into these deals and taking that risk, despite the cash flow. I mean, it's like Memphis, right, you can go out to Memphis and buy, you know, single family homes or apartment complexes at 15 to 20% cap rates. But there's a reason that those are still available and they're not getting scooped up left and right. You know, there's still a massive amount of risk that comes with that. And often often not worth it. Well, we have we've beat the dead horse on Office. How's everybody feel about multifamily right now? Dave, I'll kick this over to you because I know you're you're doing multi Are you have done historically more multifamily?

19:20

No, no, that we lose Dave. Like we lost Dave. Alright. Well, Dave, we'll kick it back to you. If he comes back. Yeah. Brian, do you have any thoughts on like, I could step in. So just to be clear, I am not a multifamily person. We've never done a multifamily deal. I only know enough to be dangerous. But again, I think the best way I've heard this put by people is you know, given where Cap rates are. They've been pretty sticky. And given where rent growth is. I'm just not sure it makes a ton of sense to take a deal down today where your upside is a 50 BIP compression after your value add

20:00

work. And even that might be pretty suspect with your underwriting. So unless you're taking, you know, pretty aggressive fees, you're vertically integrated, or you have some other

20:12

investment thesis or business plan where it makes sense, buying that stuff on a stabilized basis for a 50 Pip increase, like you're probably not going to hit your carry, unless you have some really aggressive waterfall structure. So from a sponsor perspective, I think it's it's really hard these days to make those kind of core Core Plus deals make any sense. From a from a GPU sponsor perspective, at least. Yeah, I mean, it seems like so much value add has been done over the last 10 years, there's nothing else left to value add. And so I don't know how you squeeze blood from a turnip on that one. But it seems like people are still trying to do it. I mean, you get the you know, we're at the point in the market, where the incredible risk takers that think they know everything, because they've, you know, been in in stocks or hedge funds or private equity for years, you know, they're able to raise a whole bunch of money and you know, go buy a whole bunch of apartments. And we also would happen with with Nightingale right out of Houston, the guy lost what 3200 units, because his interest rate went from 4% to 8%, in six months, and he bought it on a floating rate, you just can't. Can't do that. I mean, Dave, what are you saying? And in the multifamily world, you think it's worth buying today?

21:26

I just there's so much competition. Right. You know, ultimately, people are looking to make allocations into real estate.

21:35

And if you're taken out office, and that's not a viable source anymore, I mean, office pricing is is typically way higher than than multifamily. You've got all those funds, now looking for a new home and multifamily has been the, you know, the star child of that situation over the past few years here. So just very competitive and

21:56

hard to find numbers that pencil out in that space. But a lot of it was bought on floating rate loans, and they don't the floating rate loans for multifamily do not take as long to kind of work to the system as they do on the commercial side. So there might be some opportunities coming up through that, you know, possibly prior to the commercial stuff. Like Brian was saying you could serve as 10 years interest only for a long time, multifamily might have been a three year interest only. No bank loan.

22:28

Yeah, the other kind of big picture demographic play, I think multifamily does make a lot of sense with mortgage rates north of 7%. You know, the affordability factor is a real problem for the majority of America today. And I think there should be a conversation in Washington, whether from a policy perspective, we want to continue to try to push home ownership as part of the kind of American dream, you know, historically, we've been a renting nation in modern history, you know, maybe we should go back to being a renting nation for the vast majority of America. So from that perspective, you know, I think it does make sense to get into multifamily. A lot of these people are not going to ever be able to afford a home. And there's just not enough product or inventory in the market to service it. Even when rates go back down to say five or 6%, which is probably an historical average. I'm still not really sure it makes a lot of sense for people. So from that perspective, Viola have a longer time horizon, I think multifamily, you know, makes a lot of sense. But, again, in today's market, it's just hard. I, you know, you keep hearing horror stories about noi going down, rent growth has stalled out. And it seems like all of this free money and incentives that were given to people to, you know, be catalytic to that investment no longer applies. Yeah, I mean, I'll caveat. Go ahead. Sorry, I'm looking at the Fed website on mortgage rates in the last seven or 8% was 2000. So it's like a whole generation of home, potential homebuyers or first time homebuyers that have never seen rates? At 8%. That's like, what, like, they're not gonna buy anything at 8%. It's completely out of the norm for what they've seen over 20 years. What it completely changes how much you can afford, right? I mean, just a 1% change on your mortgage rate. I mean, to us, we're like, yeah, that's not that big of a difference. But when you have a fixed income, and you're trying to buy a house and your mortgage goes up 100 bucks a month. I mean, that changes things, right? average american does not have access to $1,000 of cash.

24:42

That's crazy. The average American does not have access to $1,000 of cash. So you talk about 25 bips and that's meaningful to them in terms of paying the rent. Yeah. And that to, you know, any kind of new kids

25:00

struction are pricing on on a single family home like they're expensive. There's no like, Hey, where's the $150,000? starter home? I don't think anywhere doesn't know where that I know of. Yeah, and we're not. I mean, this is like tiptoeing in the political realm, but just demographically, Americans are not having enough children domestically. So there's going to be a lot of housing stock that just is obsolete, I think, in the next 10 or 20 years. So, you know, big picture, like, just as an investor, you need to be paying attention to what's happening in Washington, and with the election cycle coming up about how people are thinking about immigration policy, because it will impact real estate investing. Yeah, I mean, we really started seeing that in the last five to 10 years, right. I mean, the three bedroom apartment was the least desirable rental asset out there, right. So everybody started switching their three bedrooms into, you know, either co living or eliminating them completely from new construction, because they just wouldn't lease.

26:03

And I know that there's some other factors that have to do with that right home buying homes was cheaper, but also you can rent homes now, there's a lot of rental homes out there now, that didn't used to be in the market, so that that will compete with multifamily at some point. One thing I was gonna say earlier, that I think is important to keep in mind during this whole conversation is, you know, we're talking about buying assets with leverage, right? Because we're all chasing yield. You know, if you're, if you're in a 1031 exchange, or you're paying cash for some of these assets, I think that your trajectory is a little bit different than what we're talking about here. You know, kind of like what the guys were alluding to earlier, if you're paying cash for something, you've got a really long time horizon, you're probably going to do fun.

26:45

But when you're when we're talking about floating rate, debt, interest rates, being high construction rates, you know, being as high as they are, I mean, constructions unreal, it kind of changes the way that you look at the formula. Let's, let's talk about industrial. Brian, I know you've gotten really big into industrial here recently. What are your thoughts on on investing in industrial today?

27:05

It's still pretty competitive, people are still allocating a lot of capital, much like multifamily.

27:12

And I want to be precise here. So the product type that we're familiar with is kind of existing class B, flex industrial, right. So I'm not talking about the new out of the box, million square feet class, a distribution facility that Amazon is servicing. Like, that's not our world. I think that world is actually imploded, because Amazon walked from a bunch of those deals, and there's a lot of spec development. And there's a lot of hot money chasing that. And, you know, there was just really an arbitrage capture between construction and what you could buy in, or what you could sell in a stable basis. I think some people have been really hurt in that world. But long term, you talk about mean, just think about your daily behavior, in terms of like how often you go to the grocery store, or how often you use Amazon, or I work from home Mondays, and Fridays. And it's like Grand Central Station in my house in terms of all the third party vendors and service providers and product that's being picked up and taken to my home. And now granted, we I've got a family and my wife orders a lot and I'm affluent, but still like the world is changing pretty dramatically. And I think retail, while there's a place for experiential in place retail, and I'm a believer in that. I just don't think people want to go out and buy stuff anymore like they used to. And so from a last mile fulfillment, kind of distribution standpoint, I'm a total believer and then taking a step back. I've had a lot of folks on my podcast recently talk about how like the rear the reshoring and the nearshoring of manufacturing and supply chain, because the world is going to hell in a handbasket, regardless of who's in the White House is going to continue, we are no longer going to open ourselves up to geopolitical risk of having supply chain and manufacturing based in Southeast Asia or South America, because those places are imploding. And we cannot rely on them. And it's not safe for us as America and that will have a push through effect into the commercial real estate sector. I'm a big believer in that. Yeah, I completely agree. I've been talking with my buddies here recently about you know, what would it look like if we just started buying manufacturing companies? Right, I know that that's a total like left field thing for somebody who's been investing in syndicating commercial real estate but you know, we're looking at you know, you've got all these boomers, like you were saying earlier, the youngest will be 64 in a few years. And a lot of them own manufacturing companies and so they've got to go somewhere they're going to be selling them a lot of other people are probably not going to be looking necessarily at buying manufacturing companies and and I completely agree with you I think it's coming back to the mainland. Well and inflation Reduction Act which is a complete misnomer and very misleading. But you

30:00

You know, what I'm seeing and hearing is companies and entrepreneurs and a lot of capital are chasing those tax incentives in the green energy world. And that will also have a flow through to industrial manufacturing. And so there's going to be a huge amount of capital rushing into that space, whether or not that make any sense. From a deal perspective, I had no idea. But it's like solar panels 20 years ago, or whatever tax incentive regime that the White House throws up every 10 years like this is what this is right now. There's a lot of capital chasing that. Yeah, manufacturing is going to be the new vape shop, we're going to have them popping up on every damn corner.

30:42

They What are your thoughts on industrial real estate, I know you're doing some flex,

30:48

no vape shops, but some flex Yeah, our stuff is similar to what Brian said about like, none of that brand new fancy 40 foot 50 foot clear heights, it's all the Class B Class C kind of existing, lower, I mean, ours is truly lower end, flex that's meant to be affordable for a business that's coming in there. And we're seeing a good amount of demand for that, you know, before we were talking Tyler, we released a flex space, we had about 22,000 square feet.

31:20

We had someone in there that didn't work out, we got them out, it only took us about 20 days to lease the space. So you know, and that's a big a big piece, one of the office conversions we're doing right now we've got 60,000 square feet of vacant office that will take apart and in carve up into into flex suite. So we're gonna have an office or two and a conference room up front and roll up doors in a big warehouse in the back. And you divide that into call it a 510 1000 square foot little piece. And those went pretty quick. There's a lot of demand for that right now.

31:55

I want to know more about that strategy. Because I mean, there's some bigger office parks that you know, are starting to come available for sale here in Nashville. So talk to me about the numbers like what are you able to pay on a price per square foot basis? And what are your What are your typical renovation costs? I mean, I would imagine the nice thing is like, you're basically just ripping the ceilings out leaving a lot of the HVAC in right, you've already got heated and cooled warehouse space. And then adding some some roll up doors.

32:22

Yeah, you know, one of the deals we're doing the roll up doors are still there. You know, a lot of this single story, suburban assets have been converted and used for different stuff over the years.

32:34

We're normally only at like a 14 to 16 foot clear height on the ceiling. So it's fairly low for for flex asset. But we're in industrial and industrial assets can be much higher than that. So this is this is purely flex. This is not like

32:49

the super high ceilings. But yeah, it's it's a cost us about 10 bucks a square foot to fully demo everything out. And you know, one of the ones we have now we have got some what looks to be brand new, very nice office furniture. So if you need like 100 cubicles, I can send them your way. called Dave.

33:09

They're worth, I think they're worth nothing right now, you know, so we're just throwing all that stuff out. There's not really anything we can do with it. But that'll cost us about 10 bucks a square foot to just clear out old office, carpets, floors, old drop ceilings, kind of everything you imagined you don't want. And then we've got an open space.

33:31

Our bases, you know, we can buy stuff. It's all under, you know, under 90 a square foot that we can get into this. So we've got deals under contract now there between,

33:42

you know, the 55 square foot 85 square foot very dependent on location and access that stuff. You can't just do it for every building, you got to find. How does this work for the asset that's there?

33:54

Yeah, I mean, I think just to like, tie up this product conversation, whatever it is, you're looking at it RV, do RV parks, industrial flex, build to rent, whatever, in today's interest rate environment, you need to be able to demonstrate compression, like legitimate cap rate compression for driving in a why

34:18

otherwise, yeah, the value proposition compared to holding cash or investing into a T bill, or private credit? Hard right now. Yeah, I mean, it's got to be fast. That that cap rate compression, or that increasing noi, or whatever you're going to do in your investment. A couple years ago, you had a lot of time to do that. Now. You got to make that happen. Quick. You can't have something that just sits there for 18 months with no progress.

34:50

Yeah, cuz your investors are expecting you to turn it around quickly enough so that they don't get incentivized to go by T bills instead. Right? I mean, yeah.

35:00

a tough market out there right now.

35:02

What about hospitality? I'm going to whoop in I mean, obviously, restaurants and hotels fall under hospitality. But I want to clarify that because I know you know, restaurants are a bit of a different beast, or you're interested in that at all. And Brian, I'm gonna kick it over to you first. I mean, are you looking at hotels or restaurants? Negative. I've had some scar tissue there.

35:25

From a family perspective, my wife's family, we invested into restaurants, Prio eight we got murdered. Again, this is more on the operating company side, not the dirt, although the the, the opcode did own some some real assets.

35:40

And then I actually had to pay out on a partial PG for restaurant deal that blew up during COVID. So I'm out on restaurants

35:50

just had too much fun. And I'm gonna get out of the Punchbowl on that one.

35:56

And then hotels, you know, my, my business partner is Indian and his family participates in a lot of hotel deals. And

36:05

that is, once you get into like the unflagged parcel service world, you better really know what you're doing. Because that's super inside baseball, even for real estate. And so I think there is real opportunity there. But, man, I would be careful. And

36:28

it seems like the travel industry, it's interesting. You've seen some hotels given back to the lender.

36:37

And we were talking about how people just aren't going into the office as much anymore. I'm traveling a fair amount now. And it's interesting because I don't even really bother reaching out to people any longer when I traveled to New York, because like everyone's in Connecticut, or jersey or Long Island, but they are going to the conferences, and they are aggregating in these hotels. And so business travel seems as busy as ever. And I assume those hotels are doing really well. It's not really my world.

37:07

But I would just be I would be careful there is what I would say. What about short term rentals? Would you would you invest in those at all, not not just in Nashville, but kind of abroad?

37:20

from a regulatory perspective, it seems like some of these jurisdictions are cracking down hard, right. And if New York is going to be the vanguard of how these jurisdictions start recouping tax bases, by eliminating Airbnb and short term rentals, I would be very cautious. I don't like any investment regime where the regulatory oversight is that.

37:42

You know, it can be so schizophrenic, that one day, they could just say, Hey, you no longer qualify for this. Or, Oh, by the way, you need to actually live in this building or this unit before you can rent it. I mean, I just, I think we've all seen how inept government is and which they start having a bigger role in your investments, I'd walk. Yeah, that's what's always scared me off from doing short term rentals. Because I mean, you know, we managed a whole bunch of them. Back before the pandemic hit, we dropped that business completely, because obviously went to zero. It came roaring back. But it's, it seems like every other week in Nashville, you know, a different council member is proposing a different, you know, crazy regulation, some of them good, but most of them are not in favor. And it's it's tough for me to see that as an investable asset. When tomorrow, they could just say nope, no permits anymore. Can't transfer these. It's over.

38:43

So Dave, Dave, what about you? What about hotels, short term rentals and

38:49

short term rentals is interesting. They when Airbnb started, it was like a very small percentage of like the travel industry. And it was kind of like, Hey, this is pretty cool. And that's fine. But as that percentage of market share has increased, essentially, like the hotels are on notice. And they're Those are big, exceptionally well run organizations. And now they're you've got Airbnb trying to be a direct competitor against Hilton Marriott. You know, that's a battle read, if you want to get into a battle and start doing it like there, you can pick one with those guys, but I don't know, I'm not a huge fan of trying to fight something like that with a business. So I think they got a lot of headwind, just from that. Just from that alone, and people are shutting down.

39:36

If Yeah, like just like New York is doing California has got big restrictions on what can and can't be done. And I think there's just more of that to come across that industry as a whole. So, so we don't do anything short term rentals, hotels, or, Brian, you mentioned it's a little I mean, it's definitely inside baseball on some of those on some of the hotel deals, and those operators are close knit for such a large market. It's very

40:00

a close knit nationally of what's there. So if we don't get that space

40:05

for the for the, you know the

40:09

Select service

40:12

if you're not on the right Whatsapp group channel, I think you're toast. But that's the legit how those deals get done. So, yeah, no thanks. Yeah, I mean, Mikey O'Brien one of my partners is a Patel and man he the deals get traded between them. Like they never hit the market. It's it's such a different it's kind of like multifamily how like different multifamily the processes for buying and selling deals compared to office retail, industrial. I mean, hotels has its completely own separate way of doing things. It's really interesting. Alright, we've got two more, go ahead. Go ahead. Well, we like to tie we're doing restaurant deals on some front. I mean, we're not, we don't own the restaurant or anything, we're just buying the buying the dirt for them. And they've done pretty well. And in some cases where you know, we get pretty clear rent to sales ratio, so we get a little bit of their financial reporting. And they seem to be least the markets that we're in predominantly, Atlanta going up towards Charlotte, they've performed pretty well, like their revenue numbers look good. Obviously, they got wage growth that they're working with and supply growth. And you know, there's, there's stuff facing, but they seem to be doing pretty well. And we've got a good number of mostly franchised restaurants that we own with strong operators and they're performing, they're performing well. Are you buying? Well, we look at those deals, we like them. Are you buying ground leases? Are you buying the actual buildings like single tenant Net Lease structures? Yeah, actual building single tenant net lease, with an we're only really buying them though, if we know the operator is not just like, hey, we're just gonna pick a restaurant, it's like, if we have a good relationship with an operator, we know what they do. And that's their focus, we're going to get behind them. Not so much a specific, you know, type or brand is like, Hey, how's this operator perform? What's their track record? And we'll look at that we're going to deal with them, essentially. Yeah, and those QSR, single tenant triple net deals, I think do make a lot of sense. And that's where technology can, it can manage the demographic problem from an employment perspective, right, because you can go to a lot of technical technological solutions that will avoid human human contact. There are some real, you know, employment challenges there. But I think tech solutions in terms of like ordering ahead of time pushing people to an app delivery services, I think those deals still make a lot of sense. The delivery service business has been phenomenal for a lot of, you know,

42:52

a lot of the restaurants that are able to take advantage of it implement that technology into their business, sometimes they can't do that. And then they're at a strategic disadvantage. But the ones that are able to do that, especially they're larger franchises that have the balance sheet and can invest in this type of stuff. It's helping their business. Yeah. And they're getting better pricing on that mobile apps. And they are in store. So better margins. I mean, it seems like you know, I mean, obviously, they take a hit with the delivery service, taking a portion of what the restaurant gets paid. But I mean, if you look at your marketing cost to drive a customer into your space, and then you look at the cost of having vacant space in your store. I mean, I would imagine it's got about even out. Yeah, so Well, cool. Well, we've got, we've got two more that we're going to cover one that obviously everyone is going to expect. And one that's a bit of a surprise. We're gonna be diving into retail. Next, if you have any questions, and you're joining us live, feel free to jump in the live chat, let us know we'll talk about those too. So retail, retail is where I really, you know, have cut my teeth. Well, I guess not cut my teeth, but where I've really been focused for the past three years. I think it's a very interesting market still today, even though 10 years ago, but he said it was dead. So Dave, what are your thoughts on retail you guys do in any retail deals?

44:07

I don't think it's dead. Right? I don't think that death ever happened. It seems to be doing very well, you know, in

44:16

liking it a lot, too. I'm a big fan of investing in the local areas where you're at. So my comprehension or understanding of retail is based on the areas that I live in. And there's a lot of the mixed use kind of townhome retail restaurant bar areas all throughout Atlanta that are performing well in the sense that there's a lot of people there, there's good foot traffic, and the stores are open. So I don't know, I don't have any insight into their operating margin. We've bought some smaller retail strip center stuff, and it's performed well from the standpoint that it stays occupied. They're paying the rents and they're performing. And it seems like at least in the areas that I live, North Atlanta, they're building more of these smaller strip places where you have some

45:00

Times restaurants, but also small retail stores going in.

45:03

They're building one right across the street from my office right now. It's tough for Amazon to compete with that, right? It's like the everyday needs or weekly needs that people just want to stop in and get on their way home. I love neighborhood retail, I think it'll always do well, Brian, what about you,

45:19

we don't have a lot of like straight up retail. But we do have what I'm seeing as kind of

45:28

healthcare, retail services, right. So some medical office or some flex office that has a dialysis clinic, and it may be or a LASIK center or podiatrist, etc. I think that's kind of become retail, right. And when you think about, you know, if you ever are wondering like where you should invest or how to invest, and you're getting new to this, start tracking on GPS, where you spend most of your day when you're in town. And it's a pretty consistent 15 to 20 minute loop around your house, where you get your groceries where you get your services done, where your kids go to school where you know, whatever social activities you're engaged with. And you'd be surprised how much time you actually spend going into places and doing things.

46:16

And so I'm a, I'm a believer

46:20

in retail, I think, especially kind of the urban infill smaller strip stuff. You know, I do worry, I mean, the mall isn't all that obvious. You're just getting absolutely torched. I think that business is very, very difficult in a very different business. But yeah, I believe the retail story and remember, if you look at how much of our of our economy is consumer oriented, I mean, we are a consuming economy, like the whole thing works because we all spend money on stuff. And so you know, I think healthcare and retail, pretty good bets. Yeah. And there's just some things that I don't think, or at least that I personally don't want to buy on Amazon, like shoes, I'm usually 5050. I might buy some shoes on Amazon, but I like to look at them, feel them, try them on, make sure my size fits. You know, I know that it's so easy to return things to Amazon, but I'm not going to go through those steps. So I'd rather just buy it right the first time. And there's there's other things like that, that I think will always do well.

47:25

I like retail, I would say it's still high on my list, especially if you've got some sort of restaurant or bar component in the retail. And there's a story behind story behind it. Right, like the wash has done incredibly well. It's a project that we did here in East Nashville. It's in a walkable neighborhood, high visibility at a lighted intersection. street parking, right, we've got a bunch of smaller tenants there. And it's it stays full. Right. We had we didn't renew to tenants that this past year, and I had two leases signed before they were vacated.

48:01

I mean, just because we have a waitlist on that that property, which makes it really good.

48:05

All right now for the more unique one. This is something that we started talking about before we went live.

48:11

Considering our current thoughts on the market, I told everybody you know, I'm looking at doing a house flip, getting back into single family. You know, I went some hard money on a deal, that deal went wrong. And it looks like I'm taking the house back and, you know, running the numbers on it. I'm like, Man, I think I feel like the risk is a little bit lower in the single family world, I think that my profit margins will be pretty good. I'm not going to have to deal with investors today. Right investors two years ago, very different story. But investors today, it's really tough debt today is tough. So might start doing more single family residential deals. And you know, that could be a mix of house flips or ground up developments. I think there's a lot of potential in that in that realm. Dave, what about you? Have you ever have you looked at single family residential at all?

49:00

We've done some in the past. I did some, as I mentioned, in the very beginning of my, my real estate journey, I would say, I think looking at those though, it's it's also how are you going to get them done? And are the contractors that are support a lot of this happening?

49:17

That's been, I think, really, in any asset class, the getting the work to be able to be done is still been a little bit of a challenge. So if you can get if you can get the good subs and the good contractors into to do one of the houses in the numbers match up. Right? If the math works, and it's an air you like to invest I'm a fan as long as the math works.

49:38

Yep. Ryan, what about you? Yeah, so this is kind of a taking a step back, getting away from maybe the real estate specific but being just being an entrepreneur.

49:49

You know, historically, the best companies come out of recessions when you look at venture or tech or operating companies. And so as a spy

50:00

Answer a GP entrepreneur, I would take this opportunity to go try some things on, you know, you've got some time, and you've got some flexibility. I would go out there and try some different things, take some risks, see what works, see what doesn't.

50:16

There'll be some pain. But, you know, I think for most of us, the last three to five years were, you know, really good times. This is just how real estate works. It is, you know, to be cliche, it's a stickler that this is where we are in the cycle. And you've got to be comfortable with not just trying to push deals, because you can push deals, it's okay to try some different things. And so I would, you know, applaud you go out there, give it a whirl, see what happens.

50:49

But business models are gonna have to change. Interest rates are real. And they do affect the business from an operating company standpoint. And you can't just put your head in the sand and wait for it to change. It's gonna be here for a while. Yeah, I think I think you're so right. On the model side. I mean, because I'm looking at what we were doing three, four years ago, compared to what we've been trying to do for the past 12 months. And it was the same thing with completely different results. Right, which to me means like, I don't think that we're broken, I think the model is broken. And you can't raise with a six to 8% preferred return deals that are at lower cap rates than you've ever seen with interest rates, the highest we've seen and make any money unjustified. You know, there's about a 20% annual annual turnover within the s&p,

51:40

like your company is no different. It's not to say that you can't endure and do well, but like, that's just kind of the reality of business in America. Yeah. Yeah. I want to I want to mention one thing here that not to throw California credit on

51:56

policy. But did you guys see this thing they have where you can basically convert any lot to two lots?

52:05

So basically, like, a single family home lot in California, yeah, you can just add another unit.

52:11

You can build another unit, and you're like the backyard garage or something. So I think there's something in there. If you can take a single family home lot, that's big. Or Brian, like you were saying, like defunct? You're like,

52:22

I got this big house, or can you convert it into two lots? Are they doing that to try to impact the housing crisis? Yeah, they're trying to like how can we get more housing? I think it's a, I think it's a state law that bypasses all local ordinances. So I got a state level, you can take a single family lot, turn it into two lots or a two unit dwelling.

52:45

And like the state has okayed it, because I mean, they've got they got 55 million people there. They got a housing. They got a definite housing shortage and affordability issue throughout that whole state. So that was one thing they did that. It makes sense. I mean, like if there's a way to buy some single family homes and convert them to two unit places, and I mean,

53:06

there's gonna be something there, if that kind of trickles through to the rest of our areas. Yeah, I think that's such a brilliant policy change. Because if you look at our zonings I mean, it nationals the same way, right. It is always promoted single family homes,

53:21

or 250 unit apartment complexes, you have I mean, that's why everybody has been talking about the missing middle for years. It's really tough to you can't get duplexes approved in Nashville, you can't get triplex as quad plexes. That's why a lot of them have not been built in the last 20 3040 years. And you can't get these you know, 16 unit apartment complexes to work. Right. Your boyfriend, your boyfriend, he will change all that for you, Tyler.

53:48

I hope so.

53:50

Yeah, I think it'd be great. I mean, you know, we're doing a documentary right now on the affordable housing crisis. And that's what the Civic Design Center talked about the most was the missing middle.

54:00

So maybe there's there's something to focus on there. And funny enough, the place where we got this house, it's in a neighborhood with an overlay, Dave, where any house in this overlay can have an accessory dwelling unit, and they passed a few years ago. And it has completely changed that neighborhood. Because everybody's gone over there and started buying that because they go Oh, well I can build an apartment on this on this lot and rent it out and help cover my mortgage.

54:28

I mean, if you can do that, that sounds that sounds a great. Yeah, why not? So it'll be fun. Well, I'll keep you guys posted on that venture. We'll see if it's worth doing a second time.

54:39

It'll be it'll be interesting. That'll be very interesting. Well guys, thanks for joining us this week to dive into what what types of commercial real estate should we be buying today? It sounds like Office is a no multifamily is a no hospitality. No. Kind of kind of slight maybe. Retail is a yes industrial is a yes and single family home is well

55:00

wait to see what Tyler has to say about his first deal.

55:03

But good conversation. Appreciate you guys being here. We'll be back in a couple of weeks with another episode. Until then, appreciate you all for tuning in. We'll see you next time.

55:13

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